Author Topic: Do you regret paying off your mortgage early?  (Read 98072 times)

slythr

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Re: Do you regret paying off your mortgage early?
« Reply #500 on: December 03, 2017, 12:18:17 PM »


So if I udnerstand your position correctly, you are assuming i) someone fully retired with no income and ii) modeling your position around the possibility that we may have a protracted period of negative gains?
Is that a fair synopsis?

Kind of...
But there is more to it.
Inflation is a double edge sword.

The argument is a mortgage is a hedge against inflation.  Which is true.  But that same inflation then harms the leverage portion of the argument even more as it lowers expected returns of the alternative investment.

My point is the market underperformance cost will affect the theory far more than the hedge benefit

I do think we will soon have a period of protracted below average gains, including negative gains. Someone fully retired with no income will be adversely affected, sure.  But so will anyone employing the keep the mortgage strategy.  And the market below-average performance doesn't have to be protracted.

But it doesn't matter what I think.  What really matters is if what I just said is possible, and more importantly how probable.  I don't think the probability is 100%, but it's not 0% either. But the probability needs to be considered.

Even if it is only for a few years, that is enough.  Equity performance and leverage rates are fluid.  You don't have to make a decision for the next 30 years, that is a very tall order with very limited information.
I believe in course corrections.  If the market falters enough to mean revert, then a reevaluation would be appropriate. 
« Last Edit: December 03, 2017, 12:22:19 PM by slythr »

boarder42

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Re: Do you regret paying off your mortgage early?
« Reply #501 on: December 03, 2017, 12:46:06 PM »
The issue with your entire theory and to swap into putting money into a mortgage basically to time the market like you're talking about. Is that its not easily moved back out of the mortgage for the same savings it went in. If I pay down my 3.25% mortgage today bc the market is over valued and as you're saying I need to weigh that as an option(this is called market timing around here and discouraged). When the market is undervalued in the future there is a high likelihood I will not be able to move that money back out of my house and into equity holdings for the same insanely low rate at 3.25%.

You're viewing the decision as put my money into my mortgage today for guaranteed 3.25% vs put my money in a market which you're speculating to perform poorly based on a few data points. Could the next ten years be one of the very few 10 year periods in history you would have been correct maybe. But history has told us it's unlikely and since no one here has a crystal ball I'll bet on red and black vs green.
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slythr

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Re: Do you regret paying off your mortgage early?
« Reply #502 on: December 03, 2017, 01:24:00 PM »
The issue with your entire theory and to swap into putting money into a mortgage basically to time the market like you're talking about. Is that its not easily moved back out of the mortgage for the same savings it went in. If I pay down my 3.25% mortgage today bc the market is over valued and as you're saying I need to weigh that as an option(this is called market timing around here and discouraged). When the market is undervalued in the future there is a high likelihood I will not be able to move that money back out of my house and into equity holdings for the same insanely low rate at 3.25%.

You're viewing the decision as put my money into my mortgage today for guaranteed 3.25% vs put my money in a market which you're speculating to perform poorly based on a few data points. Could the next ten years be one of the very few 10 year periods in history you would have been correct maybe. But history has told us it's unlikely and since no one here has a crystal ball I'll bet on red and black vs green.

It's not my entire theory
Market performance is only ONE of several reasons for paying off the mortgage that I have mentioned in this thread.  And it's not even the primary reason in my opinion.

I have listed several reasons:
1. Complete Control over your home (no 3rd party with legal rights)
2. Taxes (lower required income means lower required taxes and more deduction eligibility)
3. Potential for Poor or below average equity market performance
4. Increased ACA subsidy eligibility
5. Decreased FAFSA parent responsibility for student loan aid
6. Greater control with insurance claims (no lender to co-sign checks and more control on DYI repairs)
7. Emotional benefit of having no debt (many people value this highly).  For some they sleep better.
8. Ability to DCA into equities during a downturn, lowering average cost basis.

There are certainly more for others.

And if there is a sharp downturn, there will likely be a point to re-enter the mortgage market at a similarly low rate if one chooses.  As well, an early sharp downturn will frontload the benefit to paying off a mortgage as it will take a significant amount of time and higher than average returns to reach the breakeven point on a leverage theory.  Sequence of gains theory.  If the market drops 10%, it will take about a 20% gain just to get back to breakeven.

But remember, that is just the market performance reason.  There are 6 other reasons have  nothing to do with the equity market and are equally valid.
« Last Edit: December 03, 2017, 01:27:10 PM by slythr »

boarder42

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Re: Do you regret paying off your mortgage early?
« Reply #503 on: December 03, 2017, 01:36:48 PM »
2 4 and 5 have all been addressed multiple times in this thread. And in other threads. No one has presented a mathematical scenario where it actually comes out ahead for these. If the math makes sense go for it no heart burn from me but it's one thing to just throw down a bunch of reason it's another to actually quantify the impact.

Historically 8 is worst than lump sum investing. Also not sure how you're doing this and it's different than the people who are just investing now instead of paying the mortgage down. Sounds more like market timing is what you're selling with this.

1&6. I think this is basically a mental power Trip because I've seen very few cases where anyone here is actually going to have an issue with either of these " I want control ". What control are you missing now that a bank stops.

3 potential for poor performance is out weighed by the large potential for great performance over 30 year mortgage periods. I prefer to play the overall odds not a short term timing odd

7 no dispute from me here if you can't get over the emotional stress in your life and completely understand the math and realize the heightened risk you would be taking on by paying down a mortgage then go for it.
« Last Edit: December 03, 2017, 01:40:35 PM by boarder42 »
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NoraLenderbee

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Re: Do you regret paying off your mortgage early?
« Reply #504 on: December 03, 2017, 06:47:37 PM »
I counted the answers from posters who have actually paid off a mortgage, counting only since the thread was revived (2017).
Did not regret it: 21
Regretted it: 3
Paid off the first time, decided not to pay off the second time: 3

21 of 27, or 78%, don't regret it.

Several of the no-regrets acknowledged that they gave up some market returns and that it was worth it to them for the increase in peace of mind, security, freedom, and happiness.

(Numbers may be a bit off owing to the glass of wine I'm drinking.)

This suggests to me that if someone *wants* to pay off their mortgage, they should, and they won't be sorry.



boarder42

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Re: Do you regret paying off your mortgage early?
« Reply #505 on: December 03, 2017, 07:07:48 PM »
That's a very unscientific analysis. And many of the paydown we're paying down mortgages at a time when everyone who is currently a proponent of not paying them down would have too. 9.75%. No one here is going to tell anyone to keep that or at least they wouldn't find any. Support. 
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jleo

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Re: Do you regret paying off your mortgage early?
« Reply #506 on: December 03, 2017, 10:53:35 PM »
Is it going to make more sense to pay off the mortgage with the new tax plan.

For instance I have 12k in mortgage interest and 2k in property taxes and basically nothing else is deductible now so this would leave you 2k over the standard deduction.

The reason I have not paid off my mortgage is for the tax deduction I get, now that I am going to be barley over the standard deduction amount it makes more sense to pay off my mortgage for a guaranteed return of 4.37% tax free. "I owe 290k @ 4.375% on 30 year loan, no PMI"

For my situation does this make sense to anyone else?

 

Telecaster

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Re: Do you regret paying off your mortgage early?
« Reply #507 on: December 04, 2017, 12:39:08 AM »
I wouldn't use a 30 year time-frame for an investment just because a mortgage is generally a 30 year term because that is not the average mortgage duration in the US.
The average home is only owned for about 7 years
The average home loan is held even shorter.. just under 5 years.
That is because people move often and refinance even more often.  A very small percent of 30 yr fixed mortgages are held to full term.

The advantage of paying off a mortgage early is realized if you live in a paid off house.  If you sell or refinance at five years, then you don't get that advantage.  You are still paying on a mortgage or paying rent or something.   You can't extol the virtues of of a paid-off mortgage if you have a mortgage if you refinanced or bought another house and don't have a paid off mortgage.  The comparison is paying off a 30-year mortgage or not paying off a 30-year mortgage.   

Quote
And while your 10% return is correct 3% of that is due to inflation.  Real returns are closer to 7% historically. And things can go down...for along time...even 20 years.

Yep, and make sure to include inflation the other way.  Your 4% "guaranteed" return is is a real return of closer to 0.25% historically. 

Is that even worth doing?  You've said you like to invest in businesses you control.  Honest question:  Of your business investments, do any of them project a 30-year real return of 0.25%?

Quote
As is famously quoted "After accounting for dividends, inflation, taxes and fees, $10,000 invested at the end of 1961 would have shrunk to $6,600 by 1981." That would have been a bad time to keep the mortgage.

Again, the comparison has to be 30 years, not 20 years.   And again, don't ignore inflation. Because if you include inflation, you'll find that was a great time to have a mortgage.   One of the best times you could have picked actually. 

The sweet spot of having a mortgage is when the inflation rate is higher than the interest rate, right?  In that event, the bank is essentially paying you to use their money.    If you got a mortgage back in 1961, it was probably around 6% or 7%.   By the early 1970s, inflation was at 12%, and 10 year treasuries were at about 8%.  Does it make more sense to pay off the 7% mortgage or the buy the 8% bond?  It gets better.  By 1981 at the end of your cherry-picked time period, inflation was raging along at 15% and 10 Year Treasuries were about 15% as well.   Passing up 15% bond to pay down a 7% mortgage doesn't make a lick of sense on any level.  And incredibly, by the end of that 30 year period, inflation had cut the value of a dollar by 80%. That dollar you used to pre-pay the mortgage in 1961 saved you the equivalent of 20 cents in 1991.  Is that even worth doing? 

And by the end of that 30 year period, the stock market had started to take off in a big way, and if you maintained a diversified portfolio, as most recommend, you made a righteous bundle on your bonds as interest rates fell.  One dollar invested in the stock market in 1961 has now grown to five inflation-adjusted dollars ($24 actual dollars).  Compare that to the 20 cents you would have saved by pre-paying the mortgage.   Let that paragraph sink in for a moment. 

So, in hindsight if you had a time machine would you instruct yourself to pay down mortgage during this period?  No, in hindsight such instructions would be barking mad. Financial suicide.  The exact opposite of what you should have done.

Yet you are holding up this cherry picked time-frame as an example why you should pay down the mortgage.  Sorry if I am scratching my head with the logic. 

boarder42

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Re: Do you regret paying off your mortgage early?
« Reply #508 on: December 04, 2017, 04:29:20 AM »
Is it going to make more sense to pay off the mortgage with the new tax plan.

For instance I have 12k in mortgage interest and 2k in property taxes and basically nothing else is deductible now so this would leave you 2k over the standard deduction.

The reason I have not paid off my mortgage is for the tax deduction I get, now that I am going to be barley over the standard deduction amount it makes more sense to pay off my mortgage for a guaranteed return of 4.37% tax free. "I owe 290k @ 4.375% on 30 year loan, no PMI"

For my situation does this make sense to anyone else?

No it still doesn't make sense for you to pay this off. I would refi to a better rate though they should be available.
« Last Edit: December 04, 2017, 05:53:51 AM by boarder42 »
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nereo

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Re: Do you regret paying off your mortgage early?
« Reply #509 on: December 04, 2017, 05:36:42 AM »
Is it going to make more sense to pay off the mortgage with the new tax plan.

For instance I have 12k in mortgage interest and 2k in property taxes and basically nothing else is deductible now so this would leave you 2k over the standard deduction.

The reason I have not paid off my mortgage is for the tax deduction I get, now that I am going to be barley over the standard deduction amount it makes more sense to pay off my mortgage for a guaranteed return of 4.37% tax free. "I owe 290k @ 4.375% on 30 year loan, no PMI"

For my situation does this make sense to anyone else?

No it still doesn't make sense for you to pay this off. I would refi to a beer rate though they should be available.

how do I get a beer rate?  Im not sure my bank offers that
:-P
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boarder42

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Re: Do you regret paying off your mortgage early?
« Reply #510 on: December 04, 2017, 05:54:06 AM »
Is it going to make more sense to pay off the mortgage with the new tax plan.

For instance I have 12k in mortgage interest and 2k in property taxes and basically nothing else is deductible now so this would leave you 2k over the standard deduction.

The reason I have not paid off my mortgage is for the tax deduction I get, now that I am going to be barley over the standard deduction amount it makes more sense to pay off my mortgage for a guaranteed return of 4.37% tax free. "I owe 290k @ 4.375% on 30 year loan, no PMI"

For my situation does this make sense to anyone else?

No it still doesn't make sense for you to pay this off. I would refi to a beer rate though they should be available.

how do I get a beer rate?  Im not sure my bank offers that
:-P

Haha Fixed.
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Lmoot

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Re: Do you regret paying off your mortgage early?
« Reply #511 on: December 04, 2017, 08:10:21 AM »
Beer rate should be a thing. 3% fixed rate plus 1% points in free beer annually. Like back in the day when the bank used to give out toasters.

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Re: Do you regret paying off your mortgage early?
« Reply #512 on: December 04, 2017, 08:52:36 AM »
Beer rate should be a thing. 3% fixed rate plus 1% points in free beer annually. Like back in the day when the bank used to give out toasters.
Banks used to give out toasters?  Man, i learn so much on this forum!  ..seriously, I could use a new toaster - ours broke about two weeks ago.
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slythr

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Re: Do you regret paying off your mortgage early?
« Reply #513 on: December 04, 2017, 09:05:52 AM »
Is it going to make more sense to pay off the mortgage with the new tax plan.

For instance I have 12k in mortgage interest and 2k in property taxes and basically nothing else is deductible now so this would leave you 2k over the standard deduction.

The reason I have not paid off my mortgage is for the tax deduction I get, now that I am going to be barley over the standard deduction amount it makes more sense to pay off my mortgage for a guaranteed return of 4.37% tax free. "I owe 290k @ 4.375% on 30 year loan, no PMI"

For my situation does this make sense to anyone else?

I wouldn't accept any advice that is blanket...whether for or against.
The best answer is it's up to you.  If the only reason you were keeping the loan really was for the deduction, and the deduction in fact no longer applies due to an increase in the standard deduction, then there is your answer. Your age, risk tolerance, other asset mix, etc all factor in to the decision.  Taking any advice that doesn't ask, much less consider, any of those other factors says more about the responder than your actual question.

coppertop

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Re: Do you regret paying off your mortgage early?
« Reply #514 on: December 04, 2017, 09:09:32 AM »
Are you implying that boarder42 is wrong or are you just trying vainly to be funny?

I don't think boarder42 is wrong, nor do I think you or anyone else in the "Don't pay off your mortgage club" is wrong. I think y'all are making the correct decision for you, in your circumstances, with your emotional tolerance. I'm trying to point out to b42 that he's acting foolish if he thinks he'll change anyone's mind by posting the exact same spiel "in any and every thread about a mortgage pay down until this community starts treating it like an Escalade", both in the "mortgage payoff club" and *especially* this particular necro'd thread, and then getting defensive about it when people politely and not-so-politely ask him to knock it off.

Sometimes people do "wrong" things, and then they post about them on the internet. Continuously telling them they're wrong just sucks all the oxygen out of the room. That's not discussion, that's browbeating.

you should go look at some comments in threads where people have changed their minds b/c they had no clue.

its a disservice to this community for such a thread to exist IMO b/c it allows for people who do not truly understand what they are doing to receive support for a decision that is detrimental to many.

Boarder42...

If you are going to esposue understanding then maybe you should do some yourself
I have lurked here for a long time, and I have seen countless threads regarding HOME LOAN payoffs, and the resuting debate between paying and arbitrating, and you always pop in.  With your one sided opinion. And you pick on those who disagree with you and you are positive you are correct in your opinion.

But you aint.  So let me introduce myself.

There are valid reasons for paying a loan off.  And there are equal valid reasons for keeping a loan.  They are both valid options depending on the borrower.


Rule #1.  If you are going to discuss and debate a subject, understand the correct terminology.  As in Mortgage. 

As a borrower...
You don't get a mortgage
You don't have a mortgage
And you don't pay off a mortgage.

The BANK has the mortgage, not the borrower.  The BANK gets the mortgage.  The borrower gets.....a home loan in exchange
The borrower doesn't pay off a mortgage.  They pay off a loan. A mortgage is a lien in exchange for money in the form of a loan described on a note signed on a recorded deed.

You don't go to a restaurant and get money.  You GIVE money and GET food.

Same with mortgages.  You GIVE them.  Banks get them.  I get them.  Because I am the bank.  You aren't.
Learn that first.  Then debate.

#2.

You have been hit over the head with several valid arguments for why anyone would pay off a home loan early, but it goes in one ear and out the other.  There are several reasons.

Here is the primary reason.  Control.

When you agree to a mortgage, that deed of trust I mentioned above has page after page of RESTRICTIONS on what the lender will allow you to do with your home.  I am looking at one now, and there are 11 pages detailing "Uniform Covenants" and they detail items such as maintenance, occupancy, preservation and protection of lenders interest.

So by leveraging or arbitrating your property you give up control of what you can and can't do with or on your property.
Some people are ok with that.  Some are not.  These covenants cover alot of areas and some are very limiting.  Minimum insurance requirements, usage, renting, # of occupants, minimum conditions, etc.

Me...I am not interested in giving up control over anything unless necessary.  Control trumps money in about all situation in my life.  I control my employment.  I control my income.  I control my home and housing too.

For the same reason people prefer to own vs rent.  Control.  Many of those same people prefer to not have a legally vested third party with rights to that property. 

There are other reasons too.  You state in this and other threads that the math works in favor of leverage, but that is not entirely true.  It "Can" work.  It also can't sometimes, like the lost decade from 2000 - 2010.   Historically it may have worked out in certain timeframes due to various simulators, but we don't live in history, and simulators don't pay home loan payments.  And comparing a fixed home loan, which is a bond, with equity markets, skews the risk and is not a viable comparison. You have to account for risk, which you rarely do.  And your reasoning that if you don't trust the 4% SWR we are all screwed, or the argument of how one can you assume a 4% SWR but not apply that in the calculation is an invalid argument. 

Of course there is freedom, and flexibility.  You discount these as reasons, but they still exist

Also..paying off a loan requires less income to maintain a lifestyle.  Less income is generally less taxes paid.  Less income also allows for more tax deductions and more tax credits due to phaseouts.  Less income allows for a higher ACA subsidy. There are 3 more reasons

As well, simply inflating an asset so it can be use to pay off a debt at a later date has it's own inherent risks.  When the market rises, it sounds great as the gains are magnified.  But when the market drops, the losses are magnified as well. You then conflate present market value (which is known and fixed with future market value with an unknown and non-guaranteed return)  You can't do that man.

The proper comparison is bond to bonds.  Home loans to 10yr Treas returns.  You don't compare a home loan to a Vanguard equity index fund without accounting for risk.  For many people, the risk isn't worth it.  For many institutions, the risk isn't worth it.  For most Banks and governments and countries, the risk isn't worth it at all.

See, Mr Keep the Mortgage, the real players play in the Bond market.  That is where banks and governments and state pensions invest. 

Have you ever stopped and asked a simple question?
WHY is the bank loaning you the money in the first place? Why does (or did) this fixed 3.25% $400K home loan even exist.
Why can people borrow up to $424K at under 4% fixed for 30 years for a home today?
Ask it.  I'll wait.

Why are home loan interest rates so low?  Why would most all of these Billion or Trillion dollar banks loan Mr KTM money on a house.  Mr. KTM already laid out his infallible reasoning that the "market" is the better risk over time, and is virtually risk free.  95 or 96% of the time the market wins you say over and over again.  So why are they betting on you as a borrower and all the risk you entail with not making payments on time X millions of home loan borrowers just like you vs just putting that money in a vanguard index fund and then spending the other 29 days of the month at the beach?

HMM????

They have teams...shit they have buildings full of PHD economists, mathematicians and statisticians.  MBA's.  Actuaries.  The smartest mofo's there are.  They have their own trading floors and their own trading desks too.  And I am quite confident they have access to cfire sim and this blog as well.  They could buy index funds all day long...hell...they have their own index funds actually.  Bank of America owns Merril Lynch.  Why didn't your loan officer just take your home loan check and drop it downstairs at their Merril Lynch office and put it in VSTAX.  That would be alot easier.

So WHY, with all this brainpower, all these resources, and all this knowledge do they choose to loan you the $500K instead of index it?  After all, unlike us little people with emotions, these are business whose sole purpose is to profit at maximum efficiency.  Every dollar must be deployed at maximum benefit.  Of all the places to invest that $500K, why did they choose to loan it to you as a home loan? And to all the other Millions of people who get loans each year?

You figure out the answer to that, and you will start to understand why many smart people on this blog already figured it out and paid their loans off early, and why you continuing to insult and beat up on people who do makes you look foolish.

I immensely enjoyed reading this post. 

slythr

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Re: Do you regret paying off your mortgage early?
« Reply #515 on: December 04, 2017, 09:29:53 AM »
Re: slythr's first post... I found it a bit misguided, on both main points.



2) Re: Why the banks loan it. It's not because they have decided this is the risk-premium and this is a better use of "their" money than investing it in index funds, as you imply that all their eggheads have decided. It's because they can create money out of thin air due to our fractional reserve banking system. When they loan out money, they can do so at a very high ratio. They cannot do this when straight investing it. Therefore they make free money (interest) when creating the loans, so there's no downside to them to do so. The mortgage money you're borrowing isn't money that actually exists somewhere that could be invested at a higher rate somewhere else, it's money where 90%
 of it is created when you take the loan.

Paying off your mortgage, or not, nitpicking on terminology and creating a false reason why mortgages exist isn't what I'd call a stellar post, and I felt the need to correct it since multiple people seemed to think it was.

My apologies for not addressing this sooner.
Fractional reserve banking is NOT the answer to my question.

First (short response to ARS)...While it is true that banks create new money when they make a loan using excess reserves, that money only adds to their asset and credit column if the loan proceeds are deposited into that same bank.  In other words your answer would be correct if the loan proceeds were deposited into the loan originating bank and left there for the duration of the loan term.  But that isn't what happens.  The loan proceeds don't go to the originating bank, they go to the seller (or the existing mortgage company if it is a refinance - and paying loans off destroys M1 money), who then deposits it in their own likely different bank, or spends it, or buys another house, etc. 

So back to the original question.  Why do banks loan money on residential mortgages instead of investing depositor funds in equities?

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Re: Do you regret paying off your mortgage early?
« Reply #516 on: December 04, 2017, 09:33:44 AM »
200k mortgage:

Max benefit: 7%(theoretical) - 4% (mortgage interest rate) - (.7% taxes on investments) = 2.3%

200k * 2.3% = $4600

$4600  - $30(time of managing mortgage per year)
$4570  - $100( fees)
$4470 - $1000 (time spent arguing on the internet that keeping this is better)

$3470 (a joke,... Kind of)

And that's year one. It continues to decrease along with the life of the mortgage. So not bad, but that's the max benefit we're arguing about. Having a consistent cashflow can gain you about $3500 a year, that's the cost. (My mortgage was actually half this size so not even). For the legal requirements, cash flow requirements, and general idea of debt. I don't feel that 2-4k per year is really worth it for it's own sake. I would get a loan to buy, by I wouldn't go out of my way to get one if my house was paid off.

This is definitely not an Escalade-owning problem.
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boarder42

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Re: Do you regret paying off your mortgage early?
« Reply #517 on: December 04, 2017, 09:39:03 AM »
Is it going to make more sense to pay off the mortgage with the new tax plan.

For instance I have 12k in mortgage interest and 2k in property taxes and basically nothing else is deductible now so this would leave you 2k over the standard deduction.

The reason I have not paid off my mortgage is for the tax deduction I get, now that I am going to be barley over the standard deduction amount it makes more sense to pay off my mortgage for a guaranteed return of 4.37% tax free. "I owe 290k @ 4.375% on 30 year loan, no PMI"

For my situation does this make sense to anyone else?

I wouldn't accept any advice that is blanket...whether for or against.
The best answer is it's up to you.  If the only reason you were keeping the loan really was for the deduction, and the deduction in fact no longer applies due to an increase in the standard deduction, then there is your answer. Your age, risk tolerance, other asset mix, etc all factor in to the decision.  Taking any advice that doesn't ask, much less consider, any of those other factors says more about the responder than your actual question.

You sound like a financial advisor trying to make this decision more complicated than it really is. 

Jleo.  in most all historical cases regardless of the mortgage deduction you're going to come out ahead investing in the market, with a loan at 4.375% vs paying it down.  The market averages 10-11% annually pre inflation and your loan is 4.375%(fixed forever and doesn't increase with inflation) less than half what you would expect to make invested in equities.  In addition when paying down a loan over time you open yourself up to a bigger risk for total financial failure in the event of a job loss.  say you've been socking an extra 10k a year into your 100k mortgage and 2008 happens and you lose your job.  you have a house paid down to 60k but the bank still wants that check for the same amount.  Now say you had been investing this money.  sure your investments would only be 28k b/c you lost some in 2008 at 37% but you'd have an extra 28k to continue to support your life on. 

You have to find very specific selected time frames with selective paydown times to have a mortgage paydown at 4.375% beat a simple index fund allocation.  Its worse than betting on green in roulette if your alternative was to bet on black and red.

What Slythr has tried to indicate many times here is in line with market timing b/c he personally believes equities are at highs and expects them to not perform as well.  Some other experts in the industry agree they will perform lower over the next 10 years including Jack Bogle - vanguard founder - but even Jack expects 6%+ returns investing in equities over the next 10 years.  And if rates rise you wont be able to get your money back out at such a good rate in the future if equities due pull back. 

Basically if you were comfortable investing in lieu of mortgage paydown pre tax plan changes - you should be comfortable now as well. at your 4.375% rate.
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nereo

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Re: Do you regret paying off your mortgage early?
« Reply #518 on: December 04, 2017, 09:45:28 AM »
200k mortgage:

Max benefit: 7%(theoretical) - 4% (mortgage interest rate) - (.7% taxes on investments) = 2.3%

200k * 2.3% = $4600

$4600  - $30(time of managing mortgage per year)
$4570  - $100( fees)
$4470 - $1000 (time spent arguing on the internet that keeping this is better)

$3470 (a joke,... Kind of)

And that's year one. It continues to decrease along with the life of the mortgage. So not bad, but that's the max benefit we're arguing about. Having a consistent cashflow can gain you about $3500 a year, that's the cost. (My mortgage was actually half this size so not even). For the legal requirements, cash flow requirements, and general idea of debt. I don't feel that 2-4k per year is really worth it for it's own sake. I would get a loan to buy, by I wouldn't go out of my way to get one if my house was paid off.

This is definitely not an Escalade-owning problem.

This made me laugh.  Edited a few things to more accurately reflect our situation
200k mortgage:

Max benefit: 9%(theoretical, includes inflation (see above)) - 2.5% (mortgage interest rate) - (.7% taxes on investments) = 5.8%

200k * 5.8% = $11,600

$11600  - $30(time of managing mortgage per year... well ok, i guess - but is it more than managing an index fund??)
$11,570  - $100 $0( fees ... what fees?)
$11,570 - $1000 $0(time spent arguing on the internet that keeping this is better PRICELESS :-)

$11,570 (STILL a joke,... Kind of)

yea, I'm not going to sneeze at an extra $1k/mo.  Why would you chose a scenario that didn't offer you more money?
I'm sure someone will take this tongue-in-cheek analysis and try to prove some point or other...

« Last Edit: December 04, 2017, 09:51:49 AM by nereo »
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boarder42

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Re: Do you regret paying off your mortgage early?
« Reply #519 on: December 04, 2017, 09:47:58 AM »
200k mortgage:

Max benefit: 7%(theoretical) - 4% (mortgage interest rate) - (.7% taxes on investments) = 2.3%

200k * 2.3% = $4600

$4600  - $30(time of managing mortgage per year)
$4570  - $100( fees)
$4470 - $1000 (time spent arguing on the internet that keeping this is better)

$3470 (a joke,... Kind of)

And that's year one. It continues to decrease along with the life of the mortgage. So not bad, but that's the max benefit we're arguing about. Having a consistent cashflow can gain you about $3500 a year, that's the cost. (My mortgage was actually half this size so not even). For the legal requirements, cash flow requirements, and general idea of debt. I don't feel that 2-4k per year is really worth it for it's own sake. I would get a loan to buy, by I wouldn't go out of my way to get one if my house was paid off.

This is definitely not an Escalade-owning problem.

when your math begins with a flaw then yeah you can make it look smaller - the mortgage rate should either be reduced by inflation or the equity gains should be including inflation - this has been discussed many times.  Made up costs for random things.  It costs nothing to manage a mortgage you setup auto pay and forget about it. in some cases for those who escrow it could add some actual work once the mortgage is paid off to pay taxes and insurance. Taxes on investments are currenly 100% negated by being in the 15% bracket in FIRE which most here should be - i'm not sure what the "fees" are you're talking about for 100 bucks.

But lets redo the math with all that in mind and then lets compound that savings over 30 years b/c really thats whats going to happen. 

10%-4% = 6% no tax loss if you're in the 15% bracket

6% of 200k = 12k

- 100 for some unknown fee i'm paying to have a mortgage - $11900


Compound 11900 for 30 years its worth 207k - 

if these numbers seem insignificant to you congrats go hire a lawn mower while you're at it 30 bucks a week - 40 weeks mowing - 1200 per year 10% of the total


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slythr

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Re: Do you regret paying off your mortgage early?
« Reply #520 on: December 04, 2017, 10:02:02 AM »
I wouldn't use a 30 year time-frame for an investment just because a mortgage is generally a 30 year term because that is not the average mortgage duration in the US.
The average home is only owned for about 7 years
The average home loan is held even shorter.. just under 5 years.
That is because people move often and refinance even more often.  A very small percent of 30 yr fixed mortgages are held to full term.

The advantage of paying off a mortgage early is realized if you live in a paid off house.  If you sell or refinance at five years, then you don't get that advantage.  You are still paying on a mortgage or paying rent or something.   You can't extol the virtues of of a paid-off mortgage if you have a mortgage if you refinanced or bought another house and don't have a paid off mortgage.  The comparison is paying off a 30-year mortgage or not paying off a 30-year mortgage.   



Quote
And while your 10% return is correct 3% of that is due to inflation.  Real returns are closer to 7% historically. And things can go down...for along time...even 20 years.

Yep, and make sure to include inflation the other way.  Your 4% "guaranteed" return is is a real return of closer to 0.25% historically. 

Is that even worth doing?  You've said you like to invest in businesses you control.  Honest question:  Of your business investments, do any of them project a 30-year real return of 0.25%?

Quote
As is famously quoted "After accounting for dividends, inflation, taxes and fees, $10,000 invested at the end of 1961 would have shrunk to $6,600 by 1981." That would have been a bad time to keep the mortgage.

Again, the comparison has to be 30 years, not 20 years.   And again, don't ignore inflation. Because if you include inflation, you'll find that was a great time to have a mortgage.   One of the best times you could have picked actually. 

The sweet spot of having a mortgage is when the inflation rate is higher than the interest rate, right?  In that event, the bank is essentially paying you to use their money.    If you got a mortgage back in 1961, it was probably around 6% or 7%.   By the early 1970s, inflation was at 12%, and 10 year treasuries were at about 8%.  Does it make more sense to pay off the 7% mortgage or the buy the 8% bond?  It gets better.  By 1981 at the end of your cherry-picked time period, inflation was raging along at 15% and 10 Year Treasuries were about 15% as well.   Passing up 15% bond to pay down a 7% mortgage doesn't make a lick of sense on any level.  And incredibly, by the end of that 30 year period, inflation had cut the value of a dollar by 80%. That dollar you used to pre-pay the mortgage in 1961 saved you the equivalent of 20 cents in 1991.  Is that even worth doing? 

And by the end of that 30 year period, the stock market had started to take off in a big way, and if you maintained a diversified portfolio, as most recommend, you made a righteous bundle on your bonds as interest rates fell.  One dollar invested in the stock market in 1961 has now grown to five inflation-adjusted dollars ($24 actual dollars).  Compare that to the 20 cents you would have saved by pre-paying the mortgage.   Let that paragraph sink in for a moment. 

So, in hindsight if you had a time machine would you instruct yourself to pay down mortgage during this period?  No, in hindsight such instructions would be barking mad. Financial suicide.  The exact opposite of what you should have done.

Yet you are holding up this cherry picked time-frame as an example why you should pay down the mortgage.  Sorry if I am scratching my head with the logic.

We disagree on timeframes.  Just because the loan term is 30 years does't mean the investment horizon is the same.
What about a 20 year loan.  Or a 15 year loan.  Do the timeframes change then?  If you initially had a 30 year loan, but now only have 19 years left, is your horizon still 30 years, or now only only 19?  Your assumption of 30 year investment horizon technically only applies to brand new loan origination made in 2017.  How many years are left on your loan?  How about your family's loans?

And If I have a paid off house for only 5 years, that is still a benefit for those 5 years, especially if the market underperforms.  If in year six it becomes financially beneficial to leverage due to a change in circumstances than that doesn't negate the fact I benefited the prior 5 years.  These are not independent 30 year decisions. Risk changes over time.  If I am going to retire and move in 10 years, then my time horizon is 10 years, regardless of whether my mortgage has 8 years left of 27 years left. That still doesn't negate the benefit of being mortgage free during those next 10 years.

Paying off a home loan isn't as much about a real return of 4%, or an inflation adjusted .25%.  It is more about minimizing other risks, not taking as much on itself. But I do agree with you that inflation does affect all dollars, not just debt dollars.

Your explanation of higher inflation I completely agree with.  But you are using fixed investments (treasuries) as an example, not equities. Little bit of a difference there.  I am all for fixed investments.  As I have said several times, I do not debate math as there is nothing to debate.  I debate assumptions or scenarios. Fixed vs Fixed the math is certain, and therefore easy.

If there is a fixed investment that guarantees returns higher than a fixed mortgage rate for a similar timeframe, I will sign right up.  I have never said I am not a keep the mortgage guy.  My first post started off with the understanding there are reasons for both sides.

What I have an issue with is the assumption that equities will always win.  They won't.  They haven't in the past, and they won't in the future.  Not everyone has a 30 year time horizon, even if they want to.The stating that equities started to take off after 20 years...come on.  That is a long time to ride that pony until the turn around. I am not cherry picking timeframes.  I used the most recent decade as an example of how the market can not perform as it has historically.  And 61-81 is the next closest 20 yr timeframe.  In a 49 year timespan the market has dropped in one 20 year term and one separate 10 year term.  That is not cherrypicking, that is a reminder that the good time don;t last forever.  The longer and further away from the mean return of equities, the sharper and more violent the reversion will be.  That is a statistical certainty.  I don't know when that will be, but I am not going to be on the wrong end of it

Hindsight is indeed 20/20.  But we don't get that luxury going forward.  There is risk in all markets, and my point has been from day one you have to account for it correctly.  If you don't want to account for it, then you either pay the loan off, or take your chances.

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Re: Do you regret paying off your mortgage early?
« Reply #521 on: December 04, 2017, 10:13:26 AM »
you keep saying "take your chances" as has been stated numerous times above - over 90% of this site plans to use some version of the 4% rule which means those chances you keep bringing up had better be correct or it wont matter if we paid off our mortgages or invested.  now if you fall into the 10% which it sounds like you do congratulations.  you're not buying into what the 90% due and have come up with some other plan for you money in which case paying it down may eliminate some risk you personally are trying to mitigate.  BUT as a general rule for this forum paying down a mortgage is a poor decision.  Similar to hiring a lawn mower - does that mean there isnt someone out there who can justify paying a lawn mower - nope it doesnt.  BUT what it does mean is this shouldnt be a debate so much as a rule with a small sect of exceptions.
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slythr

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Re: Do you regret paying off your mortgage early?
« Reply #522 on: December 04, 2017, 10:15:15 AM »
200k mortgage:

Max benefit: 7%(theoretical) - 4% (mortgage interest rate) - (.7% taxes on investments) = 2.3%

200k * 2.3% = $4600

$4600  - $30(time of managing mortgage per year)
$4570  - $100( fees)
$4470 - $1000 (time spent arguing on the internet that keeping this is better)

$3470 (a joke,... Kind of)

And that's year one. It continues to decrease along with the life of the mortgage. So not bad, but that's the max benefit we're arguing about. Having a consistent cashflow can gain you about $3500 a year, that's the cost. (My mortgage was actually half this size so not even). For the legal requirements, cash flow requirements, and general idea of debt. I don't feel that 2-4k per year is really worth it for it's own sake. I would get a loan to buy, by I wouldn't go out of my way to get one if my house was paid off.

This is definitely not an Escalade-owning problem.

You bring up a great point that others have said before.
For alot of us, the leverage just isn't worth it.  The 3K-5K or even $10K per year just isn't enough and isn't worth it.
I think there are many instances where someone has an asset balance that is close to their mortgage balance.  Say they have $300K in assets and a $300K mortgage.  If they pay that mortgage off, they have no money. Their net worth is zero either way, but many times people fool themselves into thinking they are in a better spot than they really are because they are leveraged. But you can't fool yourself with no leverage.  If you have assets, they are free.  They are not offsetting a liability.

Great post.

boarder42

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Re: Do you regret paying off your mortgage early?
« Reply #523 on: December 04, 2017, 10:17:49 AM »
200k mortgage:

Max benefit: 7%(theoretical) - 4% (mortgage interest rate) - (.7% taxes on investments) = 2.3%

200k * 2.3% = $4600

$4600  - $30(time of managing mortgage per year)
$4570  - $100( fees)
$4470 - $1000 (time spent arguing on the internet that keeping this is better)

$3470 (a joke,... Kind of)

And that's year one. It continues to decrease along with the life of the mortgage. So not bad, but that's the max benefit we're arguing about. Having a consistent cashflow can gain you about $3500 a year, that's the cost. (My mortgage was actually half this size so not even). For the legal requirements, cash flow requirements, and general idea of debt. I don't feel that 2-4k per year is really worth it for it's own sake. I would get a loan to buy, by I wouldn't go out of my way to get one if my house was paid off.

This is definitely not an Escalade-owning problem.

You bring up a great point that others have said before.
For alot of us, the leverage just isn't worth it.  The 3K-5K or even $10K per year just isn't enough and isn't worth it.
I think there are many instances where someone has an asset balance that is close to their mortgage balance.  Say they have $300K in assets and a $300K mortgage.  If they pay that mortgage off, they have no money. Their net worth is zero either way, but many times people fool themselves into thinking they are in a better spot than they really are because they are leveraged. But you can't fool yourself with no leverage.  If you have assets, they are free.  They are not offsetting a liability.

Great post.

i love the people following up incorrect posts by indicating they are great posts.  when they are wrong.

and there is a HUGE difference between 300k house no mortgage and 0 invested and a 300k house 300k mortgage and 300k invested.  the risk in owning the home is much larger than the leveraged asset.  there is nothing to fall back on if the income stream is lost. 
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ACyclist

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Re: Do you regret paying off your mortgage early?
« Reply #524 on: December 04, 2017, 10:45:57 AM »
We still owe a little less than 10K on ours.  I've been paying it down for a while.  After being educated that this isn't so wise, I am going to start going minimum payment again.  This will milk out the mortgage to about two more years.  It feels very strange to only do the minimum this month. 

It does feel nice to be down to the point of paying $30 a month in interest, compared to what it was.

I can see both sides of the coin.  We'll see how this goes.

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Re: Do you regret paying off your mortgage early?
« Reply #525 on: December 04, 2017, 10:53:04 AM »
There is risk in all markets, and my point has been from day one you have to account for it correctly.  If you don't want to account for it, then you either pay the loan off, or take your chances.

We all tend to use the word "risk" too loosely, without precisely defining what it means, and that is why everyone always ends up talking past each other in these mortgage debates.  If "risk" means "exposure to an adverse possibility," then when we use that term we should be clear about which specific adverse possibility or possibilities we are referring to, or, alternatively, that we are broadly referring to the entire universe of conceivable adverse possibilities.

As between "leveraged-investing-via-mortgage" and "mortgage-payoff," the former unquestionably exposes you to certain adverse possibilities that are not present in the latter, including the possibility of underperforming the worst-case possible outcome of the alternative strategy and the possibility of capital loss (which should be obvious, given that leveraged-investing-via-mortgage is, after all, a form of leveraged-investing).

But there is a panoply of other specific risks that are (or should be) material to the decision-maker, and that therefore should also be accounted for in the analysis, including, not least of which for the aspiring early retiree, the risk of having to work longer than necessary before achieving self-declared financial independence.  In my view, on balance, when all relevant risks are taken into consideration, paying off "fixed-rate non-callable low-interest long-term government-favored possibly-tax-deductible possibly-non-recourse debt secured by an instrument on which creditors are generally slow to foreclose" is risker for the prototypical early retiree or aspiring early retiree than retaining such debt and investing the proceeds in the stock market.

Note:  This post is a modified version of this post from an earlier mortgage thread, which I am restating here because every one of these mortgage debate threads (like all discussions of "risk") could benefit from more precision in language.

slythr

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Re: Do you regret paying off your mortgage early?
« Reply #526 on: December 04, 2017, 11:06:59 AM »
There is risk in all markets, and my point has been from day one you have to account for it correctly.  If you don't want to account for it, then you either pay the loan off, or take your chances.

We all tend to use the word "risk" too loosely, without precisely defining what it means, and that is why everyone always ends up talking past each other in these mortgage debates.  If "risk" means "exposure to an adverse possibility," then when we use that term we should be clear about which specific adverse possibility or possibilities we are referring to, or, alternatively, that we are broadly referring to the entire universe of conceivable adverse possibilities.

As between "leveraged-investing-via-mortgage" and "mortgage-payoff," the former unquestionably exposes you to certain adverse possibilities that are not present in the latter, including the possibility of underperforming the worst-case possible outcome of the alternative strategy and the possibility of capital loss (which should be obvious, given that leveraged-investing-via-mortgage is, after all, a form of leveraged-investing).

But there is a panoply of other specific risks that are (or should be) material to the decision-maker, and that therefore should also be accounted for in the analysis, including, not least of which for the aspiring early retiree, the risk of having to work longer than necessary before achieving self-declared financial independence.  In my view, on balance, when all relevant risks are taken into consideration, paying off "fixed-rate non-callable low-interest long-term government-favored possibly-tax-deductible possibly-non-recourse debt secured by an instrument on which creditors are generally slow to foreclose" is risker for the prototypical early retiree or aspiring early retiree than retaining such debt and investing the proceeds in the stock market.

Note:  This post is a modified version of this post from an earlier mortgage thread, which I am restating here because every one of these mortgage debate threads (like all discussions of "risk") could benefit from more precision in language.

Panoply?
You would be punctilious in assuming that!
Sounds like your opinion is well thought out and balanced.
Cheers

slythr

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Re: Do you regret paying off your mortgage early?
« Reply #527 on: December 04, 2017, 11:47:06 AM »
you keep saying "take your chances" as has been stated numerous times above - over 90% of this site plans to use some version of the 4% rule which means those chances you keep bringing up had better be correct or it wont matter if we paid off our mortgages or invested.  now if you fall into the 10% which it sounds like you do congratulations.  you're not buying into what the 90% due and have come up with some other plan for you money in which case paying it down may eliminate some risk you personally are trying to mitigate.  BUT as a general rule for this forum paying down a mortgage is a poor decision.  Similar to hiring a lawn mower - does that mean there isnt someone out there who can justify paying a lawn mower - nope it doesnt.  BUT what it does mean is this shouldnt be a debate so much as a rule with a small sect of exceptions.

I appreciate that but my opinion isn't formed solely by this forum.  I am not going to adjust or manipulate what the real possibilities and probabilities are just to fit the confines of a FIRE blog.

The equity market doesn't care what early retires plan on doing, or how they plan on retiring, or what the universally accepted SWR is. It's going to do what it does regardless of whether that helps or harms the 4% withdrawal plan.  The argument that 90% of the readers on this blog follow a specific retirement strategy doesn't really matter.   

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Re: Do you regret paying off your mortgage early?
« Reply #528 on: December 04, 2017, 11:50:21 AM »
200k mortgage:

Max benefit: 7%(theoretical) - 4% (mortgage interest rate) - (.7% taxes on investments) = 2.3%

200k * 2.3% = $4600

$4600  - $30(time of managing mortgage per year)
$4570  - $100( fees)
$4470 - $1000 (time spent arguing on the internet that keeping this is better)

$3470 (a joke,... Kind of)

And that's year one. It continues to decrease along with the life of the mortgage. So not bad, but that's the max benefit we're arguing about. Having a consistent cashflow can gain you about $3500 a year, that's the cost. (My mortgage was actually half this size so not even). For the legal requirements, cash flow requirements, and general idea of debt. I don't feel that 2-4k per year is really worth it for it's own sake. I would get a loan to buy, by I wouldn't go out of my way to get one if my house was paid off.

This is definitely not an Escalade-owning problem.

when your math begins with a flaw then yeah you can make it look smaller - the mortgage rate should either be reduced by inflation or the equity gains should be including inflation - this has been discussed many times.  Made up costs for random things.  It costs nothing to manage a mortgage you setup auto pay and forget about it. in some cases for those who escrow it could add some actual work once the mortgage is paid off to pay taxes and insurance. Taxes on investments are currenly 100% negated by being in the 15% bracket in FIRE which most here should be - i'm not sure what the "fees" are you're talking about for 100 bucks.

But lets redo the math with all that in mind and then lets compound that savings over 30 years b/c really thats whats going to happen. 

10%-4% = 6% no tax loss if you're in the 15% bracket

6% of 200k = 12k

- 100 for some unknown fee i'm paying to have a mortgage - $11900


Compound 11900 for 30 years its worth 207k - 

if these numbers seem insignificant to you congrats go hire a lawn mower while you're at it 30 bucks a week - 40 weeks mowing - 1200 per year 10% of the total

I mean if you're going to debunk my kind of facetious math, you could do it honestly.

You removed the tax because ala everyone is in your tax bracket?
The $100 was me trying to spread out the origination fee on a loan.
And yes everyone spends time on their mortgage. Goodness, I only accounted for like 2 hours a year. That's for like setup and taxes each year, receiving mail updates and escrow statements.

But then the worst thing you did was attempt to stretch this example over 30 years? You're paying down the loan. You only get the max benefit once. Year one. The amount you're leveraging goes down each year.

Whatever it takes for you I guess. You seem way more motivated on this board than I am.
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Scortius

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Re: Do you regret paying off your mortgage early?
« Reply #529 on: December 04, 2017, 12:07:37 PM »
200k mortgage:

Max benefit: 7%(theoretical) - 4% (mortgage interest rate) - (.7% taxes on investments) = 2.3%

200k * 2.3% = $4600

$4600  - $30(time of managing mortgage per year)
$4570  - $100( fees)
$4470 - $1000 (time spent arguing on the internet that keeping this is better)

$3470 (a joke,... Kind of)

And that's year one. It continues to decrease along with the life of the mortgage. So not bad, but that's the max benefit we're arguing about. Having a consistent cashflow can gain you about $3500 a year, that's the cost. (My mortgage was actually half this size so not even). For the legal requirements, cash flow requirements, and general idea of debt. I don't feel that 2-4k per year is really worth it for it's own sake. I would get a loan to buy, by I wouldn't go out of my way to get one if my house was paid off.

This is definitely not an Escalade-owning problem.

when your math begins with a flaw then yeah you can make it look smaller - the mortgage rate should either be reduced by inflation or the equity gains should be including inflation - this has been discussed many times.  Made up costs for random things.  It costs nothing to manage a mortgage you setup auto pay and forget about it. in some cases for those who escrow it could add some actual work once the mortgage is paid off to pay taxes and insurance. Taxes on investments are currenly 100% negated by being in the 15% bracket in FIRE which most here should be - i'm not sure what the "fees" are you're talking about for 100 bucks.

But lets redo the math with all that in mind and then lets compound that savings over 30 years b/c really thats whats going to happen. 

10%-4% = 6% no tax loss if you're in the 15% bracket

6% of 200k = 12k

- 100 for some unknown fee i'm paying to have a mortgage - $11900


Compound 11900 for 30 years its worth 207k - 

if these numbers seem insignificant to you congrats go hire a lawn mower while you're at it 30 bucks a week - 40 weeks mowing - 1200 per year 10% of the total

I mean if you're going to debunk my kind of facetious math, you could do it honestly.

You removed the tax because ala everyone is in your tax bracket?
The $100 was me trying to spread out the origination fee on a loan.
And yes everyone spends time on their mortgage. Goodness, I only accounted for like 2 hours a year. That's for like setup and taxes each year, receiving mail updates and escrow statements.

But then the worst thing you did was attempt to stretch this example over 30 years? You're paying down the loan. You only get the max benefit once. Year one. The amount you're leveraging goes down each year.

Whatever it takes for you I guess. You seem way more motivated on this board than I am.

Come'on guys, this has been done over and over and one thing that can be very easily verified is the math.  Boarder is correct on all accounts here. You can't include inflation adjusted rates for one and real rates for the other.  You can't ignore origination fees for one, but then pretend that they exist for the other (you're taking out the loan either way in this scenario). And yes, you're looking at the difference over a 30 year period, even if the loan is paid off in 5 or 15 or however many years because the effects of the decision propagate well beyond the life of the loan itself, and it's important to look at the cumulative effect rather than the marginal difference to get an idea of the true trade-off.  In every post, the numbers have always held up, it's a simple thing to do if you do it correctly which is why it can be exasperating to have to keep correcting common mistakes over and over.

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Re: Do you regret paying off your mortgage early?
« Reply #530 on: December 04, 2017, 12:09:22 PM »
Our strategy was to first maximize all tax-advantaged accounts,
then pay off the mortgage,
then open taxable account.

We finally paid off our mortgage couple months ago.


Having a paid-off home brings a lot of peace to our life.
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seattlecyclone

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Re: Do you regret paying off your mortgage early?
« Reply #531 on: December 04, 2017, 12:25:27 PM »
200k mortgage:

Max benefit: 7%(theoretical) - 4% (mortgage interest rate) - (.7% taxes on investments) = 2.3%

200k * 2.3% = $4600

$4600  - $30(time of managing mortgage per year)
$4570  - $100( fees)
$4470 - $1000 (time spent arguing on the internet that keeping this is better)

$3470 (a joke,... Kind of)

And that's year one. It continues to decrease along with the life of the mortgage. So not bad, but that's the max benefit we're arguing about. Having a consistent cashflow can gain you about $3500 a year, that's the cost. (My mortgage was actually half this size so not even). For the legal requirements, cash flow requirements, and general idea of debt. I don't feel that 2-4k per year is really worth it for it's own sake. I would get a loan to buy, by I wouldn't go out of my way to get one if my house was paid off.

This is definitely not an Escalade-owning problem.

I looked back at my own $200k/4.25% mortgage that my wife and I took out in 2010, put every extra cent (after retirement accounts) into, and paid off a few years later. I looked over our past extra payments and put them into a spreadsheet simulating what would have happened if we had instead put the extra payments into VTSAX. Before even considering the tax benefit of extending the mortgage interest deduction, we would have come out ahead by $130k by the time we sold that house earlier in 2017.

$130k divided by seven years is a lot more than your "max benefit" that you state.

I'm not arguing that my situation is typical of all time periods. If we had instead bought the house in 2005 the numbers would surely be different. I'd like to run those numbers when I have a bit more time, just to see.
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slythr

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Re: Do you regret paying off your mortgage early?
« Reply #532 on: December 04, 2017, 01:09:25 PM »
200k mortgage:

Max benefit: 7%(theoretical) - 4% (mortgage interest rate) - (.7% taxes on investments) = 2.3%

200k * 2.3% = $4600

$4600  - $30(time of managing mortgage per year)
$4570  - $100( fees)
$4470 - $1000 (time spent arguing on the internet that keeping this is better)

$3470 (a joke,... Kind of)

And that's year one. It continues to decrease along with the life of the mortgage. So not bad, but that's the max benefit we're arguing about. Having a consistent cashflow can gain you about $3500 a year, that's the cost. (My mortgage was actually half this size so not even). For the legal requirements, cash flow requirements, and general idea of debt. I don't feel that 2-4k per year is really worth it for it's own sake. I would get a loan to buy, by I wouldn't go out of my way to get one if my house was paid off.

This is definitely not an Escalade-owning problem.

I looked back at my own $200k/4.25% mortgage that my wife and I took out in 2010, put every extra cent (after retirement accounts) into, and paid off a few years later. I looked over our past extra payments and put them into a spreadsheet simulating what would have happened if we had instead put the extra payments into VTSAX. Before even considering the tax benefit of extending the mortgage interest deduction, we would have come out ahead by $130k by the time we sold that house earlier in 2017.

$130k divided by seven years is a lot more than your "max benefit" that you state.

I'm not arguing that my situation is typical of all time periods. If we had instead bought the house in 2005 the numbers would surely be different. I'd like to run those numbers when I have a bit more time, just to see.

Congrats on paying the loan off so fast. That takes alot of effort.

I find your 7 year interval to be quite telling, as it matches the average homeowners life per home. That was mentioned earlier in this thread I believe.

I thought it would be interesting to expand the dates a bit, just to see as many people on here bought homes since 2000.

So I went back to January 2000 - the beginning of this century.  And calculated the 7 year returns, with dividends invested of the 500 index for comparison.
there are 11 - 7 year timeframes.
The 7 year return for each timeframe is also shown to the right

2000-2007  (1.024)
2001-2008 (0.543)
2002-2009 (4.507)
2003-2010  2.732
2004-2011  1.322
2005-2012  0.962
2006-2013  2.080
2007-2014  3.654
2008-2015  6.409
2009-2016  12.541
2010-2017  11.034

Average      3.15%

So if you would have bought your house in 2008, 2009 or 2010 you would have clearly come out ahead by leveraging. 3 years
If you bought in 2000-2007 you would have likely been better off paying down the loan. 8 years

So far this century, if you hold a home for the average 7 years, you would have been better off paying down the loan 8 years and leveraging 3.  I am sure if you start earlier or later the numbers change somewhat, but the ratio will still generally be equal.

That is because of the 7 year timeframe.  I prefer 10 years as that matches the MBS duration for most home loans that investors use.  That is not some internet opinion.  That is where the bulk of the trillion dollar MBS market invests after they consider prepayment spreads, so I am quite comfortable using their timeframe.
« Last Edit: December 04, 2017, 01:11:00 PM by slythr »

boarder42

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Re: Do you regret paying off your mortgage early?
« Reply #533 on: December 04, 2017, 01:10:56 PM »
you keep saying "take your chances" as has been stated numerous times above - over 90% of this site plans to use some version of the 4% rule which means those chances you keep bringing up had better be correct or it wont matter if we paid off our mortgages or invested.  now if you fall into the 10% which it sounds like you do congratulations.  you're not buying into what the 90% due and have come up with some other plan for you money in which case paying it down may eliminate some risk you personally are trying to mitigate.  BUT as a general rule for this forum paying down a mortgage is a poor decision.  Similar to hiring a lawn mower - does that mean there isnt someone out there who can justify paying a lawn mower - nope it doesnt.  BUT what it does mean is this shouldnt be a debate so much as a rule with a small sect of exceptions.
  The argument that 90% of the readers on this blog follow a specific retirement strategy doesn't really matter.

It entirely matters b/c that is the forum that you are in.  Not to say we arent open to counterpoints but you havent presented any new data to this conversation that would change the fundamental way people of this forum plan to retire, which means it doesnt change the fundamental math behind the mortgage vs investing conversation.
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boarder42

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Re: Do you regret paying off your mortgage early?
« Reply #534 on: December 04, 2017, 01:13:22 PM »
200k mortgage:

Max benefit: 7%(theoretical) - 4% (mortgage interest rate) - (.7% taxes on investments) = 2.3%

200k * 2.3% = $4600

$4600  - $30(time of managing mortgage per year)
$4570  - $100( fees)
$4470 - $1000 (time spent arguing on the internet that keeping this is better)

$3470 (a joke,... Kind of)

And that's year one. It continues to decrease along with the life of the mortgage. So not bad, but that's the max benefit we're arguing about. Having a consistent cashflow can gain you about $3500 a year, that's the cost. (My mortgage was actually half this size so not even). For the legal requirements, cash flow requirements, and general idea of debt. I don't feel that 2-4k per year is really worth it for it's own sake. I would get a loan to buy, by I wouldn't go out of my way to get one if my house was paid off.

This is definitely not an Escalade-owning problem.

I looked back at my own $200k/4.25% mortgage that my wife and I took out in 2010, put every extra cent (after retirement accounts) into, and paid off a few years later. I looked over our past extra payments and put them into a spreadsheet simulating what would have happened if we had instead put the extra payments into VTSAX. Before even considering the tax benefit of extending the mortgage interest deduction, we would have come out ahead by $130k by the time we sold that house earlier in 2017.

$130k divided by seven years is a lot more than your "max benefit" that you state.

I'm not arguing that my situation is typical of all time periods. If we had instead bought the house in 2005 the numbers would surely be different. I'd like to run those numbers when I have a bit more time, just to see.

Congrats on paying the loan off so fast. That takes alot of effort.

I find your 7 year interval to be quite telling, as it matches the average homeowners life per home. That was mentioned earlier in this thread I believe.

I thought it would be interesting to expand the dates a bit, just to see as many people on here bought homes since 2000.

So I went back to January 2000 - the beginning of this century.  And calculated the 7 year returns, with dividends invested of the 500 index for comparison.
there are 11 - 7 year timeframes.
The 7 year return for each timeframe is also shown to the right

2000-2007  (1.024)
2001-2008 (0.543)
2002-2009 (4.507)
2003-2010  2.732
2004-2011  1.322
2005-2012  0.962
2006-2013  2.080
2007-2014  3.654
2008-2015  6.409
2009-2016  12.541
2010-2017  11.034

Average      3.15%

So if you would have bought your house in 2008, 2009 or 2010 you would have clearly come out ahead by leveraging. 3 years
If you bought in 2000-2007 you would have likely been better off paying down the loan. 8 years

So far this century, if you hold a home for the average 7 years, you would have been better off paying down the loan 8 years and leveraging 3.  I am sure if you start earlier or later the numbers change somewhat, but the ratio will still generally be equal.

That is because of the 7 year timeframe.  I prefer 10 years as that matches the MBS duration for most home loans that investors use.  That is not some internet opinion.  That is where the bulk of the trillion dollar MBS market invests after they consider prepayment spreads, so I am quite comfortable using their timeframe.

so of all the historical data available to you going back to the beginning of the 1900s you chose to run your calculations based on 17 years.  or less that 16% of the total time frame data is available for.  good snap shot.  And used some word smithing like data since the beginning of the century!  OMG that must be good its data from the whole century.  Come on now man.  You also have a very selective and cherry picked start date for the collection of the data.  Look at all 7 year periods and its not a roll of the dice its much more favorable to the opposite side.   You're also looking at a total 7 year return when an investor would be putting money in each month instead of dropping it in lump sum at the beginning - which i believe was one of your counter points as to why shouldnt invest.

the correct way to do this math would be to figure out how much extra would be paid on a 30 year mortgage at the rates provided to pay it off in 7 years then put that money in each year and see what the outcome was in relation to the balance left on the mortgage.

you know if you'd like to do the math the right way.
« Last Edit: December 04, 2017, 01:22:33 PM by boarder42 »
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Scortius

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Re: Do you regret paying off your mortgage early?
« Reply #535 on: December 04, 2017, 01:20:14 PM »
200k mortgage:

Max benefit: 7%(theoretical) - 4% (mortgage interest rate) - (.7% taxes on investments) = 2.3%

200k * 2.3% = $4600

$4600  - $30(time of managing mortgage per year)
$4570  - $100( fees)
$4470 - $1000 (time spent arguing on the internet that keeping this is better)

$3470 (a joke,... Kind of)

And that's year one. It continues to decrease along with the life of the mortgage. So not bad, but that's the max benefit we're arguing about. Having a consistent cashflow can gain you about $3500 a year, that's the cost. (My mortgage was actually half this size so not even). For the legal requirements, cash flow requirements, and general idea of debt. I don't feel that 2-4k per year is really worth it for it's own sake. I would get a loan to buy, by I wouldn't go out of my way to get one if my house was paid off.

This is definitely not an Escalade-owning problem.

I looked back at my own $200k/4.25% mortgage that my wife and I took out in 2010, put every extra cent (after retirement accounts) into, and paid off a few years later. I looked over our past extra payments and put them into a spreadsheet simulating what would have happened if we had instead put the extra payments into VTSAX. Before even considering the tax benefit of extending the mortgage interest deduction, we would have come out ahead by $130k by the time we sold that house earlier in 2017.

$130k divided by seven years is a lot more than your "max benefit" that you state.

I'm not arguing that my situation is typical of all time periods. If we had instead bought the house in 2005 the numbers would surely be different. I'd like to run those numbers when I have a bit more time, just to see.

Congrats on paying the loan off so fast. That takes alot of effort.

I find your 7 year interval to be quite telling, as it matches the average homeowners life per home. That was mentioned earlier in this thread I believe.

I thought it would be interesting to expand the dates a bit, just to see as many people on here bought homes since 2000.

So I went back to January 2000 - the beginning of this century.  And calculated the 7 year returns, with dividends invested of the 500 index for comparison.
there are 11 - 7 year timeframes.
The 7 year return for each timeframe is also shown to the right

2000-2007  (1.024)
2001-2008 (0.543)
2002-2009 (4.507)
2003-2010  2.732
2004-2011  1.322
2005-2012  0.962
2006-2013  2.080
2007-2014  3.654
2008-2015  6.409
2009-2016  12.541
2010-2017  11.034

Average      3.15%

So if you would have bought your house in 2008, 2009 or 2010 you would have clearly come out ahead by leveraging. 3 years
If you bought in 2000-2007 you would have likely been better off paying down the loan. 8 years

So far this century, if you hold a home for the average 7 years, you would have been better off paying down the loan 8 years and leveraging 3.  I am sure if you start earlier or later the numbers change somewhat, but the ratio will still generally be equal.

That is because of the 7 year timeframe.  I prefer 10 years as that matches the MBS duration for most home loans that investors use.  That is not some internet opinion.  That is where the bulk of the trillion dollar MBS market invests after they consider prepayment spreads, so I am quite comfortable using their timeframe.

so of all the historical data available to you going back to the beginning of the 1900s you chose to run your calculations based on 17 years.  or less that 16% of the total time frame data is available for.  good snap shot.  And used some word smithing like data since the beginning of the century!  OMG that must be good its data from the whole century.  Come on now man.  You also have a very selective and cherry picked start date for the collection of the data.  Look at all 7 year periods and its not a roll of the dice its much more favorable to the opposite side.   You're also looking at a total 7 year return when an investor would be putting money in each month instead of dropping it in lump sum at the beginning - which i believe was one of your counter points as to why shouldnt invest.

No, it's not the average of 17 years. It's the average where you count the years 2007 and 2008 eight times and count the year 2017 once.

boarder42

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Re: Do you regret paying off your mortgage early?
« Reply #536 on: December 04, 2017, 01:24:32 PM »
If everyone is going to shit on people talking about paying their mortgage off because of math issues, why on earth hasn't someone centralized all of the arguments and counter points and point to that reference?

This seems to be the obvious choice rather than telling people to screw off and do the math themselves because its been already been discussed and researched after shitting on them for their choice.

I get face punching; this is bullying.  I, and I can't imagine there aren't others, am actively avoiding posting in these threads because of this.  Users and mods alike, stop it.

I'm out.

No one is talking shit about you paying off your mortgage.  if that is the way you're viewing this conversation you should read the comments more.
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jleo

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Re: Do you regret paying off your mortgage early?
« Reply #537 on: December 04, 2017, 01:44:08 PM »
Is it going to make more sense to pay off the mortgage with the new tax plan.

For instance I have 12k in mortgage interest and 2k in property taxes and basically nothing else is deductible now so this would leave you 2k over the standard deduction.

The reason I have not paid off my mortgage is for the tax deduction I get, now that I am going to be barley over the standard deduction amount it makes more sense to pay off my mortgage for a guaranteed return of 4.37% tax free. "I owe 290k @ 4.375% on 30 year loan, no PMI"

For my situation does this make sense to anyone else?

I wouldn't accept any advice that is blanket...whether for or against.
The best answer is it's up to you.  If the only reason you were keeping the loan really was for the deduction, and the deduction in fact no longer applies due to an increase in the standard deduction, then there is your answer. Your age, risk tolerance, other asset mix, etc all factor in to the decision.  Taking any advice that doesn't ask, much less consider, any of those other factors says more about the responder than your actual question.

You sound like a financial advisor trying to make this decision more complicated than it really is. 

Jleo.  in most all historical cases regardless of the mortgage deduction you're going to come out ahead investing in the market, with a loan at 4.375% vs paying it down.  The market averages 10-11% annually pre inflation and your loan is 4.375%(fixed forever and doesn't increase with inflation) less than half what you would expect to make invested in equities.  In addition when paying down a loan over time you open yourself up to a bigger risk for total financial failure in the event of a job loss.  say you've been socking an extra 10k a year into your 100k mortgage and 2008 happens and you lose your job.  you have a house paid down to 60k but the bank still wants that check for the same amount.  Now say you had been investing this money.  sure your investments would only be 28k b/c you lost some in 2008 at 37% but you'd have an extra 28k to continue to support your life on. 

You have to find very specific selected time frames with selective paydown times to have a mortgage paydown at 4.375% beat a simple index fund allocation.  Its worse than betting on green in roulette if your alternative was to bet on black and red.

What Slythr has tried to indicate many times here is in line with market timing b/c he personally believes equities are at highs and expects them to not perform as well.  Some other experts in the industry agree they will perform lower over the next 10 years including Jack Bogle - vanguard founder - but even Jack expects 6%+ returns investing in equities over the next 10 years.  And if rates rise you wont be able to get your money back out at such a good rate in the future if equities due pull back. 

Basically if you were comfortable investing in lieu of mortgage paydown pre tax plan changes - you should be comfortable now as well. at your 4.375% rate.

I am talking about paying off entire 290k mortgage at once not over time, I do plan on keeping this home for a very long time 10 or more years.

My thing is the interest is non tax deductible now and you invest in a taxable account in my case that is my only option I would need to get to 6% or greater returns to match my 4.375% tax free guarantee loan.

One thing I never hear is isn't one disadvantage of paying off a mortgage loan early an increase in risk of a lawsuit as a paid off home anyone can basically look that up and see you have a large asset paid off and make you a target?

nereo

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Re: Do you regret paying off your mortgage early?
« Reply #538 on: December 04, 2017, 01:59:46 PM »

I am talking about paying off entire 290k mortgage at once not over time, I do plan on keeping this home for a very long time 10 or more years.

My thing is the interest is non tax deductible now and you invest in a taxable account in my case that is my only option I would need to get to 6% or greater returns to match my 4.375% tax free guarantee loan.

One thing I never hear is isn't one disadvantage of paying off a mortgage loan early an increase in risk of a lawsuit as a paid off home anyone can basically look that up and see you have a large asset paid off and make you a target?
Regarding your situation, when you say you are talking about paying off the mortgage all at once... not over time, what's relevant there is opportunity cost.  While you might pay the $290k in one year (or month or day) those funds come from somewhere. As you are not flipping this house and plan to live there long-term there's no question that the relevant time-horizon is the term of your mortgage (>10 years).

I am unclear why you are stating that you need to get 6% "or greater" returns to match your 4.375% 'tax-free guarantee loan'.  I gather your mortgage rate is 4.375% and I'm guessing (?) that the 6% figure you arrived at includes your tax rate?  Here you are ignoring inflation over the term of your loan (see 'Opportunity cost' above).

As for the increasing the risk of a lawsuit, I honestly don't know which is more likely - that someone will learn you have a paid-off home or if someone will learn you have >>$290k in investments.  Given the data-gathering abilities these days, I suppose both are quite probable. If that's the case I suspect the person with the large investment portfolio would be more of a target for scams, as those funds are more easily liquidated.  Regardless, valid lawsuits must show cause to proceed, so basic awareness and diligence should help you there.
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slythr

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Re: Do you regret paying off your mortgage early?
« Reply #539 on: December 04, 2017, 02:06:51 PM »
200k mortgage:

Max benefit: 7%(theoretical) - 4% (mortgage interest rate) - (.7% taxes on investments) = 2.3%

200k * 2.3% = $4600

$4600  - $30(time of managing mortgage per year)
$4570  - $100( fees)
$4470 - $1000 (time spent arguing on the internet that keeping this is better)

$3470 (a joke,... Kind of)

And that's year one. It continues to decrease along with the life of the mortgage. So not bad, but that's the max benefit we're arguing about. Having a consistent cashflow can gain you about $3500 a year, that's the cost. (My mortgage was actually half this size so not even). For the legal requirements, cash flow requirements, and general idea of debt. I don't feel that 2-4k per year is really worth it for it's own sake. I would get a loan to buy, by I wouldn't go out of my way to get one if my house was paid off.

This is definitely not an Escalade-owning problem.

I looked back at my own $200k/4.25% mortgage that my wife and I took out in 2010, put every extra cent (after retirement accounts) into, and paid off a few years later. I looked over our past extra payments and put them into a spreadsheet simulating what would have happened if we had instead put the extra payments into VTSAX. Before even considering the tax benefit of extending the mortgage interest deduction, we would have come out ahead by $130k by the time we sold that house earlier in 2017.

$130k divided by seven years is a lot more than your "max benefit" that you state.

I'm not arguing that my situation is typical of all time periods. If we had instead bought the house in 2005 the numbers would surely be different. I'd like to run those numbers when I have a bit more time, just to see.

Congrats on paying the loan off so fast. That takes alot of effort.

I find your 7 year interval to be quite telling, as it matches the average homeowners life per home. That was mentioned earlier in this thread I believe.

I thought it would be interesting to expand the dates a bit, just to see as many people on here bought homes since 2000.

So I went back to January 2000 - the beginning of this century.  And calculated the 7 year returns, with dividends invested of the 500 index for comparison.
there are 11 - 7 year timeframes.
The 7 year return for each timeframe is also shown to the right

2000-2007  (1.024)
2001-2008 (0.543)
2002-2009 (4.507)
2003-2010  2.732
2004-2011  1.322
2005-2012  0.962
2006-2013  2.080
2007-2014  3.654
2008-2015  6.409
2009-2016  12.541
2010-2017  11.034

Average      3.15%

So if you would have bought your house in 2008, 2009 or 2010 you would have clearly come out ahead by leveraging. 3 years
If you bought in 2000-2007 you would have likely been better off paying down the loan. 8 years

So far this century, if you hold a home for the average 7 years, you would have been better off paying down the loan 8 years and leveraging 3.  I am sure if you start earlier or later the numbers change somewhat, but the ratio will still generally be equal.

That is because of the 7 year timeframe.  I prefer 10 years as that matches the MBS duration for most home loans that investors use.  That is not some internet opinion.  That is where the bulk of the trillion dollar MBS market invests after they consider prepayment spreads, so I am quite comfortable using their timeframe.

so of all the historical data available to you going back to the beginning of the 1900s you chose to run your calculations based on 17 years.  or less that 16% of the total time frame data is available for.  good snap shot.  And used some word smithing like data since the beginning of the century!  OMG that must be good its data from the whole century.  Come on now man.  You also have a very selective and cherry picked start date for the collection of the data.  Look at all 7 year periods and its not a roll of the dice its much more favorable to the opposite side.   You're also looking at a total 7 year return when an investor would be putting money in each month instead of dropping it in lump sum at the beginning - which i believe was one of your counter points as to why shouldnt invest.

the correct way to do this math would be to figure out how much extra would be paid on a 30 year mortgage at the rates provided to pay it off in 7 years then put that money in each year and see what the outcome was in relation to the balance left on the mortgage.

you know if you'd like to do the math the right way.

I picked the last 17 years because that is the most likely timeframe that the average reader of this blog would have purchased a home. Hence the most likely timeframe that is APPLICABLE.  I would assume that most readers, being younger ER adopties would be in the 2000 and after category as home purchasers.  I am sure there are some that are older, but likely most on her bought their current home within the past 17 years.

When exactly did you buy your house?

Sorry you don't like the numbers or the market returns since 2000.
And where are you getting this "incorrect math" from my post.  I didn't do math or calculate any specific investment returns. 
I only listed the average 7 year MARKET returns for the S&P index over 11 7 year rolling periods which is readily available.

« Last Edit: December 04, 2017, 02:19:38 PM by slythr »

slythr

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Re: Do you regret paying off your mortgage early?
« Reply #540 on: December 04, 2017, 02:32:32 PM »
  And yes, you're looking at the difference over a 30 year period, even if the loan is paid off in 5 or 15 or however many years because the effects of the decision propagate well beyond the life of the loan itself, and it's important to look at the cumulative effect rather than the marginal difference to get an idea of the true trade-off. 

Interested in this quote
Where does the 30 year period come from?
Why does the difference have to be over 30 years?

NoraLenderbee

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Re: Do you regret paying off your mortgage early?
« Reply #541 on: December 04, 2017, 02:37:13 PM »
That's a very unscientific analysis.

LOL "scientific analysis." It's a freakin poll about how people FEEL. But flog away at that grease spot.

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Re: Do you regret paying off your mortgage early?
« Reply #542 on: December 04, 2017, 02:41:50 PM »

Quote
2000-2007  (1.024)
2001-2008 (0.543)
2002-2009 (4.507)
2003-2010  2.732
2004-2011  1.322
2005-2012  0.962
2006-2013  2.080
2007-2014  3.654
2008-2015  6.409
2009-2016  12.541
2010-2017  11.034

And where are you getting this "incorrect math" from my post.  I didn't do math or calculate any specific investment returns. 
I only listed the average 7 year MARKET returns for the S&P index over 11 7 year rolling periods which is readily available.

Can't speak for Boarder42 specifically, but here's one error; you've calculated the 7 year periods incorrectly, again adjusting for inflation (CPI, apparently) for a comparison against a fixed-rate loan.  A quick re-run of the numbers would give you this:
1) 1.58%
2) 2.15%
3) (2.2%)
4) 5.4%
5) 3.7%
6) 3.5%
7) 4.3%
8) 5.8%
9) 8.0%
10) 14.4%
I'm still uncertain why you're sticking with these 10 subsets of the last 17 years, except that it seems designed to capture the great recession in the middle.  Given the market returns of the last 6 years it seems unlikely that several more periods won't also be substantially positive, even with a sudden 20-30% drop.

Second, this entire comparison is a bit frivilous, as you can't take the prime rates available today and retroactively apply them to loans taken out in other time periods. If mortgage rates were 7%+ as they were in the early 2000s the calculus would be different comparing them to rates around 3%.It isn't an apples-to-apples comparison here.  L

Third, your instance of using a 7 year time horizon further skews the results. If that is your particular time frame before selling, fine, but it is not (as you assert) the 'average length of home ownership' - that's closer to 13 years (source).  Re-running the market returns over 13 year periods shows >90% outstripping the 3.x% threshold you determined.  Here's where its helpful for the individual to calculate based on their own circumstances. If you plan to stay in a home for 4 years your numbers and preference may differ from someone who plans on it being their 'forever home'.
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Re: Do you regret paying off your mortgage early?
« Reply #543 on: December 04, 2017, 02:55:06 PM »
LOL "scientific analysis." It's a freakin poll about how people FEEL. But flog away at that grease spot.
I'm sorry Nora, but as a statistician I have to take issue with the poll, and how it could be potentially interpreted.
For starters, we must consider the pool of sampled individuals.  Given the thread topic we're heavily biased towards
i) individuals who have paid off their mortgage
ii) feelings (vs analysis) towards having a mortgage.
iii) people who would participate in such a thread to begin with (I'm guilty I guess...)
by design its not going to do a good job capturing people who decided not to pay of their mortgage.  IOW it's biased against capturing the 'hold-a-mortgage' camp and biased towards those that paid it off.  By inclusion of the word 'regret' we invoke emotion and (i would argue) favor responses from people who have deep feelings about a mortgage.  That can illicit two different responses.  Clearly Boarder22 hates the idea of paying off a mortgage early, but many others have a deep disdain for paying a mortgage each month (which reads in sentences like: It's just so wonderful not to pay a mortgage each month!)

I appreciate that you went through the thread and tallied up the available responses, but I don't think we can say much about how people in the broader MMM community think about paying down a mortgage vs. investing. Short of polling randomly selected members (almost impossible to do with a forum poll) it might be more informative to ask a question like; at current rates which do you think is a better financial strategy for you; accelerated mortgage payments or holding your mortgage to term.

just my 2
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Re: Do you regret paying off your mortgage early?
« Reply #544 on: December 04, 2017, 03:16:53 PM »
adding to your 13 year source because link didn't work for source article.

http://nahbclassic.org/generic.aspx?genericContentID=194717

weird... link works for me, not sure what the problem is.  Thank you regardless!
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Scortius

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Re: Do you regret paying off your mortgage early?
« Reply #545 on: December 04, 2017, 03:19:42 PM »
I wanted to take my own shot at addressing this thread's main questions and arguments and may try and better explain some of the motives of those people invading this thread with the "don't pay" message. I should point out that I subscribe very heavily to the don't pay school of thought.

First off, I get this thread, I really do. There have been some very passionate debates here about this very topic and the discussion has been heated. Given the passion of the don't pay group, I would guess those of you who did already pay off their mortgage early would feel a bit annoyed at all these people coming in and loudly proclaiming that you made a huge mistake and should feel bad. To be clear, that's not at all the message I think these people are trying to convey, but I would guess that if I were on the other side of the argument it would come off that way. I can imagine that those of you who paid off your mortgage early and felt really great about it wanted a place away from all of this debate where you could have somewhat of a support group where you could rightfully celebrate your accomplishment, which I do truly believe is a fantastic feat of fiscal discipline that should be celebrated. And then even here, away from the more contentious debate threads, people come invade what should be a celebratory (and supposedly not a back-and-forth) thread to dump on you even more. Why?

I think that is where the big disconnect is. The way I see it there are two groups here and both are trying to accomplish separate but not mutually exclusive goals, except it keeps coming off like it's this argument that has to be resolved. The first, as I just described, are people who accomplished a very impressive and significant goal that took discipline and effort and would now like to look back upon that effort with pride. The second, the don't pay off group, isn't trying to take away the celebrations of past events, but rather establish a comprehensive framework of advice for future decisions. People who paid their mortgage want a place to celebrate how nice it is to be done while people who advocate for carrying a mortgage worry that these posts lauding the benefits of paying off the mortgage may influence people making future decisions to base those decisions off of incomplete or faulty information, given the current economic factors regarding fixed long-term low interest rate mortgages that have only available for the past few years. Again, these two motivations don't have to be opposed to each other, but somehow end up so in each thread.

I think both sides need to be aware of the psychological aspects of this argument as well. Specifically, cognitive dissonance, confirmation bias, and survivorship bias are going to strongly entrench the positions of each side. People who paid off their mortgage early and feel good about it are not going to be predisposed to agree that paying off was a 'mistake' (if you can call it that). People who have committed to the long-term mortgage are going to be looking for arguments that back up their decision as well. It's only natural, but I don't think the strengths of these psychological effects are being properly acknowledged. The implicit biases involved in such a monumental decision are going to be huge and since this thread in particular is more focused on the mental side of the equation, the effect will only be exacerbated.

So here is the part I personally struggle with. I've basically avoided this thread because I know it was started with the goal of being a place for celebration and not debate, yet when I read the comments, so many of the arguments and justifications for why paying off the mortgage of yesterday was a great thing just don't hold up to scrutiny when used to discuss whether or not people making the decision today should do the same thing. Boarder's point is pretty simple really: this is a blog and a board espousing advanced financial optimization for the purpose of increased and accelerated lifestyle freedom. Yet, the colloquial wisdom that all debt is bad and that aggressively paying off a mortgage should be a financial priority ignores the fact that by simply doing nothing other than putting that money in an investment bucket instead of a housing equity bucket, a family will be extremely likely to realize benefits of hundreds of thousands of dollars and a reduction of their FIRE date by anywhere from 1 to 5 years, all while lowering their risk of insolvency in a down market! This was not always the case, especially for those who have already paid off their mortgages early. In fact it's only been the case in the USA for the past few years given the low interest rates available, but today and at least for a little longer, the benefits for people holding their mortgages are immense.

People making that argument can still celebrate the accomplishments of those who paid off their mortgage early. Those that paid their mortgages early can still agree that today's very specific window of low interest mortgage rates creates a system that greatly incentivizes borrowers to not pay off their mortgage. We don't have to disagree if we realize we're making two different arguments.
 

brooklynguy

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Re: Do you regret paying off your mortgage early?
« Reply #546 on: December 04, 2017, 03:25:51 PM »
Second, this entire comparison is a bit frivilous, as you can't take the prime rates available today and retroactively apply them to loans taken out in other time periods.

On this particular point, we've had interesting philosophical debates in other threads (see this post, the linked discussion referenced therein, and the discussion that followed that post in that particular thread).  As noted there, any criticism of an analysis of the performance of a leveraged-investing-via-mortgage strategy on the basis that today's prevailing mortgage rates were not actually available in the past applies equally to the entire enterprise of doing Trinity-study-style-backtesting.

The purpose of these types of backtests is not to determine how actual investors in the past would have actually fared under actual then-applicable real-world constraints -- instead, it is to determine how hypothetical investors in the past would have fared (using actual historical market performance) if it were somehow possible for them to invest using the investment options available today.  A backtest of the performance of a leveraged-investing-via-mortgage strategy that uses today's prevailing interest rates (rather than actual historical interest rates) is no different than any other backtest of how a portfolio would have fared in historical periods when subjected to an assumed future spending/withdrawal plan--in the case of a leveraged-investing-via-mortgage backtest, the future spending/withdrawal plan just happens to match the mortgage loan's (non-inflation-adjusted) amortization schedule.

MrMoneySaver

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Re: Do you regret paying off your mortgage early?
« Reply #547 on: December 04, 2017, 03:45:39 PM »
Quote
One thing I never hear is isn't one disadvantage of paying off a mortgage loan early an increase in risk of a lawsuit as a paid off home anyone can basically look that up and see you have a large asset paid off and make you a target?

It's an issue. Much depends on your state's homestead exemption. It's good to have an umbrella policy just in case.

Certainly it's easy to find out in public records that that large, paid-off asset is sitting there for the taking. An investment account shouldn't be "visible" in that way.


slythr

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Re: Do you regret paying off your mortgage early?
« Reply #548 on: December 04, 2017, 03:51:37 PM »


Can't speak for Boarder42 specifically, but here's one error; you've calculated the 7 year periods incorrectly, again adjusting for inflation (CPI, apparently) for a comparison against a fixed-rate loan.  A quick re-run of the numbers would give you this:
1) 1.58%
2) 2.15%
3) (2.2%)
4) 5.4%
5) 3.7%
6) 3.5%
7) 4.3%
8) 5.8%
9) 8.0%
10) 14.4%
I'm still uncertain why you're sticking with these 10 subsets of the last 17 years, except that it seems designed to capture the great recession in the middle.  Given the market returns of the last 6 years it seems unlikely that several more periods won't also be substantially positive, even with a sudden 20-30% drop.

Second, this entire comparison is a bit frivilous, as you can't take the prime rates available today and retroactively apply them to loans taken out in other time periods. If mortgage rates were 7%+ as they were in the early 2000s the calculus would be different comparing them to rates around 3%.It isn't an apples-to-apples comparison here.  L

Third, your instance of using a 7 year time horizon further skews the results. If that is your particular time frame before selling, fine, but it is not (as you assert) the 'average length of home ownership' - that's closer to 13 years (source).  Re-running the market returns over 13 year periods shows >90% outstripping the 3.x% threshold you determined.  Here's where its helpful for the individual to calculate based on their own circumstances. If you plan to stay in a home for 4 years your numbers and preference may differ from someone who plans on it being their 'forever home'.

I didn't personally calculate the returns, I used a calculator online from Jan 1 of each timeframe accounting for CPI inflation
S&P calculator from dqydj.com
I did revise the numbers some January to January.
-1.591
-5.811
-7.68
4.137
1.215
2.552
4.556
4.84
4.946
13.228.
They still don't match yours exactly but the point is the same. Over half of the timeframes the leverage strategy loses.
I explained why I started at 2000 in a prior post.  It is not cherry picked.  It is the beginning of when most on her started buying homes.  It is true that timeframe captures the 2007 and 2008 markets, but that is a reality that happens, and will happen again.

People had this argument in 2000, a year after the 1999 stock rocket.  The market couldn't drop. Tech stock are the future.  Housing can't go down.  The market is solid.  Until it isn't.

I ran the numbers back 50 years to 1966 just to see as well.  The average 7 year return was 5.59%.  Subtracting the current rate and tax and the net benefit is minimal.  Less than 1% for taking on market risk. And that is over 50 years, which is way too long of a time horizon for me.

I agree with your prime rate comparison.  This leverage idea is fairly new.  15 years ago it made no sense due to the math as mortgage rates were much higher.  Now it makes little sense due to the risk of mean reversion.

I see you are a statistician, and you noted a recent report that increases the homeownership length to 13 years. That may be due to that recent survey by the NAHB but the longer term data still supports the 7 year timeframe.  Over the past 10-20 years, it still averages out to 6-7.  This is likely due to the 08 crisis as well, which skews data as we just discussed.

From Keeping Current
"The National Association of Realtors (NAR) keeps historical data on many aspects of homeownership. One of the data points that has changed dramatically is the median tenure of a family in a home. As the graph below shows, for over twenty years (1985-2008), the median tenure averaged exactly six years. However, since 2008, that average is almost nine years."

We can skew numbers however we want.  We can look at 50 year periods, or 2 year periods.  But it really doesn't matter.
The only thing that matters is what is likely to happen in the future.
For some people, they care about the near term.  The next 5-10 years.  For others, they are comfortable with a time horizon that is 40 years out.  I care about the next 5-10.  Once that book is done, I'll open the next one and re-evaluate.

slythr

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Re: Do you regret paying off your mortgage early?
« Reply #549 on: December 04, 2017, 04:07:54 PM »
I wanted to take my own shot at addressing this thread's main questions and arguments and may try and better explain some of the motives of those people invading this thread with the "don't pay" message. I should point out that I subscribe very heavily to the don't pay school of thought.

First off, I get this thread, I really do. There have been some very passionate debates here about this very topic and the discussion has been heated. Given the passion of the don't pay group, I would guess those of you who did already pay off their mortgage early would feel a bit annoyed at all these people coming in and loudly proclaiming that you made a huge mistake and should feel bad. To be clear, that's not at all the message I think these people are trying to convey, but I would guess that if I were on the other side of the argument it would come off that way. I can imagine that those of you who paid off your mortgage early and felt really great about it wanted a place away from all of this debate where you could have somewhat of a support group where you could rightfully celebrate your accomplishment, which I do truly believe is a fantastic feat of fiscal discipline that should be celebrated. And then even here, away from the more contentious debate threads, people come invade what should be a celebratory (and supposedly not a back-and-forth) thread to dump on you even more. Why?

I think that is where the big disconnect is. The way I see it there are two groups here and both are trying to accomplish separate but not mutually exclusive goals, except it keeps coming off like it's this argument that has to be resolved. The first, as I just described, are people who accomplished a very impressive and significant goal that took discipline and effort and would now like to look back upon that effort with pride. The second, the don't pay off group, isn't trying to take away the celebrations of past events, but rather establish a comprehensive framework of advice for future decisions. People who paid their mortgage want a place to celebrate how nice it is to be done while people who advocate for carrying a mortgage worry that these posts lauding the benefits of paying off the mortgage may influence people making future decisions to base those decisions off of incomplete or faulty information, given the current economic factors regarding fixed long-term low interest rate mortgages that have only available for the past few years. Again, these two motivations don't have to be opposed to each other, but somehow end up so in each thread.

I think both sides need to be aware of the psychological aspects of this argument as well. Specifically, cognitive dissonance, confirmation bias, and survivorship bias are going to strongly entrench the positions of each side. People who paid off their mortgage early and feel good about it are not going to be predisposed to agree that paying off was a 'mistake' (if you can call it that). People who have committed to the long-term mortgage are going to be looking for arguments that back up their decision as well. It's only natural, but I don't think the strengths of these psychological effects are being properly acknowledged. The implicit biases involved in such a monumental decision are going to be huge and since this thread in particular is more focused on the mental side of the equation, the effect will only be exacerbated.

So here is the part I personally struggle with. I've basically avoided this thread because I know it was started with the goal of being a place for celebration and not debate, yet when I read the comments, so many of the arguments and justifications for why paying off the mortgage of yesterday was a great thing just don't hold up to scrutiny when used to discuss whether or not people making the decision today should do the same thing. Boarder's point is pretty simple really: this is a blog and a board espousing advanced financial optimization for the purpose of increased and accelerated lifestyle freedom. Yet, the colloquial wisdom that all debt is bad and that aggressively paying off a mortgage should be a financial priority ignores the fact that by simply doing nothing other than putting that money in an investment bucket instead of a housing equity bucket, a family will be extremely likely to realize benefits of hundreds of thousands of dollars and a reduction of their FIRE date by anywhere from 1 to 5 years, all while lowering their risk of insolvency in a down market! This was not always the case, especially for those who have already paid off their mortgages early. In fact it's only been the case in the USA for the past few years given the low interest rates available, but today and at least for a little longer, the benefits for people holding their mortgages are immense.

People making that argument can still celebrate the accomplishments of those who paid off their mortgage early. Those that paid their mortgages early can still agree that today's very specific window of low interest mortgage rates creates a system that greatly incentivizes borrowers to not pay off their mortgage. We don't have to disagree if we realize we're making two different arguments.

Great Post
My addition if I may is I notice you are fond of the historically low interest rates, and how many should benefit from them.
My point has always been this:

It is precisely because of those historically low interest rates that problems are ahead. 
The advice to borrow low and invest was PERFECT 8 years ago.  PERFECT.  It was really good 5 years ago, and beneficial 3 years ago.

But now.  We are on a nearly 9 year RECORD run of 18% average returns fueled by low rates that are going away.  The fuel is running out. It plain to see for anyone that looks. The Fed has all but shouted it.  They are raising rates, and the markets are overvalued
That is what I have been saying this entire thread. 
Not that the math of leverage doesn't work.  Of course it does
Not that there are differennt options
Of course there are
Not even that Boarder or others posts are not trying to do the right thing or your hearts in the right place.  They are.

What is wrong is the ASSUMPTION that the market will perform like you need it to.
It will not.  It is a statistical certaintly the market will revert.
It is not market timing.  It is simple observation.  It's one thing to invest in the ups and downs when it is your regular retirement.  There is no other option.
But this is an option, with a limited benefit even with normal market returns.