Author Topic: Do you regret paying off your mortgage early?  (Read 98066 times)

tobitonic

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Re: Do you regret paying off your mortgage early?
« Reply #200 on: January 10, 2016, 10:27:48 AM »
Absolutely not. We're firm believers in the idea that a paid off house is its own retirement fund.

With a part time job (or social security), we sleep easy knowing we could pay for property taxes, utilities, and food for the rest of our lives.

Indio

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Re: Do you regret paying off your mortgage early?
« Reply #201 on: January 11, 2016, 09:11:03 AM »
I haven't done this yet, but I know one other person has on the forum - I'm doing a recast next year to lower our payment.  A recast is where you put down a large chunk on the principal and then the bank re-amortizes the loan based on the new principal balance. It costs us $250 and we need 10K to put towards the mortgage principal. 

This makes sense for us because we paid down almost 20K in the past two years to get rid of PMI (I was an idiot and forgot about PMI when we did our loan).  Also, my husband wants the house paid off, and while I'm fine with not paying it off, he brings in all the money so we are compromising and investing in the tax advantaged accounts and using the rest to pay off the mortgage over the next 5 years. 

When we recast next year (or late this year) we will drop our mortgage payment down by about $200 to $700 per month due to all of the previous prepayments we made to get rid of PMI. 

I could see eventually doing another recast in the future, and then not payoff our mortgage early if my husband is okay with it.  If we could get our monthly PITI payments down to around $600 I think he'd be fine not paying it off and investing all of our money.  Taxes and Insurance is about $300 of our payment now.

Anyways, just throwing it out there.  I think it's a decent compromise.  I get the added security of lower payments, we also are paying the mortgage down but it's possible we'll stop at some point when the monthly payment is low enough.

My mortgage holder, Wells Fargo, told me they only allow one recast over the life of the loan. When I inquired about this three years ago, there was a fee associated with it, but they have since eliminated the fee.

JLee

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Re: Do you regret paying off your mortgage early?
« Reply #202 on: January 11, 2016, 09:14:14 AM »
I haven't done this yet, but I know one other person has on the forum - I'm doing a recast next year to lower our payment.  A recast is where you put down a large chunk on the principal and then the bank re-amortizes the loan based on the new principal balance. It costs us $250 and we need 10K to put towards the mortgage principal. 

This makes sense for us because we paid down almost 20K in the past two years to get rid of PMI (I was an idiot and forgot about PMI when we did our loan).  Also, my husband wants the house paid off, and while I'm fine with not paying it off, he brings in all the money so we are compromising and investing in the tax advantaged accounts and using the rest to pay off the mortgage over the next 5 years. 

When we recast next year (or late this year) we will drop our mortgage payment down by about $200 to $700 per month due to all of the previous prepayments we made to get rid of PMI. 

I could see eventually doing another recast in the future, and then not payoff our mortgage early if my husband is okay with it.  If we could get our monthly PITI payments down to around $600 I think he'd be fine not paying it off and investing all of our money.  Taxes and Insurance is about $300 of our payment now.

Anyways, just throwing it out there.  I think it's a decent compromise.  I get the added security of lower payments, we also are paying the mortgage down but it's possible we'll stop at some point when the monthly payment is low enough.

My mortgage holder, Wells Fargo, told me they only allow one recast over the life of the loan. When I inquired about this three years ago, there was a fee associated with it, but they have since eliminated the fee.

Interesting - I didn't know you could do that.  My mortgage is with Wells Fargo as well - I'm $17k away from dropping PMI, but given that it's only ~$65/mo it's still less than 5%/yr on that $17k so I'm not sure it's worth paying down (although, it'd also be a 3.75% return because of paying principal down, so if I look at it that way it's ~8%. Hmm).  I will probably accelerate that portion once all my tax-advantaged accounts are maxed out.

bacchi

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Re: Do you regret paying off your mortgage early?
« Reply #203 on: January 11, 2016, 10:15:26 AM »
"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.

You're assuming that your own situation applies to all readers.

In my case, the arithmetic was simple. The (variable) mortgage rate in the UK at the time was 6% and I was paying 40% marginal income tax. Therefore I would need a 10% return on investment to do better than paying off the mortgage. It was a no-brainer to do so. If I'd put that money into a FTSE-100 tracker, I'd have lost out big-time, because the index in the UK is still lower than it was 16 years ago, during the dotcom boom. So, no regrets at all.

Yes, you're right. My bad.

If you have non-callable, fixed-rate, mortgage with a rate <4% and no PMI, it takes mental and mathematical gymnastics to convince yourself that it's better financially to pay it down.*


* If you believe in the Trinity SWR. If you think the SWR is 1%, then by all means pay it down!
« Last Edit: January 11, 2016, 10:17:18 AM by bacchi »

BTDretire

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Re: Do you regret paying off your mortgage early?
« Reply #204 on: January 11, 2016, 12:22:24 PM »


If you have non-callable, fixed-rate, mortgage with a rate <4% and no PMI, it takes mental and mathematical gymnastics to convince yourself that it's better financially to pay it down.*


* If you believe in the Trinity SWR. If you think the SWR is 1%, then by all means pay it down!

 Yep, it's all about the math, if you have a 4% mortgage and your in the 25% tax bracket, your real cost is 3%. Also, with inflation each year you are paying the mortgage with less valuable dollars.
 On a good year a stock investment can make 10%+.
A preferred stock can generate a 7% dividend.
 With a bad year you can lose 20% in the stock market.
Housing prices can also fall, but with that your stuck with
or without a mortgage, unless the government forces
taxpayers to bail you out.
 Then you feel like an idiot, because your neighbor got
a bailout with mortgage reduction, and you with no mortgage
get nothing, but you do get to help fund your neighbors bailout.
 :-)
Do whatever makes you feel comfortable.

FIPurpose

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Re: Do you regret paying off your mortgage early?
« Reply #205 on: January 11, 2016, 12:45:01 PM »
It's more than just your tax bracket. Correct me if I'm wrong but attributing all the mortgage deduction to tax savings is assuming that you are above the standard deduction and not taking the standard deduction into consideration in your calculations. If you're married and have:

$6000 in charity
$12,000 in mortgage interest.

4% interest mortgage
25% tax bracket

I don't think you can just claim all 12k to make a fair comparison if it wasn't there. A more fair comparison would be 18k - 12.6k (std. ded.) = $5.4k additional tax benefit. 66% which came from mortgage. So .66 * 5.4k = ~3.6k in additional tax write-off from mortgage. In the example above this would come to:

$3600 mortgage tax write-off
3600 * 25% = 900 actual tax removed
900 / 12000 = 7.5% tax deduction from mortgage interest.

So in this example the numbers play out that the real cost of a 4% mortgage is closer to 3.7% not 3%. I'm claiming that your situation is different but everyone should analyze there own situation and know that a tax deduction cannot be properly analyzed as taxes saved for every dollar. Compare what your mortgage interest provides and compare it to the proper baseline: the standard deduction.


In my own situation, I do not exceed the standard deduction since my mortgage is small. So I do not consider my mortgage tax advantageous at all.
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FIPurpose

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Re: Do you regret paying off your mortgage early?
« Reply #206 on: January 11, 2016, 12:56:09 PM »
Thinking a little bit more on my math it isn't fair to calculate at a particular rate. Because paying down the mortgage early does not reduce tax savings by that same rate. (I hope that makes sense).

12k in mortgage 5.5k of which is above the std ded. means that the top 5.5k of interest is at a discounted rate due to the tax savings (the assumed 25%), but the other 6.5k holds no additional tax savings. You can think of paying this situation early as being forced to payoff the lower interest rate before being allowed to pay off the higher rate. If you do not meet the stand. ded., still know that the mortgage ded. holds no advantage to you.
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cerat0n1a

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Re: Do you regret paying off your mortgage early?
« Reply #207 on: January 12, 2016, 03:56:50 AM »
If you have non-callable, fixed-rate, mortgage with a rate <4% and no PMI, it takes mental and mathematical gymnastics to convince yourself that it's better financially to pay it down.*

Hadn't appreciated that in the US you get a tax break on mortgage interest too. That really does skew the calculation in favour of keeping the loan, unless you're particularly risk averse.

big_owl

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Re: Do you regret paying off your mortgage early?
« Reply #208 on: January 12, 2016, 09:27:48 AM »
At 3.375% even my large mortgage doesn't provide diddly-dick of an interest write-off for my year-end taxes at this point in its amortization.  I can't wait to get the thing paid off in 7 years....11 years ahead of schedule.  3.375% is quite a bit more than my Dow/consumer/energy index funds have returned over the past two years ;)


TheNick

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Re: Do you regret paying off your mortgage early?
« Reply #209 on: January 13, 2016, 08:44:44 PM »
Hello ladies and gentlemen.  Given where the market is at right now....anyone who paid off debt in the last 2 years made the right more, let's see how much lower it goes...

Neustache

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Re: Do you regret paying off your mortgage early?
« Reply #210 on: January 14, 2016, 05:36:01 AM »
@TheNick
Due to the markets......feeling good about the 20K I paid down - got a 4.25% return (less with the tax deduction..) and eliminated my PMI.  Woot!  Still maxing out my IRA for the year so not currently paying it down, but come May or so, I'll be saving to reach 10-15K in a lump sum to reduce our payments via a recast.

dandarc

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Re: Do you regret paying off your mortgage early?
« Reply #211 on: January 14, 2016, 07:33:02 AM »
@TheNick
Due to the markets......feeling good about the 20K I paid down - got a 4.25% return (less with the tax deduction..) and eliminated my PMI.  Woot!  Still maxing out my IRA for the year so not currently paying it down, but come May or so, I'll be saving to reach 10-15K in a lump sum to reduce our payments via a recast.

I would suggest your return on that 20K was much higher than 4.25%.

Neustache

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Re: Do you regret paying off your mortgage early?
« Reply #212 on: January 14, 2016, 12:24:40 PM »
Yeah, the PMI elimination was the main reason for doing it.  I can't figure out what the return is on that, for some reason.  Ha!  But it was $600 a year and would have continued for another 6 years or so (I think, it's been awhile since I looked at it!).   I found MMM a few months AFTER buying a house we didn't need, to move into a slightly better school.  Gah!


JLee

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Re: Do you regret paying off your mortgage early?
« Reply #213 on: January 14, 2016, 01:57:33 PM »
I think if I refinance now, I will be able to get out of PMI (almost 3 years into a 30yr now). I could probably do a no-fee refinance to 15yr/3.125% (currently 27 years left at 3.75%, with ~6 years of $65/mo PMI remaining). I was going to pay it down $17k this year to drop PMI, but just refinancing seems the wiser option...

Conjou

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Re: Do you regret paying off your mortgage early?
« Reply #214 on: January 14, 2016, 06:33:46 PM »
Absolutely not. Most liberating feeling, because it was the last thing I paid off early after also paying all my other loans back. I don't claim to be a genius with money but it sure feels good to have no debt and no reason to write "I am debt free except for a mortgage".

blrkdales@centurylink.net

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Re: Do you regret paying off your mortgage early?
« Reply #215 on: January 15, 2016, 04:03:47 PM »
Is there anyone that can give some advise on paying off my mortgage VS investing?  I have about 3 years until I can pay my house off, faster if I stop my 457 and other investments and just pay it off.  The problem is that I loose 3 or so years of investments.  Any help would be greatly appreciated. 

Telecaster

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Re: Do you regret paying off your mortgage early?
« Reply #216 on: January 17, 2016, 05:53:03 PM »
Hello ladies and gentlemen.  Given where the market is at right now....anyone who paid off debt in the last 2 years made the right more, let's see how much lower it goes...

Probably.  But anyone who paid off 4% debt in 2010 made the wrong move.  The length of a typical mortgage is 30 years.  If you are looking at two year periods you are making a mistake. 

protostache

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Re: Do you regret paying off your mortgage early?
« Reply #217 on: January 17, 2016, 06:25:20 PM »
This is an interesting thread, along with the links to older threads. After reading the opinions here and elsewhere, including from MMM himself, we've decided to pay off our mortgage over the next three years. Our plan right now is to pay enough this year to get rid of PMI and get a HELOC in case we need the cash, then pay off the rest in one big chunk in May 2018. We'll probably be saving up the prepayment in a savings account at 0.7% interest, but investing it in the market is way too risky for this money.

My consulting clients are the main source of income for the family and soon my wife will be leaving her job to be a SAHP for a few years. I understand the opportunity cost, but I'm not vain enough to think that my skill set will be in demand for decades. I'd rather pay off the debt while the money's good instead of being stuck in something I don't like just to service the mortgage.

While we're saving for this goal we'll also be maxing out our solo 401(k) and backdoor Roth accounts (normal and backdoor), so we won't be sacrificing all of our investing opportunities.

I do have one question I'd like to hear opinions on. Should we do it all in one chunk at the end or do a big chunk each year and request a HELOC line increase each time?

Fi(re) on the Farm

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Re: Do you regret paying off your mortgage early?
« Reply #218 on: January 17, 2016, 06:29:57 PM »
Is there anyone that can give some advise on paying off my mortgage VS investing?  I have about 3 years until I can pay my house off, faster if I stop my 457 and other investments and just pay it off.  The problem is that I loose 3 or so years of investments.  Any help would be greatly appreciated.
Mortgage vs. investing is a pretty individualized choice.  Are you paying PMI?? then if so, pay your mortgage down.  Are your taxes and mortgage interest enough for you to itemize and get a bigger deduction?? then you should invest. Do your earning  boost you into a higher tax bracket?? then dump money into your 457.  For us, when we paid off our mortgage it made sense.  We bought a house well below what we were approved for and our tax savings were negligible after the first 5 years so it made sense for us to pay it off. I'm seriously debt phobic and knowing that I could pay all of the bills for my house if something happened to my husband or his job was the real reason we paid off the mortgage after 14 years.

DollarBill

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Re: Do you regret paying off your mortgage early?
« Reply #219 on: January 17, 2016, 08:42:24 PM »
Only because I sold Amazon @$70 a share to pay off my house but I sleep well at night and I don't dwell over it.

BlueHouse

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Re: Do you regret paying off your mortgage early?
« Reply #220 on: January 18, 2016, 05:03:29 AM »
.
 I'm not vain enough to think that my skill set will be in demand for decades. I'd rather pay off the debt while the money's good instead of being stuck in something I don't like just to service the mortgage.

While we're saving for this goal we'll also be maxing out our solo 401(k) and backdoor Roth accounts (normal and backdoor), so we won't be sacrificing all of our investing opportunities.

This is my situation exactly. Not sure I will pay it all off, but I want to pay it down enough so that after a recast, my payments are low enough for any w2 worker to handle.
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Ebrat

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Re: Do you regret paying off your mortgage early?
« Reply #221 on: January 18, 2016, 05:16:16 AM »
Interesting - I didn't know you could do that.  My mortgage is with Wells Fargo as well - I'm $17k away from dropping PMI, but given that it's only ~$65/mo it's still less than 5%/yr on that $17k so I'm not sure it's worth paying down (although, it'd also be a 3.75% return because of paying principal down, so if I look at it that way it's ~8%. Hmm).  I will probably accelerate that portion once all my tax-advantaged accounts are maxed out.

I calculate it the latter way--I'm paying 4.25% plus $90/mo on about $25k, so that $25k costs me .0425*25000+90*12=2142.5 per year, or 8.57%.  Of course, the real indignity is that the PMI payment stays the same while the balance I'm paying it on drops, so every time I pay down principal, my rate on the portion I'm paying PMI on goes up (e.g., if I had $20k to go before getting rid of PMI, that equates to a 9.65% rate; on $5k, it would be 25.85%!).

Liquid

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Re: Do you regret paying off your mortgage early?
« Reply #222 on: January 18, 2016, 11:06:51 AM »

Yes, you're right. My bad.

If you have non-callable, fixed-rate, mortgage with a rate <4% and no PMI, it takes mental and mathematical gymnastics to convince yourself that it's better financially to pay it down.*


This comes off as a bit smug and misses some critical points. You are ignoring the fact that when the market crashes, someone may lose their job and have to sell stocks low to pay the mortgage. You also ignore the value of a guaranteed return vs potential for flat or negative stock returns for long (eg 10yr) periods which may be your entire ER horizon. Over the short term, savings rate is much more important than stock return.

JLee

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Re: Do you regret paying off your mortgage early?
« Reply #223 on: January 18, 2016, 11:22:52 AM »
Interesting - I didn't know you could do that.  My mortgage is with Wells Fargo as well - I'm $17k away from dropping PMI, but given that it's only ~$65/mo it's still less than 5%/yr on that $17k so I'm not sure it's worth paying down (although, it'd also be a 3.75% return because of paying principal down, so if I look at it that way it's ~8%. Hmm).  I will probably accelerate that portion once all my tax-advantaged accounts are maxed out.

I calculate it the latter way--I'm paying 4.25% plus $90/mo on about $25k, so that $25k costs me .0425*25000+90*12=2142.5 per year, or 8.57%.  Of course, the real indignity is that the PMI payment stays the same while the balance I'm paying it on drops, so every time I pay down principal, my rate on the portion I'm paying PMI on goes up (e.g., if I had $20k to go before getting rid of PMI, that equates to a 9.65% rate; on $5k, it would be 25.85%!).
Oh man, I hadn't thought of that...yeah, it's a backwards situation where the effective rate goes up as you pay it down! I may look at refinancing to a 15yr at a lower rate - hopefully that'll kick me over the edge of no longer needing PMI (and it'd keep $17k at ~3%, and happen in a month or two instead of in a year).

TheNick

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Re: Do you regret paying off your mortgage early?
« Reply #224 on: January 18, 2016, 11:24:51 AM »
This comes off as a bit smug and misses some critical points. You are ignoring the fact that when the market crashes, someone may lose their job and have to sell stocks low to pay the mortgage. You also ignore the value of a guaranteed return vs potential for flat or negative stock returns for long (eg 10yr) periods which may be your entire ER horizon. Over the short term, savings rate is much more important than stock return.

Exactly.  We are in a down turn right now...everyone that put money into stock over the last two while carrying a mortgage not only paid mortgage interest, but got to watch their principal shrink...a double whammy, and things will probably get even worse before they get better.  Meanwhile paying off your mortgage early means you have a higher rate of savings during downturns and are less at risk to have to sell stock low to cover living expenses in the event of job loss if things get real bad.

Its easy to say average market return 8%, interest rate 3%, market wins, but when you break it down into a specific 10 year period that you'd be paying mortgage vs investing it doesn't always work out that way...we could very well have a significant drop this year and not see new market highs for 5-10 years which would leave us with a window where paying off your mortgage, even with today's low rates, ends up being a much better investment than the market.

JLee

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Re: Do you regret paying off your mortgage early?
« Reply #225 on: January 18, 2016, 11:29:34 AM »
This comes off as a bit smug and misses some critical points. You are ignoring the fact that when the market crashes, someone may lose their job and have to sell stocks low to pay the mortgage. You also ignore the value of a guaranteed return vs potential for flat or negative stock returns for long (eg 10yr) periods which may be your entire ER horizon. Over the short term, savings rate is much more important than stock return.

Exactly.  We are in a down turn right now...everyone that put money into stock over the last two while carrying a mortgage not only paid mortgage interest, but got to watch their principal shrink...a double whammy, and things will probably get even worse before they get better.  Meanwhile paying off your mortgage early means you have a higher rate of savings during downturns and are less at risk to have to sell stock low to cover living expenses in the event of job loss if things get real bad.

Its easy to say average market return 8%, interest rate 3%, market wins, but when you break it down into a specific 10 year period that you'd be paying mortgage vs investing it doesn't always work out that way...we could very well have a significant drop this year and not see new market highs for 5-10 years which would leave us with a window where paying off your mortgage, even with today's low rates, ends up being a much better investment than the market.

Are you saying that the correct answer is market timing?

Cookie78

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Re: Do you regret paying off your mortgage early?
« Reply #226 on: January 18, 2016, 11:39:07 AM »
This comes off as a bit smug and misses some critical points. You are ignoring the fact that when the market crashes, someone may lose their job and have to sell stocks low to pay the mortgage. You also ignore the value of a guaranteed return vs potential for flat or negative stock returns for long (eg 10yr) periods which may be your entire ER horizon. Over the short term, savings rate is much more important than stock return.

Exactly.  We are in a down turn right now...everyone that put money into stock over the last two while carrying a mortgage not only paid mortgage interest, but got to watch their principal shrink...a double whammy, and things will probably get even worse before they get better.  Meanwhile paying off your mortgage early means you have a higher rate of savings during downturns and are less at risk to have to sell stock low to cover living expenses in the event of job loss if things get real bad.

Its easy to say average market return 8%, interest rate 3%, market wins, but when you break it down into a specific 10 year period that you'd be paying mortgage vs investing it doesn't always work out that way...we could very well have a significant drop this year and not see new market highs for 5-10 years which would leave us with a window where paying off your mortgage, even with today's low rates, ends up being a much better investment than the market.

I'm confused about this because don't you WANT to be buying stocks when the market is low, as opposed to when it's high?

Having a 35 year mortgage myself your example doesn't apply, I'm just trying to wrap my head around your opinion.

dragoncar

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Re: Do you regret paying off your mortgage early?
« Reply #227 on: January 18, 2016, 12:03:35 PM »
Wow, OK so we are back to people arguing that it's not financially advantageous to keep the mortgage (for the majority of forum readers)?  Last time I checked FIRECalc can do this comparison, so go ahead and let us know what it says for your numbers instead of rambling on about "market crashes"

brooklynguy

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Re: Do you regret paying off your mortgage early?
« Reply #228 on: January 18, 2016, 12:06:17 PM »

Yes, you're right. My bad.

If you have non-callable, fixed-rate, mortgage with a rate <4% and no PMI, it takes mental and mathematical gymnastics to convince yourself that it's better financially to pay it down.*

This comes off as a bit smug and misses some critical points. You are ignoring the fact that when the market crashes...

It is of course possible for there to be a scenario where you come out ahead by prepaying non-callable, fixed-rate, 30-year, sub-4% debt having a standard U.S.-mortgage's amortization schedule, but you're performing the exact "mental and mathematical gymnastics" bacchi referred to by envisioning that scenario's actual occurrence (which, in the entire history of the market, has happened less often than the 4% rule (on which most of the same people around here who decry leveraged-investing-via-mortgage as "too risky" gleefully rely for purposes of planning their own retirements) has failed).

Quote
You also ignore the value of a guaranteed return vs potential for flat or negative stock returns for long (eg 10yr) periods which may be your entire ER horizon.

One's "ER horizon" is irrelevant for purposes of determining the success or failure of a leveraged-investing-via-mortgage strategy.  The relevant period is the entirety of the 30-year term of the mortgage loan.

Liquid

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Re: Do you regret paying off your mortgage early?
« Reply #229 on: January 18, 2016, 12:18:58 PM »
Wow, OK so we are back to people arguing that it's not financially advantageous to keep the mortgage (for the majority of forum readers)?  Last time I checked FIRECalc can do this comparison, so go ahead and let us know what it says for your numbers instead of rambling on about "market crashes"

I don't see how this is relevant, FIRECalc is for modeling after FIRE success rate, which is not what we are discussing (pre-FIRE). And yes over the short term it may be financially advantageous to many looking to ER.

dragoncar

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Re: Do you regret paying off your mortgage early?
« Reply #230 on: January 18, 2016, 12:23:53 PM »
Wow, OK so we are back to people arguing that it's not financially advantageous to keep the mortgage (for the majority of forum readers)?  Last time I checked FIRECalc can do this comparison, so go ahead and let us know what it says for your numbers instead of rambling on about "market crashes"

I don't see how this is relevant, FIRECalc is for modeling after FIRE success rate, which is not what we are discussing (pre-FIRE). And yes over the short term it may be financially advantageous to many looking to ER.

FIRECalc can model whatever inputs you give it, so no it's not just about retirement.

brooklynguy

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Re: Do you regret paying off your mortgage early?
« Reply #231 on: January 18, 2016, 12:30:22 PM »
I don't see how this is relevant, FIRECalc is for modeling after FIRE success rate, which is not what we are discussing (pre-FIRE).

FIRECalc and, even better, cFIREsim, allow you to "model" (really, backtest) the performance of prepaying your mortgage versus not prepaying your mortgage.  This post is one example describing the methodology for doing so.

Quote
And yes over the short term it may be financially advantageous to many looking to ER.

Again, the "short term" is irrelevant for this analysis.  The only period that matters for the "prepay or not to prepay" financial-advantageousness analysis is the entire weighted average life to maturity of the mortgage loan.

[EDIT:  corrected link]
« Last Edit: January 18, 2016, 06:11:18 PM by brooklynguy »

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Re: Do you regret paying off your mortgage early?
« Reply #232 on: January 18, 2016, 12:46:50 PM »

This comes off as a bit smug and misses some critical points. You are ignoring the fact that when the market crashes, someone may lose their job and have to sell stocks low to pay the mortgage. You also ignore the value of a guaranteed return vs potential for flat or negative stock returns for long (eg 10yr) periods which may be your entire ER horizon. Over the short term, savings rate is much more important than stock return.

That indeed is a critical point.  Let's say that exact scenario happens, but before you have finished paying off the mortgage.    The bank will still foreclose on you.  You may well lose all all those extra payments along with your down payment. 

"Ah," you say "It is prudent to have sufficient liquid reserves before paying down the mortgage."   That is correct.   But it is also an admission that putting money into the mortgage isn't entirely safe.   And I've never once heard someone who is planning to pay down the mortgage say that they will first save a couple year's expenses before starting.   Also worth considering what effect keeping large amounts of cash does to your investment returns over time.   We've had some threads on that previously. 

Another thing that people sometimes recommend is keeping an untapped HELOC available in case of an emergency like a job loss, that way you don't have a big cash drag.  But is borrowing money to pay for daily expenses really a good plan?     I'd much rather sell asserts if I was in that situation.

Finally, the part in bold relates to the mental gymnastics bacchi was talking about.  The length of a typical mortgage is 30 years.  That's the investment horizon we are looking at.   It isn't valid to reframe it into five or ten year periods (or even two year periods as some posters have done).   That's a fundamental misstatement of the question.   It is important to understand the question before looking for answers.   




Liquid

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Re: Do you regret paying off your mortgage early?
« Reply #233 on: January 18, 2016, 12:53:00 PM »

It is of course possible for there to be a scenario where you come out ahead by prepaying non-callable, fixed-rate, 30-year, sub-4% debt having a standard U.S.-mortgage's amortization schedule, but you're performing the exact "mental and mathematical gymnastics" bacchi referred to by envisioning that scenario's actual occurrence (which, in the entire history of the market, has happened less often than the 4% rule (on which most of the same people around here who decry leveraged-investing-via-mortgage as "too risky" gleefully rely for purposes of planning their own retirements) has failed).

One's "ER horizon" is irrelevant for purposes of determining the success or failure of a leveraged-investing-via-mortgage strategy.  The relevant period is the entirety of the 30-year term of the mortgage loan.

Ones ER horizon is very relevant... if you are looking to ER = )
vs have an academic debate about 30-year terms (for which I agree stocks look much better).

Finally regarding "mental and mathematical gymnastics," there have been four 10year periods AND four 20year periods of ~0% stock market growth. I do not know the stats for <4%, but I suspect higher.

How sure are you that you are not starting your aggressive 4-10yr ER push in one of these periods? The point is for short retirement horizons conservative investment is prudent. This is not a shocking concept, and is the current state of the art in retirement planning : )

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Re: Do you regret paying off your mortgage early?
« Reply #234 on: January 18, 2016, 01:15:47 PM »
Quote
The length of a typical mortgage is 30 years.  That's the investment horizon we are looking at.   It isn't valid to reframe it into five or ten year periods (or even two year periods as some posters have done).   That's a fundamental misstatement of the question.   It is important to understand the question before looking for answers.   

Just wanted to point out that the 30 year mortgage is not universal. In Canada a typical mortgage is 5 years, with 25 year amortization. We have lower rates than the US but those rates are not guaranteed for the length of the mortgage. After the 5 year term the mortgage has to be renewed at whatever rates are current at the time.

Additionally Canadians do not have tax breaks on mortgage interest. Both are important factors in the decision to pay down vs. invest.

Telecaster

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Re: Do you regret paying off your mortgage early?
« Reply #235 on: January 18, 2016, 01:35:44 PM »
How sure are you that you are not starting your aggressive 4-10yr ER push in one of these periods? The point is for short retirement horizons conservative investment is prudent. This is not a shocking concept, and is the current state of the art in retirement planning : )

Doesn't matter, because the mortgage doesn't know about your ER push.  It is still 30 years (exceptions noted, Canadians).   So if you are making the payoff vs. invest calculation, you have to look at a 30 year timeline.   There's no other way to do the comparison.   

I'm not quite sure what you mean by short retirement horizons.   Do you mean retirement isn't far off, or that you will only be retired for a short period of time?  If it is the former, then again, it doesn't matter because hopefully you will be retired a long time, easily more than 30 years for most people on this board.   If it is the latter, then yes I suppose being conservative would be more prudent.   

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Re: Do you regret paying off your mortgage early?
« Reply #236 on: January 18, 2016, 02:34:15 PM »
How sure are you that you are not starting your aggressive 4-10yr ER push in one of these periods? The point is for short retirement horizons conservative investment is prudent. This is not a shocking concept, and is the current state of the art in retirement planning : )

Doesn't matter, because the mortgage doesn't know about your ER push.  It is still 30 years (exceptions noted, Canadians).   So if you are making the payoff vs. invest calculation, you have to look at a 30 year timeline.   There's no other way to do the comparison.   

I'm not quite sure what you mean by short retirement horizons.   Do you mean retirement isn't far off, or that you will only be retired for a short period of time?  If it is the former, then again, it doesn't matter because hopefully you will be retired a long time, easily more than 30 years for most people on this board.   If it is the latter, then yes I suppose being conservative would be more prudent.

I am really struggling to understand you. You do not need to look at any timeline aside from the one that is relevant to you. For many here that may be short eg 4-10years until FIRE.

Liquid

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Re: Do you regret paying off your mortgage early?
« Reply #237 on: January 18, 2016, 03:08:33 PM »

This comes off as a bit smug and misses some critical points. You are ignoring the fact that when the market crashes, someone may lose their job and have to sell stocks low to pay the mortgage. You also ignore the value of a guaranteed return vs potential for flat or negative stock returns for long (eg 10yr) periods which may be your entire ER horizon. Over the short term, savings rate is much more important than stock return.

That indeed is a critical point.  Let's say that exact scenario happens, but before you have finished paying off the mortgage.    The bank will still foreclose on you.  You may well lose all all those extra payments along with your down payment. 

"Ah," you say "It is prudent to have sufficient liquid reserves before paying down the mortgage."   That is correct.   But it is also an admission that putting money into the mortgage isn't entirely safe.   And I've never once heard someone who is planning to pay down the mortgage say that they will first save a couple year's expenses before starting.   Also worth considering what effect keeping large amounts of cash does to your investment returns over time.   We've had some threads on that previously. 

Another thing that people sometimes recommend is keeping an untapped HELOC available in case of an emergency like a job loss, that way you don't have a big cash drag.  But is borrowing money to pay for daily expenses really a good plan?     I'd much rather sell asserts if I was in that situation.

Finally, the part in bold relates to the mental gymnastics bacchi was talking about.  The length of a typical mortgage is 30 years.  That's the investment horizon we are looking at.   It isn't valid to reframe it into five or ten year periods (or even two year periods as some posters have done).   That's a fundamental misstatement of the question.   It is important to understand the question before looking for answers.

There are some good points here regarding risk. However, when you go into foreclosure your equity remains yours. You will be credited for any excess beyond what the bank is owed on sale and any fees (which may be large). Ideally you would refinance or sell the property before it got to that point however.

Most loans do not require a full 30year term, so I am not sure why you are so focused on this point. You are free to shorten the term with early payments as fit your needs and goals.

It is perfectly valid to re-frame the investment horizon likewise as you see fit. Most care a great deal that their portfolio can support their expenses at retirement... and less so how it looks 30years down the line (eg if the portfolio cratered at expected retirement date but looked great 30yrs later).

This "re-framing" is what target retirement funds do for you automatically...

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Re: Do you regret paying off your mortgage early?
« Reply #238 on: January 18, 2016, 03:16:29 PM »

That indeed is a critical point.  Let's say that exact scenario happens, but before you have finished paying off the mortgage.    The bank will still foreclose on you.  You may well lose all all those extra payments along with your down payment. 

"Ah," you say "It is prudent to have sufficient liquid reserves before paying down the mortgage."   That is correct.   But it is also an admission that putting money into the mortgage isn't entirely safe.   And I've never once heard someone who is planning to pay down the mortgage say that they will first save a couple year's expenses before starting.   Also worth considering what effect keeping large amounts of cash does to your investment returns over time.   We've had some threads on that previously. 

<snip>
(bold is my emphasis)
It's not uncommon among the pre-paying club to build up a sinking fund and then use that to pay off the balance or some portion of a mortgage loan.  (I know this, because I was doing it before I knew what it was called, and the wise folks here provided the proper language for me).  I recently sold off my sinking fund and paid down 1/5 of my balance (I'm now at 53% equity).  My plan was to immediately recast the loan (for free) to reduce the risk of "losing it all" should something catastrophic happen with my employment.  Just didn't get around to it yet.   


Sometimes nothing can be a real cool hand

brooklynguy

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Re: Do you regret paying off your mortgage early?
« Reply #239 on: January 18, 2016, 04:40:54 PM »
I am really struggling to understand you. You do not need to look at any timeline aside from the one that is relevant to you. For many here that may be short eg 4-10years until FIRE.

Most loans do not require a full 30year term, so I am not sure why you are so focused on this point. You are free to shorten the term with early payments as fit your needs and goals.

It is perfectly valid to re-frame the investment horizon likewise as you see fit. Most care a great deal that their portfolio can support their expenses at retirement... and less so how it looks 30years down the line (eg if the portfolio cratered at expected retirement date but looked great 30yrs later).

The point is that for purposes of the "prepay vs. invest" decision (which is the topic of this thread (and many others like it)) for any given dollar, the only time period that matters is the remaining weighted life to maturity of the mortgage loan.  In choosing whether to deploy that dollar towards mortgage prepayment or investment in the market, one of those two options will turn out to be the better financial decision, and the then-remaining time horizon until your target retirement commencement is totally irrelevant (i.e., the answer won't change depending on whether your target retirement date (or actual retirement date) is five years away, or ten years away, or fifty years away).

You're focusing on the "prepay vs. invest" decision's impact on the ratio of the size of your stash as of the target date of retirement commencement to the then-remaining principal balance of your mortgage, but that focus is misplaced.  If all else remains equal, including your actual retirement commencement date, history suggests that the overwhelming odds are that you will come out ahead by investing in lieu of prepaying--and if you don't, and your early retirement is being funded by an investment portfolio, then that also more than likely means your retirement would have resulted in failure in any event.  In other words, if you are relying on the 4%-(or another reasonable SWR)-rule, if the market does not outperform a sub-4% mortgage prepayment plan over the next 30 years, your retirement plan is virtually assured to fail.

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Re: Do you regret paying off your mortgage early?
« Reply #240 on: January 18, 2016, 04:46:45 PM »

That indeed is a critical point.  Let's say that exact scenario happens, but before you have finished paying off the mortgage.    The bank will still foreclose on you.  You may well lose all all those extra payments along with your down payment. 

"Ah," you say "It is prudent to have sufficient liquid reserves before paying down the mortgage."   That is correct.   But it is also an admission that putting money into the mortgage isn't entirely safe.   And I've never once heard someone who is planning to pay down the mortgage say that they will first save a couple year's expenses before starting.   Also worth considering what effect keeping large amounts of cash does to your investment returns over time.   We've had some threads on that previously. 

<snip>
(bold is my emphasis)
It's not uncommon among the pre-paying club to build up a sinking fund and then use that to pay off the balance or some portion of a mortgage loan.  (I know this, because I was doing it before I knew what it was called, and the wise folks here provided the proper language for me).  I recently sold off my sinking fund and paid down 1/5 of my balance (I'm now at 53% equity).  My plan was to immediately recast the loan (for free) to reduce the risk of "losing it all" should something catastrophic happen with my employment.  Just didn't get around to it yet.

I feel like the recast point can't be stressed enough, as those in the anti-paydown group seem to not acknowledge it as an option.  All isn't lost if you reduce your payment by X amount per month after paying it down by utilizing a recast option.  I plan on saving up 10-20K and then doing a recast.  My payment will go down to the point that a full-time cashier job at Aldi's ($12/hr here) would cover our expenses each month, should my husband lose employment, or when I'm employed, my teaching salary will more than cover all of our expenses.   




brooklynguy

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Re: Do you regret paying off your mortgage early?
« Reply #241 on: January 18, 2016, 04:58:52 PM »
I feel like the recast point can't be stressed enough, as those in the anti-paydown group seem to not acknowledge it as an option.   

That's because, once you assume the truth of the set of assumptions that make investing a better option than prepaying, paying down and recasting is necessarily also a worse option than investing (but not as bad as paying down without recasting).

Once you do make a paydown sizable enough to qualify for recasting, though, if your mortgage serviced charges no (or minimal) fees for recasting, there's definitely no (or minimal) downside in doing so, so in that case it's definitely worth doing for the flexibility it provides.

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Re: Do you regret paying off your mortgage early?
« Reply #242 on: January 18, 2016, 05:07:41 PM »

The point is that for purposes of the "prepay vs. invest" decision (which is the topic of this thread (and many others like it)) ...

My reading of the topic of this thread led me to believe the OP was looking for responses based on emotion or gut rather than a straightforward analytic decision.  Regret is an emotion isn't it?  I've very much enjoyed reading the responses from people who say they breathe easier now.  I know it's a little bit of confirmation bias, but I've already made up my mind about paying it off faster than 30 years.  The only question left for me is how much and how fast. 
Sometimes nothing can be a real cool hand

brooklynguy

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Re: Do you regret paying off your mortgage early?
« Reply #243 on: January 18, 2016, 05:18:04 PM »
My reading of the topic of this thread led me to believe the OP was looking for responses based on emotion or gut rather than a straightforward analytic decision.  Regret is an emotion isn't it?

Yes, I don't disagree that psychological benefits could be a perfectly valid reason for someone to prepay debt (as long as they do it with their eyes open to the potential financial costs).  I was responding to subdiscussion that cropped back up in this thread concerning the purely financial cost-benefit analysis.

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Re: Do you regret paying off your mortgage early?
« Reply #244 on: January 18, 2016, 05:19:16 PM »

The point is that for purposes of the "prepay vs. invest" decision (which is the topic of this thread (and many others like it)) for any given dollar, the only time period that matters is the remaining weighted life to maturity of the mortgage loan.  In choosing whether to deploy that dollar towards mortgage prepayment or investment in the market, one of those two options will turn out to be the better financial decision, and the then-remaining time horizon until your target retirement commencement is totally irrelevant (i.e., the answer won't change depending on whether your target retirement date (or actual retirement date) is five years away, or ten years away, or fifty years away).

You're focusing on the "prepay vs. invest" decision's impact on the ratio of the size of your stash as of the target date of retirement commencement to the then-remaining principal balance of your mortgage, but that focus is misplaced.  If all else remains equal, including your actual retirement commencement date, history suggests that the overwhelming odds are that you will come out ahead by investing in lieu of prepaying--and if you don't, and your early retirement is being funded by an investment portfolio, then that also more than likely means your retirement would have resulted in failure in any event.  In other words, if you are relying on the 4%-(or another reasonable SWR)-rule, if the market does not outperform a sub-4% mortgage prepayment plan over the next 30 years, your retirement plan is virtually assured to fail.

The point of the thread is not invest vs mortgage pay down over 30years... it's do you regret paying off your mortgage early.... and we are NOT seeing a lot of regret : )

Your point is academic... and yes I agree over the long term likely correct.

However, over the short term it may not be the correct choice.

Please explain why target retirement funds change composition as you near retirement. The best mathematical choice is 100% stock all the time. Why bother with any investment other than MAX return?!!!

Liquid

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Re: Do you regret paying off your mortgage early?
« Reply #245 on: January 18, 2016, 05:31:26 PM »
I don't see how this is relevant, FIRECalc is for modeling after FIRE success rate, which is not what we are discussing (pre-FIRE).

FIRECalc and, even better, cFIREsim, allow you to "model" (really, backtest) the performance of prepaying your mortgage versus not prepaying your mortgage.  This post is one example describing the methodology for doing so.


Your link is not working, went to a malware site.   

brooklynguy

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Re: Do you regret paying off your mortgage early?
« Reply #246 on: January 18, 2016, 05:42:59 PM »
[
The point of the thread is not invest vs mortgage pay down over 30years... it's do you regret paying off your mortgage early.... and we are NOT seeing a lot of regret : )

Your point is academic... and yes I agree over the long term likely correct.

However, over the short term it may not be the correct choice.

Please explain why target retirement funds change composition as you near retirement. The best mathematical choice is 100% stock all the time. Why bother with any investment other than MAX return?!!!

Well, I'd say it's the opposite of "academic," since the points we're discussing are actually being put into practice by real people with real dollars at stake.

Target retirement funds change composition on the theory that you should dial down your portfolio's risk profile as you approach retirement (i.e., the time when you will start drawing down on your portfolio), but you can (and I routinely do) argue that an early retiree (with a very long expected retirement period) should retain an aggressive asset allocation into retirement.

Your link is not working, went to a malware site.

Here's the link again, but it's the same as the original link, which I think is the correct link, but it appears that the MMM forum site has been compromised because I'm also being redirected to a malware site when I click on it:

http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/msg605854/#msg605854

EDIT:  I removed the extra "http://" (oops!) and that seemed to fix the link. 
« Last Edit: January 18, 2016, 06:02:16 PM by brooklynguy »

Liquid

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Re: Do you regret paying off your mortgage early?
« Reply #247 on: January 18, 2016, 06:23:34 PM »

Well, I'd say it's the opposite of "academic," since the points we're discussing are actually being put into practice by real people with real dollars at stake.

Target retirement funds change composition on the theory that you should dial down your portfolio's risk profile as you approach retirement (i.e., the time when you will start drawing down on your portfolio), but you can (and I routinely do) argue that an early retiree (with a very long expected retirement period) should retain an aggressive asset allocation into retirement.

Your link is not working, went to a malware site.

Here's the link again, but it's the same as the original link, which I think is the correct link, but it appears that the MMM forum site has been compromised because I'm also being redirected to a malware site when I click on it:

http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/msg605854/#msg605854

EDIT:  I removed the extra "http://" (oops!) and that seemed to fix the link.

Thank you for clarifying the link.

Agreed, risk is the reason for target retirement fund changes. It is also the reason that endowment funds are not 100% stock even though they have indefinite time frames (longer than your early retiree ; ). It is the reason you can get a home loan at 3%, rather than the bank sinking that money into stocks.

Risk is the reason that in the sort term paying down a mortgage aggressively may be a good financial decision... not just an emotional one.

Risk ladies and gentlemen, is real.  : )




« Last Edit: January 18, 2016, 06:33:58 PM by Liquid »

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Re: Do you regret paying off your mortgage early?
« Reply #248 on: January 18, 2016, 08:50:34 PM »

Agreed, risk is the reason for target retirement fund changes. It is also the reason that endowment funds are not 100% stock even though they have indefinite time frames (longer than your early retiree ; ). It is the reason you can get a home loan at 3%, rather than the bank sinking that money into stocks.

Risk is the reason that in the sort term paying down a mortgage aggressively may be a good financial decision... not just an emotional one.

Risk ladies and gentlemen, is real.  : )

Actually, volatility is the reason why target retirement fund changes.   Risk and volatility are often used interchangeably (especially in academics for some reason), but while they are somewhat related they are not at all the same thing.   

Acknowledging the usual caveats (an asteroid hits, Chinese invade, etc.) stock market risk is very close to zero, as long as you own a piece of the whole market and have a long holding period.   On the flip side, bonds are very risky over long holding periods.  That's why financial gurus like William Bernstein recommend never holding bonds greater than five years.   You wind up losing your gains to taxes and inflation.  Knowing how much money you will have in two or five years is surely a good thing, but you have to pay quite a bit for that certainty.   

As an aside, this also relates to another reason why paying down the mortgage doesn't make sense.   Let's say you took out a mortgage back in 1985 and dutifully paid it down.   You saved a whole bunch of money, right?   Not exactly.   A 1985 dollar is only worth 45 cents today.   In other words, you paid a full dollar now in order to save 45 cents in the future (at least for the last year of the mortgage).*   

On the flip side, if you put that same 1985 dollar into the stock market you would have wound up with eighteen dollars today (or eight 1985 dollars, if you prefer).   Spending one dollar to save 45 cents is not that great, but spending one dollar to get 18 is pretty awesome.   And is spending a dollar to get 45 cents less risky than getting 18 dollars?   Swami says no.   Yes, you saved some volatility, but man you paid a high price for it.   In a practical and very real sense you took a guaranteed loss in order to reduce volatility.   


* Of course you couldn't get a 4% mortgage in 1985, so the example is for illustration only.   Also, I'm using only the beginning and end points in my example, so stuff in the middle is less dramatic.   Same principle holds though. 



Cathy

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Re: Do you regret paying off your mortgage early?
« Reply #249 on: January 18, 2016, 11:49:45 PM »
Additionally Canadians do not have tax breaks on mortgage interest.

Under the Internal Revenue Code, Canadians are free to claim a deduction for "qualified residence interest", assuming that the requirements of the statute are otherwise met. 26 USC 163(a), (h)(2)(D). The statute does not consider the nationality or citizenship of the taxpayer. There is no requirement to be a US citizen to claim this deduction.

In fact, if a Canadian is a resident of the United States, a relevant treaty provision prohibits the USA from imposing "any requirement ... which is other or more burdensome than ... connected requirements to which citizens of [the United States] are or may be subjected". Convention Between Canada and the United States of America With Respect to Taxes on Income and on Capital, as amended, Art XXV(1). This nondiscrimination requirement is incorporated into domestic US law by virtue of the Supremacy Clause of the US Constitution (Art VI, cl 2), which makes treaties part of "the supreme Law of the Land" in the United States (unlike the situation in Canada, where treaties generally have no domestic legal effect, other than as an interpretive aid to other documents).
« Last Edit: January 18, 2016, 11:59:54 PM by Cathy »
This post contains only general information on the issues raised by this topic. This post does not provide help tailored to your specific situation. There are many facts that could be relevant to your specific situation and I am not in possession of those facts. If you need help tailored to your specific situation, you should retain an appropriate professional and not rely on this post.