Author Topic: DONT Payoff your Mortgage Club  (Read 143677 times)

couponvan

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Re: DONT Payoff your Mortgage Club
« Reply #1250 on: March 12, 2019, 04:03:48 PM »
Couponvan-
have you asked for a quote on a 5/1 ARM? If you can get a lower rate there than for the 30-year fixed (the spreads between these two often fluctuate), you might save money.

If you're concerned about the interest rate risk, you can get the 5/1 ARM, but pay what the 15-year fixed payments would have been so that you have a lower balance by the time the reset gets here.

It sounds like your plans involve only staying in this house for a few years, which is why I'm suggesting this.

That's a definite possibility, but DH would not go for variable rates....even if we only plan on staying a few years. 

FIreDrill

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Re: DONT Payoff your Mortgage Club
« Reply #1251 on: March 12, 2019, 05:20:16 PM »
Couponvan-
have you asked for a quote on a 5/1 ARM? If you can get a lower rate there than for the 30-year fixed (the spreads between these two often fluctuate), you might save money.

If you're concerned about the interest rate risk, you can get the 5/1 ARM, but pay what the 15-year fixed payments would have been so that you have a lower balance by the time the reset gets here.

It sounds like your plans involve only staying in this house for a few years, which is why I'm suggesting this.

That's a definite possibility, but DH would not go for variable rates....even if we only plan on staying a few years.
Do you plan on renting it out after you move or is this strictly short term housing?  If it short term housing I would suggest doing a rent/buy comparison.  Depending on the spread renting may be a better option for you over the next 5 years.

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eightyeighttoone

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Re: DONT Payoff your Mortgage Club
« Reply #1252 on: March 12, 2019, 10:31:29 PM »
Ok y'all convinced me. I have been paying an extra $50/month on my 4.5% fixed 30y since we signed the thing in 2015. It felt like a responsible move at the time. I will cancel that extra payment, and move that money into my 401(k) since I have not been maxing that out (just doing enough for the full ER contribution). The nice thing is I can boost my 401(k) by about $57/m since it's now pre-tax -- and it will feel the same. One small step!

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Re: DONT Payoff your Mortgage Club
« Reply #1253 on: March 13, 2019, 05:31:52 AM »
Ok y'all convinced me. I have been paying an extra $50/month on my 4.5% fixed 30y since we signed the thing in 2015. It felt like a responsible move at the time. I will cancel that extra payment, and move that money into my 401(k) since I have not been maxing that out (just doing enough for the full ER contribution). The nice thing is I can boost my 401(k) by about $57/m since it's now pre-tax -- and it will feel the same. One small step!
Woot!

EngagedToFIRE

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Re: DONT Payoff your Mortgage Club
« Reply #1254 on: March 13, 2019, 06:26:58 AM »
About to jump into a mortgage and it's killing me. I HATE seeing that money disappear from my accounts and vanish into (an albiet glorious) pile of wood and concrete.

Our taxable accounts have more than enough to buy the house in cash, but I'll keep it earning instead of locking it up in a thing. Still.. debt. It's a visceral fear. I figure in a few months I'll get over it, but it's going to be rough for a bit.

Reading through this, I do wonder about the timing.  Buy low, sell high.

The market is hot right now and seemingly past due for a hit.  Could it possibly be a good strategy to pull money out of the taxable accounts, that are probably way up, and pay off a mortgage?  Then start dollar cost averaging back in to the market?

I have one mortgage, and paid off another.  My real estate was up so much in value, without corresponding rent increases.  I loaded up after the crash 10 years ago.  The taxes were shooting up but rents were not.  So my ROI on the rentals was getting worse.  2% - 5% based on the sell value of the properties.  I decided to sell off my rentals for a huge profit.  I ended up with about $700k late last year.  Instead of dumping $700k at once in to a massive bull market, I thought it made more sense to take the guaranteed 4.5% return on my morgage and eliminate that debt.  And now without the mortgage debt, I'm putting what would have been my mortgage payment (and a lot more) in to the market every month.  Dollar cost averaging back in slower.  I'm not 100% sure that was the best move, but it seems to make sense.

Curious about the thoughts from some of the people here.  I do also have a 2nd home with a $200k mortgage that I'm not going to pay off even though I have the funds to do so.  Mostly because I am far too invested in real estate and don't want to drain my taxable accounts anymore.

nereo

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Re: DONT Payoff your Mortgage Club
« Reply #1255 on: March 13, 2019, 06:51:00 AM »

The market is hot right now and seemingly past due for a hit.  Could it possibly be a good strategy to pull money out of the taxable accounts, that are probably way up, and pay off a mortgage?  Then start dollar cost averaging back in to the market?


I wish I had $1 for every time a poster here talked about the markets being too "hot" and that a selloff was imminent.

If you pay off the mortgage you lose all future benefit. As the most common mortgages in the us are fixed and many in the 3-4.x% range the real (ie inflation adjusted) amount you pay each month steadily decreases, making it a fantastic inflation hedge.  What you are proposing is market timing followed by DCAing back into it.  Besides going against one of the central beliefs here ("don't try to time the market") the time frame involved will make it even more unlikely for you to come out ahead. 

For example, suppose you are paying $2k/month on a mortgage with $125k left.  If you decided to gut your taxable accounts to get rid of the mortgage it would take you over 5 years to pay it back with the $24k/year you "saved" from not having a mortgage.  You might even get really, really, really lucky and sell right before a big drop.  But five years later where is the market when you are still trying to buy your way back in? In most cases way above where it was when you started this whole exercise, even if you look at doing this just before a correction or recession.

Time in the market is much more important than timing the market.

brute

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Re: DONT Payoff your Mortgage Club
« Reply #1256 on: March 13, 2019, 07:08:45 AM »

The market is hot right now and seemingly past due for a hit.  Could it possibly be a good strategy to pull money out of the taxable accounts, that are probably way up, and pay off a mortgage?  Then start dollar cost averaging back in to the market?


I wish I had $1 for every time a poster here talked about the markets being too "hot" and that a selloff was imminent.

If you pay off the mortgage you lose all future benefit. As the most common mortgages in the us are fixed and many in the 3-4.x% range the real (ie inflation adjusted) amount you pay each month steadily decreases, making it a fantastic inflation hedge.  What you are proposing is market timing followed by DCAing back into it.  Besides going against one of the central beliefs here ("don't try to time the market") the time frame involved will make it even more unlikely for you to come out ahead. 

For example, suppose you are paying $2k/month on a mortgage with $125k left.  If you decided to gut your taxable accounts to get rid of the mortgage it would take you over 5 years to pay it back with the $24k/year you "saved" from not having a mortgage.  You might even get really, really, really lucky and sell right before a big drop.  But five years later where is the market when you are still trying to buy your way back in? In most cases way above where it was when you started this whole exercise, even if you look at doing this just before a correction or recession.

Time in the market is much more important than timing the market.

True dat. I'll probably be living in this thread for the first 6 months to remind myself that investing is the right way to go. Also, that I don't need to throw it all back into the low interest money market account that I'd been using for the past year to hold the down payment. It's hard seeing that go to zero, but I have plenty of other cushion in ETFs, a good income, and excellent credit that I can borrow against if the need were to arise and I couldn't move money around fast enough. It will be fine. I just want to see that big scrooge mcduckian pile of money at my fingertips. Emotions are dumb sometimes.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #1257 on: March 13, 2019, 07:31:56 AM »
I paid an extra 15.03 on my 15 YR fixed @ 2.625% so that I could get down to $99,999.99 with my most recent payment...please face punch me, it was all about the figures.

I'm paying an extra ~$143 so the principal goes down $1000 a month.   It's silly but it works for me.  No stones cast from me!
I pay an extra 136.09 so my payment is an even $1,500 and i pay more to principle instead of interest.  Will drop it to $1,400 in a few years.
$15.03 is not much more than a rounding error. $143 and $136 are not. You're both diverting over $1500 a year from equities. Unless you are fully maximizing every single retirement saving option available to you, this is sub-optimal.

Dicey, in my case I am.  I fully fund my TSP, a ROTH (conversion), my HSA and put a significant amount into a taxable account.  I go back and forth on the extra $100 but it is less then I spend on my cats a month so it is a rounding error to me honestly.
Good for you! You're doing it in the right order. Congratulations, @Formerly known as something.

Malkynn

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Re: DONT Payoff your Mortgage Club
« Reply #1258 on: March 13, 2019, 07:38:59 AM »

The market is hot right now and seemingly past due for a hit.  Could it possibly be a good strategy to pull money out of the taxable accounts, that are probably way up, and pay off a mortgage?  Then start dollar cost averaging back in to the market?


I wish I had $1 for every time a poster here talked about the markets being too "hot" and that a selloff was imminent.

If you pay off the mortgage you lose all future benefit. As the most common mortgages in the us are fixed and many in the 3-4.x% range the real (ie inflation adjusted) amount you pay each month steadily decreases, making it a fantastic inflation hedge.  What you are proposing is market timing followed by DCAing back into it.  Besides going against one of the central beliefs here ("don't try to time the market") the time frame involved will make it even more unlikely for you to come out ahead. 

For example, suppose you are paying $2k/month on a mortgage with $125k left.  If you decided to gut your taxable accounts to get rid of the mortgage it would take you over 5 years to pay it back with the $24k/year you "saved" from not having a mortgage.  You might even get really, really, really lucky and sell right before a big drop.  But five years later where is the market when you are still trying to buy your way back in? In most cases way above where it was when you started this whole exercise, even if you look at doing this just before a correction or recession.

Time in the market is much more important than timing the market.

A-fucken-men to that.

Plus, the less cash you have in your house, the easier it is to weather the economic crashes, possible job losses, provides more capital to jump on the many opportunities that crop up in crashes, etc, etc.

In a major crash, it's not like everything always just stays exactly the same and life chugs on like normal until recovery. The whole world gets all whacky and things can shift significantly in individual industries and regions. In a major crash, you want to be as flexible as possible in order to come out with the best outcome.

In fact, if everything did just stay the same and chug along until recovery, then leaving everything as-is is by far the best option.

Either way, if market timing was predictable, then we would have thousands of threads about all of the various approaches to market timing with countless of the local mathy-types posting endlessly about different statistical models, etc, etc.

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #1259 on: March 13, 2019, 08:17:57 AM »
The market is hot right now and seemingly past due for a hit.

Were you not paying attention? The market already took the hit back in December. It still hasn't even recovered to the peak from over a year ago (Jan 2018) and you're calling the market hot right now?

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #1260 on: March 13, 2019, 08:36:20 AM »
The market is hot right now and seemingly past due for a hit.

Were you not paying attention? The market already took the hit back in December. It still hasn't even recovered to the peak from over a year ago (Jan 2018) and you're calling the market hot right now?
Which market? Real Estate and the Stock Market don't necessarily move in tandem.

FIreDrill

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Re: DONT Payoff your Mortgage Club
« Reply #1261 on: March 13, 2019, 08:38:35 AM »
The market is hot right now and seemingly past due for a hit.

Were you not paying attention? The market already took the hit back in December. It still hasn't even recovered to the peak from over a year ago (Jan 2018) and you're calling the market hot right now?
Which market? Real Estate and the Stock Market don't necessarily move in tandem.
I believe they are referring to the total us stock market, or VTSAX.

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EngagedToFIRE

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Re: DONT Payoff your Mortgage Club
« Reply #1262 on: March 13, 2019, 08:50:08 AM »

The market is hot right now and seemingly past due for a hit.  Could it possibly be a good strategy to pull money out of the taxable accounts, that are probably way up, and pay off a mortgage?  Then start dollar cost averaging back in to the market?


I wish I had $1 for every time a poster here talked about the markets being too "hot" and that a selloff was imminent.

If you pay off the mortgage you lose all future benefit. As the most common mortgages in the us are fixed and many in the 3-4.x% range the real (ie inflation adjusted) amount you pay each month steadily decreases, making it a fantastic inflation hedge.  What you are proposing is market timing followed by DCAing back into it.  Besides going against one of the central beliefs here ("don't try to time the market") the time frame involved will make it even more unlikely for you to come out ahead. 

For example, suppose you are paying $2k/month on a mortgage with $125k left.  If you decided to gut your taxable accounts to get rid of the mortgage it would take you over 5 years to pay it back with the $24k/year you "saved" from not having a mortgage.  You might even get really, really, really lucky and sell right before a big drop.  But five years later where is the market when you are still trying to buy your way back in? In most cases way above where it was when you started this whole exercise, even if you look at doing this just before a correction or recession.

Time in the market is much more important than timing the market.

If there was a big drop, over 5 years you would have bought your way back in at a substantially discounted cost.  The gains would be much higher than if I put all of the funds in right now.  Instead of waiting years for the funds to come back after the drop, I'd see substantial gains by having a lower cost basis.  It seems if there was a drop, you would come out ahead paying off the mortgage then buying back in on the drop by cost averaging over a few years.

I understand the idea here is simply time in market and no timing at all.  That would have been a miss on my real estate which was getting exponentially worse returns.  Selling off and converting was a great strategy.  I'm not entirely convinced dropping $700k in at current levels instead of DCA would have been better.  Are you arguing against DCA then?

EngagedToFIRE

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Re: DONT Payoff your Mortgage Club
« Reply #1263 on: March 13, 2019, 08:55:02 AM »

The market is hot right now and seemingly past due for a hit.  Could it possibly be a good strategy to pull money out of the taxable accounts, that are probably way up, and pay off a mortgage?  Then start dollar cost averaging back in to the market?


I wish I had $1 for every time a poster here talked about the markets being too "hot" and that a selloff was imminent.

If you pay off the mortgage you lose all future benefit. As the most common mortgages in the us are fixed and many in the 3-4.x% range the real (ie inflation adjusted) amount you pay each month steadily decreases, making it a fantastic inflation hedge.  What you are proposing is market timing followed by DCAing back into it.  Besides going against one of the central beliefs here ("don't try to time the market") the time frame involved will make it even more unlikely for you to come out ahead. 

For example, suppose you are paying $2k/month on a mortgage with $125k left.  If you decided to gut your taxable accounts to get rid of the mortgage it would take you over 5 years to pay it back with the $24k/year you "saved" from not having a mortgage.  You might even get really, really, really lucky and sell right before a big drop.  But five years later where is the market when you are still trying to buy your way back in? In most cases way above where it was when you started this whole exercise, even if you look at doing this just before a correction or recession.

Time in the market is much more important than timing the market.

A-fucken-men to that.

Plus, the less cash you have in your house, the easier it is to weather the economic crashes, possible job losses, provides more capital to jump on the many opportunities that crop up in crashes, etc, etc.

In a major crash, it's not like everything always just stays exactly the same and life chugs on like normal until recovery. The whole world gets all whacky and things can shift significantly in individual industries and regions. In a major crash, you want to be as flexible as possible in order to come out with the best outcome.

In fact, if everything did just stay the same and chug along until recovery, then leaving everything as-is is by far the best option.

Either way, if market timing was predictable, then we would have thousands of threads about all of the various approaches to market timing with countless of the local mathy-types posting endlessly about different statistical models, etc, etc.

Couldn't you argue that not having a mortgage and substantially lower monthly bills also helps weather economic crashes?  I'm not opposed to mortgages.  I see the value in the uber low interest rates currently offered.  I have a mortgage on one of my houses that I plan to keep.  I'm just questioning a lump sum option.  And I think it's more of a DCA question.  Could you be better off in a bull market paying off the house then DCA back in?

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #1264 on: March 13, 2019, 09:44:39 AM »
The market is hot right now and seemingly past due for a hit.

Were you not paying attention? The market already took the hit back in December. It still hasn't even recovered to the peak from over a year ago (Jan 2018) and you're calling the market hot right now?
Which market? Real Estate and the Stock Market don't necessarily move in tandem.
I believe they are referring to the total us stock market, or VTSAX.
Correct. EngagedToFIRE was talking about the stock market being overpriced as justification for selling equities to pay down the mortgage. So I pointed out the recent 20% correction in the SP500 as a counterpoint.

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #1265 on: March 13, 2019, 09:47:50 AM »
Couldn't you argue that not having a mortgage and substantially lower monthly bills also helps weather economic crashes?  I'm not opposed to mortgages.  I see the value in the uber low interest rates currently offered.  I have a mortgage on one of my houses that I plan to keep.  I'm just questioning a lump sum option.  And I think it's more of a DCA question.  Could you be better off in a bull market paying off the house then DCA back in?
It's only better if you actually completely pay off your house and don't lose your job. If you have only partly paid off your house your mortgage payments don't get smaller. And if you lose your job you'll have no cushion to pay your bills. Having liquid assets is much more flexible.

On DCA:
https://jlcollinsnh.com/2014/11/12/stocks-part-xxvii-why-i-dont-like-dollar-cost-averaging/

nereo

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Re: DONT Payoff your Mortgage Club
« Reply #1266 on: March 13, 2019, 10:03:06 AM »

Couldn't you argue that not having a mortgage and substantially lower monthly bills also helps weather economic crashes?  I'm not opposed to mortgages.  I see the value in the uber low interest rates currently offered.  I have a mortgage on one of my houses that I plan to keep.  I'm just questioning a lump sum option.  And I think it's more of a DCA question.  Could you be better off in a bull market paying off the house then DCA back in?

You could come up with scenarios where this might be true, but in general it is not.  What you gain by not having a mortgage is lower monthly expenses (ie better cashflow). Typically this is a 20-30% reduction in monthly expenditures for most people.  What you lose by paying off the mortgage is liquid assets (ie investments easily transferable to cash). While it's true that - should the SHTF - you may have to sell some investments at a loss, including some to continue paying off your mortgage, but that's really the worst-case scenario.  For perspective, one version of this scenario has you losing your income right as the markets crash and you have an emergency expense of ~$10,000. But even in such a scenario investments give you more ways of combating 'really bad stuff'.  Had you paid off your mortgage when both the economy dropped and you lost your employment you would be in a more precarious situation precisely because your smaller investment portfolio would also decrease, and that unexpected expense would cost just as much. You still have the majority of your monthly expenses to meet, but less cash on hand to do so.

The worst-case scenario (as RWD has already address) is if you start to aggressively pay off the mortgage while ignoring investments and then the SHTF.  Under such a scenario you have the worst of both worlds: higher expenses and less (or no) savings. 

I'll state the obvious, which is that if you are fortunate enough to have both a large investment portfolio AND no mortgage you'll probably be fine regardless, even though you'll still come out ahead most of the time by keeping the mortgage.

Lum sum:  JL Collins is good, but also check out the white paper put out by Vanguard .  Numerous threads on here and Bogleheads too.

Malkynn

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Re: DONT Payoff your Mortgage Club
« Reply #1267 on: March 13, 2019, 10:34:33 AM »

The market is hot right now and seemingly past due for a hit.  Could it possibly be a good strategy to pull money out of the taxable accounts, that are probably way up, and pay off a mortgage?  Then start dollar cost averaging back in to the market?


I wish I had $1 for every time a poster here talked about the markets being too "hot" and that a selloff was imminent.

If you pay off the mortgage you lose all future benefit. As the most common mortgages in the us are fixed and many in the 3-4.x% range the real (ie inflation adjusted) amount you pay each month steadily decreases, making it a fantastic inflation hedge.  What you are proposing is market timing followed by DCAing back into it.  Besides going against one of the central beliefs here ("don't try to time the market") the time frame involved will make it even more unlikely for you to come out ahead. 

For example, suppose you are paying $2k/month on a mortgage with $125k left.  If you decided to gut your taxable accounts to get rid of the mortgage it would take you over 5 years to pay it back with the $24k/year you "saved" from not having a mortgage.  You might even get really, really, really lucky and sell right before a big drop.  But five years later where is the market when you are still trying to buy your way back in? In most cases way above where it was when you started this whole exercise, even if you look at doing this just before a correction or recession.

Time in the market is much more important than timing the market.

A-fucken-men to that.

Plus, the less cash you have in your house, the easier it is to weather the economic crashes, possible job losses, provides more capital to jump on the many opportunities that crop up in crashes, etc, etc.

In a major crash, it's not like everything always just stays exactly the same and life chugs on like normal until recovery. The whole world gets all whacky and things can shift significantly in individual industries and regions. In a major crash, you want to be as flexible as possible in order to come out with the best outcome.

In fact, if everything did just stay the same and chug along until recovery, then leaving everything as-is is by far the best option.

Either way, if market timing was predictable, then we would have thousands of threads about all of the various approaches to market timing with countless of the local mathy-types posting endlessly about different statistical models, etc, etc.

Couldn't you argue that not having a mortgage and substantially lower monthly bills also helps weather economic crashes?  I'm not opposed to mortgages.  I see the value in the uber low interest rates currently offered.  I have a mortgage on one of my houses that I plan to keep.  I'm just questioning a lump sum option.  And I think it's more of a DCA question.  Could you be better off in a bull market paying off the house then DCA back in?

I see your logic, but it requires paying off the mortgage entirely, until the mortgage is gone, you are actually at higher risk.
A few months of covering a mortgage is not a huge amount of cash, so it doesn't take massive sums to have a lot of flexibility. Paying off the mortgage means trading off massive financial flexibility for a marginal gain in monthly cash flow. There's a net loss of flexibility.

If you have a ~200K mortgage, then a year of payments is ~12K. If you have 40K, you have a year's worth of living expenses with no income at all, regardless of how much is left on the mortgage. If you pay off your mortgage completely with that 40K, you still need income to pay for the rest of life. How long are you expecting to be jobless? Do you potentially lose out on opportunities by having to take whatever job you can get in order to pay those lower monthly expenses?
What happens if a 40K opportunity comes up? Like buying into a business, or buying more real estate? Downturns open A LOT of doors if you have cash because most people will be cash-strapped.

As for your DCA question...maybe you could make more money doing that?
It would all depend on your timing, which has been proven to be tremendously unlikely to pull off.

Regardless, I come back to my initial point, which is that if it was a predictably good strategy, then it would be discussed to death here, on finance blogs, in books, etc.
At the end of the day, it's market timing...'nuff said.

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1268 on: March 13, 2019, 11:32:03 AM »
What happens if a 40K opportunity comes up? Like buying into a business, or buying more real estate? Downturns open A LOT of doors if you have cash because most people will be cash-strapped.

Just want to point out that downturns occur more frequently and with higher magnitude in the stock market than in real estate (so if a downturn did occur, you'd presumably be selling your investments at a huge loss). That's why sequence of returns risk usually favors paying off a mortgage at early retirement rather than keeping the mortgage and increasing your stash.

That being said, if you don't have any liquid holdings, you should avoid paying any extra on the mortgage for a number of reasons (as noted by Malkynn and many others).

nereo

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Re: DONT Payoff your Mortgage Club
« Reply #1269 on: March 13, 2019, 12:20:52 PM »
What happens if a 40K opportunity comes up? Like buying into a business, or buying more real estate? Downturns open A LOT of doors if you have cash because most people will be cash-strapped.

Just want to point out that downturns occur more frequently and with higher magnitude in the stock market than in real estate (so if a downturn did occur, you'd presumably be selling your investments at a huge loss). That's why sequence of returns risk usually favors paying off a mortgage at early retirement rather than keeping the mortgage and increasing your stash.

That being said, if you don't have any liquid holdings, you should avoid paying any extra on the mortgage for a number of reasons (as noted by Malkynn and many others).
Intersting.  Are you certain this is the case?
From what I see, your personal residence is an un-diversified asset.  You cannot change where it is. I've also seen housing markets which have crashed and stayed depressed for generations - something that the broad market has not done.  Smaller towns are infamous for this but it happens in large cities as well (example: Detroit), and with considerable frequency.

Regardless, the value of my home only matters to me when I intend to sell or refinance. So there is that.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #1270 on: March 13, 2019, 12:39:14 PM »
What happens if a 40K opportunity comes up? Like buying into a business, or buying more real estate? Downturns open A LOT of doors if you have cash because most people will be cash-strapped.

Just want to point out that downturns occur more frequently and with higher magnitude in the stock market than in real estate (so if a downturn did occur, you'd presumably be selling your investments at a huge loss). That's why sequence of returns risk usually favors paying off a mortgage at early retirement rather than keeping the mortgage and increasing your stash.

That being said, if you don't have any liquid holdings, you should avoid paying any extra on the mortgage for a number of reasons (as noted by Malkynn and many others).
Intersting.  Are you certain this is the case?
From what I see, your personal residence is an un-diversified asset.  You cannot change where it is. I've also seen housing markets which have crashed and stayed depressed for generations - something that the broad market has not done.  Smaller towns are infamous for this but it happens in large cities as well (example: Detroit), and with considerable frequency.

Regardless, the value of my home only matters to me when I intend to sell or refinance. So there is that.
I think fluctuation is perhaps the better term. The stock market fluctuates much more than Real Estate. RE cycles tend to take years. Even in your example, there was little fluctuation, just continuous downward spiral. I agree that one shouldn't bank on RE going up continuously, but it's far less volatile than the Stock Market. It's not a diversified asset, but if you're planted in an economically strong area, and the numbers make sense, why not?

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1271 on: March 13, 2019, 12:45:51 PM »
What happens if a 40K opportunity comes up? Like buying into a business, or buying more real estate? Downturns open A LOT of doors if you have cash because most people will be cash-strapped.

Just want to point out that downturns occur more frequently and with higher magnitude in the stock market than in real estate (so if a downturn did occur, you'd presumably be selling your investments at a huge loss). That's why sequence of returns risk usually favors paying off a mortgage at early retirement rather than keeping the mortgage and increasing your stash.

That being said, if you don't have any liquid holdings, you should avoid paying any extra on the mortgage for a number of reasons (as noted by Malkynn and many others).
Intersting.  Are you certain this is the case?
From what I see, your personal residence is an un-diversified asset.  You cannot change where it is. I've also seen housing markets which have crashed and stayed depressed for generations - something that the broad market has not done.  Smaller towns are infamous for this but it happens in large cities as well (example: Detroit), and with considerable frequency.

Regardless, the value of my home only matters to me when I intend to sell or refinance. So there is that.

You are accurate, the purchase of a home is an undiversified asset, subject to many unique forces. It is similar to buying a single stock, which often go full belly-up. But most of us know better than to buy a single stock (with apologies to the professional traders on these boards), and buy a market fund instead. So stocks have the benefit of diversification as an asset class, which a single home purchase does not. If you compare apples to apples, or asset class to asset class, then real estate typically provides a much smoother ride: https://www.businessinsider.com/real-estate-vs-stock-market-investment-2018-9.

That being said, we are asking the question of whether or not one should pay off the mortgage, conditional to the home having already been purchased. In that case, I can't think of any scenario where the home value is relevant to the decision of whether or not to pay off the home (for a Mustachian with extra savings to invest). If anybody can think of a scenario otherwise, I'd be curious to hear about it.

EngagedToFIRE

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Re: DONT Payoff your Mortgage Club
« Reply #1272 on: March 13, 2019, 01:36:21 PM »
What a great conversation!

Nereo, "unexpected expense".  If you were to pay off your home, I would hope you would also have some liquid funds.  Paying off a home and having no emergency fund would be silly.  At the same time, a paid off home could have an equity line attached to it for emergencies as well as credit cards.

RWD/Malkynn.  I am not advocating for the $1,000/mo towards mortgage approach. I don't like that.  My original comment was in regards to another poster who said they could pay the house cash.  I also brought up my personal situation where I paid the mortgage off in full.  For anyone looking to pay their house off early, I would suggest putting the money in an index fund like VTSAX, once it's enough to pay the house off in full, consider selling the position and paying off the house.  I am not a fan of putting small amounts towards the mortgage here and there. 

I think this does come down to a market timing question.  If the markets are sky high and clearly on a bull run, taking in past volatility, is it a terrible idea to liquidate some of the gains, pay off the house IN FULL if able, and DCA back in to the market assuming, based on historical performance, that the market could very well have a large correction?

I'm not a fan of trying to time the top and bottom of a market.  It's always good to buy no matter what, which is why I am using my previous mortgage payment to DCA back in to the market.  But there can be some clear indicators that the market is due to go south.  It was obvious that it was a good time to sell my real estate assets when I did.  Very smart.  Worked out well but I don't think that was luck.  I bought when I knew the market was trashed and values were low but rents were fairly stable.  Once the market went back up, it made a lot of sense to cash out the properties and put the funds in to higher performing assets.  The problem, is that the stock market right now is on a long bull run.  I've read "historical".  I'm no expert, which is why I started the conversation to hear other opinions, but it seems to me to make sense to get the 100% 4.5% ROI on my primary residence and DCA that money in to the market assuming there may be some volatility and potential sales on stocks coming up.  If my mortgage was like some of those here, 2%+ then I would definitely not pay it off.  But mine was 4.5% which is still low, but not so low that it's a no brainer to keep it.

Am I right?  I have no idea.  My logic could be flawed.  I'm no expert.

Malkynn

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Re: DONT Payoff your Mortgage Club
« Reply #1273 on: March 13, 2019, 01:47:05 PM »
^um...

Paying off the house in full vs not was a very small part of my response...

The rest of my post gives my answer with respect to what you've posted above.

Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #1274 on: March 13, 2019, 06:51:23 PM »
I think this does come down to a market timing question.  If the markets are sky high and clearly on a bull run, taking in past volatility, is it a terrible idea to liquidate some of the gains, pay off the house IN FULL if able, and DCA back in to the market assuming, based on historical performance, that the market could very well have a large correction?


Yep, it is terrible idea. 

There are several misconceptions in your post, including one I see almost every day here.  Namely, because the market is now highly valued, there must be a big crash around the corner.  This notion is false.  There might be a big crash around the corner, or the market just might trend sideways for years.   Both have happened in the past.  You seem to be betting on a big crash in some future date, and you have no earthly idea if that will happen or not. 

We all know that stocks are supposed to be long term investments.  Therefore, the only rational way to value making a stock investment is over some long period of time.  Now, if stocks are valued higher than average, then we can reasonably expect the long term return will be lower than average.  That's okay.  You can't be above average all the time.  If you sit in cash waiting for a crash and then invest, you are also effectively lowering your long term rate of return by some amount.   Since we don't know how much, why bet against yourself?  The caveat is if you are close to the end of your mortgage, then the calculation changes.  Early in the term paying off the mortgage is nutso.   

DCA is almost always a bad strategy for too many reasons to get into here.  But basically you are again betting against yourself. 

TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #1275 on: March 13, 2019, 07:36:17 PM »
There are several misconceptions in your post, including one I see almost every day here.  Namely, because the market is now highly valued, there must be a big crash around the corner. 

...

I'm just gonna point out that we had a 3.4% gain in less than a week...  If you weren't in the market then you missed out on that.

Even if its overvalued but it goes up 35% more before the next 30% correction, then there is no "I told you so moment", you will have lost out anyways not even counting dividends...

Its strange to me how many pay-off-the-mortgage types are also willing to try (and fail) timing the market...  :/

EngagedToFIRE

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Re: DONT Payoff your Mortgage Club
« Reply #1276 on: March 14, 2019, 07:26:50 AM »
There are several misconceptions in your post, including one I see almost every day here.  Namely, because the market is now highly valued, there must be a big crash around the corner. 

...

I'm just gonna point out that we had a 3.4% gain in less than a week...  If you weren't in the market then you missed out on that.

Even if its overvalued but it goes up 35% more before the next 30% correction, then there is no "I told you so moment", you will have lost out anyways not even counting dividends...

Its strange to me how many pay-off-the-mortgage types are also willing to try (and fail) timing the market...  :/

I would like to point out that Dollar Cost Averaging is all about not timing the market.  Everything I've read suggests dollar cost averaging is the way to go.  Telecaster, you made a comment that DCA is almost always a bad strategy.  We don't need to get in to tons of reasons why, but could you point me to an article that you like so I can better understand your position?

I'm not a "pay off the mortgage" type, per se.  I think finance is too dynamic for such rules.  As I said, I do still hold a mortgage on a second property.  It's not my plan to pay it off.  My dilemma was that I had a ton of cash.  I know, dilemma!  I had 3 options, assuming my goal is to invest it.  Invest it all at once in the market.  Hold the cash and DCA slowly, thus having lots of cash on hand losing value or in bonds/low risk investments that are substantially less than my mortgage interest.  Or third, pay off the house, then use the old mortgage payment to DCA in to the market.

All of my reading suggests DCA is a good idea.  Some here are challenging that idea and it's intriguing as I thought DCA was a well accepted good practice.  In my case, it seemed paying off the mortgage then making large monthly investments in to an index fund makes sense.

Whether the so called experts are right or wrong about us due a major crash, that's left to be seen.  I think their commentary and reasoning is convincing.  We all know the stock market can and does see huge corrections and crashes vs real estate which is why DCA is supposedly effective.  My comment ultimately is pretty simple.  Is it possible that it could be a good idea to harvest big gains during a long bull market and pay off a mortgage in full, providing a higher interest mortgage (4%+), then DCA your old mortgage payment back in to the market?  Considering the title of the thread, I was expecting contrarian opinions that would help expand my own understanding.  I like that and the insight is great.

I'll bookmark this page of the thread, it would be interesting to see how this ages.
« Last Edit: March 14, 2019, 07:31:06 AM by EngagedToFIRE »

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #1277 on: March 14, 2019, 08:29:04 AM »
What makes real estate crashes more damaging isn't the price variation, but the leverage.

But here at the DNPYM club, we think about our mortgage debt as being set aside All our assets. Our ability to maintain a $200,000 loan is far stronger when it's backed by $300,000 of real estate and $100,000 of investments. And if those $100,000 of investments grow to $300,000, they pay for that mortgage completely, even if a weak local real estate market has sliced off 30% of your equity in the property.

terrifictim

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Re: DONT Payoff your Mortgage Club
« Reply #1278 on: March 14, 2019, 08:54:32 AM »
In regards to DCA - it's a good strategy when it's contributing a consistent amount out of your income (W2 or otherwise) and it's done over a period of years.
When it's done with a large lump sum, however, it's suboptimal because of "time in the market better than timing the market". Granted investing in a lump sum at once is statistically the better choice - but it doesn't guarantee a better outcome for a particular combination of financial parameters.

References:
https://jlcollinsnh.com/2014/11/12/stocks-part-xxvii-why-i-dont-like-dollar-cost-averaging/
https://www.madfientist.com/front-loading/
https://affordanything.com/why-dollar-cost-averaging-stinks/

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1279 on: March 14, 2019, 09:39:36 AM »
There are several misconceptions in your post, including one I see almost every day here.  Namely, because the market is now highly valued, there must be a big crash around the corner. 

...

I'm just gonna point out that we had a 3.4% gain in less than a week...  If you weren't in the market then you missed out on that.

Even if its overvalued but it goes up 35% more before the next 30% correction, then there is no "I told you so moment", you will have lost out anyways not even counting dividends...

Its strange to me how many pay-off-the-mortgage types are also willing to try (and fail) timing the market...  :/

I would like to point out that Dollar Cost Averaging is all about not timing the market.  Everything I've read suggests dollar cost averaging is the way to go.  Telecaster, you made a comment that DCA is almost always a bad strategy.  We don't need to get in to tons of reasons why, but could you point me to an article that you like so I can better understand your position?

I'm not a "pay off the mortgage" type, per se.  I think finance is too dynamic for such rules.  As I said, I do still hold a mortgage on a second property.  It's not my plan to pay it off.  My dilemma was that I had a ton of cash.  I know, dilemma!  I had 3 options, assuming my goal is to invest it.  Invest it all at once in the market.  Hold the cash and DCA slowly, thus having lots of cash on hand losing value or in bonds/low risk investments that are substantially less than my mortgage interest.  Or third, pay off the house, then use the old mortgage payment to DCA in to the market.

All of my reading suggests DCA is a good idea.  Some here are challenging that idea and it's intriguing as I thought DCA was a well accepted good practice.  In my case, it seemed paying off the mortgage then making large monthly investments in to an index fund makes sense.

Whether the so called experts are right or wrong about us due a major crash, that's left to be seen.  I think their commentary and reasoning is convincing.  We all know the stock market can and does see huge corrections and crashes vs real estate which is why DCA is supposedly effective.  My comment ultimately is pretty simple.  Is it possible that it could be a good idea to harvest big gains during a long bull market and pay off a mortgage in full, providing a higher interest mortgage (4%+), then DCA your old mortgage payment back in to the market?  Considering the title of the thread, I was expecting contrarian opinions that would help expand my own understanding.  I like that and the insight is great.

I'll bookmark this page of the thread, it would be interesting to see how this ages.

This is not a poor strategy in my opinion, presuming you have enough liquidity to cover any minor emergencies (and all financial emergencies are relatively minor if you live a Mustachian lifestyle). You're increasing your asset allocation to bonds (essentially) at a time when low returns and high volatility are expected in the stock market (ref Vanguard market outlook for 2019: https://personal.vanguard.com/pdf/ISGVEMO_122018.pdf). So you're essentially getting a risk-free rate of 4.5% when U.S. stocks are expected to return 3-5% (with a median volatility of 16.3%) over the next decade (per Vanguard).

Don't take it personally, but it seems that some people on these boards view any approach to investing that looks at anything other than historical data of U.S. market returns as "market timing". Theirs is not a bad approach for the layman investor, but at the same time one can make calculated risks with the knowledge available and not lose their Mustachian card.

(Note that if you were DCAing with cash, I would be singing a different tune.)

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1280 on: March 14, 2019, 09:47:34 AM »
I'm just gonna point out that we had a 3.4% gain in less than a week...  If you weren't in the market then you missed out on that.

I'm just going to point out that pointing out weekly blips in the stock market is not a way I would recommend to think about investing. (It's like pointing out minor weather fluctuations when discussing climate.)

TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #1281 on: March 14, 2019, 10:36:43 AM »
I'm just gonna point out that we had a 3.4% gain in less than a week...  If you weren't in the market then you missed out on that.

I'm just going to point out that pointing out weekly blips in the stock market is not a way I would recommend to think about investing. (It's like pointing out minor weather fluctuations when discussing climate.)

Except very short periods of time can have huge impacts on returns.  The "Time in the market" argument is primarily focused on not missing out on the best days, as well as collecting dividends and riding the upward trend.

https://www.ifa.com/12steps/step4/missing_the_best_and_worst_days/

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1282 on: March 14, 2019, 10:56:40 AM »
I'm just gonna point out that we had a 3.4% gain in less than a week...  If you weren't in the market then you missed out on that.

I'm just going to point out that pointing out weekly blips in the stock market is not a way I would recommend to think about investing. (It's like pointing out minor weather fluctuations when discussing climate.)

Except very short periods of time can have huge impacts on returns.  The "Time in the market" argument is primarily focused on not missing out on the best days, as well as collecting dividends and riding the upward trend.

https://www.ifa.com/12steps/step4/missing_the_best_and_worst_days/

I don't disagree, but it cuts both ways. What if we had a 3.4%* loss last week? Or next week? (Or a 7.7% loss the week before Christmas?) Really none of the small movements matter if you're investing for the long-term. 100% agree with "Time in the Market", but that's to capture the long-term expected returns while completely ignoring the short-term noise.

*By the way, not sure which index you are looking at. S&P 500 returned 2.5% since last Friday's low.

K-ice

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Re: DONT Payoff your Mortgage Club
« Reply #1283 on: March 14, 2019, 11:19:57 AM »
I think the DCA argument depends on how you acquired that large chunk of cash.

a) An inheritance or something unexpected

b) You squirreled away a bunch of cash over time and are now asking what to do with it.

On the day you need to make your decision the cases are the same, but ideally you won't find yourself in situation b because you were DCA over the past year anyway.

I confess, I have been in situation b before Doh!

Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #1284 on: March 14, 2019, 12:26:01 PM »
I would like to point out that Dollar Cost Averaging is all about not timing the market.  Everything I've read suggests dollar cost averaging is the way to go.  Telecaster, you made a comment that DCA is almost always a bad strategy.  We don't need to get in to tons of reasons why, but could you point me to an article that you like so I can better understand your position?

Sure, here's a paper from Vanguard:

https://personal.vanguard.com/pdf/ISGDCA.pdf

Here's the basic logic:  The market goes up 2/3 and down 1/3 of the time.   So if you DCA in a lump sum, you lose 2/3 of the time.  And even if you DCA, eventually you will fully invested in the market anyway, right?   You only avoid volatility for the DCA period and then only for the part of your investment that isn't invested.   

Stocks of course are long term investments.   So if you look at your portfolio 30 years from now, do you think it would matter to the final value if you were fully invested in 2019 or on DCA'ed into 2020?   


Quote
Whether the so called experts are right or wrong about us due a major crash, that's left to be seen.  I think their commentary and reasoning is convincing.  We all know the stock market can and does see huge corrections and crashes vs real estate which is why DCA is supposedly effective.  My comment ultimately is pretty simple.  Is it possible that it could be a good idea to harvest big gains during a long bull market and pay off a mortgage in full, providing a higher interest mortgage (4%+), then DCA your old mortgage payment back in to the market?  Considering the title of the thread, I was expecting contrarian opinions that would help expand my own understanding.  I like that and the insight is great.


There is a little bit of nuance to the "don't pay off the mortgage" philosophy, but basically the key is that mortgages are long term.   If your remaining term is short, then maybe paying it off isn't a terrible idea.  Otherwise it really doesn't make sense.   Remember that 4% mortgage payment is hit by inflation every year.  Inflation is around 2% currently, so you don't really have a high bar to clear to find better performing investments.   

TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #1285 on: March 14, 2019, 12:32:43 PM »
There is a little bit of nuance to the "don't pay off the mortgage" philosophy, but basically the key is that mortgages are long term.   If your remaining term is short, then maybe paying it off isn't a terrible idea.  Otherwise it really doesn't make sense.   Remember that 4% mortgage payment is hit by inflation every year.  Inflation is around 2% currently, so you don't really have a high bar to clear to find better performing investments.

Along this line of thinking, I just took advantage of CIT Banks savings account at 2.45% (with 25k+ in the account or at least a $100 deposit each month).  Stacked with the average inflation rate of 2.0% across the last three years I'm getting 4.45% FDIC insured....  And MUCH more liquid in an emergency then equity in the house.

In other words, a low rate fixed mortgage is a terrible investment vehicle for mustachians (but good for non-savers as it forces some version of savings).

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1286 on: March 14, 2019, 12:40:09 PM »
There is a little bit of nuance to the "don't pay off the mortgage" philosophy, but basically the key is that mortgages are long term.   If your remaining term is short, then maybe paying it off isn't a terrible idea.  Otherwise it really doesn't make sense.   Remember that 4% mortgage payment is hit by inflation every year.  Inflation is around 2% currently, so you don't really have a high bar to clear to find better performing investments.

Along this line of thinking, I just took advantage of CIT Banks savings account at 2.45% (with 25k+ in the account or at least a $100 deposit each month).  Stacked with the average inflation rate of 2.0% across the last three years I'm getting 4.45% FDIC insured....  And MUCH more liquid in an emergency then equity in the house.

In other words, a low rate fixed mortgage is a terrible investment vehicle for mustachians (but good for non-savers as it forces some version of savings).

Are you saying your savings account is indexed for inflation?

ETA: I apologize for the sarcasm. I didn't get much sleep last night. That being said, you can't reasonably subtract inflation from your mortgage and talk about 'real returns' and in the next breath add inflation to the investment alternative (even if it was indexed to inflation, whereas yours I'm quite certain isn't).
« Last Edit: March 14, 2019, 12:47:45 PM by Boofinator »

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1287 on: March 14, 2019, 12:55:39 PM »
I would like to point out that Dollar Cost Averaging is all about not timing the market.  Everything I've read suggests dollar cost averaging is the way to go.  Telecaster, you made a comment that DCA is almost always a bad strategy.  We don't need to get in to tons of reasons why, but could you point me to an article that you like so I can better understand your position?

Sure, here's a paper from Vanguard:

https://personal.vanguard.com/pdf/ISGDCA.pdf

Here's the basic logic:  The market goes up 2/3 and down 1/3 of the time.   So if you DCA in a lump sum, you lose 2/3 of the time.  And even if you DCA, eventually you will fully invested in the market anyway, right?   You only avoid volatility for the DCA period and then only for the part of your investment that isn't invested.   

Stocks of course are long term investments.   So if you look at your portfolio 30 years from now, do you think it would matter to the final value if you were fully invested in 2019 or on DCA'ed into 2020?   


Quote
Whether the so called experts are right or wrong about us due a major crash, that's left to be seen.  I think their commentary and reasoning is convincing.  We all know the stock market can and does see huge corrections and crashes vs real estate which is why DCA is supposedly effective.  My comment ultimately is pretty simple.  Is it possible that it could be a good idea to harvest big gains during a long bull market and pay off a mortgage in full, providing a higher interest mortgage (4%+), then DCA your old mortgage payment back in to the market?  Considering the title of the thread, I was expecting contrarian opinions that would help expand my own understanding.  I like that and the insight is great.


There is a little bit of nuance to the "don't pay off the mortgage" philosophy, but basically the key is that mortgages are long term.   If your remaining term is short, then maybe paying it off isn't a terrible idea.  Otherwise it really doesn't make sense.   Remember that 4% mortgage payment is hit by inflation every year.  Inflation is around 2% currently, so you don't really have a high bar to clear to find better performing investments.

Regarding DCAing: EngagedToFIRE did lump-sum. He just lump-summed into his mortgage, rather into stocks. It's not like he's hoarding cash.

Regarding inflation and mortgages: I thought we beat this to death already. All that matters is the expected return and volatility of your investment alternatives (unless your alternative investment is linked to inflation, like TIPS). Imagine a hypothetical credit card with an APY of 10% and interest-only payments. 'Bob' has a $100,000 balance. Should Bob pay this off as quickly as possible, or hold on to it for as long as possible because inflation will eventually reduce his payments to a pittance in real terms (and of course he'll invest the difference in equities)?

EngagedToFIRE

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Re: DONT Payoff your Mortgage Club
« Reply #1288 on: March 14, 2019, 02:30:56 PM »
I would like to point out that Dollar Cost Averaging is all about not timing the market.  Everything I've read suggests dollar cost averaging is the way to go.  Telecaster, you made a comment that DCA is almost always a bad strategy.  We don't need to get in to tons of reasons why, but could you point me to an article that you like so I can better understand your position?

Sure, here's a paper from Vanguard:

https://personal.vanguard.com/pdf/ISGDCA.pdf

Here's the basic logic: The market goes up 2/3 and down 1/3 of the time.   So if you DCA in a lump sum, you lose 2/3 of the time.  And even if you DCA, eventually you will fully invested in the market anyway, right?   You only avoid volatility for the DCA period and then only for the part of your investment that isn't invested.   

Stocks of course are long term investments.   So if you look at your portfolio 30 years from now, do you think it would matter to the final value if you were fully invested in 2019 or on DCA'ed into 2020?   


Quote
Whether the so called experts are right or wrong about us due a major crash, that's left to be seen.  I think their commentary and reasoning is convincing.  We all know the stock market can and does see huge corrections and crashes vs real estate which is why DCA is supposedly effective.  My comment ultimately is pretty simple.  Is it possible that it could be a good idea to harvest big gains during a long bull market and pay off a mortgage in full, providing a higher interest mortgage (4%+), then DCA your old mortgage payment back in to the market?  Considering the title of the thread, I was expecting contrarian opinions that would help expand my own understanding.  I like that and the insight is great.


There is a little bit of nuance to the "don't pay off the mortgage" philosophy, but basically the key is that mortgages are long term.   If your remaining term is short, then maybe paying it off isn't a terrible idea.  Otherwise it really doesn't make sense.   Remember that 4% mortgage payment is hit by inflation every year.  Inflation is around 2% currently, so you don't really have a high bar to clear to find better performing investments.

I like this explanation.  But to reiterate, I would never suggest holding cash then DCA over a long period of time.  My strategy was to take the 4.5% on my mortgage as a guaranteed return, then use the previous mortgage payment ($6,000/mo) to buy in to the market over a period of time.

I only had this mortgage for 3 years.  That said, I do plan on keeping my other mortgage for the term, which has 28 years left.  I have a Fundrise investment equal to the original mortgage amount that more than covers that mortgage along with the expenses for that house, essentially giving us a free vacation house which is a much better return than paying off the mortgage.  In fact, it provides a surplus that I reinvest.

Boofinator,

If the market outlook is about the same as my mortgage, then it seems I was probably reasonable in my approach of getting rid of the 4.5% mortgage.  I'll continue investing every month, often several times per month.  Maybe we'll get a big drop and cheaper prices, who knows.  Time shall tell.

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1289 on: March 14, 2019, 02:54:56 PM »
If the market outlook is about the same as my mortgage, then it seems I was probably reasonable in my approach of getting rid of the 4.5% mortgage.  I'll continue investing every month, often several times per month.  Maybe we'll get a big drop and cheaper prices, who knows.  Time shall tell.

I'd say it would be a reasonable approach, depending on your financial situation. If you consider market outlook and are close to FI, I think you've probably made the optimal investment; if you don't consider market outlook (and there is a very good case that can be made for this approach) and are close to FI, I think you've probably made a wise decision (one that does not result in the highest expected return, but it does provide a hedge against sequence of returns risk); and if you aren't close to FI, I would not recommend putting money into a mortgage at that rate, as you have a long time horizon and should be eager to take risk.

"Time shall tell", indeed. However, if I may get philosophical for a moment, hindsight confirmation is perhaps not the best way to view a decision-making process. You can make an optimal decision and come out behind most of the time. (Insurance is a good example of this.)

nereo

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Re: DONT Payoff your Mortgage Club
« Reply #1290 on: March 14, 2019, 03:54:36 PM »

"Time shall tell", indeed. However, if I may get philosophical for a moment, hindsight confirmation is perhaps not the best way to view a decision-making process. You can make an optimal decision and come out behind most of the time. (Insurance is a good example of this.)

I'd just like to say how glad I am to see someone else stress this.
All too often I hear people say things like "I got an inheritance and invested it, but then the market dropped almost 10% - turns out I made a bad decision investing then".
No!  This person made a good decision given all that was known or knowable at the time.  Just because an outcome is bad doesn't mean the underlying decision was bad.

Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #1291 on: March 14, 2019, 04:32:54 PM »
Imagine a hypothetical credit card with an APY of 10% and interest-only payments.'Bob' has a $100,000 balance. Should Bob pay this off as quickly as possible, or hold on to it for as long as possible because inflation will eventually reduce his payments to a pittance in real terms (and of course he'll invest the difference in equities)?

That 10% APR is being reduced by about 2% a year, so 8% real.  So, if you know of an investment that will return greater than 8% after inflation, then you should put money to that investment instead of paying off your credit card. 

I'm baffled why this is such a difficult concept for some. 


Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1292 on: March 14, 2019, 06:09:24 PM »
Imagine a hypothetical credit card with an APY of 10% and interest-only payments.'Bob' has a $100,000 balance. Should Bob pay this off as quickly as possible, or hold on to it for as long as possible because inflation will eventually reduce his payments to a pittance in real terms (and of course he'll invest the difference in equities)?

That 10% APR is being reduced by about 2% a year, so 8% real.  So, if you know of an investment that will return greater than 8% after inflation, then you should put money to that investment instead of paying off your credit card. 

I'm baffled why this is such a difficult concept for some. 


US stocks have historically returned about 11% on average. What city do you live in? I'd be happy to fly out and meet you personally if you'd like a six-figure loan at 10%.

In all seriousness, you probably are aware that this would be a really bad investment (ignore for the moment that you could certainly get cheaper money). Why?

By the way, the concept of real versus nominal returns is not difficult at all. It is the application of that concept to investment decisions which seems to be difficult for some.

EngagedToFIRE

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Re: DONT Payoff your Mortgage Club
« Reply #1293 on: March 15, 2019, 08:30:43 AM »
If the market outlook is about the same as my mortgage, then it seems I was probably reasonable in my approach of getting rid of the 4.5% mortgage.  I'll continue investing every month, often several times per month.  Maybe we'll get a big drop and cheaper prices, who knows.  Time shall tell.

I'd say it would be a reasonable approach, depending on your financial situation. If you consider market outlook and are close to FI, I think you've probably made the optimal investment; if you don't consider market outlook (and there is a very good case that can be made for this approach) and are close to FI, I think you've probably made a wise decision (one that does not result in the highest expected return, but it does provide a hedge against sequence of returns risk); and if you aren't close to FI, I would not recommend putting money into a mortgage at that rate, as you have a long time horizon and should be eager to take risk.

"Time shall tell", indeed. However, if I may get philosophical for a moment, hindsight confirmation is perhaps not the best way to view a decision-making process. You can make an optimal decision and come out behind most of the time. (Insurance is a good example of this.)


I am already FI and semi RE.  Business owner with a business that 98% runs itself.  I am not sure I'll ever fully retire since I have almost all of the freedom one would want when retiring already.

My comment about "time shall tell" was more about curiosity than any sort of confirmation.  It seems my financial decision was reasonable and made when there are multiple "correct" decisions that could be made.   Time will tell which one comes out ahead.

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1294 on: March 15, 2019, 08:44:58 AM »
If the market outlook is about the same as my mortgage, then it seems I was probably reasonable in my approach of getting rid of the 4.5% mortgage.  I'll continue investing every month, often several times per month.  Maybe we'll get a big drop and cheaper prices, who knows.  Time shall tell.

I'd say it would be a reasonable approach, depending on your financial situation. If you consider market outlook and are close to FI, I think you've probably made the optimal investment; if you don't consider market outlook (and there is a very good case that can be made for this approach) and are close to FI, I think you've probably made a wise decision (one that does not result in the highest expected return, but it does provide a hedge against sequence of returns risk); and if you aren't close to FI, I would not recommend putting money into a mortgage at that rate, as you have a long time horizon and should be eager to take risk.

"Time shall tell", indeed. However, if I may get philosophical for a moment, hindsight confirmation is perhaps not the best way to view a decision-making process. You can make an optimal decision and come out behind most of the time. (Insurance is a good example of this.)


I am already FI and semi RE.  Business owner with a business that 98% runs itself.  I am not sure I'll ever fully retire since I have almost all of the freedom one would want when retiring already.

My comment about "time shall tell" was more about curiosity than any sort of confirmation.  It seems my financial decision was reasonable and made when there are multiple "correct" decisions that could be made.   Time will tell which one comes out ahead.

I didn't want to imply in my statement on decision-making that it was directed at you. Apologies that I didn't better generalize it.

As nereo reiterated, the decision-making process is inherently forward-looking between options with uncertain outcomes. Some people think (or imply) hindsight should be used to judge the value of a decision, but instead hindsight should just be used to inform future decisions.

Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #1295 on: March 15, 2019, 06:10:01 PM »
Imagine a hypothetical credit card with an APY of 10% and interest-only payments.'Bob' has a $100,000 balance. Should Bob pay this off as quickly as possible, or hold on to it for as long as possible because inflation will eventually reduce his payments to a pittance in real terms (and of course he'll invest the difference in equities)?

That 10% APR is being reduced by about 2% a year, so 8% real.  So, if you know of an investment that will return greater than 8% after inflation, then you should put money to that investment instead of paying off your credit card. 

I'm baffled why this is such a difficult concept for some. 


US stocks have historically returned about 11% on average. What city do you live in? I'd be happy to fly out and meet you personally if you'd like a six-figure loan at 10%.

In all seriousness, you probably are aware that this would be a really bad investment (ignore for the moment that you could certainly get cheaper money). Why?

By the way, the concept of real versus nominal returns is not difficult at all. It is the application of that concept to investment decisions which seems to be difficult for some.

You're right.  It is totally foolish to consider the effects of inflation. 
« Last Edit: March 15, 2019, 06:13:35 PM by Telecaster »

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #1296 on: March 15, 2019, 08:05:27 PM »
Imagine a hypothetical credit card with an APY of 10% and interest-only payments.'Bob' has a $100,000 balance. Should Bob pay this off as quickly as possible, or hold on to it for as long as possible because inflation will eventually reduce his payments to a pittance in real terms (and of course he'll invest the difference in equities)?

That 10% APR is being reduced by about 2% a year, so 8% real.  So, if you know of an investment that will return greater than 8% after inflation, then you should put money to that investment instead of paying off your credit card. 

I'm baffled why this is such a difficult concept for some. 


US stocks have historically returned about 11% on average. What city do you live in? I'd be happy to fly out and meet you personally if you'd like a six-figure loan at 10%.

In all seriousness, you probably are aware that this would be a really bad investment (ignore for the moment that you could certainly get cheaper money). Why?

By the way, the concept of real versus nominal returns is not difficult at all. It is the application of that concept to investment decisions which seems to be difficult for some.

You're right.  It is totally foolish to consider the effects of inflation.

I never said that inflation doesn't matter, only that it doesn't matter when considering two asset classes that don't correlate well with inflation. Read my previous posts. But to get into it again....

Historic stock returns do not correlate well with inflation (there might be some very delayed (10+ years) correlation). At very high inflation and deflation, stocks have done horribly (in nominal terms). So, when you have two asset classes that do not correlate with inflation (mortgage and equities), please tell me how inflation comes into this debate?

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Re: DONT Payoff your Mortgage Club
« Reply #1297 on: March 17, 2019, 11:22:06 AM »
Wow, for once Yahoo Finance picked up something interesting. Good food for thought.

https://www.yahoo.com/finance/news/7-reasons-not-pay-off-165620088.html

7 Reasons Not to Pay Off Your Mortgage Before Retiring
Money Talks News  Emmet Pierce,Money Talks News 2 hours 36 minutes ago
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Paying off a home mortgage before you retire is a common goal, but it isn’t always the best financial strategy.

It could end up costing you in the long run — such as by leaving you without cash savings to cover an unexpected expense or without the flexibility to take advantage of an opportunity to earn a better return on your money.

What follows are some financially shrewd reasons to carry your mortgage debt into retirement.

1. You plan to sell your home
Many people decide to downsize before or in retirement. They find that a smaller, less expensive home better fits their retirement lifestyle, as we detail in “7 Unexpected Benefits of Downsizing in Retirement.”

If you think you may be selling your home soon, think hard before you pay off the mortgage on your current home. That’s because selling your dwelling may give you the money you need to repay your home loan without having to deplete your savings.

2. You plan to rent out your home — or a room
Does your retirement plan include relocating and renting out your present home? There’s no pressing need to pay off your home loan if the tenants’ rent payments will cover your future mortgage costs.

You could avoid tapping into your savings to pay off the loan. You may even realize a profit after your mortgage bill is paid each month.

That could be true even if you remain in your home and simply rent out a spare room through a vacation rental site like Airbnb.

A 2018 analysis by Homes.com found that in some cities, a homeowner could make enough money by renting out a room just four or five nights per month to cover a monthly mortgage payment. We detailed the analysis findings in “Do This a Few Days Each Month and Watch Your Mortgage Disappear.”

3. It’s more important to repay debts with higher interest rates
Before you commit to paying off a mortgage, determine whether there are better ways to spend your money.

For example, if you’ve purchased or refinanced a home in the past decade, your home loan likely has a relatively low interest rate. And if that’s the case, you will be better off financially if you first repay debts with higher interest rates, such as credit cards debt.

Paying off the debt with the highest interest rate first will save you more money in interest payments over the life of your debt.

4. You’re still saving for retirement
Not everyone completes their career with enough money to enjoy a comfortable retirement. That’s why many Americans continue to work after age 65, the traditional retirement age.

If you’re contributing to a retirement account, such as an IRA or a 401(k), it may make more sense to use any extra money you have to build your retirement savings rather than to repay your mortgage ahead of schedule.

Retirement accounts are tax-advantaged. So, saving money in one will likely enable you to lower your taxable income now or avoid taxation when you withdraw funds from the account in retirement, depending on whether the account is Roth or traditional.

To learn more, check out “Confused by Retirement Accounts? Roth, Regular IRAs and 401(k)s Made Simple.”

5. You’re low on cash reserves
Maintaining an emergency fund is critical for financial stability. If paying off a mortgage will drain your cash reserves, it could leave you in a weakened position. No one can predict when an emergency will happen.

Corey Vandenberg, a mortgage banker in Lafayette, Indiana, says people who pay off their mortgages early often end up with lots of home equity but no money in the bank.

“This position is not financially healthy,” he tells Money Talks News. “You have to have an emergency fund for life’s unexpected events.”

6. You’d rather maximize your income through investments
If you pay off your mortgage, you will have less cash to invest. Much of your wealth will be tied up in the value of your home. The only way to get at it will be to sell the home or take out a loan against your home equity.

Without any liquid funds on hands, it will be more difficult to take advantage of an investment opportunity.

Watch the video of ‘7 Reasons Not to Pay Off Your Mortgage Before Retiring’ on MoneyTalksNews.com.

7. You want to deduct your mortgage interest
One of the benefits of being a homeowner is the ability to deduct the interest you pay on your home loan.

The Tax Cuts and Jobs Act of 2017 — the federal tax reform law — placed new limits on the deduction, but it’s still beneficial to homeowners, says Eric Tyson, co-author of “Mortgages for Dummies.”

For loans taken out after Dec. 15, 2017, most homeowners can deduct the interest they paid on up to $750,000 of qualified personal residence debt on a first and/or second home, Tyson tells Money Talks News. Married couples filing separate tax returns can deduct up to $375,000.

The previous limits were $1 million and, for married taxpayers filing separately, $500,000. If you took out your home loan before Dec. 16, 2017, you’ll be allowed to deduct interest under those old limits.

Mortgage interest is an itemized deduction, however. That means you can only take advantage of it if you itemize your deductions, as opposed to taking the standard deduction. And tax reform substantially increased the standard deduction — to as much as $24,000 for the 2018 tax year.

As a result, Congress’ Joint Committee on Taxation has estimated that far fewer taxpayers will opt to itemize deductions on their 2018 tax returns, since claiming the new standard deduction will gain them more money. That would mean far fewer homeowners stand to gain by itemizing deductions like mortgage interest.

This article was originally published on MoneyTalksNews.com as '7 Reasons Not to Pay Off Your Mortgage Before Retiring'.

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Re: DONT Payoff your Mortgage Club
« Reply #1298 on: Today at 07:19:29 AM »
I cannot help but feel like item #6 should have been more like item #1., i.e. all of the other things involve minor decisions in life, but "maximizing investment returns" is really the only one that truly focuses on what the opportunity cost of those mortgage payments is.

nereo

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Re: DONT Payoff your Mortgage Club
« Reply #1299 on: Today at 07:29:53 AM »
I don't really understand why #2 would be part of the equation. 
You can rent out a room in your home regardless of whether you have a mortgage or not.