Author Topic: DONT Payoff your Mortgage Club  (Read 110892 times)

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #850 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 #851 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 #852 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 #853 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 #854 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 #855 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 #856 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 #857 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 #858 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.

Lews Therin

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Re: DONT Payoff your Mortgage Club
« Reply #859 on: October 04, 2018, 02:39:18 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!)

Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #860 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. 




weirdlair

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Re: DONT Payoff your Mortgage Club
« Reply #861 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!

Fomerly known as something

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Re: DONT Payoff your Mortgage Club
« Reply #862 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 #863 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 »

Lews Therin

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Re: DONT Payoff your Mortgage Club
« Reply #864 on: October 04, 2018, 04:44:01 PM »
For you to receive your FI number in account changes, we're talking about 100% gain.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #865 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.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #866 on: October 04, 2018, 11:42:13 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.

@boarder42 ..."view-only," but not forgotten! Thanks, b42, for carrying the DPYM torch!
He can see us, but we can't see him. Miss you B42, but I know you're killing it IRL.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #867 on: October 05, 2018, 02:19:33 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.

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!)
But you said it like it was a bad thing. In fact, IMO, oversaving (OMY) is a bad thing, but that's not really what happened.

A FI number is merely an educated guess. Some costs simply can't be known very far in advance. For example, ACA didn't exist when I was working my way toward FIRE. I have pre-existing conditions and had a very rare form of cancer a long time ago. I had no way of knowing if I could get insurance or how much it would cost, so I had to guess and guess big. You could say market currents shifted in my favor while I was pulling steadily toward the goal. A couple of things happened, I hit FI rather suddenly, so I RE, and the market just kept doing its thing. At most, I overworked by about a month, but most of that was my three-week notice.

My experience totally mimics the compound interest graph. After a certain point, money grows exponentially. It's a crazy ride that beats the hell out of the buzz of prepaying a cheap-ass mortgage.

YoungGranny

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Re: DONT Payoff your Mortgage Club
« Reply #868 on: October 10, 2018, 09:26:20 AM »
Still sad about not having B42 here. He convinced me to join the DPYMC about a year ago. I switched from throwing extra money at my mortgage to tossing it into investments. I was always maxing out my 401k, my husband maxes out his and we max out an HSA so I figured splitting the difference and paying off our mortgage in 3 years instead of investing was good enough but B42 convinced me otherwise.

 Just figured it's a good time to share that my taxable account that I started last January now has ~$75k in it - I'd be less than a year away from paying off my mortgage but instead I've grown my investments, earned some dividends, and will be able to FIRE in 3-4 years.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #869 on: October 10, 2018, 09:35:10 AM »
This is a great story, thanks for sharing!


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Re: DONT Payoff your Mortgage Club
« Reply #870 on: October 14, 2018, 09:33:40 AM »
I've been going through all pages of this thread for awhile as well as reading other don't pay off your mortgage threads. I haven't been able to quite figure out what is best for my situation and I am truly open to suggestions. Both low income earners but wife and I were able to max out TIRAS and put little in 401s. We bought a house this year because our cheap rent was going to increase more than what we could get a mortgage payment for... However we only put 10% down and have PMI. (Conventional) Loan is for 125k and PMI is $75/mo and rate is 4.75%. I think theres roughly 94 payments until we would get 20% equity, so roughly $7050 in PMI would be paid if we did do the min payment for mortgage.

Also have $35k in student debt @ 4.25% Federal loans.  - 8 years left.


RWD

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Re: DONT Payoff your Mortgage Club
« Reply #871 on: October 14, 2018, 10:42:16 AM »
I've been going through all pages of this thread for awhile as well as reading other don't pay off your mortgage threads. I haven't been able to quite figure out what is best for my situation and I am truly open to suggestions. Both low income earners but wife and I were able to max out TIRAS and put little in 401s. We bought a house this year because our cheap rent was going to increase more than what we could get a mortgage payment for... However we only put 10% down and have PMI. (Conventional) Loan is for 125k and PMI is $75/mo and rate is 4.75%. I think theres roughly 94 payments until we would get 20% equity, so roughly $7050 in PMI would be paid if we did do the min payment for mortgage.

Also have $35k in student debt @ 4.25% Federal loans.  - 8 years left.

Okay, so if you dropped ~$18k on the mortgage you could get rid of PMI? That would save you $1,755/year, a 9.75% return on investment. If you can lump sum it I would do it to get rid of PMI. Are there any catches (e.g requires a refinance to remove PMI)?

However, the calculation gets more complicated if you can't lump sum remove PMI. PMI is currently adding 0.72% to your interest rate, making your effective rate 4.75+0.72 = 5.47%. Sort of borderline but if you aren't maxing tax advantaged accounts yet usually you'd want to do that first. Depends on how much extra you can direct towards the mortgage though.

Minimum payment on the student loans should be fine.

Mr. Metal Mustache

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Re: DONT Payoff your Mortgage Club
« Reply #872 on: October 14, 2018, 10:54:44 AM »
Purchased at 135k and original appraisal at 137k. About 15k lump sum would do it. PMI at 80% LTV ratio will be removed after written request... Supposedly. Otherwise 78% LTV it is removed by law. Problem is I don't have a lump sum to do that with. At least at this time. Thats why I was wondering if I would be better off making extra payments towards principal to get the PMI off faster than switch over to making the minimum payment. I agree though, any tax deferred accounts should be a priority. Theres just not much leftover after that though lol.

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #873 on: October 14, 2018, 11:46:43 AM »
Purchased at 135k and original appraisal at 137k. About 15k lump sum would do it. PMI at 80% LTV ratio will be removed after written request... Supposedly. Otherwise 78% LTV it is removed by law. Problem is I don't have a lump sum to do that with. At least at this time. Thats why I was wondering if I would be better off making extra payments towards principal to get the PMI off faster than switch over to making the minimum payment. I agree though, any tax deferred accounts should be a priority. Theres just not much leftover after that though lol.
How much extra could you realistically put towards the mortgage each month?


Everything I'm hearing makes me think you should keep the PMI until your income grows and your liquidity is stronger.  My 2 cents.   
I'm leaning towards that recommendation as well.

Mr. Metal Mustache

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Re: DONT Payoff your Mortgage Club
« Reply #874 on: October 14, 2018, 11:48:17 AM »
I think this year we will be sitting at 64k (pre-tax) (combined) married filing jointly - no kids. We focus on the IRA's because one of our 401k's has no match but decent ER's and the other has a small match but horrible ER's. The student debt is fixed and in 3-4 more years we'll qualify for forgiveness on a portion of it. After that if lower rates can be had we'll refinance it. At this point even with my PMI rate it still may make sense to pay the minimum yet. 7% invest return  minus the 5.47% adjusted rate still leaves me with a 1.53% positive increase in returns when invested which is not a ton but more than none.

Mr. Metal Mustache

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Re: DONT Payoff your Mortgage Club
« Reply #875 on: October 14, 2018, 11:59:06 AM »
Purchased at 135k and original appraisal at 137k. About 15k lump sum would do it. PMI at 80% LTV ratio will be removed after written request... Supposedly. Otherwise 78% LTV it is removed by law. Problem is I don't have a lump sum to do that with. At least at this time. Thats why I was wondering if I would be better off making extra payments towards principal to get the PMI off faster than switch over to making the minimum payment. I agree though, any tax deferred accounts should be a priority. Theres just not much leftover after that though lol.
How much extra could you realistically put towards the mortgage each month?

I was already set for $100 extra a month. Without touching what we are putting into pretax accounts... Maybe another (monthly)$300 - $400.... Whereas again the pretaxes are still not maxed out where this money could be going into them instead.


Everything I'm hearing makes me think you should keep the PMI until your income grows and your liquidity is stronger.  My 2 cents.   
I'm leaning towards that recommendation as well.

Yes.

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #876 on: October 14, 2018, 01:33:14 PM »
I was already set for $100 extra a month. Without touching what we are putting into pretax accounts... Maybe another (monthly)$300 - $400.... Whereas again the pretaxes are still not maxed out where this money could be going into them instead.

At an additional $500/month you'll remove PMI after 27 payments costing an extra $13.5k. This will reduce your principal balance by $13.7k compared to the minimum payment. If instead invested the $500/month would have grown to $14.3k to $15.1k (5% - 10% range). Total cost to get rid of PMI = $14.1k to $14.9k. Benefit going forward: $651 (annual interest saved on reduced principal) + $900 (PMI) - $715 to $1,510 (continued investment interest) = $51 to $836. ROI = 0.3% to 5.6%, depending on your expected investment returns. I'm ignoring that PMI wouldn't last forever anyway, but I don't want to do all the spreadsheet calculations to factor that in right now.

Yeah, I'd recommend investing in a tax advantaged account, at least until you get closer to the 80% point.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #877 on: October 14, 2018, 07:44:54 PM »
I'm loving the smart conversation happening here. B42 would be so pleased.

Mr. Metal Mustache

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Re: DONT Payoff your Mortgage Club
« Reply #878 on: October 14, 2018, 08:46:29 PM »
This is awesome. And by utilizing the 401k contributions we would be saving more on payroll tax too. The cheapest ER I can get is 1.6% (my wife lucks out @ 0.04%) so...less than 5% hah. So if I'm understanding this correctly. Pay the minimum - Worse case I'll come ahead 0.3% and best case 5.6%. Is this my overall scenario or just during the PMI period?


RWD

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Re: DONT Payoff your Mortgage Club
« Reply #879 on: October 14, 2018, 10:01:26 PM »
So if I'm understanding this correctly. Pay the minimum - Worse case I'll come ahead 0.3% and best case 5.6%. Is this my overall scenario or just during the PMI period?
No, that's not what I meant. 0.3% to 5.6% is the return expected by paying $500/month extra on your mortgage until PMI is gone. But looking at my math again I'm not sure that's the right way to think about it.

A good way to test if numbers make sense is to try the calculation another way. So let's try this instead:

94 minimum payments...
Payment + PMI sum: $68.3k
Loan principal reduction: $17.6k
Investment balance: $39.0k, $51.7k, $66.5k, $98.4k, $162.2k (min, bottom 10 percentile, median, top 10 percentile, max) [7 years, 10 months]

26 extra payments + 68 minimum payments...
Payment + PMI sum: $76.2k
Loan principal reduction: $35.4k
Investment balance: $34.2k, $41.9k, $50.0k, $65.7k, $92.2k

Worst case scenario (-4.953% returns): Paying $500/month extra is better by $5.1k
Really bad returns (2.442% returns): Break even ($100 difference)
Median stock market (8.513% returns): Minimum payments is $6.6k better
Really good returns (17.288% returns): Minimum payments is $22.8k better
Best 94 months ever (27.556% returns): Minimum payments is $60.1k better


Hmm, is it really better to invest in the stock market at ~2.5% than pay down a mortgage at 4.75% + PMI? I must be doing something wrong here... I don't see any obvious errors though and I have to go to bed now. Maybe someone else can point out any flaws in this math.

Edit: My math was wrong. See update below.
« Last Edit: October 15, 2018, 08:23:59 AM by RWD »

TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #880 on: October 15, 2018, 07:11:28 AM »
Hmm, is it really better to invest in the stock market at ~2.5% than pay down a mortgage at 4.75% + PMI? I must be doing something wrong here... I don't see any obvious errors though and I have to go to bed now. Maybe someone else can point out any flaws in this math.

Your math is solid.  Compounding is awesome!

Also keep in mind that Mr. Metal Mustache will have more options through liquidity if he has it in an investment account.  Even in his very-close-to-break-even situation, the options are better from keeping the mortgage.

Also keep in mind that extra money invested to get rid of PMI is for the life of the mortgage.  You can't pull that money back out (without HELOC expenses and fees) so you really need to be using compounding across the life of the loan, rather than only the PMI portion.  That will increase the numbers towards the keep-the-mortgage scenario.

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #881 on: October 15, 2018, 07:46:28 AM »
Hmm, is it really better to invest in the stock market at ~2.5% than pay down a mortgage at 4.75% + PMI? I must be doing something wrong here... I don't see any obvious errors though and I have to go to bed now. Maybe someone else can point out any flaws in this math.

Your math is solid.  Compounding is awesome!

Also keep in mind that Mr. Metal Mustache will have more options through liquidity if he has it in an investment account.  Even in his very-close-to-break-even situation, the options are better from keeping the mortgage.

Also keep in mind that extra money invested to get rid of PMI is for the life of the mortgage.  You can't pull that money back out (without HELOC expenses and fees) so you really need to be using compounding across the life of the loan, rather than only the PMI portion.  That will increase the numbers towards the keep-the-mortgage scenario.

Thanks. I may need to run the numbers a couple more times to convince myself.

I figured if the minimum payments approach was ahead after 94 payments (when PMI drops anyway) then it would stay ahead over the life of the loan. But you're right, doing the full loan length would be more accurate.

I also didn't account for pre-tax savings ($500 extra on mortgage might be the equivalent of $641 in a 401k).

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #882 on: October 15, 2018, 08:22:55 AM »
Hmm, is it really better to invest in the stock market at ~2.5% than pay down a mortgage at 4.75% + PMI? I must be doing something wrong here... I don't see any obvious errors though and I have to go to bed now. Maybe someone else can point out any flaws in this math.

Okay, I found a big problem with my math. I double counted the extra payments. The investment balance I came up with already takes into account the difference in payments cost so I should not have been also counting the extra cost of those. Just adding principal reduction and ending investment balances should be fine.

Revised summary...

Worst case scenario (-4.953% returns): Paying $500/month extra is better by $13k
Really bad returns (2.442% returns): Paying $500/month extra is better by $8k
Median stock market (8.513% returns): Paying $500/month extra is better by $1.3k
Really good returns (17.288% returns): Minimum payments is $14.9k better
Best 94 months ever (27.556% returns): Minimum payments is $52.2k better

As TexasRunner mentioned this does not take into account the capital locked up in the mortgage. And it also is ignoring the pre-tax benefits of investing in a 401k. Both of those factors would make paying the minimum more advantageous.

I will follow up with more comprehensive analysis.

TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #883 on: October 15, 2018, 09:15:10 AM »
Hmm, is it really better to invest in the stock market at ~2.5% than pay down a mortgage at 4.75% + PMI? I must be doing something wrong here... I don't see any obvious errors though and I have to go to bed now. Maybe someone else can point out any flaws in this math.

Okay, I found a big problem with my math. I double counted the extra payments. The investment balance I came up with already takes into account the difference in payments cost so I should not have been also counting the extra cost of those. Just adding principal reduction and ending investment balances should be fine.

Revised summary...

Worst case scenario (-4.953% returns): Paying $500/month extra is better by $13k
Really bad returns (2.442% returns): Paying $500/month extra is better by $8k
Median stock market (8.513% returns): Paying $500/month extra is better by $1.3k
Really good returns (17.288% returns): Minimum payments is $14.9k better
Best 94 months ever (27.556% returns): Minimum payments is $52.2k better

As TexasRunner mentioned this does not take into account the capital locked up in the mortgage. And it also is ignoring the pre-tax benefits of investing in a 401k. Both of those factors would make paying the minimum more advantageous.

I will follow up with more comprehensive analysis.

Don't forget inflation analysis...  Either reduce the mortgage rate by ~3.1% (or more conservative if you prefer) or increase the stock return numbers.  IE - Paying the mortgage payment in 2030 will be in reduced value 2030 dollars, vs prepaying in higher-value 2018 dollars.

I'm just gonna build a spreadsheet for this, because it comes up way to much and I'm sure it can be done.

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #884 on: October 15, 2018, 09:27:54 AM »
Okay, 30 year analysis.

Assumptions:
125k starting balance at 4.75% interest with $653 P+I payment
$75 PMI until loan balance drops below $110k
Extra payment (or investment) of $500
Extra payments only made until PMI is removed
30 year historic S&P 500 returns source (using nominal returns)
Investing in post-tax account (ignoring capital gains and taxes on dividends, e.g. Roth IRA)

SP500 returns Minimum payment advantage
Min3.635%-$22k
Bad6.376%$1.5k
Median9.879%$85k
Good12.443%$238k
Max14.319%$452k

There is some oscillation in between. For 6.376% returns (worst 10 percentile in history) paying the minimum will be ahead for 25 months, will slip behind shortly after the PMI drops off, but pulls back ahead at the 305 month mark. For median returns you'll be ahead for 48 months with minimum payments, but will drop behind until month 94 where it blazes on ahead. Anything at 10.6% returns or higher is always better no matter the time frame. All this assumes a consistent yearly return. A certain sequence of returns could make it better or worse than expected.

Assuming 22% marginal tax bracket and investing in a pre-tax account (e.g. 401k):

SP500 returns Minimum payment advantage
Min3.635%-$28k
Bad6.376%$2.0k
Median9.879%$109k
Good12.443%$305k
Max14.319%$580k

In the pre-tax scenario the oscillation is not nearly as bad. The 6.376% case only results in a disadvantage from months 73 through 120. Returns over 7.1% will always favor minimum payments, no matter the time frame.

So, in conclusion, @Mr. Metal Mustache, my recommendation would be to make the minimum payments.


Don't forget inflation analysis...  Either reduce the mortgage rate by ~3.1% (or more conservative if you prefer) or increase the stock return numbers.  IE - Paying the mortgage payment in 2030 will be in reduced value 2030 dollars, vs prepaying in higher-value 2018 dollars.

I'm just gonna build a spreadsheet for this, because it comes up way to much and I'm sure it can be done.

All my numbers used nominal returns so they can be compared to the actual mortgage rate.

I built a spreadsheet myself. (attached)

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #885 on: October 15, 2018, 09:46:48 AM »
Gotta say, there are a number of disclaimers, such as:

1. If you're funding every retirement/investment vehicle available to you and still have money left over
2. You don't live where you can get fixed-rate mortages
3. You don't live where mortgages are tax deductible
4. You live in a place where housing is cheap and
5. You haven't bought a clown house

...then the advantages of Don't Payoff vs. Prepayment become smaller and smaller.

With such a small mortgage, I'd consider skipping the math and PMI gyrations and stockpiling $125k asap (side hustles, belt tightening, etc.). Once I had the payoff amount in hand, the option of decimating the mortgage in one fell swoop might seem a reasonable option.

But I live in a high COLA where $125k won't even buy you a garage.
« Last Edit: October 15, 2018, 03:08:26 PM by Dicey »

onlykelsey

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Re: DONT Payoff your Mortgage Club
« Reply #886 on: October 15, 2018, 10:08:38 AM »
Okay, 30 year analysis.

Assumptions:
125k starting balance at 4.75% interest with $653 P+I payment
$75 PMI until loan balance drops below $110k
Extra payment (or investment) of $500
Extra payments only made until PMI is removed
30 year historic S&P 500 returns source (using nominal returns)
Investing in post-tax account (ignoring capital gains and taxes on dividends, e.g. Roth IRA)

SP500 returns Minimum payment advantage
Min3.635%-$22k
Bad6.376%$1.5k
Median9.879%$85k
Good12.443%$238k
Max14.319%$452k

There is some oscillation in between. For 6.376% returns (worst 10 percentile in history) paying the minimum will be ahead for 25 months, will slip behind shortly after the PMI drops off, but pulls back ahead at the 305 month mark. For median returns you'll be ahead for 48 months with minimum payments, but will drop behind until month 94 where it blazes on ahead. Anything at 10.6% returns or higher is always better no matter the time frame. All this assumes a consistent yearly return. A certain sequence of returns could make it better or worse than expected.

Assuming 22% marginal tax bracket and investing in a pre-tax account (e.g. 401k):

SP500 returns Minimum payment advantage
Min3.635%-$28k
Bad6.376%$2.0k
Median9.879%$109k
Good12.443%$305k
Max14.319%$580k

In the pre-tax scenario the oscillation is not nearly as bad. The 6.376% case only results in a disadvantage from months 73 through 120. Returns over 7.1% will always favor minimum payments, no matter the time frame.

So, in conclusion, @Mr. Metal Mustache, my recommendation would be to make the minimum payments.


Don't forget inflation analysis...  Either reduce the mortgage rate by ~3.1% (or more conservative if you prefer) or increase the stock return numbers.  IE - Paying the mortgage payment in 2030 will be in reduced value 2030 dollars, vs prepaying in higher-value 2018 dollars.

I'm just gonna build a spreadsheet for this, because it comes up way to much and I'm sure it can be done.

All my numbers used nominal returns so they can be compared to the actual mortgage rate.

I built a spreadsheet myself. (attached)

I can't see these spreadsheets at work, but sounds awesome.  One small thing that might move the needle the tiniest bit is fees on your investment account, but they should be pretty low. 

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #887 on: October 15, 2018, 10:30:19 AM »
I built a spreadsheet myself. (attached)

I can't see these spreadsheets at work, but sounds awesome.  One small thing that might move the needle the tiniest bit is fees on your investment account, but they should be pretty low.

Yes, good point, I excluded expense ratios. Assuming 0.04% the change is pretty negligible. About $2k at median returns after 30 years.

TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #888 on: October 15, 2018, 11:42:50 AM »
The spreadsheet is much more usefull for **trying** to prove to the 600k mortgage at 3% crowd than the 150k at 5% crowd...
The math at 5% is going to be much different than 3%...  Exponents and all....

I'll dig through the spreadsheet shortly and let you know if I find anything.  :)

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #889 on: October 15, 2018, 11:54:59 AM »
The spreadsheet is much more usefull for **trying** to prove to the 600k mortgage at 3% crowd than the 150k at 5% crowd...
The math at 5% is going to be much different than 3%...  Exponents and all....

I'll dig through the spreadsheet shortly and let you know if I find anything.  :)

I agree.

Thanks, I appreciate it.

Mr. Metal Mustache

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Re: DONT Payoff your Mortgage Club
« Reply #890 on: October 15, 2018, 12:08:11 PM »
I appreciate all the digging for my case. That's why I had to post. I just couldn't figure it out either. So as of right now we're on the still on the 'Do not prepay mortgage' page and focus on pretax investments?

TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #891 on: October 15, 2018, 12:25:07 PM »
The spreadsheet is much more usefull for **trying** to prove to the 600k mortgage at 3% crowd than the 150k at 5% crowd...
The math at 5% is going to be much different than 3%...  Exponents and all....

I'll dig through the spreadsheet shortly and let you know if I find anything.  :)

I agree.

Thanks, I appreciate it.

Spreadsheet looks correct.  Technically....  Since OP is alread a bit into his loan, we aren't seeing the exact values on a 360 term but its 100% accurate for him as far as time is concerned.  I doubt he is in the 22% income tax threshold.  Still, the fact that if he were to dump $3,000 into the mortgage to remove PMI monthly, he would lose another $30,000 by the end of the loan is telling.  Its not a good idea, generally, for him to prepay.

Also note:  he has to get down to 78% LTV to get rid of PMI or pay for another appraisal.  The agreement with the bank is 80% based on the standard amort schedule or 78% by law, or 80% LTV based on a re-appraisal (hence recommending a re-app now).  Getting to 80% ahead of schedule isn't enough, they still want the 2% or an app done.


Now the fun begins:
A $600,000 mortgage at 3% interest with 0% down payment investing vs making extra $5,000 payments to get rid of PMI nets an additional $1,049,703.00 if invested instead.
A $600,000 mortgage at 3% interest with 0% down payment investing vs making extra payments to pay off the whole house nets an additional $2,606,283.00 if invested instead.

Thats why the math at 3% doesn't work.  Even at 150k at 3% the numbers are much more drastic.  A 3% mortgage is a great thing...

TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #892 on: October 15, 2018, 12:36:54 PM »
I appreciate all the digging for my case. That's why I had to post. I just couldn't figure it out either. So as of right now we're on the still on the 'Do not prepay mortgage' page and focus on pretax investments?

Yes.  The math says no to pre-payment. 

Which would make you more comfortable in 7 years, having removed PMI and owing 78% of the principle on your loan with a 6 month emergency fund
--or--
Having PMI and owing ~86% of the principle on your loan but having a 6-month emergency fund and an additional $9,950.74 in an investment account (or your 401k, which would be an even higher amount due to pre-tax) that you can draw on in an absolute emergency...?

$9,950.00 would buy you an additional 12 months worth of payments or so while you find another job (in a personal level SHTF situation).  Most likely, just by not paying PMI, in the next 7 years you will have doubled your emergency fund from 6 months to 12 months (IE - less personal risk) while also getting closer to FIRE.  Thats a deal I would take.

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #893 on: October 15, 2018, 12:41:02 PM »
The spreadsheet is much more usefull for **trying** to prove to the 600k mortgage at 3% crowd than the 150k at 5% crowd...
The math at 5% is going to be much different than 3%...  Exponents and all....

I'll dig through the spreadsheet shortly and let you know if I find anything.  :)

I agree.

Thanks, I appreciate it.

Spreadsheet looks correct.  Technically....  Since OP is alread a bit into his loan, we aren't seeing the exact values on a 360 term but its 100% accurate for him as far as time is concerned.  I doubt he is in the 22% income tax threshold.  Still, the fact that if he were to dump $3,000 into the mortgage to remove PMI monthly, he would lose another $30,000 by the end of the loan is telling.  Its not a good idea, generally, for him to prepay.

Also note:  he has to get down to 78% LTV to get rid of PMI or pay for another appraisal.  The agreement with the bank is 80% based on the standard amort schedule or 78% by law, or 80% LTV based on a re-appraisal (hence recommending a re-app now).  Getting to 80% ahead of schedule isn't enough, they still want the 2% or an app done.

Thanks for looking it over. Yeah, I didn't have enough information to figure out how many payments into the loan I should start but I figured treating it like a new 30 year was close enough for this case. I did try to make as many fields configurable as possible (expected investment returns, marginal tax bracket, LTV threshold, etc.).

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #894 on: October 15, 2018, 12:47:51 PM »
I appreciate all the digging for my case. That's why I had to post. I just couldn't figure it out either. So as of right now we're on the still on the 'Do not prepay mortgage' page and focus on pretax investments?

No problem, I enjoy playing with numbers. Yes, I think pretax investments should be your priority, at least for the ones that don't have crazy fees.

Mr. Metal Mustache

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Re: DONT Payoff your Mortgage Club
« Reply #895 on: October 15, 2018, 02:33:20 PM »
All valid points. If it helps any. 12% (Thinking 6% for state?) Tax bracket and 359 payments left.

I really am grateful for all the help.

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #896 on: October 15, 2018, 03:06:39 PM »
All valid points. If it helps any. 12% (Thinking 6% for state?) Tax bracket and 359 payments left.

I really am grateful for all the help.

Assuming 18% marginal tax rate your investments will need to beat ~6.3%/year (including inflation) over 30 years to come out ahead. Historically this has happened over 90% of the time (S&P 500).

Goldielocks

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Re: DONT Payoff your Mortgage Club
« Reply #897 on: October 15, 2018, 10:09:34 PM »
Gotta say, there are a number of disclaimers, such as:

1. If you're funding every retirement/investment vehicle available to you and still have money left over
2. You don't live where you can get fixed-rate mortages
3. You don't live where mortgages are tax deductible

4. You live in a place where housing is cheap and
5. You haven't bought a clown house

...then the advantages of Don't Payoff vs. Prepayment become smaller and smaller.

With such a small mortgage, I'd consider skipping the math and PMI gyrations and stockpiling $125k asap (side hustles, belt tightening, etc.). Once I had the payoff amount in hand, the option of decimating the mortgage in one fell swoop might seem a reasonable option.

But I live in a high COLA where $125k won't even buy you a garage.
The points 2 & 3 are true, but I need to point out:
My variable rate mortgage is about 1% lower than the available fixed rate, which compensates for the difference in not going for fixed rate and taking on the risk.  (put the extra into a non-reg account, ready to pull and pay down the principal if needed)

Even with no deduction on mortgages (hmm didn't the USA just pass a revision to taxes reducing this?), there is still a benefit to not paying down the mortgage -- BUT!  usually getting rid of PMI is a very high priority due to the payback / costs.   e.g., get the employer match, then pay off your PMI to 80% LTV.

@RWD -- can you elaborate, 6.3% returns are "bad"  ?  Is that annual return or return over all 94 months?  Why "Bad"?

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #898 on: October 16, 2018, 06:35:26 AM »
@RWD -- can you elaborate, 6.3% returns are "bad"  ?  Is that annual return or return over all 94 months?  Why "Bad"?

It's bad for nominal annual returns over 30 years as 90% of the time they have been higher. For a 94 month period 2.442% annual returns would be bad (again, worst 10 percentile). I used "bad" because it was short and fit nicely in the table...

Goldielocks

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Re: DONT Payoff your Mortgage Club
« Reply #899 on: October 16, 2018, 10:16:16 AM »
@RWD -- can you elaborate, 6.3% returns are "bad"  ?  Is that annual return or return over all 94 months?  Why "Bad"?

It's bad for nominal annual returns over 30 years as 90% of the time they have been higher. For a 94 month period 2.442% annual returns would be bad (again, worst 10 percentile). I used "bad" because it was short and fit nicely in the table...
Ah, thanks.   I see where my misunderstanding occurred.  I always use the nominal rates NET of inflation, so I can compare everything in today's dollars... and 6.3% over 94 months NET OF INFLATION is not bad at all.  :-)

I think you or another person already pointed out the impact of inflation, and how to adjust the final numbers to take it into account.. ..a mortgage is paid off in FUTURE dollars, at a $ amount decided today, but the dollars themselves are worth less and less due to inflation over time... which is why a mortgage has another advantage to keeping it for a long time.