Author Topic: Do you regret paying off your mortgage early?  (Read 98065 times)

JLee

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Re: Do you regret paying off your mortgage early?
« Reply #300 on: January 21, 2016, 07:03:25 AM »
We aren't taking the mathematically optimal path, or the fastest one, but we are going in the right direction, and we'll get there faster than most other people we know.

There's something about achieving and then surpassing "Net Worth Zero" and having it all be simple and clean that I really enjoy. Call us simple-minded peasants if you will, but if feels good.

Owning a $200k house with a $150k mortgage doesn't mean your net worth is -$150k. The house value counts too.

coppertop

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Re: Do you regret paying off your mortgage early?
« Reply #301 on: January 21, 2016, 07:29:06 AM »
We paid our mortgage off in seven years and it feels like quite the accomplishment.  Since I turned 60 a few months ago, I feel good that we will go into retirement with no debt.  Having no mortgage payment has allowed me to put the maximum permissible amounts into my retirement funds as well.  If I lost my job tomorrow, my home would not be in jeopardy.  Both my parents were brought up very poor in the Great Depression.  I learned thrift at my mother's knee, and part of what I always heard was that you needed to pay your mortgage off.

dragoncar

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Re: Do you regret paying off your mortgage early?
« Reply #302 on: January 21, 2016, 11:52:10 AM »
We aren't taking the mathematically optimal path, or the fastest one, but we are going in the right direction, and we'll get there faster than most other people we know.

There's something about achieving and then surpassing "Net Worth Zero" and having it all be simple and clean that I really enjoy. Call us simple-minded peasants if you will, but if feels good.

Owning a $200k house with a $150k mortgage doesn't mean your net worth is -$150k. The house value counts too.

Only for the first 27.5 years since it was built, after that it's fully depreciated and has no value whatsoever

cerat0n1a

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Re: Do you regret paying off your mortgage early?
« Reply #303 on: January 21, 2016, 01:22:19 PM »
Only for the first 27.5 years since it was built, after that it's fully depreciated and has no value whatsoever

Where I live, the £1m+ houses are mostly 300+ years old. I'm racking brains to think whether I know anybody who lives somewhere built this century!

plainjane

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Re: Do you regret paying off your mortgage early?
« Reply #304 on: January 21, 2016, 06:09:45 PM »
There's something about achieving and then surpassing "Net Worth Zero" and having it all be simple and clean that I really enjoy. Call us simple-minded peasants if you will, but if feels good.

I remember that point when the amount in our retirement fund was above the amount owed on the mortgage.  That was a cool feeling.
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GuitarStv

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Re: Do you regret paying off your mortgage early?
« Reply #305 on: January 22, 2016, 06:18:37 AM »
We aren't taking the mathematically optimal path, or the fastest one, but we are going in the right direction, and we'll get there faster than most other people we know.

There's something about achieving and then surpassing "Net Worth Zero" and having it all be simple and clean that I really enjoy. Call us simple-minded peasants if you will, but if feels good.

Owning a $200k house with a $150k mortgage doesn't mean your net worth is -$150k. The house value counts too.

Only for the first 27.5 years since it was built, after that it's fully depreciated and has no value whatsoever

So that's why you don't get taxed on a house that's more than 30 years old . . .

Livewell

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Re: Do you regret paying off your mortgage early?
« Reply #306 on: January 22, 2016, 09:29:26 AM »
My wife and I paid off our mortgage in 2013.

I looked at it as a bond allocation in our portfolio, we had/have a healthy stock portfolio already.  3% guaranteed over the remaining term of the loan (14 yrs in our case).  We kept our "mortgage" payment for now (as we are pre FIRE) in the form of monthly automatic Vanguard investments.

Unlike a bond investment, we also get the very satisfying feeling of having it paid off and the cash flow flexibility down the road.

we may have made more in the market, but after living through dot bomb and financial crisis, my risk tolerance is lower than it once was. 

BigoteGato

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Re: Do you regret paying off your mortgage early?
« Reply #307 on: January 22, 2016, 09:50:28 AM »
I looked at it as a bond allocation in our portfolio, we had/have a healthy stock portfolio already.  3% guaranteed over the remaining term of the loan (14 yrs in our case).  We kept our "mortgage" payment for now (as we are pre FIRE) in the form of monthly automatic Vanguard investments.

Comparing your paid off mortgage to investing in bonds is the correct approach. Many on this thread compare the returns of equities to interest on mortgage to explain why they haven't paid off their mortgage. That makes sense only if you have 0% allocated to bonds. If you have any bonds, you are likely passing up the chance to increase your income by replacing some of those bonds with your "mortgage paid off bond."

brooklynguy

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Re: Do you regret paying off your mortgage early?
« Reply #308 on: January 22, 2016, 10:17:02 AM »
Comparing your paid off mortgage to investing in bonds is the correct approach. Many on this thread compare the returns of equities to interest on mortgage to explain why they haven't paid off their mortgage. That makes sense only if you have 0% allocated to bonds. If you have any bonds, you are likely passing up the chance to increase your income by replacing some of those bonds with your "mortgage paid off bond."

As arebelspy has pointed out in the past, while comparing paying down your mortgage to holding bonds makes a of lot of sense, it's not perfectly analogous because you can't reallocate between your home equity and the rest of your portfolio the way you can with your bond allocation.

Moreover, according to cFIREsim, historically you would have come out ahead a majority of the time by taking out (and holding to maturity) a mortgage and investing the proceeds in a 100% bond portfolio as long as the mortgage rate was 3.25% or lower (of course, the low interest rate environment that we're currently in also means that prevailing bond interest rates are lower than in historical times too, but we don't know when that will change).

(In the interest of full disclosure, I personally choose to retain my (large) mortgage and I'm virtually 100% invested in equities.)

munchabunch

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Re: Do you regret paying off your mortgage early?
« Reply #309 on: January 22, 2016, 10:49:01 AM »

I remember that point when the amount in our retirement fund was above the amount owed on the mortgage.  That was a cool feeling.

Oooh, I like the sound of this!  We aren't there yet, but now I'm looking forward to it!

EnjoyIt

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Re: Do you regret paying off your mortgage early?
« Reply #310 on: January 22, 2016, 01:22:46 PM »
One blog poster Whitecoatinvestor has created his mortgage payoff fund. It is a relatively less aggressive fund he uses to add extra cash into. It is designed to help payoff his mortgage sooner but still invest in index funds. When he has enough cash value in this fund to payoff that mortgage he will make the decision to just pay if off, or continue investing.

Since his mortgage rate is so low, the biggest benefit of paying extra in your mortgage comes when you actually have no more mortgage and increase your cash flow. In the long run, his plan gives him more options, and a hypothetical better returns on his money.

DividendMoney

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Re: Do you regret paying off your mortgage early?
« Reply #311 on: January 22, 2016, 01:34:44 PM »
One blog poster Whitecoatinvestor has created his mortgage payoff fund. It is a relatively less aggressive fund he uses to add extra cash into. It is designed to help payoff his mortgage sooner but still invest in index funds. When he has enough cash value in this fund to payoff that mortgage he will make the decision to just pay if off, or continue investing.

Since his mortgage rate is so low, the biggest benefit of paying extra in your mortgage comes when you actually have no more mortgage and increase your cash flow. In the long run, his plan gives him more options, and a hypothetical better returns on his money.

This is exactly what I did. 

powersuitrecall

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Re: Do you regret paying off your mortgage early?
« Reply #312 on: January 22, 2016, 02:38:02 PM »
One blog poster Whitecoatinvestor has created his mortgage payoff fund. It is a relatively less aggressive fund he uses to add extra cash into. It is designed to help payoff his mortgage sooner but still invest in index funds. When he has enough cash value in this fund to payoff that mortgage he will make the decision to just pay if off, or continue investing.

Since his mortgage rate is so low, the biggest benefit of paying extra in your mortgage comes when you actually have no more mortgage and increase your cash flow. In the long run, his plan gives him more options, and a hypothetical better returns on his money.

This is exactly what I did.

Ditto here too. 

We just recently reached "mortgage  parity" in this investment account.  Prior to this, we had been putting almost everything extra into our mortgage, and I DO regret it.  We missed out on some great years of returns. 

Now that this investment account could easily pay off the mortgage, we won't do it.  No way man.  We're staying invested.

socalteacher

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Re: Do you regret paying off your mortgage early?
« Reply #313 on: January 22, 2016, 06:10:40 PM »
I get all the points shared here. My personal experience was we started chipping away our mortgage from the beginning of 2005. We bought a medium sized home in SoCal. When the economy tanked we were able to refi down to a lower rate even though we lost equity in the downturn. While several friends started losing jobs and their homes, our payments started going down with each refinance. Our monthly payment is currently about $500 less than our home would rent for. The equity has all come back and the home is worth 70K more than we paid for it. People thought we were stupid to be paying down our mortgage when they were doing the opposite and pulling equity out through HELOC's etc. When  everything hit we felt so fortunate to have held on to the house and weathered the storm. I wish I would have started investing earlier but if I had lost money during those years I would not have kept the house.

Now we are doing things differently. We have below average payments for our area and age group. We have enough money to save for retirement and we also throw a little extra at the 30 year fixed so that it is paid off when my son is a junior in high school.

I think the point is you do what is right for you and adjust as your needs change.

FreeWheel

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Re: Do you regret paying off your mortgage early?
« Reply #314 on: January 22, 2016, 06:54:52 PM »
So how about it do you regret paying off your mortgage and not making use of "cheap money"?

Nope. Making extra payments on principle was easy, "making use of cheap money" would have been more work. Besides, we really feel comfortable not having that payment any longer. But now we're amazed at how much taxes are!

Exflyboy

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Re: Do you regret paying off your mortgage early?
« Reply #315 on: January 22, 2016, 07:12:59 PM »
Hell no! I don't regret it.

When I was paying mine off (at double rate using rental income) the job market was very tenuous.. Finally in 2003 I made the last payment.. biggest relief ever!

Our rentals now bring in nearly $1500 a month and its all gravy.. All housing costs of about $2000 a year in RE taxes for nearly 6 acre farmett.

Not a bad deal at all..:)

Bolshevik Artizan

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Re: Do you regret paying off your mortgage early?
« Reply #316 on: January 22, 2016, 10:17:26 PM »
My regret, such as it is, is paying off the mortgage early and chumping too much money in to pensions I may never see. Technically I am a millionaire (multi, since net worth hovers at $2m) but in reality $800000 of that is caught up in pension schemes and another $800000 in housing (I live in Vancouver, Canada, need I say more??) leaving my real net worth at around $400,000 - so it's a good thing I am frugal and the DW is still working.

If I had my time again I would rebalance away from pensions particularly and only pay the minimum in to corporate schemes to trigger their maximum benefit, then put the rest in investments. Likewise I might have paid down my mortgage, but not paid it off, given how low rates are and will stay for the next few years.

Tiny anecdote - remember meeting an early-30s woman some years ago now who told me she and her DH were going to pay off the mortgage "and then we'll be done" - even at that stage I had paid mine off and had to gently suggest to her that it was just the first step to FI (albeit a big one) and not the be-all and end-all.


K-ice

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Re: Do you regret paying off your mortgage early?
« Reply #317 on: January 22, 2016, 11:39:29 PM »
When I do the math & briefly regret paying it off early I ask myself "am I willing to borrow all that equity back & throw it at the market?"

The market is low, some say, now is the time to buy.

But I say no. I don't even have the stomach to borrow 10K.

So no regrets.


faramund

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Re: Do you regret paying off your mortgage early?
« Reply #318 on: January 22, 2016, 11:57:39 PM »
Some food for thought from Kitces: Why Is It Risky To Buy Stocks On Margin But Prudent To Buy Them "On Mortgage"?

Interesting, but if I currently use my mortgage and a margin loan to buy stocks,

he is suggesting thats equivalent to not using them, and just buying an investment with twice the volatility that the stocks. What is this asset class with twice the volatility? And if they exist, why can't I just buy then with my mortgage loan?

Telecaster

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Re: Do you regret paying off your mortgage early?
« Reply #319 on: January 23, 2016, 12:22:58 AM »
Some food for thought from Kitces: Why Is It Risky To Buy Stocks On Margin But Prudent To Buy Them "On Mortgage"?

I like  Kitces, and I refer to his site regularly.  But he's wrong on this point, and he's wrong for two main reasons.

The first is that mortgages unlike margin loans, are long term, fixed rate, and non-callable.  Right there, that makes mortgages safer than margin loans and not really comparable.

The other thing and more importantly is that he uses the academic definition of risk, namely volatility.   Academics like this because it is easy to measure and easy to plug into a formula.  But volatility is not the same as risk!   Risk is the chance of permanent loss of capital.  Michael Burry quoted in the book "The Big Short" uses this example (paraphrasing but close):    If someone is selling dollars for 30 cents one day, 60 cents the next day, and 50 cents the following day, is it risky to buy dollars for 40 cents?   Of course not.

A typical home loan is 30 years.  So that's our borrowing horizon.  Over a 30 year timeline, the historic risk of owning the broad stock market has been zero.  No one has ever lost money owning a conventional index fund over that period.  Over similar periods, people have lots money owning bonds, individual stocks, gold, real estate, and what have you, but not by owning a slice of the entire market. So if the chance of losing money is very close to zero, how can you argue it is risky?  Sure, Cthulhu could return but that would kind of screw any investment. 

Another thing he didn't include was inflation risk.   It doesn't seem likely now, but it wasn't that long ago when we had double digit, and high single digit inflation for a lot of years in a row.   Could that happen again?  It might.  It it does happen, a mortgage at today's rates would be the opposite of risky.






YoungRetire

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Re: Do you regret paying off your mortgage early?
« Reply #320 on: January 23, 2016, 12:42:05 AM »
Mustachian coworkers and I are discussing paying off our mortgages early.  One question is - "Have you ever met someone who regretted paying off their mortgage early?"

So how about it do you regret paying off your mortgage and not making use of "cheap money"?

Im almost done with my 1st one and have 4 more to go.  Dave Ramsey always says as a joke. " I did a study recently and 100% of all paid off homes never end up in foreclosure ! "

arebelspy

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Re: Do you regret paying off your mortgage early?
« Reply #321 on: January 23, 2016, 03:19:26 AM »
Dave Ramsey always says as a joke. " I did a study recently and 100% of all paid off homes never end up in foreclosure ! "

Which is false.  Tax liens can cause a foreclosure on a home with no mortgage.

To the original question: I haven't paid off a mortgage early, but have many opportunities to (including holding cash > my mortgage balances).  Declined to pay them off, and very happy I had the willpower to do the smart thing.

I did pay for some higher education (Master's Degree) in cash, rather than taking out student loans, and regret that; I should have taken the loans.  So in a sense that was "paying them off early" by not even taking them, and I regret that.
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brooklynguy

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Re: Do you regret paying off your mortgage early?
« Reply #322 on: January 23, 2016, 05:53:05 AM »
I like  Kitces, and I refer to his site regularly.  But he's wrong on this point

I'm firmly in the leveraged-investing-via-mortgage camp (in case it wasn't already obvious), but I wouldn't characterize Kitces as being "wrong."  Instead, like many of the people on the opposite side of the debate in this thread (and the umpteen other equivalent threads across the forum), it's just that he's focusing on certain specific risks to the exclusion of others.

(It is true that margin loans and mortgage loans have differing characteristics that make mortgage loans a patently better vehicle for leveraged investing, but, as Canuck noted, Kitces concedes that point and it doesn't contradict his central argument, which, essentially, is simply that leveraged-investing-via-mortgage is in fact a form of leveraged investing!)

Kitces is clearly correct that leveraged investing, as a matter of course, presents the risk (not present with unleveraged investing) that your portfolio can go negative (the reason we use leverage in the first place is to put more capital at stake, with the inherent risk/reward trade off that our returns will increase if things go well while our losses will increase if things go poorly).  This risk unquestionably exists, and, for the 4%-rate mortgage we've been using as a benchmark, has in fact already materialized in the past (ignoring tax and related considerations) (because leveraged-investing-via-mortgage using a 4% mortgage loan has a below-100% historical success rate of coming out ahead).

But, as you pointed out, Kitces is ignoring other risks that leveraged-investing-via-mortgage mitigates, most importantly, in my view, inflation risk, but also others, like the property loss risks dragoncar cited.

In addition, the unstated corollary to Kitces' warning that leveraged investing exposes you to low expected-probability black swan events is that there is a high expected-probability of being rewarded.  For me, this is the biggest consideration -- effectively, by retaining my mortgage, I'm deciding to reduce my expected likelihood of working longer than necessary (and I'm willing to accept the risk that, in the unlikely (based on my expectations) event that the world implodes, I might have been better off otherwise).

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A typical home loan is 30 years.  So that's our borrowing horizon.  Over a 30 year timeline, the historic risk of owning the broad stock market has been zero.

A nuanced nitpick on this point:  technically, the horizon that matters is the weighted average life to maturity of the mortgage (which is shorter than 30 years, because of amortization).  If the loan had no required principal or interest payments until final maturity, then your statement would be completely true (with no nits to pick).  But in reality, if, say, the stock market plummeted by 99% in years one through five of the loan, then fully recovered and soared to new heights in the remaining 25 years, you'd still come out behind (suffer total portfolio depletion) by having had retained the mortgage, because the required prepayment/amortization schedule would have forced you to liquidate stocks during the initial phase of the horrendous sequence of returns.

fa

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Re: Do you regret paying off your mortgage early?
« Reply #323 on: January 23, 2016, 07:12:21 AM »
Dave Ramsey always says as a joke. " I did a study recently and 100% of all paid off homes never end up in foreclosure ! "

Which is false.  Tax liens can cause a foreclosure on a home with no mortgage.

To the original question: I haven't paid off a mortgage early, but have many opportunities to (including holding cash > my mortgage balances).  Declined to pay them off, and very happy I had the willpower to do the smart thing.

I did pay for some higher education (Master's Degree) in cash, rather than taking out student loans, and regret that; I should have taken the loans.  So in a sense that was "paying them off early" by not even taking them, and I regret that.

Leverage increases your potential wins AND your potential losses.  Arebelspy, being 30 years old, your investment horizon has essentially taken place post-2008.  At the very least it is safe to say that the bulk of your wealth accumulation occurred after 2008.  That means your personal investing experience spans a period of high growth in real estate values, a huge rise in the stock market, and historically very low interest rates.  This is an ideal environment for leveraged investing.  But change this to a different period, where housing values drop or the market drops to bear territory, and all of a sudden the leverage becomes a noose around your neck.  Using borrowed money to invest works great when values rise.  Not so much when values drop.  The day that you cannot make the required payments on your loans, maybe due to tenant delinquency or the broker calling your margin loan, provides an entirely different perspective.  I hope you never have to experience a day like that, but many highly leveraged people have had to consider bancruptcy.  It all depends on market conditions. 

I have never taken on debt that I could not easily afford to pay back.  That has reduced my speed of wealth accumulation and I know that I could not have retired at age 30.  But I also slept well at night and never worried about placing the financial future of my family in jeopardy.  Same reason that I don't gamble.  Period.  Having been around for quite a while, I have personal experience with the many unpredictable ups and down of markets.  Those gyrations always looked predictable in hindsight, but nobody ever saw them coming.  That is the scary part of leverage.  Reading about something is just very different than experiencing it.  I have known very smart highly leveraged people who believed they thought of everything.  Yet they still went bancrupt.  I don't believe that I am smarter than those people or that I have a better ability to see the future.  You can look at historical data and make investment decisions based on that.  But nobody knows if the next 30 years will be anything like the last 30 years.  Peak cheap energy has already happened.  Our entire prosperity of the last century was based on cheap and abundant energy.  That factor alone could make the 21st century completely different than the last one.  The prediction business is a tough one.

You are correct that you can lose a house by not paying your taxes.  But paying the property taxes on a home is of a completely different magnitude than paying the monthly mortgage payment on that home.  I would say that losing a home due to non-payment of taxes on a fully paid up property virtually does not exist in real life.  It is almost always connected to factors other than the inability to pay the tax itself.  BTW, I paid off my mortgage very early and never regretted it.  I do not miss those payments at all.

arebelspy

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Re: Do you regret paying off your mortgage early?
« Reply #324 on: January 23, 2016, 07:52:24 AM »
Dave Ramsey always says as a joke. " I did a study recently and 100% of all paid off homes never end up in foreclosure ! "

Which is false.  Tax liens can cause a foreclosure on a home with no mortgage.

To the original question: I haven't paid off a mortgage early, but have many opportunities to (including holding cash > my mortgage balances).  Declined to pay them off, and very happy I had the willpower to do the smart thing.

I did pay for some higher education (Master's Degree) in cash, rather than taking out student loans, and regret that; I should have taken the loans.  So in a sense that was "paying them off early" by not even taking them, and I regret that.

Leverage increases your potential wins AND your potential losses.  Arebelspy, being 30 years old, your investment horizon has essentially taken place post-2008.  At the very least it is safe to say that the bulk of your wealth accumulation occurred after 2008.  That means your personal investing experience spans a period of high growth in real estate values, a huge rise in the stock market, and historically very low interest rates.  This is an ideal environment for leveraged investing.  But change this to a different period, where housing values drop or the market drops to bear territory, and all of a sudden the leverage becomes a noose around your neck.
 

Naturally the environment will affect things, but we're talking about the optimal move in today's environment, where we have low, fixed-rate 30 year mortgages here in the U.S.

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Using borrowed money to invest works great when values rise.  Not so much when values drop.

Paper values are less important than cash flows in this scenario.  Since mortgages aren't callable if you make the payments, the paper value dropping doesn't matter if you're cash flowing well.

For example, one of my properties is rented for $1350.  The monthly P&I on it is around $300.  If the paper value was cut in half tomorrow, I wouldn't care.  Even if the tenant lost their job and had to move, and vacancies were higher, and I had to cut the rent by several hundred dollars, I'm still doing just fine.  I'd borrow again (especially at stupid low, sub-4% rates) for an asset like that. 

You're assuming leverage for speculation.  That would make the above quoted statement true.  Using leverage for speculation is great if values rise, terrible if they drop.  Using it for prudent investing means it may not matter what values are doing.

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The day that you cannot make the required payments on your loans, maybe due to tenant delinquency or the broker calling your margin loan, provides an entirely different perspective.  I hope you never have to experience a day like that, but many highly leveraged people have had to consider bancruptcy.  It all depends on market conditions. 

I don't know why you assume I'm so highly leveraged.  My LTV is under 25% (i.e. as if I had put down a 75% cash down payment).

My gross rents are over $12,300/month.  My total monthly P&I is about $1500/month.

I'm not highly leveraged, I think I have a fairly low amount of leverage.

I don't have a margin loan; all my loans are uncallable if I'm making the payments and following the mortgage terms.

You made multiple assumptions that, frankly, aren't true.  I'm not sure why.

I agree with your final sentence.  Of course it depends on market conditions.  And the market conditions of "low rate, fixed, 30 year mortgages" is an insane market condition that one should take advantage of if they find a good deal.  :)
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Exflyboy

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Re: Do you regret paying off your mortgage early?
« Reply #325 on: January 23, 2016, 11:37:05 AM »
You can or course argue this any way you like.

Thing is though (and this assumes your RE tax is relatively small.. mine is less than $2k/yr) if you rely on your job to provide a roof over your head and you lose your job you will probably be moving out.

If your are risk adverse like me then you'll be happy. If your an aggresive investor then you'd be unhappy at the lost opportunity if increasing your NW.

Each to their own, but to me at least this is as much of an emotional decision as it is mathematical.

Think

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Re: Do you regret paying off your mortgage early?
« Reply #326 on: January 23, 2016, 12:28:02 PM »
We are paying off our mortgage early.  While it may not make sense financially we also have to take into account that we are investing a lot in the market as well.  Each month we save:

3k 401k
1.5k 401k matching
1-2k brokerage

So that's around 5.5-6.5k in the market.  We also pay down an extra 2k a month on our mortgage. 

JLee

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Re: Do you regret paying off your mortgage early?
« Reply #327 on: January 23, 2016, 12:29:25 PM »
We are paying off our mortgage early.  While it may not make sense financially we also have to take into account that we are investing a lot in the market as well.  Each month we save:

3k 401k
1.5k 401k matching
1-2k brokerage

So that's around 5.5-6.5k in the market.  We also pay down an extra 2k a month on our mortgage.
I'm amazed at how many people here have such phenomenal 401k matching. I've never found something better than 3.5%!

ender

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Re: Do you regret paying off your mortgage early?
« Reply #328 on: January 23, 2016, 12:34:08 PM »
We are paying off our mortgage early.  While it may not make sense financially we also have to take into account that we are investing a lot in the market as well.  Each month we save:

3k 401k
1.5k 401k matching
1-2k brokerage

So that's around 5.5-6.5k in the market.  We also pay down an extra 2k a month on our mortgage.
I'm amazed at how many people here have such phenomenal 401k matching. I've never found something better than 3.5%!

My now-previous employer matched 10%. Technically it was dependent on company performance, but for all the time I was there it was around the max of 10%.


BigoteGato

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Re: Do you regret paying off your mortgage early?
« Reply #329 on: January 23, 2016, 01:48:23 PM »
Comparing your paid off mortgage to investing in bonds is the correct approach. Many on this thread compare the returns of equities to interest on mortgage to explain why they haven't paid off their mortgage. That makes sense only if you have 0% allocated to bonds. If you have any bonds, you are likely passing up the chance to increase your income by replacing some of those bonds with your "mortgage paid off bond."

As arebelspy has pointed out in the past, while comparing paying down your mortgage to holding bonds makes a of lot of sense, it's not perfectly analogous because you can't reallocate between your home equity and the rest of your portfolio the way you can with your bond allocation.

Moreover, according to cFIREsim, historically you would have come out ahead a majority of the time by taking out (and holding to maturity) a mortgage and investing the proceeds in a 100% bond portfolio as long as the mortgage rate was 3.25% or lower (of course, the low interest rate environment that we're currently in also means that prevailing bond interest rates are lower than in historical times too, but we don't know when that will change).

(In the interest of full disclosure, I personally choose to retain my (large) mortgage and I'm virtually 100% invested in equities.)

I'll dig up his comments so I can learn more. I'm not sure I agree with your comment about rebalancing and reallocating mortgage amount. I can always take out a partial mortgage in he future. Or I can use a HELOC. Regardless, I was thinking of the case where you have more than enough bonds to pay your mortgage off completely. Then you can rebalance with the remaining bonds.
I'll need to read more about your cFIREsim comment. I don't enough know to have an opinion but I wonder why would a bank lend me to buy a house if they could make more in a safer (more widely spread out bets) manner with bonds.
If you are interested in this topic, you may want to dig up what Kitces has written on his blog. Pretty convincing.

mathlete

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Re: Do you regret paying off your mortgage early?
« Reply #330 on: January 23, 2016, 04:07:33 PM »
I wish people wouldn't have the sentiment, "It's the mathematically incorrect thing to do, but it makes us feel better."

It's not mathematically incorrect. It is a choice. You're trading higher expected returns (based on historical performance) for lower volatility.

And this is a choice that pretty much everyone makes on some level. Even the mathematics of mortgages master race does this as they aren't likely refinancing the outstanding balance of their loan into a fresh 30 year mortgage at every possible opportunity.

I probably posted this earlier, but there is a lot you could be doing in order to leverage debt into capital investments. Most people draw the line at a certain point though. My line was drawn at maxing out the 401k and IRA. Time to throw money at the mortgage until I come up with something better.

fa

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Re: Do you regret paying off your mortgage early?
« Reply #331 on: January 23, 2016, 04:37:09 PM »
@Arebelspy.

Thanks for the reply.  I guess my response came across a far more personal than I intended it to be.  I was making general comments in the context of your posting.  I did not intend to critique the way you are personally leveraged.  I just wanted to point out that the last 7 years were very favorable to leverage.  Other periods have been far less so.  Human memory tends to favor more recent events over older ones.  I wanted to remind readers of the added risks, the more leverage is involved.  No critique of how you handle your investments was intended here.  I need to be more careful how I word things.

arebelspy

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Re: Do you regret paying off your mortgage early?
« Reply #332 on: January 23, 2016, 04:40:23 PM »
Gotcha, no worries.  :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with a kid.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (occasionally) blog at AdventuringAlong.com.
You can also read my forum "Journal."

Mermaid3011

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Re: Do you regret paying off your mortgage early?
« Reply #333 on: January 23, 2016, 04:57:05 PM »
Just wanted to throw in here:

the Canadian typical mortgage is 5 yrs fixed (usually around 2.8-3.2% right now)

Considering that the interest rates are going to go up eventually I can't see anything wrong with paying off as much as possible before having to refinance at a higher interest rate in a few years.

I may be giving up potential return right now... but in three years I'll be happy about the 20-30k I paid off on top and wont have borrow at 4 or 5 or even 6%.


tobitonic

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Re: Do you regret paying off your mortgage early?
« Reply #334 on: January 23, 2016, 08:40:43 PM »
I wish people wouldn't have the sentiment, "It's the mathematically incorrect thing to do, but it makes us feel better."

It's not mathematically incorrect. It is a choice. You're trading higher expected returns (based on historical performance) for lower volatility.

And this is a choice that pretty much everyone makes on some level. Even the mathematics of mortgages master race does this as they aren't likely refinancing the outstanding balance of their loan into a fresh 30 year mortgage at every possible opportunity.

I probably posted this earlier, but there is a lot you could be doing in order to leverage debt into capital investments. Most people draw the line at a certain point though. My line was drawn at maxing out the 401k and IRA. Time to throw money at the mortgage until I come up with something better.

Yup. If making as much money as possible were the only thing that mattered, no one here would buy homes to begin with. It would be far cheaper to simply live in a shed with 20 roommates, for example.

There isn't a single person on this thread who is making as much money as they theoretically could or saving as much as theoretically possible. Not a single one. There's always something more you could be doing to increase profits or decrease expenses.

It's easy to forget this when attacking choices we disagree with. Of course, this happens throughout the forum (with transportation, food, location, children, charity, education, etc) and throughout society.
« Last Edit: January 23, 2016, 08:44:19 PM by tobitonic »

Telecaster

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Re: Do you regret paying off your mortgage early?
« Reply #335 on: January 24, 2016, 12:12:49 AM »

He does concede this point further in the comments:

Quote
Yes, I will certainly agree that IF someone wants to massively leverage their portfolio, mortgage debt is superior to margin debt, for all the reasons you note...But comparing the mechanics of margin vs mortgage debt is just about "the best way to finance a massively leveraged portfolio"

I think that's the important point that he's getting at that.. that either way we are talking about different ways of using massive leverage.

FWIW, I'm not aggressively paying off my mortgage, but I'm also in a non-recourse state :)
Then again, I also don't have a thirty year fixed rate, so who knows..

Ghostery has the comments blocked  ;)

Regardless, while acknowledging the nits, his point is still pretty shallow.   Mortgages themselves are not particularly risky as long as you are reasonably intelligent about them.   In fact let me drill down.  Kitces' example is supposed to be a  general illustration, but instead his example applies to virtually no one, ever even in the abstract.

Quote
However, there are two important caveats to the scenario. The first is that in very extreme market declines, the outcomes are no longer even. While client C [no mortgage or margin loan] is limited in a market decline to losing his whole portfolio and nothing more, clients A and B could theoretically lose so much in the portfolio that there isnít enough left to pay back the loan entirely.  At that point, clients A and B can actually experience worse losses than client C; they can actually forfeit a portion of the equity in their residence to pay back the value of the loan if the portfolio falls below $500,000. Leverage has additional risk.

This makes almost no sense.  No ever lost their whole portfolio due to market decline if they owned the broad index.   The worst market decline was 85% back in the Great Depression, and that took three years.  And even if you did lose 85%, you could still make the loan payments for literally years on the remainder if necessary.   So no, you would not have to tap your equity to pay the loan, except in extreme circumstances. 

But, and this is a huge "but", the majority of people pay their mortgage out of current income.  You would have to have substantial assets for the bank to give you a mortgage without sufficient income (which makes his scenario invalid right there).  Client A (the one with the mortgage) almost certainly can't go back and tap his equity in order to pay his mortgage, as Kitces suggests.  That's not the way banks work.  And if you are prudently using the 4% rule to pay expenses out of existing assets, his example doesn't fit either.

And mortgage isn't a zero sum payment.  You also get housing out of it.  If you didn't have a mortgage, you would be paying rent.   Just for the sake of argument lets say rent cost is similar to the mortgage payment (and just to be clear, sometimes renting is more advantageous than buying.  But buying does come with an asset).    Now add one column to his example  to include a renter where there is no residence and no liabilities and the portfolio goes to zero.  In that case, the renter is really screwed because they lost the full $1MM in the market.   At least the guy with the mortgage still has his house.  So leverage actually provides safety in this case. 

Finally, he suggests the thing to do is pay down the mortgage but dial up the beta.  How exactly do you do dial up the beta?   Seriously, if you wanted a portfolio with a beta of 1.5 how would you accomplish that?  It is easy to lower the beta by adding cash, but how exactly do you raise it?   And even if you could, why would you want to?  Beta is volatility.  Who wants that?  Everybody wants gains. 

I have to emphasize I like Kitces.  But he is making a fundamental--but common--mistake of assuming volatility equals risk.   Enron had a beta of close to one, but the risk was 100%.   This is one article he just didn't think through. 

As a general comment:  I've seen several posts of the nature "seeing the balance go down works for me" or "paying the mortgage is the only way I could get my spouse on board."  I applaud those approaches, more power to ya!  Not being sarcastic at all.  If you can find a way to save and invest you are doing much better than a lot of folks. 








brooklynguy

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Re: Do you regret paying off your mortgage early?
« Reply #336 on: January 24, 2016, 07:27:45 AM »
It's a slightly different scenario than a mortgage (callable debts)

As has been noted several times upthread, callable debt isn't a "slightly" different scenario, it's fundamentally different (noncallability (combined with long duration and fixed rate of interest) is the very reason mortgage loans are such a monumentally better tool for leveraged investing than alternative forms of debt).

This makes almost no sense.  No ever lost their whole portfolio due to market decline if they owned the broad index.

But they did (assuming they were fully-leveraged using a mortgage loan of the type (and with the low interest rate) available today) -- that was my point above when I said that leveraged-investing-via-mortgage using a 4% mortgage loan does not have a 100% historical success rate of coming out ahead.  According to cFIREsim, someone who took out a 30-year, 4% mortgage and invested all the proceeds in the stock market would have totally depleted their portfolio to zero (with a remaining mortgage loan balance still outstanding) slightly over 5% of the time (with most of those failure cases clustered around the 1929 market crash).

Quote
But, and this is a huge "but", the majority of people pay their mortgage out of current income.

On this forum, it's common for investment assets to exceed the mortgage balance (which, given the fungibility of money, means the mortgage is not being paid out of "current income" or other sources of funds) for the better part of the mortgage's life (for example, my investment portfolio balance already exceeds my remaining mortgage principal balance, and I still have 28 remaining years to maturity).  The cFIREsim simulation referenced above assumes this to be true from day one (replicating the situation of someone who takes out a mortgage loan without needing it in the first place because they have already have sufficient other sources of funds).

justajane

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Re: Do you regret paying off your mortgage early?
« Reply #337 on: January 24, 2016, 08:34:09 AM »
Thing is though (and this assumes your RE tax is relatively small.. mine is less than $2k/yr) if you rely on your job to provide a roof over your head and you lose your job you will probably be moving out.

Sure, if you bought a house larger than you should and spent the excess cash every month on stuff instead of prepaying your mortgage. But if, like people on here, you have a high savings rate and invested the amount that you would have used to prepay the mortgage, then, no, you will not have to move out.

Exflyboy

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Re: Do you regret paying off your mortgage early?
« Reply #338 on: January 24, 2016, 02:56:18 PM »
Thing is though (and this assumes your RE tax is relatively small.. mine is less than $2k/yr) if you rely on your job to provide a roof over your head and you lose your job you will probably be moving out.

Sure, if you bought a house larger than you should and spent the excess cash every month on stuff instead of prepaying your mortgage. But if, like people on here, you have a high savings rate and invested the amount that you would have used to prepay the mortgage, then, no, you will not have to move out.

Except that a lot of jobs were lost in 2008 when the stock market tanked.. So I agree your emergency fund would pay your mortgage for say 6 months.. What do you do then if the rest of your money was invested in stocks (which if you have a long investment time frame it likely would be).. because the stock market would be way down too.

Of course you'd have something to sell to preserve the roof over your head.

Each to their own.

JLee

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Re: Do you regret paying off your mortgage early?
« Reply #339 on: January 24, 2016, 03:14:08 PM »
Thing is though (and this assumes your RE tax is relatively small.. mine is less than $2k/yr) if you rely on your job to provide a roof over your head and you lose your job you will probably be moving out.

Sure, if you bought a house larger than you should and spent the excess cash every month on stuff instead of prepaying your mortgage. But if, like people on here, you have a high savings rate and invested the amount that you would have used to prepay the mortgage, then, no, you will not have to move out.

Except that a lot of jobs were lost in 2008 when the stock market tanked.. So I agree your emergency fund would pay your mortgage for say 6 months.. What do you do then if the rest of your money was invested in stocks (which if you have a long investment time frame it likely would be).. because the stock market would be way down too.

Of course you'd have something to sell to preserve the roof over your head.

Each to their own.

Then you find a new job? If you didn't way overbuy a house, it shouldn't be too hard to pay for it -- but that's my opinion based on the Arizona housing market (which is where I bought my house). I rented two rooms which paid $300/mo more than my mortgage (including taxes, insurance and PMI). You could live on minimum wage in that situation.

You'd have a lot longer than 6 months to go, too:

According to RealtyTrac (an online marketplace for foreclosure properties and real estate data), the timeline for the foreclosure process recently reached a record high. Based on the data, it took on average:
572 days (around 19 months) to process a foreclosure in the first quarter of 2014

coppertop

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Re: Do you regret paying off your mortgage early?
« Reply #340 on: January 26, 2016, 10:19:17 AM »
Then you find a new job?

There are people who lost their jobs in 2008 and 2009 who have either not been able to find another job in their fields or who had to take a huge pay cut when they finally did find a job.  It is sometimes easier to say "find a new job" than it is to actually do it.

JLee

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Re: Do you regret paying off your mortgage early?
« Reply #341 on: January 26, 2016, 03:52:24 PM »
Then you find a new job?

There are people who lost their jobs in 2008 and 2009 who have either not been able to find another job in their fields or who had to take a huge pay cut when they finally did find a job.  It is sometimes easier to say "find a new job" than it is to actually do it.

Of course it's easier to say than do. What is the alternative solution - not find a job, and live in a paid-off house paying utilities, taxes, and living expenses out of money you don't have because you paid the house off? Unless someone's already FI, a new job is going to have to happen either way.

If you have a 75% savings rate like many on here, you could take a 75% pay cut with no impact other than a loss of future savings.

Also, for what it's worth, I lost my job in 2008. Not owning a house at all gave me flexibility to move for another job -- so there's another option. Don't own a house. ;)

effigy98

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Re: Do you regret paying off your mortgage early?
« Reply #342 on: January 26, 2016, 06:56:19 PM »
I am really surprised nobody is talking about the handouts of the government for low income folks. By reducing your outgoing monthly payments, you are lowering your income requirements. If you FI or get layed off, you have a lot more help to stay FI'ed or continue unemployment until you actually find a job you like (more choices) rather than running out and getting a soul sucking, dilbert job that you hate.

Some benefits to not having a mortgage and having lower income... say 25k a year.
- Reduced tax rates
- Reduced or free school lunches
- MUCH lower Heath Care costs
- Lower child care costs
- Lower school costs or even free college

I could go on and on, but the US is built around "what is your income", not "what is your net worth". I'm guessing most do not talk about this because taking handouts is taboo unless you are a welfare queen or something, however we all paid into these programs or subsidized others, getting that money back is not evil and wrong in my opinion.

ender

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Re: Do you regret paying off your mortgage early?
« Reply #343 on: January 26, 2016, 06:59:04 PM »
I am really surprised nobody is talking about the handouts of the government for low income folks. By reducing your outgoing monthly payments, you are lowering your income requirements. If you FI or get layed off, you have a lot more help to stay FI'ed or continue unemployment until you actually find a job you like (more choices) rather than running out and getting a soul sucking, dilbert job that you hate.

I am unaware of anyone making this argument. The assumption is if you aren't paying your house off, you are saving/investing the difference.

It's not a "spend extra money vs pay off mortgage early" question, in which case you are 100% correct and you should always pay it off. The question is whether it is on the whole a positive to your net worth to pay a mortgage off early, instead of investing the additional money instead.




effigy98

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Re: Do you regret paying off your mortgage early?
« Reply #344 on: January 26, 2016, 07:19:27 PM »
I am unaware of anyone making this argument. The assumption is if you aren't paying your house off, you are saving/investing the difference.

It's not a "spend extra money vs pay off mortgage early" question, in which case you are 100% correct and you should always pay it off. The question is whether it is on the whole a positive to your net worth to pay a mortgage off early, instead of investing the additional money instead.

I more read it like "do you regret paying off your mortgage"... The answer is very much NO.

When I get layed off from this tech job... Odds are it WILL happen, it will probably be super hard to find another without learning 50 new programming languages (and getting my 10 years experience on tech that has been around for 5) and going thru interview loops that ask questions you would never use "on the job" so there are 6 months prep for that... in no way would I regret choosing to just retire early or slowly retrain without stressing myself out about it.

In the dotcom crash, I had a hard time getting another good job, all were TERRIBLE and paid fast food worker wages, it was the most soul crushing experience of my life, had my house been paid off, I would have been able to wait it out easier and qualified for free retraining, afforded healthcare, etc. Instead I had to use the credit cards and spend the next 3 years doing jobs I hated just to catch up. I guess this is the number one experience I had that made me never want debt again. My investments since 1999 have just now BARELY recovered after gut wrenching ups and downs. I still believe in the market, but it's emotionally draining to say the least so I diversify about 20% to mortgage prepayment so I can stop worrying about it in a few more years.

brooklynguy

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Re: Do you regret paying off your mortgage early?
« Reply #345 on: January 26, 2016, 07:22:14 PM »
I am really surprised nobody is talking about the handouts of the government for low income folks. By reducing your outgoing monthly payments, you are lowering your income requirements. If you FI or get layed off, you have a lot more help to stay FI'ed or continue unemployment until you actually find a job you like (more choices) rather than running out and getting a soul sucking, dilbert job that you hate.

I am unaware of anyone making this argument. The assumption is if you aren't paying your house off, you are saving/investing the difference.

Folks routinely make this argument (which, as I interpreted effigy's post, is that, by paying off your mortgage and reducing your cash flow requirements, you can more easily qualify for income-based, means-tested benefits, not that you should squander away your money to impoverish yourself in order to qualify for said benefits).  My favorite thread on that specific subtopic is this one.  However, what most people who make that argument seem to overlook is that retaining a mortgage (and the associated required monthly mortgage payments) does not necessarily translate into a dollar-for-dollar increase in income as compared to the payoff scenario -- if the funds are invested in the stock market, then, as you liquidate those assets to service the mortgage payments, some of those proceeds (and, in the early years, the lion's share of those proceeds) will represent return of basis, not gains, meaning that the impact on your income (and, in turn, your ability to qualify for means-based benefit programs) could be minimal.

effigy98

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Re: Do you regret paying off your mortgage early?
« Reply #346 on: January 26, 2016, 07:32:11 PM »

Folks routinely make this argument (which, as I interpreted effigy's post, is that, by paying off your mortgage and reducing your cash flow requirements, you can more easily qualify for income-based, means-tested benefits, not that you should squander away your money to impoverish yourself in order to qualify for said benefits).  My favorite thread on that specific subtopic is this one.  However, what most people who make that argument seem to overlook is that retaining a mortgage (and the associated required monthly mortgage payments) does not necessarily translate into a dollar-for-dollar increase in income as compared to the payoff scenario -- if the funds are invested in the stock market, then, as you liquidate those assets to service the mortgage payments, some of those proceeds (and, in the early years, the lion's share of those proceeds) will represent return of basis, not gains, meaning that the impact on your income (and, in turn, your ability to qualify for means-based benefit programs) could be minimal.

I was not aware there was a way to exclude investment income from showing up as income for the sake of benefits. Thank you for the link, I will do some more reading.

Sharpy

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Re: Do you regret paying off your mortgage early?
« Reply #347 on: January 26, 2016, 08:50:32 PM »
This thought is tempting.  But I have resisted it so far. Most people actually prefer finishing the mortgage asap because of the psychological effect.  However, it is mathematically better if the money is in the stock market.  So far, I have put all my money in the stock market.   

To achieve a return above the average, you will have to bear the pain that average people can't.  It is mostly same for everything like your career.

 

brooklynguy

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Re: Do you regret paying off your mortgage early?
« Reply #348 on: January 26, 2016, 09:08:53 PM »
I was not aware there was a way to exclude investment income from showing up as income for the sake of benefits.

It's not that investment income doesn't count as income; it's that, when you sell investment assets to generate cash to fund the required mortgage payments, only the capital gains (plus any dividends you receive) count as income (and any unrealized capital gains do not count as income unless and until you do realize them).  For that reason, the cash flow requirements of carrying a mortgage do not translate into a need for additional income on a dollar-for-dollar basis.  In the early years of a leveraged-investing-via-mortgage plan, when your cost basis in the investments is still high, your income may not be materially higher than it would've been had you paid off the mortgage.  Over time, as your cost basis in the portfolio drifts down, your relative income will drift up.

BFGirl

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Re: Do you regret paying off your mortgage early?
« Reply #349 on: January 26, 2016, 11:10:26 PM »
Paid cash for my townhouse.  I love the peace of mind in not having a mortgage.