Any "don't pay off your mortgage" people change their minds?

[Retire-Canada]

Depends on how you structure it. You can put the funds into a CD account and pay the mortgage off all at once. Given the potential for some really meh returns on stocks going forward, it’s not so bad of an idea. Reducing expenses is usually a better deal than earning the same amount due to taxes.

Yes. When anyone I know wants to pay down their mortgage early I suggest something like this ^^^. Save the money somewhere liquid that provides enough return to be worthwhile. That way you have access it as needed. In Canada we renew mortgages usually every 5 years so people can pay off any lump sum they want at that time with no costs. If they have enough to kill the mortgage and want to go nuts. If they want to do something else with the money and keep the mortgage that's fine as well.

At least they don't have a situation here where they have a mostly paid off HCOL house and then need $$ and are in a bind.

[Dicey]

I agree with you, @Buffaloski Boris amd @Retire-Canada. Actually it applies even if you're not in a HCOLA. The other key point is the time value of money. Investing first so you can (perhaps) pay off the mortgage in a lump sum later is much more efficient than paying off the mortgage first.

Our primary home is "paid off" because we just bought it with cash, after we sold two highly appreciated houses that had held long mortgages. Recently, we made an offer on an investment property that has no kitchen. If our (lowball) offer is accepted, we'll have to pay cash for it and all the improvements. Heloc, here we come!

[Telecaster]

After 2008 i considered mortgage acceleration as a diversification strategy, not as a sole source of investing.  I feel more comfortable having some of my investment in a fixed return.

Except it is not a fixed return.  It is a future savings. 

See if there anything wrong with this logic:  I paid of my credit cards this month.  I got a 28.9% return.  I'll continue to get a 28.9% return for the next ten years and retire wealthy.  If credit card interest goes up to 33.5% I can retire even sooner because I am getting a better return.   

Obviously, that's wrong.  Paying down debt doesn't give you a return.  There is no return.  You just spend less money in the future. 

Don't get me wrong!  There is absolutely nothing wrong with a future savings.  This might sound like nitpicking but it is not.  Return on investment and future savings are completely different concepts that need to be thought about separately. 

[nereo]

After 2008 i considered mortgage acceleration as a diversification strategy, not as a sole source of investing.  I feel more comfortable having some of my investment in a fixed return.

Except it is not a fixed return.  It is a future savings. 

See if there anything wrong with this logic:  I paid of my credit cards this month.  I got a 28.9% return.  I'll continue to get a 28.9% return for the next ten years and retire wealthy.  If credit card interest goes up to 33.5% I can retire even sooner because I am getting a better return.   

Obviously, that's wrong.  Paying down debt doesn't give you a return.  There is no return.  You just spend less money in the future. 

Don't get me wrong!  There is absolutely nothing wrong with a future savings.  This might sound like nitpicking but it is not.  Return on investment and future savings are completely different concepts that need to be thought about separately. 

This brought to mind something we did recently; install a solar PV array on our new home.  We had two choices here — pay OOP or take out a 10y loan with the install company.  Despite our DNPYM stance we paid cash for our array for a few reasons (rate%, time anticipated in this home, a sizeable rebate).

Regardless, we’re not getting a ‘guaranteed fixed return’ by not financing.  We’re paying upfront to have reduced costs each month in electricity bills for the next 10 years (or whenever we sell this place).  It’s great to see a surplus and no electrical consumption charges each month,  but if we could have gotten he same rate as our mortgage and qualified for our rebate we would have gone that route.

[Buffaloski Boris]

After 2008 i considered mortgage acceleration as a diversification strategy, not as a sole source of investing.  I feel more comfortable having some of my investment in a fixed return.

Except it is not a fixed return.  It is a future savings. 

See if there anything wrong with this logic:  I paid of my credit cards this month.  I got a 28.9% return.  I'll continue to get a 28.9% return for the next ten years and retire wealthy.  If credit card interest goes up to 33.5% I can retire even sooner because I am getting a better return.   

Obviously, that's wrong.  Paying down debt doesn't give you a return.  There is no return.  You just spend less money in the future. 

Don't get me wrong!  There is absolutely nothing wrong with a future savings.  This might sound like nitpicking but it is not.  Return on investment and future savings are completely different concepts that need to be thought about separately.

We’re really in the weeds with semantics here. We’re going to have to live somewhere and in most cases we’re going to have to pay a reasonably predictable amount for that. Either as rent or for a mortgage. By eliminating that cost or most of it we’ve in effect reduced our costs going forward and freed up funds for other activities. I would argue that a dollar saved is worth more than a dollar earned due to the impact of taxes.

[Accountant]

Correct ne if this is incorrect but paying down a mortgage early over time reduces the principal more so than the original amortization schedule.  When that happens, the next payment has less interest and more principal applied, which is increasing your equity.  How is this not a return?  Equity in a house is a valuation just like a stock, granted it isnt fluidly measured.  You can make the argument there are better returns for sure, but i dont so how you can say no return. 

[YttriumNitrate]

I'm expecting several years during the term where banks pay a higher rate on risk free accounts than I'm paying on my mortgage.

If I’m reading this right, know you’re about o be paying or almost paying to have a money market in he next 60 days. Risk free will not be paying more than a mortgage rate anytime in us next several years

I doubt the best FDIC accounts will get anywhere close to zero. When the Fed target rate was basically zero five years ago, banks were still offering ~1% rates.

Interestingly, in the last 45 days, risk free returns have barely budged. On April 2nd, Barclays, American Express, and Capital One were at 1.6%, 1.6%, and 1.5%, respectively. [1]. Now those same banks are at 1.3%, 1.5%, and 1.5%, respectively. [2]. It will be interesting to see how long it takes until they start to rise.

[frugalnacho]

After 2008 i considered mortgage acceleration as a diversification strategy, not as a sole source of investing.  I feel more comfortable having some of my investment in a fixed return.

Except it is not a fixed return.  It is a future savings. 

See if there anything wrong with this logic:  I paid of my credit cards this month.  I got a 28.9% return.  I'll continue to get a 28.9% return for the next ten years and retire wealthy.  If credit card interest goes up to 33.5% I can retire even sooner because I am getting a better return.   

Obviously, that's wrong.  Paying down debt doesn't give you a return.  There is no return.  You just spend less money in the future. 

Don't get me wrong!  There is absolutely nothing wrong with a future savings.  This might sound like nitpicking but it is not.  Return on investment and future savings are completely different concepts that need to be thought about separately.

Consider you have a $1M portfolio, and $40k/yr non housing expenses and are using the 4% rule, these balance out and can be ignored for this thought experiment.  Now separately you have a $100k house with a $100k mortgage at 28.9%, and $100k cash.  You have 2 options here:

1. Keep the $100k mortgage @28.9% and pay it off on schedule with your $100k cash.  You will obviously need to achieve 28.9% return on your cash over the life of the mortgage in order to fully pay the mortgage with this stache without needing other funds.

2. Pay your mortgage in full immediately and save the 28.9%.

Now technically you aren't earning 28.9% return when you pay the mortgage you are future saving 28.9% interest, but is that not functionally equivalent over the duration of the loan?

And as for "is there anything wrong with this logic?", I think I just illustrated it.  If you could maintain and service your 28.9% interest credit card debt and still FIRE in 10 years time, then paying down your 28.6% interest debt absolutely will accelerate your FIRE date because it will be functionally equivalent to getting 28.9% return on those dollars.

[nereo]

28.9%?

Is that just to illustrate that the rate fundamentally doesn’t matter in this scenario?

[frugalnacho]

I just stuck with the rate telecaster used, and no it doesn't matter.  I would say the default expected return is not 0% though, so the lower the rate gets the less clear the illustrated point becomes, but the absurdly high rate demonstrates it pretty well.

[EscapeVelocity2020]

After 2008 i considered mortgage acceleration as a diversification strategy, not as a sole source of investing.  I feel more comfortable having some of my investment in a fixed return.

Except it is not a fixed return.  It is a future savings. 

See if there anything wrong with this logic:  I paid of my credit cards this month.  I got a 28.9% return.  I'll continue to get a 28.9% return for the next ten years and retire wealthy.  If credit card interest goes up to 33.5% I can retire even sooner because I am getting a better return.   

Obviously, that's wrong.  Paying down debt doesn't give you a return.  There is no return.  You just spend less money in the future. 

Don't get me wrong!  There is absolutely nothing wrong with a future savings.  This might sound like nitpicking but it is not.  Return on investment and future savings are completely different concepts that need to be thought about separately.

Consider you have a $1M portfolio, and $40k/yr non housing expenses and are using the 4% rule, these balance out and can be ignored for this thought experiment.  Now separately you have a $100k house with a $100k mortgage at 28.9%, and $100k cash.  You have 2 options here:

1. Keep the $100k mortgage @28.9% and pay it off on schedule with your $100k cash.  You will obviously need to achieve 28.9% return on your cash over the life of the mortgage in order to fully pay the mortgage with this stache without needing other funds.

2. Pay your mortgage in full immediately and save the 28.9%.

Now technically you aren't earning 28.9% return when you pay the mortgage you are future saving 28.9% interest, but is that not functionally equivalent over the duration of the loan?

And as for "is there anything wrong with this logic?", I think I just illustrated it.  If you could maintain and service your 28.9% interest credit card debt and still FIRE in 10 years time, then paying down your 28.6% interest debt absolutely will accelerate your FIRE date because it will be functionally equivalent to getting 28.9% return on those dollars.

The one thing you are missing is the time value of money, which is very important over a 30 year period.  $1 today is worth 50 cents or less in 30 years, and with a mortgage, you can refinance to a lower rate, extend the duration, or even cash-out extra money at the prevailing rate which is usually the best loan terms an individual can get.  Comparing a mortgage to revolving, high interest, recourse credit card debt is a red herring.

Just keep your damn mortgage unless you have a serious cashflow problem and might get foreclosed or can't get a better long term return by investing.  And even then, you can come out ahead by leveraging a mortgage by flipping.  Or just pay off the mortgage early and work longer while sitting on your asset, but stop trying to argue that there is some magic 'return on investment' on paying off debt.  'Return' is the income from investments (typically made possible by using a low interest loan).  If we all had to buy homes in cash,  Early Retirement would be a whole lot harder, and would be mostly comprised of landlords.

[EscapeVelocity2020]

Just to add, by the logic of there being a return on paying off debt - I should run to the nearest Payday loan shark, ask for the highest rate, take out the biggest loan I can, take it out and then and pay it off a day later.  Then do that again next week.  Surely I'd get rich doing that versus not doing it, right?

[frugalnacho]

Just to add, by the logic of there being a return on paying off debt - I should run to the nearest Payday loan shark, ask for the highest rate, take out the biggest loan I can, take it out and then and pay it off a day later.  Then do that again next week.  Surely I'd get rich doing that versus not doing it, right?

No your logic is wrong too.  You should not be comparing "taking out, then paying off a payday loan" vs "do nothing".  The comparison should be between "paying off my payday loan" vs "not paying off my payday loan" in which case you absolutely are getting a return on your payment.

Obviously the best course of action is to not incur a payday loan debt in the first place.  The question of getting a return on paying off debt is completely independent of your decision to incur the debt in the first place though.

[frugalnacho]

After 2008 i considered mortgage acceleration as a diversification strategy, not as a sole source of investing.  I feel more comfortable having some of my investment in a fixed return.

Except it is not a fixed return.  It is a future savings. 

See if there anything wrong with this logic:  I paid of my credit cards this month.  I got a 28.9% return.  I'll continue to get a 28.9% return for the next ten years and retire wealthy.  If credit card interest goes up to 33.5% I can retire even sooner because I am getting a better return.   

Obviously, that's wrong.  Paying down debt doesn't give you a return.  There is no return.  You just spend less money in the future. 

Don't get me wrong!  There is absolutely nothing wrong with a future savings.  This might sound like nitpicking but it is not.  Return on investment and future savings are completely different concepts that need to be thought about separately.

Consider you have a $1M portfolio, and $40k/yr non housing expenses and are using the 4% rule, these balance out and can be ignored for this thought experiment.  Now separately you have a $100k house with a $100k mortgage at 28.9%, and $100k cash.  You have 2 options here:

1. Keep the $100k mortgage @28.9% and pay it off on schedule with your $100k cash.  You will obviously need to achieve 28.9% return on your cash over the life of the mortgage in order to fully pay the mortgage with this stache without needing other funds.

2. Pay your mortgage in full immediately and save the 28.9%.

Now technically you aren't earning 28.9% return when you pay the mortgage you are future saving 28.9% interest, but is that not functionally equivalent over the duration of the loan?

And as for "is there anything wrong with this logic?", I think I just illustrated it.  If you could maintain and service your 28.9% interest credit card debt and still FIRE in 10 years time, then paying down your 28.6% interest debt absolutely will accelerate your FIRE date because it will be functionally equivalent to getting 28.9% return on those dollars.

The one thing you are missing is the time value of money, which is very important over a 30 year period.  $1 today is worth 50 cents or less in 30 years, and with a mortgage, you can refinance to a lower rate, extend the duration, or even cash-out extra money at the prevailing rate which is usually the best loan terms an individual can get.  Comparing a mortgage to revolving, high interest, recourse credit card debt is a red herring.

Just keep your damn mortgage unless you have a serious cashflow problem and might get foreclosed or can't get a better long term return by investing.  And even then, you can come out ahead by leveraging a mortgage by flipping.  Or just pay off the mortgage early and work longer while sitting on your asset, but stop trying to argue that there is some magic 'return on investment' on paying off debt.  'Return' is the income from investments (typically made possible by using a low interest loan).  If we all had to buy homes in cash,  Early Retirement would be a whole lot harder, and would be mostly comprised of landlords.

I intentionally left all of those variables out of the equation to simplify my point.  I also intentionally framed it as an all-or-nothing approach to paying the debt off also to simplify.  In the scenario I presented you'd be a fool to "just keep your damn mortgage" when it's at 28.9%.  Yes there will be inflation, yes rates may change, yes you may be able to refinance,  yes the home value may increase and you may sell and reap a profit, etc, but all of those are separate considerations.  My point was also completely separate from the pay off / not pay off your mortgage debate and was a direct response to the scenario telecaster laid out. 

[EscapeVelocity2020]

I intentionally left all of those variables out of the equation to simplify my point.  I also intentionally framed it as an all-or-nothing approach to paying the debt off also to simplify.  In the scenario I presented you'd be a fool to "just keep your damn mortgage" when it's at 28.9%.  Yes there will be inflation, yes rates may change, yes you may be able to refinance,  yes the home value may increase and you may sell and reap a profit, etc, but all of those are separate considerations.  My point was also completely separate from the pay off / not pay off your mortgage debate and was a direct response to the scenario telecaster laid out.

Mortgage rates don't happen in a vacuum, so a 28.9% mortgage rate implies bonds are paying pretty darn good rates.  I'm thinking of the 1980's - an even better time than today to have a mortgage and stay invested.

[frugalnacho]

I intentionally left all of those variables out of the equation to simplify my point.  I also intentionally framed it as an all-or-nothing approach to paying the debt off also to simplify.  In the scenario I presented you'd be a fool to "just keep your damn mortgage" when it's at 28.9%.  Yes there will be inflation, yes rates may change, yes you may be able to refinance,  yes the home value may increase and you may sell and reap a profit, etc, but all of those are separate considerations.  My point was also completely separate from the pay off / not pay off your mortgage debate and was a direct response to the scenario telecaster laid out.

Mortgage rates don't happen in a vacuum, so a 28.9% mortgage rate implies bonds are paying pretty darn good rates.  I'm thinking of the 1980's - an even better time than today to have a mortgage and stay invested.

You are completely missing the point. Nothing happens in a vacuum, which is precisely why I isolated everything but that single variable.  Replace mortgage with credit card debt if you wish.  Obviously there are other factors to consider in the decision to pay off debt, and how that affects what your debt payment "return" is relative to other options.  I'm getting the impression that some people are just arguing semantics over whether debt payments nets you a "return" or not, and while I agree that it's not an actual return it is functionally similar. 

[EscapeVelocity2020]

Just to add, by the logic of there being a return on paying off debt - I should run to the nearest Payday loan shark, ask for the highest rate, take out the biggest loan I can, take it out and then and pay it off a day later.  Then do that again next week.  Surely I'd get rich doing that versus not doing it, right?

@frugalnacho  How is taking a Payday loan and paying it off functionally similar to investing?

[frugalnacho]

Just to add, by the logic of there being a return on paying off debt - I should run to the nearest Payday loan shark, ask for the highest rate, take out the biggest loan I can, take it out and then and pay it off a day later.  Then do that again next week.  Surely I'd get rich doing that versus not doing it, right?

@frugalnacho  How is taking a Payday loan and paying it off functionally similar to investing?

What? It's not, and I never claimed it was.  I specifically excluded the act of taking out a loan because it's just a red herring; you are the one introducing that scenario.  No one is claiming that incurring a debt and then paying it off is functionally similar to investing, and all the claims (like the payday loan scenario you presented) that are being used to demonstrate that paying off debt is not an investment "return" are unnecessarily and erroneously introducing (and then ignoring) the act and negative effect of incurring the debt.  What is being claimed is that paying off an existing debt will net you a "return".  To continue with your payday loan example you should be starting from the assumption that you already have a payday loan (similarly to how you already have a mortgage, or you already have CC debt).  The question then becomes:  Does paying off this existing loan give me a "return" equivalent to the interest rate?  I would argue that yes it does functionally give you a "return" as your alternative is to not pay it and accrue interest.

[EscapeVelocity2020]

I'd still argue 'avoiding paying interest' is not functionally equivalent to a return on investment simply because you can never 'get ahead' by not paying interest, you just end up paying less until the debt is paid off.  Once the debt is paid off, you can invest and get ahead by earning a return.

One thing that really muddles people up, including Pete, is the claim of outlandish 'returns' made by saving money on an expenditure.  He did it recently here (https://www.mrmoneymustache.com/2019/08/22/1000-per-hour/) and many times in past articles.  The fact is, you are paying money and you figure out a way to pay less money with a bound of ultimately paying zero money.  This is in not equivalent to actually making money, which has no upper bound and can go on indefinitely, but also comes with a risk profile.  Paying off debt has no risk, just opportunity cost.

I will, though, agree that the amount is the same if you are comparing not paying 30% interest rate to making 30% on a dollar, but not 'functionally equivalent'.  So maybe it was semantics?

[FINate]

I've enjoyed this part of the discussion. Thanks for keeping it civil.

My vote is for "functionally equivalent" while acknowledging that avoiding expenditures is technically different than return on investment. However, the two aren't far apart. We don't really consider this in the US, but many economists and some governments consider the imputed rent homeowners accrue when owning outright.

Of course, buying something you don't really want or need because you got a "good deal" on it is the stuff of The Wall of Shame and Comedy. But what about things you actually want/need? Missing from this discussion is the concept of utility.

If you need a bike and spend $300 less on a functionally equivalent alternative, then yes, you really saved $300 by getting the less expensive option. You're getting the same utility at a lower price, which is very much like an investment return.

Utility is squishy and very personal. By the raw numbers it's always optimal to keep a mortgage and maximize investments. But for many there are intangible benefits to not having a mortgage. Perhaps these are folks with less risk tolerance and so owning outright means less stress and better sleep. Or maybe they don't like the big banking/mortgage industry and would rather not be a part of that system. Or perhaps by having no mortgage they can keep their income low enough to qualify for generous ACA subsidies. It's quite possible to have a higher utility while ending up with less money, which is a core pillar of FIRE.

[EscapeVelocity2020]

The mortgage issue is probably one of the most contentious and complicated intersections between frugality and ER.  When I bought our first home in 2003, we had a strict budget, put down 20%, and I even paid a little extra on the 30 year mortgage payments on and off.  I was very risk averse from being a tech stock investor, riding the NASDAQ up and then down again from 1996 - 2000.  But rates fell and I refinanced to a 15 year mortgage which was a revelation - lower rate and faster payoff.  We sold the home in 2007 and pocketed the proceeds (home prices were doing well headed in to 2008).

So when I bought our primary residence in 2009, I went for a 15 year mortgage.  Rates fell and i refinanced to extend the mortgage and lower the rate to 2.875% in 2011.  As the stock market has rocked and rolled over the years and I was able to take a deduction on the interest, I really fell in love with my mortgage.

Things aren't so clear cut now with such low bond yields, possible deflation, and possible unemployment - so I'm open minded about the keep vs. payoff discussion nowadays.  I still think there's a discussion to be had on this now that the Fed has cut rates to 0 - 0.25% and unemployment is spiking, and it's hard to argue that the markets are cheap.

[frugalnacho]

I'd still argue 'avoiding paying interest' is not functionally equivalent to a return on investment simply because you can never 'get ahead' by not paying interest, you just end up paying less until the debt is paid off.  Once the debt is paid off, you can invest and get ahead by earning a return.

If I have a $100k mortgage at 28.9%, I absolutely can "get ahead" by paying off that loan and thus paying less interest (assuming I can't achieve a consistent 28.9% return elsewhere, which is a reasonable assumption IMO).  I mean what is the difference between scenario A and scenario B:

Scenario A: Holding $100k mortgage to completion @28.9% and servicing it entirely with an earmarked $100k investment account earning 28.9%.  End result at the end of the mortgage term: $0 debt, $0 invested.

Scenario B: Immediately paying your $100k mortgage off with $100k cash.  End result at the end of the mortgage term: $0 debt, $0 invested.

The end result of both scenarios is that the mortgage is paid off and you have $0 debt, and you also have $0 invested.   Those seem functionally equivalent to me, and in effect your earmarked $100k resulted in a "return" of 28.9% over the life of the mortgage.  Any money you earn in addition to the $100k that is earmarked is irrelevant because you earn that in either scenario, and can direct it however you want in either scenario.  Any investment return you make after the completion of the mortgage term is also irrelevant because it's independent of the scenario and can be considered separately. 

To me this is essentially just a reconfiguration of the "don't pay of your mortgage" argument where you play 2 scenarios to completion and look at the effect on your networth at the end of the mortgage term.  Just as holding onto low interest debt (lower than you expect to earn on investments) can accelerate your timeline to FIRE, holding onto high interest debt will extend your time.  It's not a literal "return", but I would argue it's functionally equivalent. 

[frugalnacho]

By the raw numbers it's always optimal to keep a mortgage and maximize investments.

This is only true when mortgage rates are lower than your expected investment return.  If mortgage rates were 12% you would have to earn a 12% return on your investments just to keep up with the accruing interest.  If you didn't think you could earn a 12% return on investments you could get the functional equivalent of a 12% return by just paying off your mortgage.  There are definitely other factors and nuances to consider (tax consequences, psychological, etc), but is the crux of my argument. 

[frugalnacho]

The mortgage issue is probably one of the most contentious and complicated intersections between frugality and ER.  When I bought our first home in 2003, we had a strict budget, put down 20%, and I even paid a little extra on the 30 year mortgage payments on and off.  I was very risk averse from being a tech stock investor, riding the NASDAQ up and then down again from 1996 - 2000.  But rates fell and I refinanced to a 15 year mortgage which was a revelation - lower rate and faster payoff.  We sold the home in 2007 and pocketed the proceeds (home prices were doing well headed in to 2008).

So when I bought our primary residence in 2009, I went for a 15 year mortgage.  Rates fell and i refinanced to extend the mortgage and lower the rate to 2.875% in 2011.  As the stock market has rocked and rolled over the years and I was able to take a deduction on the interest, I really fell in love with my mortgage.

Things aren't so clear cut now with such low bond yields, possible deflation, and possible unemployment - so I'm open minded about the keep vs. payoff discussion nowadays.  I still think there's a discussion to be had on this now that the Fed has cut rates to 0 - 0.25% and unemployment is spiking, and it's hard to argue that the markets are cheap.

Yes, the decision isn't quite as clear cut as I am making it out to be.  There are other factors that need to be considered, and the very real possibility of things changing in the future, like mortgage interest rates, liquidity, etc.  Even though I've over simplified it, I still think paying down debt is functionally equivalent to earning a real return on an investment, in as much as the overall effect it has on your networth.

[FINate]

By the raw numbers it's always optimal to keep a mortgage and maximize investments.

This is only true when mortgage rates are lower than your expected investment return.  If mortgage rates were 12% you would have to earn a 12% return on your investments just to keep up with the accruing interest.  If you didn't think you could earn a 12% return on investments you could get the functional equivalent of a 12% return by just paying off your mortgage.  There are definitely other factors and nuances to consider (tax consequences, psychological, etc), but is the crux of my argument.

Agreed. I should clarify: by "always" I mean in my lifetime of real world experience it has always made more sense, strictly in terms of dollars, to maximize investments. Could this change going forward? Anything is possible, but a world where mortgage rates > long-term equity returns has so many follow-on implications that most of us would have to throw out our entire financial playbook and rethink everything.

In any case, we've been mortgage free for close to a decade now, for a variety of intangible reasons alluded to above.

[GuitarStv]

By the raw numbers it's always optimal to keep a mortgage and maximize investments.

This is only true when mortgage rates are lower than your expected investment return.  If mortgage rates were 12% you would have to earn a 12% return on your investments just to keep up with the accruing interest.  If you didn't think you could earn a 12% return on investments you could get the functional equivalent of a 12% return by just paying off your mortgage.  There are definitely other factors and nuances to consider (tax consequences, psychological, etc), but is the crux of my argument.

Agreed. I should clarify: by "always" I mean in my lifetime of real world experience it has always made more sense, strictly in terms of dollars, to maximize investments. Could this change going forward? Anything is possible, but a world where mortgage rates > long-term equity returns has so many follow-on implications that most of us would have to throw out our entire financial playbook and rethink everything.

In any case, we've been mortgage free for close to a decade now, for a variety of intangible reasons alluded to above.

I don't know how old you are, but interest rates on mortgages in the 80s were 12 - 17%.  The unbelievably low rates of the last twenty odd years have been a historical anomaly, and are far from normal.

[EscapeVelocity2020]

I'd still argue 'avoiding paying interest' is not functionally equivalent to a return on investment simply because you can never 'get ahead' by not paying interest, you just end up paying less until the debt is paid off.  Once the debt is paid off, you can invest and get ahead by earning a return.

If I have a $100k mortgage at 28.9%, I absolutely can "get ahead" by paying off that loan and thus paying less interest (assuming I can't achieve a consistent 28.9% return elsewhere, which is a reasonable assumption IMO).  I mean what is the difference between scenario A and scenario B:

Scenario A: Holding $100k mortgage to completion @28.9% and servicing it entirely with an earmarked $100k investment account earning 28.9%.  End result at the end of the mortgage term: $0 debt, $0 invested.

Scenario B: Immediately paying your $100k mortgage off with $100k cash.  End result at the end of the mortgage term: $0 debt, $0 invested.

Just to reiterate, I still think that the difference is the time value of money.  I'd much rather have the full $100k now to invest for 30 years than a $100k asset and have to slowly invest over time.  The assumption is that you can beat the mortgage rate by putting this free cash to work, which has been a good assumption historically.  This year could be the start of something very different though.  It's obvious that you should refinance today if you are pre-paying on a high interest mortgage.  There might also be an argument for paying off a 3% loan if you think the market isn't going to beat that over than next 30 years.

One other nice feature of a mortgage is that you can declare bankruptcy and keep the house (or have the 'underwater' debt load discharged) if you are unemployed or if house prices fall.  You don't get these advantages if you've paid off the house but fall behind on property taxes.  But this is off topic and hopefully not the 'advantage' folks rely on when deciding to keep a mortgage. 

[frugalnacho]

Just to reiterate, I still think that the difference is the time value of money.  I'd much rather have the full $100k now to invest for 30 years than a $100k asset and have to slowly invest over time.  The assumption is that you can beat the mortgage rate by putting this free cash to work, which has been a good assumption historically.  This year could be the start of something very different though.  It's obvious that you should refinance today if you are pre-paying on a high interest mortgage.  There might also be an argument for paying off a 3% loan if you think the market isn't going to beat that over than next 30 years.

One other nice feature of a mortgage is that you can declare bankruptcy and keep the house (or have the 'underwater' debt load discharged) if you are unemployed or if house prices fall.  You don't get these advantages if you've paid off the house but fall behind on property taxes.  But this is off topic and hopefully not the 'advantage' folks rely on when deciding to keep a mortgage.

The time value of money is baked into the interest though.  You have the money to pay the mortgage right now, so either you invest the money and earn enough interest to make that future payment, or you pay the mortgage and get a guaranteed "return" over the life of the mortgage.  "Slowly invest over time" is a completely separate situation, as you are not talking about the $100k you have earmarked for your mortgage (which you are investing the full amount immediately), you are talking about future earnings, which are you going to "slowly invest over time" anyway no matter which option you choose.  If you choose to pay the mortgage off right now, you will slowly invest your future earnings in a separate account with a starting balance of $0 right now.  If you choose to keep the mortgage and invest your $100k which is earmarked, you will also slowly invest your future earnings in a separate account with a starting balance of $0 right now.

The mortgage, the earmarked $100k investment account, and a different account with future earned income are all kept separate for accounting purposes.  And since the future income invested in a separate account is identical to both scenarios you can eliminated it from the discussion entirely.  The only accounts that need to be considered are the mortgage, and the earmarked investment account.

You state you'd rather have the $100k to invest and keep the mortgage, but that is entirely contingent upon mortgage rates and your expected investment return. I feel like you are implicitly making my point though because the real investment return you would get would beat the "return" you would get by paying off the mortgage, and that is driving your decision.  If you had a mortgage rate of 28.9% and had no ability to refinance your conclusion would be the exact opposite and you would pay off the mortgage for the exact same reason that you would expect that "return" to beat any real returns you could achieve with your $100k.  Other considerations aside (tax consequences, psychological, liquidity, etc) you are treating paying off the mortgage as the functional equivalent to a real investment return even if you don't realize it. 

[FINate]

I don't know how old you are, but interest rates on mortgages in the 80s were 12 - 17%.  The unbelievably low rates of the last twenty odd years have been a historical anomaly, and are far from normal.

I was a kid when that was happening. Those high interest rates (e.g. high inflation) were a historical anomaly: https://www.visualcapitalist.com/the-history-of-interest-rates-over-670-years/

I've often wondered if this was related to giving up the pretense of the gold standard with the collapse of Bretton Woods in 1971. Not that I think the gold standard was good (it was a terrible system), but it was uncharted territory at the time.

[EscapeVelocity2020]

You state you'd rather have the $100k to invest and keep the mortgage, but that is entirely contingent upon mortgage rates and your expected investment return. I feel like you are implicitly making my point though because the real investment return you would get would beat the "return" you would get by paying off the mortgage, and that is driving your decision.  If you had a mortgage rate of 28.9% and had no ability to refinance your conclusion would be the exact opposite and you would pay off the mortgage for the exact same reason that you would expect that "return" to beat any real returns you could achieve with your $100k.  Other considerations aside (tax consequences, psychological, liquidity, etc) you are treating paying off the mortgage as the functional equivalent to a real investment return even if you don't realize it.

Uncle, uncle - I give up!  It was mostly a good thought experiment though.  I pay off all my other debt because none of it gets so many advantages, but my mortgage has been good to me for the last 13-ish years.  I might pay it off now just because it is a small fraction (~5%) of my portfolio and is possibly a wash vs. putting more into investments given that I don't expect equities to meet their historical ROI over the next 30 years.  It's a bet against history, but I'm only putting 5% of my money into it as a tiny hedge.   Haven't done it yet though.

[big_owl]

One of the reasons we decided to put our after-tax investments on hold this year and shovel that money toward the mortgage (8 more payments left!) is this...

Paying off mortgage before I retire, in my case at least, frees up about $5k in monthly after tax mortgage payment.  This gives me a little more adaptability, or at last peace of mind.  My logic being that after I retire my expenses for some big items, like healthcare, are at the whims of the market.  I fully expect healthcare costs to double or more from now.  At the same time markets can go down.  If I'm hit with a doubling or more of healthcare costs (or insurance in general) during an inevitable market downturn, in addition I'm still stuck pulling $5k out of my sagging investments each month or else lose my house.  If the same happens and I don't have to pull $5k out each month for my mortgage...I have a lot more flexibility to reduce my spending to conserve my fire monies. 

But really we're just going for a combined approach, no mortgage and a large fire fund.  We are fortunate to have a large shovel and to not really have to make it an either or decision so it's not as binary in my case.

[EscapeVelocity2020]

You state you'd rather have the $100k to invest and keep the mortgage, but that is entirely contingent upon mortgage rates and your expected investment return. I feel like you are implicitly making my point though because the real investment return you would get would beat the "return" you would get by paying off the mortgage, and that is driving your decision.  If you had a mortgage rate of 28.9% and had no ability to refinance your conclusion would be the exact opposite and you would pay off the mortgage for the exact same reason that you would expect that "return" to beat any real returns you could achieve with your $100k.  Other considerations aside (tax consequences, psychological, liquidity, etc) you are treating paying off the mortgage as the functional equivalent to a real investment return even if you don't realize it.

Uncle, uncle - I give up!  It was mostly a good thought experiment though.  I pay off all my other debt because none of it gets so many advantages, but my mortgage has been good to me for the last 13-ish years.  I might pay it off now just because it is a small fraction (~5%) of my portfolio and is possibly a wash vs. putting more into investments given that I don't expect equities to meet their historical ROI over the next 30 years.  It's a bet against history, but I'm only putting 5% of my money into it as a tiny hedge.  Haven't done it yet though.

Scratch that now, it's paid off!  One of the many nice things about hitting FI by being smart and leveraging your mortgage (but might not be the same for newer mortgages, I'll admit.  I got lucky on S&P going from 667 to now 2900-ish while I could also refinance my mortgage to a lower rate).

[EscapeVelocity2020]

You state you'd rather have the $100k to invest and keep the mortgage, but that is entirely contingent upon mortgage rates and your expected investment return. I feel like you are implicitly making my point though because the real investment return you would get would beat the "return" you would get by paying off the mortgage, and that is driving your decision.  If you had a mortgage rate of 28.9% and had no ability to refinance your conclusion would be the exact opposite and you would pay off the mortgage for the exact same reason that you would expect that "return" to beat any real returns you could achieve with your $100k.  Other considerations aside (tax consequences, psychological, liquidity, etc) you are treating paying off the mortgage as the functional equivalent to a real investment return even if you don't realize it.

Uncle, uncle - I give up!  It was mostly a good thought experiment though.  I pay off all my other debt because none of it gets so many advantages, but my mortgage has been good to me for the last 13-ish years.  I might pay it off now just because it is a small fraction (~5%) of my portfolio and is possibly a wash vs. putting more into investments given that I don't expect equities to meet their historical ROI over the next 30 years.  It's a bet against history, but I'm only putting 5% of my money into it as a tiny hedge.  Haven't done it yet though.

Scratch that now, it's paid off!  One of the many nice things about hitting FI by being smart and leveraging your mortgage (but might not be the same for newer mortgages, I'll admit.  I got lucky on S&P going from 667 to now 2900-ish while I could also refinance my mortgage to a lower rate).

Told my wife that the mortgage is paid off and she was a whole lot happier than I am, so there's that also...  being the Hero for at least tonight :)

[frugalnacho]

Congrats

[EscapeVelocity2020]

Congrats

Thanks!  Still, I do hope other have the advantages I had to pay off their mortgage by making smart decisions and not just working for every dollar.  I'm guessing my payments, other than the 20% down payment, were paid mostly by return on investments.  It was also nice to get a tax deduction for interest payments until recently.

[nereo]

Interesting discussion.

Just to keep things positive, I thought I’d reiterate that the choice between putting more towards your mortgage or putting more towards savings are both substantially better than the default for most people, which is “spend every extra dollar!”
Paying down the mortgage involves more risk until it’s gone, but improves cashflow once it is gone; saving every possible dollar gives you a nice fat pile of investments to fall back on.  Both beat carrying a CC balance with $50 in your bank account.

[simonsez]

Interesting discussion.

Just to keep things positive, I thought I’d reiterate that the choice between putting more towards your mortgage or putting more towards savings are both substantially better than the default for most people, which is “spend every extra dollar!”
Paying down the mortgage involves more risk until it’s gone, but improves cashflow once it is gone; saving every possible dollar gives you a nice fat pile of investments to fall back on.  Both beat carrying a CC balance with $50 in your bank account.

Exactly, don't let perfect be the enemy of good.  We're all beating the game (or on our way to be) in our own manner.  Here's to health and those laid off recently find an even better job in the near future, happy Friday!

[frugalnacho]

Interesting discussion.

Just to keep things positive, I thought I’d reiterate that the choice between putting more towards your mortgage or putting more towards savings are both substantially better than the default for most people, which is “spend every extra dollar!”
Paying down the mortgage involves more risk until it’s gone, but improves cashflow once it is gone; saving every possible dollar gives you a nice fat pile of investments to fall back on.  Both beat carrying a CC balance with $50 in your bank account.

Agreed.  I waited until we had enough to completely eliminate the mortgage then pulled the trigger.  We had a bit of a unique situation though, and I wouldn't recommend it for everyone.  If I could have refinanced and gotten a sub 4% mortgage I would be in the don't-pay-off-your-mortgage club, but it was still a nice relief to get rid of it and go mortgage free.

[Dicey]

Interesting discussion.

Just to keep things positive, I thought I’d reiterate that the choice between putting more towards your mortgage or putting more towards savings are both substantially better than the default for most people, which is “spend every extra dollar!”
Paying down the mortgage involves more risk until it’s gone, but improves cashflow once it is gone; saving every possible dollar gives you a nice fat pile of investments to fall back on.  Both beat carrying a CC balance with $50 in your bank account.

Agreed.  I waited until we had enough to completely eliminate the mortgage then pulled the trigger.  We had a bit of a unique situation though, and I wouldn't recommend it for everyone.  If I could have refinanced and gotten a sub 4% mortgage I would be in the don't-pay-off-your-mortgage club, but it was still a nice relief to get rid of it and go mortgage free.

Anyone who does the math, and generally follows the Investment Order gets a cheer from me. I don't necessarily subscribe to the keep-a-mortgage-forever school, I just want people to work less and be more secure in their old age. Sounds like you've got it well covered.

[Telecaster]

Correct ne if this is incorrect but paying down a mortgage early over time reduces the principal more so than the original amortization schedule.  When that happens, the next payment has less interest and more principal applied, which is increasing your equity.  How is this not a return?  Equity in a house is a valuation just like a stock, granted it isnt fluidly measured.  You can make the argument there are better returns for sure, but i dont so how you can say no return.

Your mortgage doesn't know or care how much equity you have.  All it cares about is how much money you owe.  Let's say you apply $100 to principle.  This shows up on your checking account as -$100 and +$100 on your mortgage balance.  So your net worth remained exactly the same.    What did happen is you now owe less money, so you'll pay less interest in the future.   Paying less money is literally the same thing as saving money, right? 

It may sound like a trivial distinction, and it sort of is I suppose, but I see a lot of people say things like "I'm paying down my 4% mortgage because I'm getting a fixed 4% return on my money and 4% is better than 2% bonds."   But if that were really true, then a 7% mortgage would be better than a 4% mortgage because you'd be getting a 7% return, and shoot that's stock market territory.   Obviously that isn't true, and the reason why it isn't true is because mortgages are an expense.  Paying off your mortgage early  lowers that expense.   Lowering expenses is saving, not investing. 

I want to re-emphasize there is nothing wrong with savings!  Saving money is a fine thing to do. 

[rmorris50]

My recent experience has made me do a 180 on my view on this topic. For the past decade we had a 15 year mortgage outside NYC (Westchester) with property taxes over 3% of assessed value. So our mortgage was high at $4500 (all-in). But my spouse and I had good jobs, and I was looking to pay the mortgage off early and retire early. Then last Nov I was laid off and everything changed. I instantly wished we had a 30 year mortgage and I hadn't prepaid so much. My package would have let us swing the house for about 1.5 years, but we saw this as the perfect opportunity to get out of NY and move to Charlotte for my new job. We are building a new house, and I plan to get a 30 year with a rate hopefully under 3%. House is about same value but all-in mortgage will be a much more manageable $2500. I'll never prepay or do a 15 year again, and who knows we may never move again with rates so low! Our investments are enough to let us carry this mortgage into retirement too.

[nereo]

My recent experience has made me do a 180 on my view on this topic. For the past decade we had a 15 year mortgage outside NYC (Westchester) with property taxes over 3% of assessed value. So our mortgage was high at $4500 (all-in). But my spouse and I had good jobs, and I was looking to pay the mortgage off early and retire early. Then last Nov I was laid off and everything changed. I instantly wished we had a 30 year mortgage and I hadn't prepaid so much. My package would have let us swing the house for about 1.5 years, but we saw this as the perfect opportunity to get out of NY and move to Charlotte for my new job. We are building a new house, and I plan to get a 30 year with a rate hopefully under 3%. House is about same value but all-in mortgage will be a much more manageable $2500. I'll never prepay or do a 15 year again, and who knows we may never move again with rates so low! Our investments are enough to let us carry this mortgage into retirement too.

Great story.  You might want to re-post that over at the Don’t Pay Off Your Mortgage thread...

[Dicey]

My recent experience has made me do a 180 on my view on this topic. For the past decade we had a 15 year mortgage outside NYC (Westchester) with property taxes over 3% of assessed value. So our mortgage was high at $4500 (all-in). But my spouse and I had good jobs, and I was looking to pay the mortgage off early and retire early. Then last Nov I was laid off and everything changed. I instantly wished we had a 30 year mortgage and I hadn't prepaid so much. My package would have let us swing the house for about 1.5 years, but we saw this as the perfect opportunity to get out of NY and move to Charlotte for my new job. We are building a new house, and I plan to get a 30 year with a rate hopefully under 3%. House is about same value but all-in mortgage will be a much more manageable $2500. I'll never prepay or do a 15 year again, and who knows we may never move again with rates so low! Our investments are enough to let us carry this mortgage into retirement too.

Great story.  You might want to re-post that over at the Don’t Pay Off Your Mortgage thread...

I agree. In fact, stories like this are why the DPOYM thread exists. Congratulations, @rmorris50. BTW, do you know Daniel Kanter's great blog, formerly called Manhattan Nest? He's a great writer and rehabber who hails from your old stomping grounds. One of my faves.

[rmorris50]

My recent experience has made me do a 180 on my view on this topic. For the past decade we had a 15 year mortgage outside NYC (Westchester) with property taxes over 3% of assessed value. So our mortgage was high at $4500 (all-in). But my spouse and I had good jobs, and I was looking to pay the mortgage off early and retire early. Then last Nov I was laid off and everything changed. I instantly wished we had a 30 year mortgage and I hadn't prepaid so much. My package would have let us swing the house for about 1.5 years, but we saw this as the perfect opportunity to get out of NY and move to Charlotte for my new job. We are building a new house, and I plan to get a 30 year with a rate hopefully under 3%. House is about same value but all-in mortgage will be a much more manageable $2500. I'll never prepay or do a 15 year again, and who knows we may never move again with rates so low! Our investments are enough to let us carry this mortgage into retirement too.

Great story.  You might want to re-post that over at the Don’t Pay Off Your Mortgage thread...

I agree. In fact, stories like this are why the DPOYM thread exists. Congratulations, @rmorris50. BTW, do you know Daniel Kanter's great blog, formerly called Manhattan Nest? He's a great writer and rehabber who hails from your old stomping grounds. One of my faves.

Thanks! I reposted in the DPOYM thread. No I don't know Daniel's blog but I'll check it out.

[frugalnacho]

Correct ne if this is incorrect but paying down a mortgage early over time reduces the principal more so than the original amortization schedule.  When that happens, the next payment has less interest and more principal applied, which is increasing your equity.  How is this not a return?  Equity in a house is a valuation just like a stock, granted it isnt fluidly measured.  You can make the argument there are better returns for sure, but i dont so how you can say no return.

Your mortgage doesn't know or care how much equity you have.  All it cares about is how much money you owe.  Let's say you apply $100 to principle.  This shows up on your checking account as -$100 and +$100 on your mortgage balance.  So your net worth remained exactly the same.    What did happen is you now owe less money, so you'll pay less interest in the future.   Paying less money is literally the same thing as saving money, right? 

It may sound like a trivial distinction, and it sort of is I suppose, but I see a lot of people say things like "I'm paying down my 4% mortgage because I'm getting a fixed 4% return on my money and 4% is better than 2% bonds."   But if that were really true, then a 7% mortgage would be better than a 4% mortgage because you'd be getting a 7% return, and shoot that's stock market territory.   Obviously that isn't true, and the reason why it isn't true is because mortgages are an expense.  Paying off your mortgage early  lowers that expense.   Lowering expenses is saving, not investing. 

I want to re-emphasize there is nothing wrong with savings!  Saving money is a fine thing to do.

You keep making the error of saying a having a higher mortgage rate would be better because it would equate to higher "savings", but they are separate things.  Having a 7% mortgage is worse than a 4% for obvious reasons, but paying a 7% mortgage does indeed save you more money than paying off a 4% mortgage.  You aren't technically earning a return, but it's the exact same thing mathematically. 

If you had a savings account that was equal in value to your mortgage balance, and had the same rate, it would be a wash whether you paid off the mortgage immediately or you paid the full amortization schedule out of that account.  Those scenarios are mathematically equal. At any point between now and the end of your mortgage period your savings account balance will exactly match your mortgage balance. Any money used to pay the mortgage simply shifts from your savings account to your mortgage account, and they remain in perfect balance.  If you partially pay off the mortgage you forgo earning a real return on that portion of money, but eliminate accruing an equivalent amount of real debt, and they remain in balance.  You may only technically be "earning" while the money is in the savings account, but that is just semantics, they are mathematically equivalent.

[EscapeVelocity2020]

Correct ne if this is incorrect but paying down a mortgage early over time reduces the principal more so than the original amortization schedule.  When that happens, the next payment has less interest and more principal applied, which is increasing your equity.  How is this not a return?  Equity in a house is a valuation just like a stock, granted it isnt fluidly measured.  You can make the argument there are better returns for sure, but i dont so how you can say no return.

Your mortgage doesn't know or care how much equity you have.  All it cares about is how much money you owe.  Let's say you apply $100 to principle.  This shows up on your checking account as -$100 and +$100 on your mortgage balance.  So your net worth remained exactly the same.    What did happen is you now owe less money, so you'll pay less interest in the future.   Paying less money is literally the same thing as saving money, right? 

It may sound like a trivial distinction, and it sort of is I suppose, but I see a lot of people say things like "I'm paying down my 4% mortgage because I'm getting a fixed 4% return on my money and 4% is better than 2% bonds."   But if that were really true, then a 7% mortgage would be better than a 4% mortgage because you'd be getting a 7% return, and shoot that's stock market territory.   Obviously that isn't true, and the reason why it isn't true is because mortgages are an expense.  Paying off your mortgage early  lowers that expense.   Lowering expenses is saving, not investing. 

I want to re-emphasize there is nothing wrong with savings!  Saving money is a fine thing to do.

You keep making the error of saying a having a higher mortgage rate would be better because it would equate to higher "savings", but they are separate things.  Having a 7% mortgage is worse than a 4% for obvious reasons, but paying a 7% mortgage does indeed save you more money than paying off a 4% mortgage.  You aren't technically earning a return, but it's the exact same thing mathematically. 

If you had a savings account that was equal in value to your mortgage balance, and had the same rate, it would be a wash whether you paid off the mortgage immediately or you paid the full amortization schedule out of that account.  Those scenarios are mathematically equal. At any point between now and the end of your mortgage period your savings account balance will exactly match your mortgage balance. Any money used to pay the mortgage simply shifts from your savings account to your mortgage account, and they remain in perfect balance.  If you partially pay off the mortgage you forgo earning a real return on that portion of money, but eliminate accruing an equivalent amount of real debt, and they remain in balance.  You may only technically be "earning" while the money is in the savings account, but that is just semantics, they are mathematically equivalent.

I get where you are coming from Frugalnacho, but these things (investing at a fixed rate vs. paying off a fixed rate loan) are equal amounts but not 'functionally' equal when it comes to mortgages and equities.  Folks are trying to explain that investing has a range of outcomes, hopefully outpacing the borrowing financed by a mortgage, and that a mortgage is a fixed rate that can be reduced if rates drop.  You seem to want to describe a loan that is not what a mortgage is and a return that is not what the market is, which might be a nice thought experiment, but isn't the real world, especially when 15 or 30 years are involved.  And when things go terribly wrong with a mortgage (like the 2009 asset decline scenario), you are in much better shape having not paid off your balance.  I really don't think you have a good argument.

[rmorris50]

Maybe it helps to think in terms of a balance sheet.

Assets - Liabilities = Equity
You can increase assets and/or decrease liabilities to increase Equity. While different approaches can mathematically get you to the same equity, the make-up of your balance sheet does matter it terms of how you can increase equity going forward and your financial risk profile. This is because assets produce value and liabilities produces expenses, which impacts cash flows and capital available to you. Both the balance sheet and cash flow statements matter in how your finances (a business) function. There is a reason businesses look at both. In personal financial planning both should be looked at too.

If I pay for 100k house in cash:
Asset = 100k house
liabilities = 0
Equity = 100k

If I buy a 100K house with 100k mortgage (given to me because I have 100k cash)
Asset = house 100K and cash 100K
Liabilities = 100k mortgage
Equity = 100k

Now how can you go about increasing equity? let's ignore other sources of income. In option 1 all I have is house appreciation, or mortgage the house and go to option 2 (assuming you can still get a mortgage). In option 2 I can also hope for house appreciation, and I can also go invest my 100k in another asset, hopefully earning more than my mortgage rate. Option 2 is has more risk though, due to the higher leverage (debt owed), but it provides more options to increase equity.

So while mathematically equivalent, I don't view these two options as functionally equivalent.

[frugalnacho]

Correct ne if this is incorrect but paying down a mortgage early over time reduces the principal more so than the original amortization schedule.  When that happens, the next payment has less interest and more principal applied, which is increasing your equity.  How is this not a return?  Equity in a house is a valuation just like a stock, granted it isnt fluidly measured.  You can make the argument there are better returns for sure, but i dont so how you can say no return.

Your mortgage doesn't know or care how much equity you have.  All it cares about is how much money you owe.  Let's say you apply $100 to principle.  This shows up on your checking account as -$100 and +$100 on your mortgage balance.  So your net worth remained exactly the same.    What did happen is you now owe less money, so you'll pay less interest in the future.   Paying less money is literally the same thing as saving money, right? 

It may sound like a trivial distinction, and it sort of is I suppose, but I see a lot of people say things like "I'm paying down my 4% mortgage because I'm getting a fixed 4% return on my money and 4% is better than 2% bonds."   But if that were really true, then a 7% mortgage would be better than a 4% mortgage because you'd be getting a 7% return, and shoot that's stock market territory.   Obviously that isn't true, and the reason why it isn't true is because mortgages are an expense.  Paying off your mortgage early  lowers that expense.   Lowering expenses is saving, not investing. 

I want to re-emphasize there is nothing wrong with savings!  Saving money is a fine thing to do.

You keep making the error of saying a having a higher mortgage rate would be better because it would equate to higher "savings", but they are separate things.  Having a 7% mortgage is worse than a 4% for obvious reasons, but paying a 7% mortgage does indeed save you more money than paying off a 4% mortgage.  You aren't technically earning a return, but it's the exact same thing mathematically. 

If you had a savings account that was equal in value to your mortgage balance, and had the same rate, it would be a wash whether you paid off the mortgage immediately or you paid the full amortization schedule out of that account.  Those scenarios are mathematically equal. At any point between now and the end of your mortgage period your savings account balance will exactly match your mortgage balance. Any money used to pay the mortgage simply shifts from your savings account to your mortgage account, and they remain in perfect balance.  If you partially pay off the mortgage you forgo earning a real return on that portion of money, but eliminate accruing an equivalent amount of real debt, and they remain in balance.  You may only technically be "earning" while the money is in the savings account, but that is just semantics, they are mathematically equivalent.

I get where you are coming from Frugalnacho, but these things (investing at a fixed rate vs. paying off a fixed rate loan) are equal amounts but not 'functionally' equal when it comes to mortgages and equities.  Folks are trying to explain that investing has a range of outcomes, hopefully outpacing the borrowing financed by a mortgage, and that a mortgage is a fixed rate that can be reduced if rates drop.  You seem to want to describe a loan that is not what a mortgage is and a return that is not what the market is, which might be a nice thought experiment, but isn't the real world, especially when 15 or 30 years are involved.  And when things go terribly wrong with a mortgage (like the 2009 asset decline scenario), you are in much better shape having not paid off your balance.  I really don't think you have a good argument.

I am trying to point out the logical fallacy you and telecaster are making because while I fully understand the semantics and distinction between "earning a return" and "reducing future debt payments" I feel like the statements being made are incorrect could mislead a newby .  Telecaster is claiming that if it were true a 7% mortgage would be better than a 4% because you'd save (earn a return) more money.  You will in fact save more money (earn a  return) by paying off the 7% mortgage, but he is ignoring the fact that a 7% mortgage will cost more.  And the example with taking out a high interest payday loan and then paying it in order to "earn a return" is similarly ignoring the effect of taking out the payday loan in the first place. Taking out a payday loan and paying it off won't earn you a "return" because it's completely negated by taking out the loan, but if the loan already exists then paying it off does earn you a return that is mathematically equivalent to putting that money into a savings or investment account earning the same rate as your debt.

Your real world savings/investment account won't be spherical and in a vacuum like in my thought experiment.  You will have things to consider like liquidity, will your savings account interest rate (or investment account return) change in the future, will you be able to refinance, will you need to keep that credit line open to allow you to do something else with your money, what kind of sorr will you experience, tax implications, etc.  And really that is a separate discussion that could use its own thread or hundred.

However money in fungible.  If you didn't have the entire balance of your mortgage earmarked yet then Everytime you get some money you are faced with the choice of paying down your debt, or investing it, and as I showed in my thought experiment those options are mathematically equivalent to each other assuming your return matches your debt rate.  Whether you can find a savings account to exactly match your mortgage APR, or what return you expect in the market, and whatever other factors will affect your personal situation is an exercise left to the reader.  However, conceptually you can treat debt payment as "earning a return" equivalent to the APR for the duration of the loan. 

[frugalnacho]

Maybe it helps to think in terms of a balance sheet.

Assets - Liabilities = Equity
You can increase assets and/or decrease liabilities to increase Equity. While different approaches can mathematically get you to the same equity, the make-up of your balance sheet does matter it terms of how you can increase equity going forward and your financial risk profile. This is because assets produce value and liabilities produces expenses, which impacts cash flows and capital available to you. Both the balance sheet and cash flow statements matter in how your finances (a business) function. There is a reason businesses look at both. In personal financial planning both should be looked at too.

If I pay for 100k house in cash:
Asset = 100k house
liabilities = 0
Equity = 100k

If I buy a 100K house with 100k mortgage (given to me because I have 100k cash)
Asset = house 100K and cash 100K
Liabilities = 100k mortgage
Equity = 100k

Now how can you go about increasing equity? let's ignore other sources of income. In option 1 all I have is house appreciation, or mortgage the house and go to option 2 (assuming you can still get a mortgage). In option 2 I can also hope for house appreciation, and I can also go invest my 100k in another asset, hopefully earning more than my mortgage rate. Option 2 is has more risk though, due to the higher leverage (debt owed), but it provides more options to increase equity.

So while mathematically equivalent, I don't view these two options as functionally equivalent.

Like I said there are a lot of other factors to consider, but to reply to the bolded part: yes, that is the core argument of this entire discussion! If you choose to pay off your mortgage you are essentially locking in a return equivalent to your mortgage rate.  If you thought you could get a better return elsewhere then you wouldn't pay off your mortgage. 

[Accountant]

Amen frugalnacho.