Author Topic: Do you regret paying off your mortgage early?  (Read 98071 times)

frugal_c

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Re: Do you regret paying off your mortgage early?
« Reply #100 on: January 01, 2016, 04:50:36 PM »
NO! Not one bit. I know it would make more financial sense to invest but I grew up dirt poor and am horribly debt phobic. I watched my mom struggle to keep a roof over our heads and food in our bellies. Knowing that I can stay in my house as long as I can pay the taxes lets me sleep so much easier.

+1

I view paying off a house as diversification.   In 2008 it seemed entirely possible I could lose my job and who knew how long before I found another one.   With the stock portfolio down 50% it would have been a horrible time to tap into that.  It made me realize the value of having a paid for property.   You are in a much better position to survive on some low wage job whereas with a large mortgage it could just be impossible.
« Last Edit: January 01, 2016, 04:52:22 PM by frugal_c »

bacchi

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Re: Do you regret paying off your mortgage early?
« Reply #101 on: January 01, 2016, 05:32:26 PM »
I view paying off a house as diversification.   In 2008 it seemed entirely possible I could lose my job and who knew how long before I found another one.   With the stock portfolio down 50% it would have been a horrible time to tap into that.  It made me realize the value of having a paid for property.   You are in a much better position to survive on some low wage job whereas with a large mortgage it could just be impossible.

The question is whether to pay off the mortgage early or invest the difference.

In other words, it's far better to have $50k at Vanguard than it is to have half of a paid off mortgage. The bank won't give a whit that you've made extra principal payments.

frugal_c

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Re: Do you regret paying off your mortgage early?
« Reply #102 on: January 01, 2016, 05:45:30 PM »
I view paying off a house as diversification.   In 2008 it seemed entirely possible I could lose my job and who knew how long before I found another one.   With the stock portfolio down 50% it would have been a horrible time to tap into that.  It made me realize the value of having a paid for property.   You are in a much better position to survive on some low wage job whereas with a large mortgage it could just be impossible.

The question is whether to pay off the mortgage early or invest the difference.

In other words, it's far better to have $50k at Vanguard than it is to have half of a paid off mortgage. The bank won't give a whit that you've made extra principal payments.

No, the question is do you regret paying off your mortgage early.  In that scenario you just don't have a mortgage you MUST pay.  It is all about balance, so I wouldn't say put everything into the mortgage and I wouldn't say put everything into the stock market.   There are definitely scenarios, a severe depression, where you are better off with the house paid off.  Yes, in the long,long term stocks will definitely out-perform the mortgage rate, I acknowledge that.  However, due to timing it can be completely irrelevant if you need to draw it down during the depression.

dragoncar

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Re: Do you regret paying off your mortgage early?
« Reply #103 on: January 01, 2016, 06:22:35 PM »
I'm in the pay off early crowd...paid mine off early and haven't regretted it.  I thought it was fantastic shaving down my monthly budget and increasing my savings rate.

Sure I fully understand that maybe you could do better in the market, and you have some assets to draw down to pay your mortgage if something happens...but what made me not opt to take this route was that the most likely time for many of us to lose a job and have to draw savings down is going to be in a recession and down market.  I hope it never happens to anyone here but if you end up having to sell equities at a loss to cover a mortgage payment you are probably going to end up way behind where you could have been just paying it off early.

Plus when we have a down year like this year...having no mortgage still pays me dividends.  The average person is probably down 2-3% this year in the market, and I avoided 3%(was 6% at one point) interest...so I ended up 5-6% ahead this year.  If you want to look at long term averages the market returns are going to beat interest rates, but then again considering we are coming out of a period of QE, ZIRP, and an already rather long bull market, I'm pretty doubtful the next few years are going to be at or above the long term market average.  I'll continue investing consistently because I have no debt at this point but if I had debt I'd be wagering the next few years would be a great time to pay it down.

This is actually a great example of how paying off your mortgage early is akin to market timing

Isn't not paying it off also akin to market timing as well?  You are gambling the next few years for the market will be at or above long term averages, I've gambled it will be below.

The best part is if I'm wrong I've still made a 3% return, lowered my monthly expenses, and had the peace and mind of no mortgage, while an average market year might have yielded me a 7-10% return...I still win but just not by as much.  If I'm right I've avoided market losses and nothing would be stopping me from refinancing and buying into a lower market, where as if I'm wrong and was in the market the whole time I just straight up lost.  I'd much rather take a coin toss where its heads I win, tails I win a lot more than heads I win, tails I lose.

No, betting on long term averages is the opposite of market timing

thriftycanadian

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Re: Do you regret paying off your mortgage early?
« Reply #104 on: January 01, 2016, 06:47:28 PM »
No, not at all.  Paid it off 5 years ago when times were really good work wise.   Now I am at the point of FIRE plus have gone through some work turmoil in terms of a layoff then ending up in a job I greatly dislike.   So glad that the mortgage is gone which has greatly reduced our monthly spending needs.

teen persuasion

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Re: Do you regret paying off your mortgage early?
« Reply #105 on: January 01, 2016, 08:20:07 PM »


When mortgage rates fell, I looked into refinancing, but due to the small amount - by then under 40k - the low rates always came with closing costs. When I crunched the numbers, I came out ahead by just paying it off rather than refinancing to a lower rate.


Don't regret paying our 9.75% mortgage off early.  The above is exactly where we were - every time rates fell, I looked into refinancing, but the fees on a small mortgage ate up any advantage.  I crunched the numbers, too, and came to the same conclusion - paying it down fast was the better move.  Then it was too small to refi.

We never benefited from the mortgage interest deduction due to low income/expenses, so that perk was out, too.

TheNick

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Re: Do you regret paying off your mortgage early?
« Reply #106 on: January 01, 2016, 08:43:25 PM »
No, betting on long term averages is the opposite of market timing

If you were betting on long term averages, you would understand the long term average is about 7% per year, and the last 7 years have averaged about 14%.  Long term average tells me a few years to bring us back down to average will be coming in the near future.  If you want to try and time the market assuming we will continue to be well above average more power to you, but I'm counting on the long term average to continue on.

BlueMR2

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Re: Do you regret paying off your mortgage early?
« Reply #107 on: January 02, 2016, 05:06:17 AM »
I would think that the type of people that pay off their mortgage early are not the type to inflate their lifestyle and blow all the $.

Indeed.  Seeing the savings rate go up from not having a mortgage inspired me to work harder at saving money in other areas.

MMM365

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Re: Do you regret paying off your mortgage early?
« Reply #108 on: January 02, 2016, 05:49:03 AM »
Just like politics, the answer to this is justified by what one believes in terms on debt vs investing.  There are a few certainties however:

1)  Deciding between paying off early or paying minimum and investing the difference is a choice between two good options.  THere is no bad choice here. 
2)  The benefit of one vs the other is subtle and conflicting attributes makes the overall decision about equal. 
3)  There are individual circumstances in each family's situation that can make one decision more attracive than others. 
4)  See number 1. 

Don Jean

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Re: Do you regret paying off your mortgage early?
« Reply #109 on: January 02, 2016, 09:08:44 AM »
Mathematics is not subject to a belief system. Based on your own personal circumstances as input variables, there is an unambiguous answer as to whether paying off a mortgage early is or is not a statistically good decision. In these thread topics, I've yet to see someone provide concrete evidence as to why investing the difference or paying it off is advantageous--that is not to say that such a post does not exist.

To simply quote a difference in interest rates does not take into account transactions costs, liquidity, volatility, time horizon, taxable costs, and other unidentified yet likely important variables. Similarly, "peace of mind" is an easy way to explain a decision and perhaps more palpable because a mortgage is a debt instrument; however, it is no different than the "peace of mind" some claim from purchasing a truck or SUV. If the underlying assumptions are wrong, it may even be counter to the intended psychological benefit.

I mention the above because I am interested in this answer myself and would be keen to see whether someone has made a calculation that looks at the opportunity cost between the two choices that takes into account some the variables mentioned.

Why is it acceptable to borrow massive amounts of money for savings when the debt instrument is a mortgage? Unequivocally, one's savings rate has a much larger impact on the journey to financial independence than one's return on investments. If one assumes that net worth accumulation towards financial independence takes places over an average of 10 years, why would someone borrow money for 15 or 30 years in the hopes of generating additional yet arguably arbitrary (for the purposes of retirement financial independence) returns over the same horizon?

My post raises more questions than it answers yet as someone who has not yet resolved this debate personally, these questions arise in my mind when reading the responses made by others to the thread.
« Last Edit: January 02, 2016, 09:11:18 AM by Don Jean »

bacchi

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Re: Do you regret paying off your mortgage early?
« Reply #110 on: January 02, 2016, 09:21:12 AM »
I view paying off a house as diversification.   In 2008 it seemed entirely possible I could lose my job and who knew how long before I found another one.   With the stock portfolio down 50% it would have been a horrible time to tap into that.  It made me realize the value of having a paid for property.   You are in a much better position to survive on some low wage job whereas with a large mortgage it could just be impossible.

The question is whether to pay off the mortgage early or invest the difference.

In other words, it's far better to have $50k at Vanguard than it is to have half of a paid off mortgage. The bank won't give a whit that you've made extra principal payments.

No, the question is do you regret paying off your mortgage early.  In that scenario you just don't have a mortgage you MUST pay.  It is all about balance, so I wouldn't say put everything into the mortgage and I wouldn't say put everything into the stock market.   There are definitely scenarios, a severe depression, where you are better off with the house paid off.

You're right, the OP is about whether anyone regrets paying off the mortgage.

However, by your original example, you're comparing 2 different scenarios. It's not,

Pay off mortgage with extra cash.
vs.
Pay minimum towards mortgage and don't save anything extra.

It's really,

Pay off mortgage with extra cash.
vs.
Pay minimum towards mortgage and invest the extra cash.

bacchi

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Re: Do you regret paying off your mortgage early?
« Reply #111 on: January 02, 2016, 09:27:55 AM »
In these thread topics, I've yet to see someone provide concrete evidence as to why investing the difference or paying it off is advantageous--that is not to say that such a post does not exist.

It's been done, probably by brooklynguy. (No, I don't care to search for it but it might be a sticky and it's probably in the super long thread about this very topic.)

Quote
Similarly, "peace of mind" is an easy way to explain a decision and perhaps more palpable because a mortgage is a debt instrument; however, it is no different than the "peace of mind" some claim from purchasing a truck or SUV. If the underlying assumptions are wrong, it may even be counter to the intended psychological benefit.

"Peace of mind" is probably the only legitimate answer to why someone would do this. Everyone else is doing mental gymnastics to explain their decision.

Quote
Why is it acceptable to borrow massive amounts of money for savings when the debt instrument is a mortgage?

It's not about it being a mortgage. It's about a fixed-rate non-callable loan at rates lower than the SWR.

Quote
If one assumes that net worth accumulation towards financial independence takes places over an average of 10 years, why would someone borrow money for 15 or 30 years in the hopes of generating additional yet arguably arbitrary (for the purposes of retirement financial independence) returns over the same horizon?

There's nothing wrong with holding a mortgage in ER. In fact, it's a good idea as an inflation hedge.

BigoteGato

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Re: Do you regret paying off your mortgage early?
« Reply #112 on: January 02, 2016, 10:13:38 AM »
Whenever this topic comes up, posters invariably compare the financial benefit of paying a mortgage by contrasting the mortgage interest rate with the returns on stocks. Many people keep a portion of their savings in bonds and other fixed return instruments to balance their investment risk. Paying a mortgage is equivalent to investing in the safest possible investment (e.g., US treasuries), so the appropriate comparison is your mortgage interest rate with the return on T-bills. By that comparison, at this time, it makes sense to pay off your mortgage vs. keeping it and investing the money in T-bills. (This all assumes you have other funds for emergencies, etc.; I'm addressing the case where you have the money to completely pay off your mortgage and have enough left over for other purposes.)

frugal_c

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Re: Do you regret paying off your mortgage early?
« Reply #113 on: January 02, 2016, 10:20:55 AM »
Whenever this topic comes up, posters invariably compare the financial benefit of paying a mortgage by contrasting the mortgage interest rate with the returns on stocks. Many people keep a portion of their savings in bonds and other fixed return instruments to balance their investment risk. Paying a mortgage is equivalent to investing in the safest possible investment (e.g., US treasuries), so the appropriate comparison is your mortgage interest rate with the return on T-bills. By that comparison, at this time, it makes sense to pay off your mortgage vs. keeping it and investing the money in T-bills. (This all assumes you have other funds for emergencies, etc.; I'm addressing the case where you have the money to completely pay off your mortgage and have enough left over for other purposes.)

Yes, this kind of nails it.  To further elaborate on that thought, bonds typically outperform stocks in deflationary environment.   So in my mind there is nothing wrong with having a percentage of your net worth in bonds, especially if you are not 100% sure of your job situation.  The fact is, you could lose your job and need that money.  This is not some nebulous, wishy-washy, "I kind of feel more comfortable with my mortgage paid off" concept.  It's just investing basics.

fiveoh

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Re: Do you regret paying off your mortgage early?
« Reply #114 on: January 02, 2016, 10:36:53 AM »
I haven't paid it off yet but did pay some extra last year.  Market returned under 1% and my house payments 3.5% so it was a good decision last year.  In fact I wish I would have paid more instead of putting some money into a taxable account.

acroy

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Re: Do you regret paying off your mortgage early?
« Reply #115 on: January 02, 2016, 11:25:45 AM »
I could pay it off but choose not to.

-the current house is right-sized
-it costs 4% to keep that capital diversified in investments making (my 15yr average) 8%
-the interest is tax deductible, so true cost of capital is 3.x%
-barebones home insurance is $500/yr. I'd have this whether bank-owned or self-owned.

Frankly I think having more than 20% or so of your assets tied up in the house (illiquid, non-diversified investment) is risky.
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vern

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Re: Do you regret paying off your mortgage early?
« Reply #116 on: January 02, 2016, 01:33:44 PM »
Hell no!

I'll take a guaranteed 6.3% return any day of the week.
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daschtick

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Re: Do you regret paying off your mortgage early?
« Reply #117 on: January 02, 2016, 01:40:34 PM »
No way - Who wants to worry about markets and mortgage payments when President Trump gets into office!

A paid off home is my 'safe' investment. 

DocMcStuffins

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Re: Do you regret paying off your mortgage early?
« Reply #118 on: January 02, 2016, 01:45:12 PM »
The part where people get in trouble with isn't if they are paying it off or not, it is when they are doing a little of one vs the other.  You either go all in with aggressive pay off (<5 years) or you don't and do a 30 year.  The reasoning is that if you are paying a lot and trying to get rid of the payment, it only is rewarding when it is over with (i.e. mortgage free).  Ie, if you are paying extra and plan on paying it off in 10 years, it is basically making you cash poor or non-liquid with an asset limiting your ability for your money to make you money.  So it's either one extreme  or the other.  The < 5 year play only holds up your investable income for a short period and the 30 year keeps you having more cash during the entire time to put into investments.  Not sure if I made sense but those are my thoughts. 

Capsu78

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Re: Do you regret paying off your mortgage early?
« Reply #119 on: January 02, 2016, 01:56:11 PM »
For us, it's nice to be on the home stretch, with less than 10% left to knock out.  Did my annual net worth calc yesterday and it was nice to add in the equity and see the "%" of HE to NW be a nice fiscally healthy number.  We will continue to throw any "found" money in the direction of the mortgage with no regrets.

MrsPete

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Re: Do you regret paying off your mortgage early?
« Reply #120 on: January 02, 2016, 02:05:27 PM »
NO! Not one bit. I know it would make more financial sense to invest but I grew up dirt poor and am horribly debt phobic. I watched my mom struggle to keep a roof over our heads and food in our bellies. Knowing that I can stay in my house as long as I can pay the taxes lets me sleep so much easier.
I could've written this. 
Don't regret paying our 9.75% mortgage off early.
Yes, the only mortgage I've ever had was in the 9% range; however, even at today's lower rates, owning your primary residence is well worth the security.

Tabaxus

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Re: Do you regret paying off your mortgage early?
« Reply #121 on: January 02, 2016, 02:08:42 PM »
NO! Not one bit. I know it would make more financial sense to invest but I grew up dirt poor and am horribly debt phobic. I watched my mom struggle to keep a roof over our heads and food in our bellies. Knowing that I can stay in my house as long as I can pay the taxes lets me sleep so much easier.
I could've written this. 
Don't regret paying our 9.75% mortgage off early.
Yes, the only mortgage I've ever had was in the 9% range; however, even at today's lower rates, owning your primary residence is well worth the security.

A part of me is almost happy that I'm probably not going to be buying a house for another year or two and, as a result, will miss out on the lowest interest rates.  It will make the decision to do significantly more than a 20% down payment less bad (from an optimization perspective).

And yeah, I grew up poor.  I just got out of debt slavery (student loans) two years ago or so.  Even if it leaves me "less well off," I'm willing to take that hit for the certainty of owning my home.

Don Jean

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Re: Do you regret paying off your mortgage early?
« Reply #122 on: January 02, 2016, 02:44:20 PM »
It's been done, probably by brooklynguy. (No, I don't care to search for it but it might be a sticky and it's probably in the super long thread about this very topic.)

Found it. It was a discussion between brooklynguy and foobar. The laid out the groundwork for building a calculator and came to the conclusion that at low interest rates it is generally better to hold the leveraged investment, mortgage.

Thank you for pointing me in that direction of the post. I'll have to digest it to see whether I can create a tool based on the discussions.

geekette

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Re: Do you regret paying off your mortgage early?
« Reply #123 on: January 02, 2016, 02:55:35 PM »
Don't regret at all. As mentioned maybe one time in thread, for those who have retired and are on ACA plans, it allows you to get by on a much lower income, which saves on insurance costs.

Telecaster

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Re: Do you regret paying off your mortgage early?
« Reply #124 on: January 02, 2016, 03:08:36 PM »
I mention the above because I am interested in this answer myself and would be keen to see whether someone has made a calculation that looks at the opportunity cost between the two choices that takes into account some the variables mentioned.

I went through and did the calculations a few years ago.   As you suggest, there are blue million different variables/assumptions you can look at and I looked at pretty much all of them, then went back and looked at them again.   However, it doesn't much what matter what assumptions you use.   Not paying down the mortgage pretty much wallops paying off the mortgage from a financial perspective regardless of what assumptions/variables you use.   

I didn't maintain a copy of my spreadsheet, but it is reasonable easy to do yourself.   

Quote
Unequivocally, one's savings rate has a much larger impact on the journey to financial independence than one's return on investments. If one assumes that net worth accumulation towards financial independence takes places over an average of 10 years, why would someone borrow money for 15 or 30 years in the hopes of generating additional yet arguably arbitrary (for the purposes of retirement financial independence) returns over the same horizon?

Good question.  Here's why:  Savings rate is the path to FIRE.  Staying FIREd requires investment returns.   Paying down the mortgage results in a future savings.  A future savings is surely a good thing, but it usually isn't as good as a current savings.    If you are paying down the mortgage, you are not saving now.  You are saving later.   Therefore, your savings rate right now is lower then if you were investing the money.   

Let's say you pay off your mortgage 15 years early.  The money in your house will earn virtually nothing for you.  But if you had been saving and investing the whole time, you should have a pretty good stockpile that is growing a decent amount of money.  Even though your expenses go down at year 15 and therefore have more money to invest, you'll never catch up to the guy who was investing the whole time.     

That's the main reason.  Here's another reason:  Inflation.   In year 2000, a $1500 mortgage had the same real dollar value as a $2000 mortgage today.   In other words, your future savings gets smaller every year.   You are using full value dollars today in order to save inflation eroded dollars in the future.  If wages keep up with inflation, the mortgage as a percentage of your income goes down, so you can increase your savings rate by doing nothing.   That's true in both scenarios.   But you can see that it becomes easier over time (again if wages keep up) to make the mortgage payment.  Hence the benefit of paying off the mortgage becomes less over time.   

Debts_of_Despair

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Re: Do you regret paying off your mortgage early?
« Reply #125 on: January 02, 2016, 03:20:41 PM »
Nope.  The lower stress and long term stability is worth way more than the extra ~2.5% I might earn in the market. 

EnjoyIt

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Re: Do you regret paying off your mortgage early?
« Reply #126 on: January 02, 2016, 03:21:36 PM »
Here are my reasons to pay off a mortgage early:

1) If you still have PMI, pay it down to get rid of PMI. 
2) If you have a ridiculously high rate and can't refinance.
3) If you are really close to paying it off and can get rid of the extra payment quickly. Giving you increased cash flow.
4) If your interest rate is low <4%, max out all tax deferred space, have extra cash at the end of the month, but your
    job is not very secure.  Thereby when/if you loose your job you have lower basic expenses giving you some security.
5) You are about to retire.

I have a very stable job and my mortgage is a 15 year at 2.75% with 12 years to go.  I plan to semi retire in 5 years when I get close to my number.  Once I get there I will likely pay off my mortgage aggressively.  I enjoy my work, but want more free time.  Working 2 days a week should accomplish that.

The psychological reason to pay a low interest rate mortgage early is valid, but I try not to base my investing decisions on emotion.

A huge reason not to pay off a mortgage early is I would not want a majority of my wealth sitting in 1 asset, my house. 

Cassie

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Re: Do you regret paying off your mortgage early?
« Reply #127 on: January 02, 2016, 03:24:01 PM »
One thing to is if you have a fairly secure pension then you would not be as dependent on having a huge stash and a paid for house gives you much lower expenses.  You would still want some $ liquid but you would not need as much.

NoraLenderbee

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Re: Do you regret paying off your mortgage early?
« Reply #128 on: January 02, 2016, 03:28:24 PM »
Mathematics is not subject to a belief system. Based on your own personal circumstances as input variables, there is an unambiguous answer as to whether paying off a mortgage early is or is not a statistically good decision. In these thread topics, I've yet to see someone provide concrete evidence as to why investing the difference or paying it off is advantageous--that is not to say that such a post does not exist.

But this is beside the point. Nobody is claiming that paying off the mortgage is mathematically superior. The financial advantage of not paying it off is discussed every day on this forum. People who pay it off do so because of non-financial benefits. They are not stupid; they have considered the issue and decided that for them, the life-enhancing benefits of paying early outweigh the financial benefit of not doing so. That's a very MMM thing to do.

dragoncar

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Re: Do you regret paying off your mortgage early?
« Reply #129 on: January 02, 2016, 03:34:49 PM »
No, betting on long term averages is the opposite of market timing

If you were betting on long term averages, you would understand the long term average is about 7% per year, and the last 7 years have averaged about 14%.  Long term average tells me a few years to bring us back down to average will be coming in the near future.  If you want to try and time the market assuming we will continue to be well above average more power to you, but I'm counting on the long term average to continue on.

This is the financial equivalent of "I'm rubber you are glue".  You say I'm market timing by assuming long term averages and in the same breath say you can predict a "near future" downturn based on half assed reversion to the mean analysis. 

Reconsider the phrase "market timing".  I offer no prediction as to the short term market direction, only say that long term averages are greater than my long term mortgage rate.  You, on the other hand, are making investment decisions based on a short term market prediction. You will change your investment decisions (eg market crashes below your moving average). Which one of us is market timing?  If you still think it's me, I encourage you to make use of a little something called Google.

Tabaxus

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Re: Do you regret paying off your mortgage early?
« Reply #130 on: January 02, 2016, 03:36:46 PM »
Does everyone saying that you should always pay off your house first also do margin investing as long as the rate that can be obtained is less than 4% (or whatever your chosen cutoff line is for mortgage rate vs. margin investing)?  Does everyone max out a HELOC and put that money into the market as well?  I suspect the answer is no, and I'd be interested to know why, since the math is the same (setting aside tax treatment, and that can be accounted for by referencing the tax-adjusted mortgage rate).

dragoncar

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Re: Do you regret paying off your mortgage early?
« Reply #131 on: January 02, 2016, 04:17:44 PM »
Does everyone saying that you should always pay off your house first also do margin investing as long as the rate that can be obtained is less than 4% (or whatever your chosen cutoff line is for mortgage rate vs. margin investing)?  Does everyone max out a HELOC and put that money into the market as well?  I suspect the answer is no, and I'd be interested to know why, since the math is the same (setting aside tax treatment, and that can be accounted for by referencing the tax-adjusted mortgage rate).

There have been many threads in this, here and elsewhere, but a home mortgage is simply of a different character than your examples (eg margin investing).  For example, mortgage can be fixed for 30 years, whereas margin investing is variable rate, exposing you to far more rate risk.   Mortgage is basically noncallable, whereas you can easily get a margin call, and the margin requirements can change against you with little or no notice.  In many states, mortgage is even non recourse, giving you a "free" put option on the real estate (I say free but the risk is likely priced into the mortgage rate).  Don't set aside tax treatment, it's huge for many of us. 

That said, yes I have dabbled in very low leveraged margin investing at around 1% for various liquidity reasons (low enough leverage to not get a margin call even in 2008, plus assuming a job loss).

EscapeVelocity2020

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Re: Do you regret paying off your mortgage early?
« Reply #132 on: January 02, 2016, 04:28:38 PM »
Does everyone saying that you should always pay off your house first also do margin investing as long as the rate that can be obtained is less than 4% (or whatever your chosen cutoff line is for mortgage rate vs. margin investing)?  Does everyone max out a HELOC and put that money into the market as well?  I suspect the answer is no, and I'd be interested to know why, since the math is the same (setting aside tax treatment, and that can be accounted for by referencing the tax-adjusted mortgage rate).

Last time I checked, I couldn't live in a margin loan :)

If you can get a HELOC at or below your current mortgage rate (and because it is somewhat tax deductible*), sure I'd do it (or refinance and extend the term, which I have also done when rates dropped by ~1% or more), but I'm not 'everyone'.

* A final benefit to using a home equity loan or HELOC to improve (or even purchase) your home is that the interest is tax deductible, just as it is on a primary mortgage, up to $1 million. You can deduct only up to $100,000 if you use the money for another purpose.  (thanks little thing called Google :)
« Last Edit: January 02, 2016, 05:44:39 PM by EscapeVelocity2020 »
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ender

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Re: Do you regret paying off your mortgage early?
« Reply #133 on: January 02, 2016, 04:35:19 PM »
That's the main reason.  Here's another reason:  Inflation.   In year 2000, a $1500 mortgage had the same real dollar value as a $2000 mortgage today.   In other words, your future savings gets smaller every year.   You are using full value dollars today in order to save inflation eroded dollars in the future.  If wages keep up with inflation, the mortgage as a percentage of your income goes down, so you can increase your savings rate by doing nothing.   That's true in both scenarios.   But you can see that it becomes easier over time (again if wages keep up) to make the mortgage payment.  Hence the benefit of paying off the mortgage becomes less over time.

You can do some interesting FIREcalc simulations about this. Start with say a portfolio of 1M and a 250k mortgage, run the numbers to see what happens if you instead start with 750k and no mortgage.



It's interesting to consider, basically, that if you expect the 4% rule to work those same assumptions suggest you should leave your mortgage as long as possible (at the current low rates).

It also is interesting to realize the effect during your working years of not investing vs paying off a mortgage on your FIRE date. Almost always moves FIRE out further to pay a mortgage off early, for the same reasons.

/holywar

dragoncar

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Re: Do you regret paying off your mortgage early?
« Reply #134 on: January 02, 2016, 04:39:47 PM »
Of course the mortgage pre-payers will laugh when we enter an extended period of deflation.  But the renters might laugh harder.  Then we will all cry

Tabaxus

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Re: Do you regret paying off your mortgage early?
« Reply #135 on: January 02, 2016, 04:56:32 PM »
Does everyone saying that you should always pay off your house first also do margin investing as long as the rate that can be obtained is less than 4% (or whatever your chosen cutoff line is for mortgage rate vs. margin investing)?  Does everyone max out a HELOC and put that money into the market as well?  I suspect the answer is no, and I'd be interested to know why, since the math is the same (setting aside tax treatment, and that can be accounted for by referencing the tax-adjusted mortgage rate).

There have been many threads in this, here and elsewhere, but a home mortgage is simply of a different character than your examples (eg margin investing).  For example, mortgage can be fixed for 30 years, whereas margin investing is variable rate, exposing you to far more rate risk.   Mortgage is basically noncallable, whereas you can easily get a margin call, and the margin requirements can change against you with little or no notice.  In many states, mortgage is even non recourse, giving you a "free" put option on the real estate (I say free but the risk is likely priced into the mortgage rate).  Don't set aside tax treatment, it's huge for many of us. 

That said, yes I have dabbled in very low leveraged margin investing at around 1% for various liquidity reasons (low enough leverage to not get a margin call even in 2008, plus assuming a job loss).

Variable rate can be solved pretty easily--buy an interest rate swap.  It's more complicated, obviously, but it's still just a question of the difference between the effective rate (after accounting for the cost of the swap) and whatever amount you're going to assume for market returns.  That said, I'll acknowledge that the risk of a margin call does seriously alter the calculation.

Those don't really apply to the HELOC point, though, and finding other sources of borrowing isn't that difficult. I could get an unsecured loan for  $15k at 4% tomorrow as part of my bank's package.  If you had access to the same, would you draw it down and buy some stock with it?  I certainly wouldn't, but maybe you would. 

Sorry if I didn't make it clear, but I certainly don't think one should set aside the tax considerations, I just think the most logical way to deal with that is to factor the tax considerations into the effective rate of the mortgage, since everyone's tax situation is different.

On a similar line:  why not a low down payment + PMI, so long as, again, your effective rate is under whatever rate of return you're wanting to use for the market?  I see very few people advocating for 0% down payment purchasing strategies, but the math should still be the same. 

EscapeVelocity2020

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Re: Do you regret paying off your mortgage early?
« Reply #136 on: January 02, 2016, 06:13:56 PM »
Does everyone saying that you should always pay off your house first also do margin investing as long as the rate that can be obtained is less than 4% (or whatever your chosen cutoff line is for mortgage rate vs. margin investing)?  Does everyone max out a HELOC and put that money into the market as well?  I suspect the answer is no, and I'd be interested to know why, since the math is the same (setting aside tax treatment, and that can be accounted for by referencing the tax-adjusted mortgage rate).

There have been many threads in this, here and elsewhere, but a home mortgage is simply of a different character than your examples (eg margin investing).  For example, mortgage can be fixed for 30 years, whereas margin investing is variable rate, exposing you to far more rate risk.   Mortgage is basically noncallable, whereas you can easily get a margin call, and the margin requirements can change against you with little or no notice.  In many states, mortgage is even non recourse, giving you a "free" put option on the real estate (I say free but the risk is likely priced into the mortgage rate).  Don't set aside tax treatment, it's huge for many of us. 

That said, yes I have dabbled in very low leveraged margin investing at around 1% for various liquidity reasons (low enough leverage to not get a margin call even in 2008, plus assuming a job loss).

Variable rate can be solved pretty easily--buy an interest rate swap.  It's more complicated, obviously, but it's still just a question of the difference between the effective rate (after accounting for the cost of the swap) and whatever amount you're going to assume for market returns.  That said, I'll acknowledge that the risk of a margin call does seriously alter the calculation.

Those don't really apply to the HELOC point, though, and finding other sources of borrowing isn't that difficult. I could get an unsecured loan for  $15k at 4% tomorrow as part of my bank's package.  If you had access to the same, would you draw it down and buy some stock with it?  I certainly wouldn't, but maybe you would. 

Sorry if I didn't make it clear, but I certainly don't think one should set aside the tax considerations, I just think the most logical way to deal with that is to factor the tax considerations into the effective rate of the mortgage, since everyone's tax situation is different.

On a similar line:  why not a low down payment + PMI, so long as, again, your effective rate is under whatever rate of return you're wanting to use for the market?  I see very few people advocating for 0% down payment purchasing strategies, but the math should still be the same.

Good stuff.  I would consider a 4% HELOC, and given my current asset allocation and employment status, I'd probably use the funds to buy either a muni bond fund, a re-balancing fund (like emerging markets since they have been lagging), or maybe sit on it (since you don't actually *have to* spend it).

But yeah, deflation would be a bitch DC.  I have faith that the new and improved Fed won't let that happen.  And there are many much more complicated things (like the fact that USD as a reserve currency might destabilize global finance) that keep me up at night long before that.

But I'm probably getting way off topic by bringing this up.  Instead, let's get back to 20 and 30-somethings telling us how great it is to pay off their mortgage early.
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Tabaxus

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Re: Do you regret paying off your mortgage early?
« Reply #137 on: January 02, 2016, 06:19:14 PM »
If you'd use a 4% HELOC, then I'll nod to your willingness to take on more investment risk than I'm willing to and will call it a day.  Absolutely not saying you're wrong for being willing to do that, by the way, because I agree with you that math tends to favor the bold here. Just wanting to clarify consistency on this point, since I've seen many people say that they would rather invest than pay down a mortgage, but they would never otherwise consider leveraged investing. 

I will say that I think investing in certain things as a hedge against deflation is just a step above investing in certain things as a hedge against government confiscation of assets.  Severe and sustained deflation is, at this point, a black swan concept for the U.S.  It could happen, but trying to plan around it doesn't make a lot of sense in my mind. 

brooklynguy

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Re: Do you regret paying off your mortgage early?
« Reply #138 on: January 02, 2016, 06:51:19 PM »
Just wanting to clarify consistency on this point, since I've seen many people say that they would rather invest than pay down a mortgage, but they would never otherwise consider leveraged investing. 

As noted above, that's because mortgage debt has a unique combination of attributes (low-interest, fixed-interest, long-term, and non-callable) that make it ideally suited for leveraged investing.  If I could get a non-callable 30-year sub-4% fixed rate loan in any other form, I'd take it and invest the proceeds too.

Tabaxus

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Re: Do you regret paying off your mortgage early?
« Reply #139 on: January 02, 2016, 07:16:21 PM »
Just wanting to clarify consistency on this point, since I've seen many people say that they would rather invest than pay down a mortgage, but they would never otherwise consider leveraged investing. 

As noted above, that's because mortgage debt has a unique combination of attributes (low-interest, fixed-interest, long-term, and non-callable) that make it ideally suited for leveraged investing.  If I could get a non-callable 30-year sub-4% fixed rate loan in any other form, I'd take it and invest the proceeds too.

As I pointed out though, the variable rate aspect is irrelevant (get a swap, factor it into your effective interest rate to determine if the deal is worth it).  I understand the relevance of margin call scenarios when you're strictly speaking about margin investing as opposed to other kinds of debt, but I would say that you're probably underestimating the availability of personal loans (as I said, I could go out and get a 4% non-callable personal loan for $15k tomorrow, if I wanted to). 

10-year term on the personal loan, and I understand that most HELOCs are well under 30 years, but I'm not entirely sure why 30 years (as opposed to any other fairly long time horizon, 5-10 years being sufficient) makes a material difference in risk profile, as long as the cash flow on the shorter period of amortization isn't problematic.

In any case though, given the last part of your statement, it appears that you're being mostly consistent on what you would consider.  Do you have a HELOC you invest on, and if not, why not?

brooklynguy

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Re: Do you regret paying off your mortgage early?
« Reply #140 on: January 02, 2016, 08:09:17 PM »
As I pointed out though, the variable rate aspect is irrelevant (get a swap, factor it into your effective interest rate to determine if the deal is worth it).

Yes, but you may be underestimating the complexity involved (to perfectly hedge your position, you'd need swaps corresponding to the loan's amortization schedule, and you'd need to account for any tax consequences of the swap transactions in determining your effective interest rate), and I suspect the cost of obtaining the swaps would make that strategy closer to being self-defeating anyway.

Quote
10-year term on the personal loan, and I understand that most HELOCs are well under 30 years, but I'm not entirely sure why 30 years (as opposed to any other fairly long time horizon, 5-10 years being sufficient) makes a material difference in risk profile, as long as the cash flow on the shorter period of amortization isn't problematic.

According to cFIREsim, the historical odds of coming out ahead by leveraged-investing-via-mortgage with a 4% interest rate and using a 100% stock allocation and cFIREsim's default investment expense ratio (ignoring tax and similar considerations) is 94.75% with a 30-year loan term but only 68.15% with a 10-year loan term.

(Note that, because cFIREsim's withdrawal timing assumption does not align with a mortgage's amortization schedule, the above percentages actually misstate the true historical success rates of leveraged-investing-via-mortgage, as described in this post.)

But those figures assume mortgage-style amortization.  What (if any) amortization would be required for the unsecured personal loan available to you?

Quote
Do you have a HELOC you invest on, and if not, why not?

No, I just carry a large mortgage balance -- I've never explored the precise terms on which a HELOC might be available to me, but I assume I couldn't get one that's non-callable with a fixed interest rate and anywhere close to a 30 year maturity.

Telecaster

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Re: Do you regret paying off your mortgage early?
« Reply #141 on: January 02, 2016, 08:14:53 PM »

10-year term on the personal loan, and I understand that most HELOCs are well under 30 years, but I'm not entirely sure why 30 years (as opposed to any other fairly long time horizon, 5-10 years being sufficient) makes a material difference in risk profile, as long as the cash flow on the shorter period of amortization isn't problematic.

A typical mortgage is 30-years, so that's the investing horizon we're typically talking about.   

There are a large number of five and ten periods when the stock market has yielded poor or negative returns and indeed some 10-year periods have had very significant losses.  So no, I personally wouldn't make a blanket recommendation to use leverage for a five or ten year period. 

However, there are no 30-year periods where the S&P including dividends has returned less than 8% (10% is average).  In other words, the stock market behavers exactly as we already know.  In the short term--which can be five or ten years--there's no telling what it will do.  But in the long term it goes up.

Of course, I'm assuming the future will be no worse than that past, and I'm fine with taking that risk.  But if we compress down to five or ten years, we have to hope the future will be better than the past.  I'm not willing to take that bet. 

To paraphrase brooklynguy, give me a 30 year uncallable loan at 4% fixed and I'll take every inch of it.  If any of those conditions change it becomes a special case, and you have to evaluate it on a special case basis.  There could be scenarios where it makes sense.  But maybe not. 






dragoncar

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Re: Do you regret paying off your mortgage early?
« Reply #142 on: January 02, 2016, 08:25:59 PM »
  Do you have a HELOC you invest on, and if not, why not?

I don't because I just bought a house and probably don't have enough equity.  I'd consider it once my equity gets "too high".

I've also been happy to arbitrage zero interest credit card offers in the past.

My impression was that personal loans had sucky terms, but sure I'd consider those too under the right conditions.  I think that for the risk I'm willing to take I'm maxed out on leverage at this point

mathlete

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Re: Do you regret paying off your mortgage early?
« Reply #143 on: January 02, 2016, 08:31:44 PM »
Haven't read most of the thread, but is there anyone here with a paid off home who is borrowing against the equity of their home to buy stocks?

brooklynguy

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Re: Do you regret paying off your mortgage early?
« Reply #144 on: January 02, 2016, 08:38:31 PM »
Haven't read most of the thread, but is there anyone here with a paid off home who is borrowing against the equity of their home to buy stocks?

I'm in the economically equivalent position (aside from tax considerations) of retaining my mortgage even though my stock portfolio eclipses the mortgage's remaining principal balance.

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Re: Do you regret paying off your mortgage early?
« Reply #145 on: January 02, 2016, 08:44:39 PM »
We are all beating a dead horse here. This is not a black-and-white issue. The decision to either allocate more income to your mortgage or to investments depends on the same variables that apply to your investment policy statement.

If you have a short time horizon, it is agreeable that it may not be in your best interest to invest in long-term assets such as equities (or ETF's around here). This asset class is volatile, and can decrease significantly in value during the short-term. Has historical performance outperformed that of mortgage rates? Absolutely. Does that have anything to do with an individual who is 2 years away from paying off their mortgage completely? Absolutely not!

From a geographical standpoint, mortgage interest is not tax-deductible in Canada. In addition, Canadians cannot deduct mortgage interest and can only lock-in rates for an average of 5 years before prime rate will change the available rates. This year the S&P/TSX is down 11%. Hypothetically, if you had decided to max your mortgage prepayments instead of investing, you'd have profited a double-digit net return. This solidifies the fact that the debate of mortgage vs. investing is never a yes or no answer and is completely dependent on individual circumstances. How much is left on the mortgage? Is the interest tax-deductible? How much after-tax income do you have? Do you expect any job changes in the near future?

Everyone has a different situation, and therefore this debate will continue indefinitely between individuals with completely different investor profiles. It's unfortunate to see banter about which tactic is superior coming from individuals with completely different circumstances from different locations. Always take your situation personally; with the most accuracy.

mathlete

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Re: Do you regret paying off your mortgage early?
« Reply #146 on: January 02, 2016, 08:45:03 PM »
To get personal, I'm on a 15 year loan and I'm paying extra every month. I'm also maxing out my IRA and my 401(k), so the 8% return I'd expect from investing more in the market is really lower than 7% after capital gains considerations with no deferral benefits.

So the proposition for me is a 7% return with high volatility vs. a 3.5% return with zero volatility.

This is a community about retiring early right? Volatility is a big deal. A theoretical person who planned on a ten year working career staring in 1999 who leveraged all of their assets into the market would have their early retirement plans busted up pretty quickly.


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Re: Do you regret paying off your mortgage early?
« Reply #147 on: January 02, 2016, 09:10:31 PM »
A theoretical person who planned on a ten year working career staring in 1999 who leveraged all of their assets into the market would have their early retirement plans busted up pretty quickly.

Possibly, but don't fall into the trap of thinking that your investment horizon ends on your planned retirement date.  The money the early retiree invests during the accumulation phase will be slowly drawn down over the entirety of her retirement, so the time horizon for the aspiring-early-retiree-investor is the multi-decade period constituting the remainder of her expected lifespan, not the few short remaining years until her target retirement date.

Tabaxus

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Re: Do you regret paying off your mortgage early?
« Reply #148 on: January 02, 2016, 09:29:40 PM »
Brooklyn and Telecaster -- interesting points, food for thought.  Appreciate it.

mathlete

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Re: Do you regret paying off your mortgage early?
« Reply #149 on: January 02, 2016, 09:38:22 PM »
Possibly, but don't fall into the trap of thinking that your investment horizon ends on your planned retirement date.  The money the early retiree invests during the accumulation phase will be slowly drawn down over the entirety of her retirement, so the time horizon for the aspiring-early-retiree-investor is the multi-decade period constituting the remainder of her expected lifespan, not the few short remaining years until her target retirement date.

Sure but if she's planning on using the four percent rule to retire and suddenly she has only 12.5 times her expenses after ten years rather than the planned 25x (as would have been the case in the 2008 recession), the numbers say she's gotta keep working. Even though you and I both know through the benefit of hindsight, that she could pull the trigger anyway and end up back at around 22x-24x  in a matter of a few years.

I'm really not meaning to come down on one side or the other, but you could extend the superior returns logic to absurdity. To the point where you're leveraging all kinds of low interest debt in order to get market returns. Most people don't do that though and I think the reason is that people don't like being 100% at the whims of the market. Whether someone draws the line at a 30 year mortgage, or a 15 year mortgage, or a ten year mortgage, or prioritizing paying off the house after maxing out a 401k and an IRA; it all comes down to a person's appetite for volatility.