pay off mortgage?!

[goateeman]

Being risk averse (I'm 54) the first question I would ask myself is this:  If I pay my mortgage and I have a crisis (loss of job, etc) Would I have made a good decision?

I have a $200K mortgage.  I'd rather leave my cash invested elsewhere.  I can give the house to the bank but I can't trade it for food.

I agree with this.

If I was paranoid, I'd rather have a mortgage and the cash invested or stashed elsewhere.

Should you have a major need for cash, that cash can be pulled for use.  You can't pull equity from the house as easily.

Plus rates are going to go up in the future, plus the tax deduction for the mortgage interest.

Plus one more major factor - if you all of a sudden had to move, or real estate prices crashed, you could short-sale the house and walk away... not so much if it's paid off and your cash is tied up in the equity.

So in the worst case, most risky economic situation, it's better to have a mortgage and cash on the side.  Look at the most recent recession - a lot of people were able to walk away from their house by short-sales or foreclosure.  They would never have been able to walk away if they had paid off the house and had no cash to survive the recession.

Given that the mortgage rates are so dang low, and rates will only go up, plus mortgage tax deduction, I'd rather have a mortgage than pay it off, unless I had so much cash that I didn't know what to do with the cash.

[qval]

Full disclosure, I just paid off my house.

paying it off is guaranteed return (guaranteed to be lower than average, but still). The market involves risk, and you can assess that risk (whether it's high or low) for your own comfort. The question to ask yourself is: would you borrow money to invest in the stock market today (buy on margin)? Because that's what you're doing, when you buy stocks with a mortgage. That leverage is a powerful tool to build wealth, but margin buying is RISKY. Be aware of the risks.

Also, saying 7% return for 30 years is very limited. It's not certain that we'll be getting that in the next 30 years (what's the current P/E?). I've spent the last 2 years looking at the market and investing (timing) much less than I would have otherwise. It's probably hurt my returns (despite high valuations, the market keeps defying gravity). But now I no longer have that risk free return option available. So I have to find alternative investments or add to my stock holdings.

I agree with everything said: Are you comfortable with the risks you're taking, and are you okay with lower returns (probably).


Anecdote: In 2007, my parents had a windfall bonus or acquisition event. They ran this debate and decided the stock market was better than paying down the mortgage. Then their stocks went down 50% in the crash, and they kicked themselves for not using that money on the house. Luckily, like the story about the worlds worst market timer, they didn't sell low, and they got it all back and more. They still have a mortgage at age 60, though they are probably wealthier than I'll ever be. So, do you want to be super rich or super secure? Not a bad set of choices to have to make :)

[boarder42]

Super rich AND super secure. A paid off house is less rich and less secure

[tomsang]

The question to ask yourself is: would you borrow money to invest in the stock market today (buy on margin)? Because that's what you're doing, when you buy stocks with a mortgage."

If I had a 30 year fixed rate loan at sub 4%, then yes.  If possible I would like a trillion dollars please. This would be Warren Buffett's wet dream.  Why do you think that he loves insurance companies.  It gives him access to cheap money that is not paid out for long periods of time.  Even better yet, the worst that they can do is take away your house.

A question to you.  Would you rather invest your money in an illiquid geographically specific investment that pays out at most 4% and at worst a negative 100% (if it is destroyed due to earthquake, hurricane, tornado, economic malaise, or other natural disasters) or would you rather invest in 1,000's of companies that are diversified throughout the world that have been shown to earn well throughout the ages?  If the 1,000 of companies all go bankrupt, you will need a flaming river surrounding your house as the world will be in complete chaos. 

Secondly, if your house is not 100% paid off, then you are not safe at all. The bank is not going to let you call up and say that you prepaid for 6 years of principal can I skip my payments this year.  They will tell you to make your monthly payment or they will begin foreclosure proceedings.  Having a partially paid off house is very unsafe vs. having an investment Stache that can be liquidated(even at a huge loss) to pay the mortgage and living expenses until you get back on your feet.   

[Mr Mark]

The question to ask yourself is: would you borrow money to invest in the stock market today (buy on margin)? Because that's what you're doing, when you buy stocks with a mortgage."

If I had a 30 year fixed rate loan at sub 4%, then yes.  If possible I would like a trillion dollars please. This would be Warren Buffett's wet dream.  Why do you think that he loves insurance companies.  It gives him access to cheap money that is not paid out for long periods of time.  Even better yet, the worst that they can do is take away your house.

A question to you.  Would you rather invest your money in an illiquid geographically specific investment that pays out at most 4% and at worst a negative 100% (if it is destroyed due to earthquake, hurricane, tornado, economic malaise, or other natural disasters) or would you rather invest in 1,000's of companies that are diversified throughout the world that have been shown to earn well throughout the ages?  If the 1,000 of companies all go bankrupt, you will need a flaming river surrounding your house as the world will be in complete chaos. 

Secondly, if your house is not 100% paid off, then you are not safe at all. The bank is not going to let you call up and say that you prepaid for 6 years of principal can I skip my payments this year.  They will tell you to make your monthly payment or they will begin foreclosure proceedings.  Having a partially paid off house is very unsafe vs. having an investment Stache that can be liquidated(even at a huge loss) to pay the mortgage and living expenses until you get back on your feet.   

+1

And remember that loan is not only fixed in nominal terms for 30 years but is also uncallable as long as you make the minimum payments. And the interest is paid with pretax money.

There are a few dangers tho', don't get us wrong:
- you buy a much more expensive house to live in (=consumption) than you would if you had to pay cash
- you don't actually invest that borrowed money, but spend it (=consumption)
- you invest the money poorly (at average rates less than the mortgage rate, or even worse, in cash)
- you get too asset rich/cash poor and need the money just when it would be a terrible idea to sell your investments, ie after a huge market downbeat

All these risks can be managed easily with your Mustachian superpowers.

There is a reason why almost nowhere else in the world will a market give you a very large (large multiples of your disposable income), low rate, long term, nominally fixed, tax deductable, non-callable loan: it's called the US Federal Reserve combined with Government subsidised Fannie May and Freddie Mack. The US taxpayer is offering you almost free money. The smart call is to take it, IMHO, and you can get as Tomsang rightly says, a little bit of your own Buffett effect going on.

[BurtMacklin]

I plan to have our mortgage paid off in about 8 years so when my first daughter is in college I'm in a more comfortable position to help her pay. So when it's all said and done, that will be about 18 years of paying the mortgage.

[BigHaus89]

According to the 2016 annual report for the Vanguard Total Stock Market Index, the fund gained over 12.5%. Note that everyone though 2016 was going to suck/stagnate in the markets. Continue growing your stock investments and have piece of mind that you COULD pay off your mortgage at any time.

[WranglerBowman]

Ok, I understand making the minimum payment on your low interest mortgage makes sense to most of us and is generally thought of as the way to go.  Does it make any sense to refinance a mortgage at a little bit better interest rate every couple years when you only owe about $50k on the house?  My parents have refinanced just about every 3 years for the last 9 and they hardly owe anything on their house in terms of debt to home value.  They keep doing this because their investment broker tells them too.  The last refinance was $50k on a 20 yr mortgage.  They make good money and are catch up investing in their 401k's and have no other debt besides the house.  Help me talk some sense into them or what am I missing?

[boarder42]

Ok, I understand making the minimum payment on your low interest mortgage makes sense to most of us and is generally thought of as the way to go.  Does it make any sense to refinance a mortgage at a little bit better interest rate every couple years when you only owe about $50k on the house?  My parents have refinanced just about every 3 years for the last 9 and they hardly owe anything on their house in terms of debt to home value.  They keep doing this because their investment broker tells them too.  The last refinance was $50k on a 20 yr mortgage.  They make good money and are catch up investing in their 401k's and have no other debt besides the house.  Help me talk some sense into them or what am I missing?

if the REFI's dont cost them anything then yeah its probably fine but we likely wont be getting lower and lower rates anymore.  the bottom was last july.  if they REFId then i doubt they see a lower rate.  i purchased a home last Feb and REFId last March. 

[goateeman]

The question to ask yourself is: would you borrow money to invest in the stock market today (buy on margin)? Because that's what you're doing, when you buy stocks with a mortgage."

If I had a 30 year fixed rate loan at sub 4%, then yes.  If possible I would like a trillion dollars please. This would be Warren Buffett's wet dream.  Why do you think that he loves insurance companies.  It gives him access to cheap money that is not paid out for long periods of time.  Even better yet, the worst that they can do is take away your house.

A question to you.  Would you rather invest your money in an illiquid geographically specific investment that pays out at most 4% and at worst a negative 100% (if it is destroyed due to earthquake, hurricane, tornado, economic malaise, or other natural disasters) or would you rather invest in 1,000's of companies that are diversified throughout the world that have been shown to earn well throughout the ages?  If the 1,000 of companies all go bankrupt, you will need a flaming river surrounding your house as the world will be in complete chaos. 

Secondly, if your house is not 100% paid off, then you are not safe at all. The bank is not going to let you call up and say that you prepaid for 6 years of principal can I skip my payments this year.  They will tell you to make your monthly payment or they will begin foreclosure proceedings.  Having a partially paid off house is very unsafe vs. having an investment Stache that can be liquidated(even at a huge loss) to pay the mortgage and living expenses until you get back on your feet.   

Exactly, this 1000 times.  People feel good about "paying off debt" but a super low rate mortgage ought to be one of those things that you pay off slowly, preserve to cash to pay it off if you really have no need for the cash.  I let my cash grow in the market and it will be more than the small tax deductible interest rate loan on my house.

[nottoolatetostart]

Qval, there is no arguing risk adjusted returns with these guys.  Their arguement is that a strategy with the higher expected return is the best strategy.  They seem to think that market returns are guaranteed to be higher in the long run.  While higher returns are the likely scenario, they are by no means the guaranteed result.  If one uses leverage and is wrong, then the losses are multiplied.  Again, i am not saying dont do it, but to say one should always leverage is not a fit for all risk profiles.

Agree. In my MBA finance class, there is such a thing as return adjusted for risk (can't remember proper name anymore), which I think people easily forget. The reason why this debate will never be solved is because everyone has a different perception of risk. Having secure housing is one of the bottom rungs of Maslow's hierarchy of needs. That's why this is complicated. I worked as a consultant to a foreclosure unit, the bank does foreclose if you only owe 20k on the property (I have seen the computer screens of these accounts), because market dropped and you can't pay your bills. It is their fiduiciary responsibility to their investor (Fannie Mae, Freddie Mac, etc) to foreclose and sell your property. Having a 90% success rate in CFIREsim is actually really scary to some people (me included) and unacceptable.

We personally got "rich" (by American standards) not because we timed the market, bur rather we drive older cars (compared to new Audi/BMW/Mercedes crowd DH's colleagues buy into), eating in, putting investing first and foremost, buying a reasonable house (vs what others said we could afford). I don't feel like we got rich because we borrowed more at a low rate and then invested it. It helped but not the driving factor. We simply saved most of our income. The rest of this feel nitpicking and disagreements on risk tolerance.

We have to keep this all in perspective. Many Americans borrow cheap money and then use surplus for new cars, restaurants, etc but don't put a dime towards retirement, getting free matching funds from employers for 401K's, etc. Their mortgage is godwend for saving. The folks that want to free up cash flow by paying off mortgage are not going out and buying fur coats, yachts, etc....they are simply buying a home.

[tomsang]

Now clearly she wasnt investing the money, rather spending it, instead.  She was forced to sell to me at the worst time because she tapped that equity.  4 years later the market is recovered and she lost the opportunity to realize $200k in appreciation.  Quite sad that her consumption cost her a cute house in one of the most desirable communities in the bay area (she moved south to an apartment, i think she was a retired teacher on pension).

Anyway, keep the faith.  At some point the risks just dont pay off.  We are lucky in that our FIRE is fully funded, so i dont see the need to take more risk to overfund our needs.  I dont want new cars or a boat, though we can 'afford' them.  Why take risk to make more money we dont need?  As you say, our frugal ways dont need more, so paying off the house and sitting on less useful equity makes sense for us.

Now just imagine if she was Mustachian and invested the money.  She would be set by keeping her house and low interest fixed rate mortgage, having a large Stache of liquid investments to buy short sales, and ride the stock market to huge heights.  Your example does not make any sense, as we are not saying take the money and blow it, we are saying invest it in the market and over 30 years you will be significantly farther ahead.  If you believe that the stock market will not average greater than 4% nominally over 30 years, then do not plan on retiring at anything greater than a 1% SWR as all the models have the market exceeding 7% nominally over 30 years.  With mortgages at less than 4% and with the tax deductibility of interest.

[SpinGeek]

I struggle with this emotionally, but we've decided to let our 4% mortgage ride. We have about 20 years to go on the loan, but one of us will retire at 66 in 8 years. The other will still have 14 more years to go before SS kicks in, so having income-generating investments that compound is more important than feelings.

We lost money on our first house due to a fast neighborhood decline in the last year we owned it. I have no "feeling" of security that we'd make more on our present house than we paid for it, since it's market value is still below what we paid for it in 2007. While I would like it if I didn't have to plan for that house payment until I'm in my seventies, I just remind myself that you can't eat a house, and the house doesn't produce income unless I want to deal with a roommate.

And although you can't live in a mutual fund, you can sell part of a mutual fund to pay for a place to live. You can't really sell part of your house to buy groceries next month.

[goateeman]

Qval, there is no arguing risk adjusted returns with these guys.  Their arguement is that a strategy with the higher expected return is the best strategy.  They seem to think that market returns are guaranteed to be higher in the long run.  While higher returns are the likely scenario, they are by no means the guaranteed result.  If one uses leverage and is wrong, then the losses are multiplied.  Again, i am not saying dont do it, but to say one should always leverage is not a fit for all risk profiles.

The flipside of the coin, when you speak of risk, is who is holding the risk when your house is financed?

The bank is more at risk than you.  So if you have a low interest mortgage, you're not the one at risk should the asset be devalued... ie the housing market crashes and you need to move or relocated.  You simply short sales the house, or let it foreclose, and walk away with some credit marks on your credit profile.

And during a housing crash, if you should have emergency bills you need to pay, you can't liquidate the money you put into the house to pay for those expenses.  Say a loved one gets cancer and needs money for quality treatment, you are SOL if you need money fast.

So I take the money that can be used to pay off the mortgage, place a portion of it into shorter term investments, so it can be pulled in an emergency (small likelihood, but still a chance).  The rest I put into longer term investments that will yield greater returns over time.

People only think of risk on one side of the coin, not the other.  When you consider the entire picture, keeping a super low rate mortgage is a no brainer.

I struggle with this emotionally, but we've decided to let our 4% mortgage ride. We have about 20 years to go on the loan, but one of us will retire at 66 in 8 years. The other will still have 14 more years to go before SS kicks in, so having income-generating investments that compound is more important than feelings.

We lost money on our first house due to a fast neighborhood decline in the last year we owned it. I have no "feeling" of security that we'd make more on our present house than we paid for it, since it's market value is still below what we paid for it in 2007. While I would like it if I didn't have to plan for that house payment until I'm in my seventies, I just remind myself that you can't eat a house, and the house doesn't produce income unless I want to deal with a roommate.

And although you can't live in a mutual fund, you can sell part of a mutual fund to pay for a place to live. You can't really sell part of your house to buy groceries next month.

Exactly. Even if you own your house free and clear, you do not truly own it.  Try not paying property taxes for a few years and see what happens to the house.  People are fooled into thinking once they pay off the mortgage the house is their's.  Nope...property taxes can be a bear.  And if you do standard itemization (because you no longer have a mortgage interest deduction), you also lose out on the benefit of deducting property taxes.

I say again, aside from some false mental assumptions of safety, paying off a low rate mortgage on a principal residence is foolish panacea.  It's not the worst thing one can do, but if you are a smart mustachian, you will keep that mortgage and use the money to invest properly.

[goateeman]

Good points.  My view is that i think of a home as consumption, not an asset.  I treat it like a car, in the sense that i dont expect its value to fund my retirement.  Perhaps this is a wasteful and excessively conservative view.

I would not advise taking an auto loan, and investing the difference either, though mathematically the difference may make even more sense than a home morgage (preferred rates are often offered). 

I dont like giving up the full asset control that these instruments require, so that is another reason i prefer to dismiss the debt (liens on title, fees for missed payments, paperwork, insurance requirements, etc.).  I admit it is a bit of a perhaps non mustachian luxury though.

Mortgage interest is deductible, which is huge.  I don't finance cars anyway, because I have never bought a new car.  I don't pay interest unless I can do better with the money that would have paid that debt.

A house is also a depreciating asset.  I have to buy new AC units to replace my AC soon...at a cost of $10k - $15k.  Ouch.  I look at my relatively low property tax bill and am very thankful I live in a LOCL of area.  I have friends in California who pay $10k per year in property tax... for houses that are worse than mine.  That "fair weather" tax is huge!

The difference between the car and house is, you can live without a car. You either need to pay rent or own a house, you can't really do without housing.  So a mortgage or owning real estate is a necessary evil.

I also mention that I lost $100k in a real estate venture during the downturn.  I had to short-sale an investment property during that time, due to financial constraints.  Even though I lost $100k, the bank lost $300k on it.  Had I been more invested in that property, I would have eaten the loss.  My FICO score only went down 100 points, and now it's completely off of my credit, as if it has zero impact.  I'm glad I didn't pour more money into real estate than I absolutely had to.  Diversify the risk and let the bank carry the risk with you.

[tomsang]

Again, read a few prospectuses. Stocks are not for everyone.  Bold risk takers, sure...go for it, but dont act like risk adverse people are not 'getting it.'  Most are making informed decisions.  I am.   I have zero leverage by choice.

Stocks are the only hope for those Mustachians looking for a long term retirement.  If you are not investing 60%+ in stocks you will be screwed over by inflation.  So with your sentiment that equities are for Bold Risk Takers, you should be very leery about retiring with a Safe Withdrawal Rate above 1%. 

Regarding Japan or any other country.  You don't look at what one country's rate of return was for a decade or two.  You look at what has the world done as that is where you will be investing.  Don't just invest in one country.  If you expect the world to have below 4% nominal yields over 30+ years, then make sure that you don't own a house.  Housing and everything else will tank in price with the dismal financial picture that you project.  I have read tons of prospects over my 35 years as investing.  I started investing when I was 12.  My portfolio is very large now because I understand the risk and rewards of equities.  If my portfolio tanked and lost 50% tomorrow, I would be significantly farther ahead than if I did not invest my money in equities.

Debt is not evil, is not bad, and is not harmful if used appropriately. Debt is a tool.  If your debt to assets is reasonable and you have the liquidity to weather the bumps you will be in much better and safer situation than if you have no debt and are illiquid.  I encourage you to play around with Cfiresim and other tools to understand how equities and mortgages can make you safer with their use.

A 30 year fixed rate non callable tax deductible 4% or less loan is a gift from the Mustachian gods*.  Those that are paying off their mortgage early are spiting them.  Don't spite the Mustachian Gods!

* Actually, they are from the US federal government to reverse the economic environment that we were in, but still don't turn down free money if you are smart enough to invest it vs. blowing it on coke and hookers.

 

[cookielover]

This question has been asked so many times on so many finance forums.  The answer is always the same:  there is no right and wrong answer, it depends, and you do what you feel right.

I have 15-year 3% mortgage.  I am in a high tax bracket.  If I want to, I can pay my mortgage off today, but financially that does not make sense.  I still want to pay my mortgage early, I want to pay it off before I retire in ~4-5 years.  So I split the difference.  Every month I pay 50% extra toward my mortgage principle and call it good.

[powersuitrecall]

In Canada, mortgages are different:

- most terms are 2-5 years (10 years is possible, but the rates seem punitive in comparison to the lower terms - most people opt for 5 years)
- rates can be either locked in for the term (as most do), or variable rates
- most mortgages are full-recourse: the borrower is responsible for the loan amount even in the case of foreclosure (Alberta & Saskatchewan have non-recourse if you put down 20%)
- mortgage interest has no income tax benefits

On the positive:
- rates have been exceptionally low - 5 year terms are currently going for ~2.5% or 1.9% variable.
- If you get a HELOC and invest it, there are income tax benefits

The mortgage question is slightly different here, but the same principles probably apply. 

What do you think?  Would you still invest vs. pay the mortgage down?  Vice Versa?  Canadians - what do you think?

Our initial approach was to pay off as much as possible due to the assumption that rates would go up on renewal.  Since the rates actually went down, we've taken the foot off the accelerator, but still plan to pay it off at FI.

[Retire-Canada]

What do you think?  Would you still invest vs. pay the mortgage down?  Vice Versa?  Canadians - what do you think?

My rate is 1.95% variable with a 5yr term. I am not paying down extra. In fact if rates stay low at next renewal I'll increase the amortization period to draw out the repayment. Any extra $$ I would have used to pay back my mortgage is invested in my TFSA and/or Non-Registered accounts.

At 1.95% mortgage rate and official inflation at 1.3% - 2% [unofficial seems higher] the actual cost of my mortgage is tiny.

Should rates really increase I can:

- double my payments each month
- pay down 15% of the original mortgage balance as a lump sum each year
- convert my variable rate mortgage to a fixed rate
- pay it off at the end of the term [currently 3yrs away, max would be 5yrs]

Given how much damage a fast increase to mortgage rates would do to the economy I expect the Bank of Canada to do everything in their power to keep any changes slow and steady. At the moment Poloz is still saying a drop in rates is a possibility.



Keeping my mortgage is very low cost at these rates. If things remain the same for the life of the mortgage [not suggesting they will, but it's one option] borrowing $380K for 25yrs would cost me ~$22K. I write off ~30% of my house as a business so I do get a tax write off for part of my mortgage interest.

If rates increase and I want to pay my mortgage down faster or completely I can do that pretty fast or I can lock in at a fixed rate. Instead of getting a meager return on my extra payments on the mortgage I am investing them. When the time comes I will have a lot more money [most likely] to pay down the mortgage faster or I'll just keep the extra money invested to speed up my FIRE.

My mortgage is currently ~$300K. I'd much rather have an extra $300K in my investments and this mortgage than a paid off house and $300K less.

While the US 30yr mortgage has some attractive features and I might go for one if I could here, our current situation in Canada with really low borrowing rates and very flexible repayment options on our mortgages is pretty great. Certainly I am not sad that I am paying off a house at the moment.

[Lmoot]

How come no one ever considers the idea of paying off a mortgage, then redirecting the former mortgage payment back into investments? All of these calculations, assume that none of the money taken out to pay off the mortgage, is paid back in any capacity, as a direct result of paying off that mortgage?

[goateeman]

How come no one ever considers the idea of paying off a mortgage, then redirecting the former mortgage payment back into investments? All of these calculations, assume that none of the money taken out to pay off the mortgage, is paid back in any capacity, as a direct result of paying off that mortgage?

That's certainly a consideration.  You just lose the tax deduction of a very low debt, and become less liquid in the short term.  If you're ok with that, more power to you.  I like being more liquid and having the tax deduction of a historically cheap loan on an asset that may increase or decrease in value over time.

[Lmoot]

How come no one ever considers the idea of paying off a mortgage, then redirecting the former mortgage payment back into investments? All of these calculations, assume that none of the money taken out to pay off the mortgage, is paid back in any capacity, as a direct result of paying off that mortgage?

That's certainly a consideration.  You just lose the tax deduction of a very low debt, and become less liquid in the short term.  If you're ok with that, more power to you.  I like being more liquid and having the tax deduction of a historically cheap loan on an asset that may increase or decrease in value over time.

I am not saying I am ok with it, but if you're going to apply all of the negatives of paying off a mortgage vs investing, don't forget to add back in the positive hypotheticals as well. It would make for a more accurate and well-rounded argument. Also, many people do not benefit from that tax deduction. Myself included. It's way over-pushed.

[goateeman]

How come no one ever considers the idea of paying off a mortgage, then redirecting the former mortgage payment back into investments? All of these calculations, assume that none of the money taken out to pay off the mortgage, is paid back in any capacity, as a direct result of paying off that mortgage?

That's certainly a consideration.  You just lose the tax deduction of a very low debt, and become less liquid in the short term.  If you're ok with that, more power to you.  I like being more liquid and having the tax deduction of a historically cheap loan on an asset that may increase or decrease in value over time.

I am not saying I am ok with it, but if you're going to apply all of the negatives of paying off a mortgage vs investing, don't forget to add back in the positive hypotheticals as well. It would make for a more accurate and well-rounded argument.

I'm not sure this still makes that big of a difference. I mean, it's pretty obvious that once you pay off a debt you do have some free cash flow, and a smart mustachian would use that money to invest.  It doesn't change the equation that much. I think most of us already have factored this in.  It's not like we forgot that you have free cash flow after you pay off the mortgage. 

[Lmoot]

I am not a numbers person, so bare with me. But using Retire-Canada's very impressive outcome comparison presentation, it doesn't assume back in the potential increase in capital investment over the course of 30 years, as a direct result of having more cash flow without a mortgage. That could change the gap between the outcomes drastically, and could possibly change some people's minds that perhaps the potential reward isn't great enough to overcome their doubts.

[Retire-Canada]

I am not a numbers person, so bare with me. But using Retire-Canada's very impressive outcome comparison presentation, it doesn't assume back in the potential increase in capital investment over the course of 30 years, as a direct result of having more cash flow without a mortgage. That could change the gap between the outcomes drastically, and could possibly change some people's minds that perhaps the potential reward isn't great enough to overcome their doubts.

My post #17 analyzes exactly what you are talking about. It assumes you take the money for a mortgage out of investments and pay off the mortgage and then spend 30yrs paying yourself back each month with the money freed up from not having a mortgage. It also looks at the alternative where you leave the mortgage value in your investments and then pay down the mortgage for 30yrs. The early mortgage pay down and then building your investments back up with the freed up cashflow costs you about $300K.

[runewell]

Anecdote: In 2007, my parents had a windfall bonus or acquisition event. They ran this debate and decided the stock market was better than paying down the mortgage. Then their stocks went down 50% in the crash, and they kicked themselves for not using that money on the house. Luckily, like the story about the worlds worst market timer, they didn't sell low, and they got it all back and more. They still have a mortgage at age 60, though they are probably wealthier than I'll ever be. So, do you want to be super rich or super secure? Not a bad set of choices to have to make :)

During October 2007 the SPY ETF was around 156.33, took a major dive, and 9.5 years later is at 238.42.  That works out to a 4.5% rate of return per year during a market crash followed by a prosperous run. 

[Lmoot]

I am not a numbers person, so bare with me. But using Retire-Canada's very impressive outcome comparison presentation, it doesn't assume back in the potential increase in capital investment over the course of 30 years, as a direct result of having more cash flow without a mortgage. That could change the gap between the outcomes drastically, and could possibly change some people's minds that perhaps the potential reward isn't great enough to overcome their doubts.

My post #17 analyzes exactly what you are talking about. It assumes you take the money for a mortgage out of investments and pay off the mortgage and then spend 30yrs paying yourself back each month with the money freed up from not having a mortgage. It also looks at the alternative where you leave the mortgage value in your investments and then pay down the mortgage for 30yrs. The early mortgage pay down and then building your investments back up with the freed up cashflow costs you about $300K.

Thank you for the clarification. I'll need to go back and look as that is something I have often wondered about myself.

[tomsang]

I am not a numbers person, so bare with me. But using Retire-Canada's very impressive outcome comparison presentation, it doesn't assume back in the potential increase in capital investment over the course of 30 years, as a direct result of having more cash flow without a mortgage. That could change the gap between the outcomes drastically, and could possibly change some people's minds that perhaps the potential reward isn't great enough to overcome their doubts.

I provided a calculator in Post 47 that tells you exactly how much it costs you to pay off your mortgage early at these low rates.  Once the loan is paid off it redirects all mortgage payments and extra payments to investments.  Check it out.

[talltexan]

I actually appreciate the math of redirecting your eventual payment to investing.

I'm more troubled by the idea of buying a bigger house because it's financed than you would if it weren't financed. What could possibly be done to measure that?

[Dicey]

Just pay it off and be done with it. You know it will be a great feeling!!!

Choosing fleeting hedonistic pleasure over solid long term security? No thanks, Sofa King.

Having enough in securities that you could pay the mortgage off at will is a much more powerful and long lasting feeling.

[Retire-Canada]

I'm more troubled by the idea of buying a bigger house because it's financed than you would if it weren't financed. What could possibly be done to measure that?

Calculate sq ft/person. Decide on a metric that makes sense.

I'm at 500 sq ft/person in a space inefficient older home and it's plenty of room. I have friends that are at 1500 sq ft/person. That seems excessive to me.

[financepatriot@gmail.com]

Yes, don't pay off your mortgage.  Instead, put those funds into a total stock market index fund like SCHX or ITOT (ETF's).

The reason?  The historical returns of the SP500 with dividends reinvested is 9.7%.  These are choppy returns, but they are real and any long term investor will tell you these types of returns in blue chips are reasonably obtainable. 

Therefore, in order to pay a loan off early, the interest rate would have to be over half of my forecasted stock returns, or at least 4.5%.  Since your mortgage is at 4%, this is a no brainer, in my opinion. 

Confession:  I once paid extra on our mortgage, this was devoid of analysis.  Even at the time, I didn't think it was the best decision.  Since we've been investing instead, I have been very happy with the results.  We still owe $210k on our house, with a five year ARM at 2.89%.  I don't lose ANY sleep over this.  It's also partially tax deductible, making the effective interest rate even lower.

[runewell]

Qval, there is no arguing risk adjusted returns with these guys. 

A risk-adjusted return is important.  When you are 65, you should probably not be chasing a market return, but a portion of it.

But if you are 25, 35, or even 45, your time horizon is so long that it usually makes sense to bet on the long-term market return.

[Retire-Canada]

Qval, there is no arguing risk adjusted returns with these guys. 

A risk-adjusted return is important.  When you are 65, you should probably not be chasing a market return, but a portion of it.

But if you are 25, 35, or even 45, your time horizon is so long that it usually makes sense to bet on the long-term market return.

It's also important to evaluate the risks of paying down your home faster. People equate that will total risk free security and I don't that's realistic. Especially if your home value is a big part of your NW.

[qval]

In the past 16 months, I've paid off 106k of our 3.5% fixed mortgage. This was sort of in preparation for quitting our jobs (not hving to earn that $1300/month puts the tax bracket a lot lower). I went very aggressively, to the point of not having a full emergency fund. This was risky but we're back above 6 months now (we figured credit cards would step in in the unlikely event of a job loss). We're also getting in some decent cashflow from other investments, so those safety factors were calculated in the draw down of the checking account.

The math that every body (95% of this thread's authors) is advocating is, keep that 106k in the market, get 7% average (20% for 2016) returns and be happy. This is true, and the only argument is is the risk of the higher (market) return worth it to the steady interest savings? It seems most are earning and investing, not about to FIRE. For me, I've been on the cusp of FIRE for a while, and a paid off house was one of my hurdles. The next steps are more dividend income, more certainty on healthcare, and a part-time counteroffer to my current employer. How do I know if I'm stuck in one-more-year syndrome? Any tell-tale symptoms?

[Dicey]

I'm more troubled by the idea of buying a bigger house because it's financed than you would if it weren't financed. What could possibly be done to measure that?

Calculate sq ft/person. Decide on a metric that makes sense.

I'm at 500 sq ft/person in a space inefficient older home and it's plenty of room. I have friends that are at 1500 sq ft/person. That seems excessive to me.

Wow, R-C, our clown house is 2600 sf for 4 adults. I always that that was ridiculous, but it's about 750 sf each. By that metric, I guess that's not as bad as I thought. Thanks. Now I'll have to go find something else to feel guilty about.

[Retire-Canada]

Wow, R-C, our clown house is 2600 sf for 4 adults. I always that that was ridiculous, but it's about 750 sf each. By that metric, I guess that's not as bad as I thought. Thanks. Now I'll have to go find something else to feel guilty about.

I don't want to move again unless it's my forever home and depending on negotiations with my GF I can see that being 750 sq ft per person. So I think you are at a reasonable size for 4 adults as 2600/4 = 650 sq ft/per person.

[Dicey]

Wow, R-C, our clown house is 2600 sf for 4 adults. I always that that was ridiculous, but it's about 750 sf each. By that metric, I guess that's not as bad as I thought. Thanks. Now I'll have to go find something else to feel guilty about.

I don't want to move again unless it's my forever home and depending on negotiations with my GF I can see that being 750 sq ft per person. So I think you are at a reasonable size for 4 adults as 2600/4 = 650 sq ft/per person.

Lolz! I really can math, most days. Probably obvious that I was multi-tasking when I read your post, no? Thanks to that catch, I can now feel even better about this castle we inhabit. Until we discovered that MIL had ALZ. and needed to move in with us, we were looking at buying a 1450 sf mega-fixer for three adult-size humans, so this feels cavernous by comparison. Perhaps the 1050 sf garage has something to do with that.

[jessicat]

How come no one ever considers the idea of paying off a mortgage, then redirecting the former mortgage payment back into investments? All of these calculations, assume that none of the money taken out to pay off the mortgage, is paid back in any capacity, as a direct result of paying off that mortgage?

This is what we are doing.  We just started doing it.  We had to do some catch up on home repairs.  We paid off our house in 6 years and 8 months.  Now the money is going to investments.  The problem is looking at this as straight numbers.  Finance isn't straight numbers.  You have to factor in the psychology of the people involved.

[runewell]

This is what we are doing.  We just started doing it.  We had to do some catch up on home repairs.  We paid off our house in 6 years and 8 months.  Now the money is going to investments.  The problem is looking at this as straight numbers.  Finance isn't straight numbers.  You have to factor in the psychology of the people involved.

Or does the psychology affect people because they aren't aware of the numbers or willing to do the math.  If I told you that paying down your mortgage early cost you $200,000 in additional wealth, would it still be worth it to you?  People on this forum generally talk about how important it is to pay down the debt and give no consideration to the wealth they have lost in the meantime, all in the name of saving some interest.

[Retire-Canada]

Or does the psychology affect people because they aren't aware of the numbers or willing to do the math.  If I told you that paying down your mortgage early cost you $200,000 in additional wealth, would it still be worth it to you?  People on this forum generally talk about how important it is to pay down the debt and give no consideration to the wealth they have lost in the meantime, all in the name of saving some interest.

When I first got my current mortgage [a few years pre-MMM] I was thinking about paying it down faster. It just seemed like the logical, financially sensible thing to do. Luckily I didn't and kept investing. Later when I did the analysis I appreciated what an expensive idea that was likely to be with so few upsides - almost all of them emotional. That said realising I'm building a significant amount of extra wealth and the associated financial security that comes from that makes me fell pretty darn good not accelerating my mortgage pay down.

[EnjoyIt]

OP,
Your question has been asked on every finance forum at least once a month and it always gets into a heated debate about risk, math, and feeling good.  I will share a few facts and my opinion.

Facts:
1) 4% is a very cheap way to borrow money especially if you itemize.
2) If you are choosing between paying off low interest rate debt and investing.  Over long term, historically you should come out ahead investing.
3) Most people choose between paying down their mortgage and spending more on crap.  For them paying down their mortgage is a better choice.
4) History does not have to repeat itself and paying down your mortgage may be a better investment
5) Having no debt feels good and gives people a sense of security.
6) Having no debt decreases how much you "must" spend every year to survive which gives you even more security if troubled times roll around.
7) Paying off a mortgage using your taxable account will put a very large portion of your wealth into 1 asset. Which actually increases your overall risk.


Opinion:
1) I do not think that you should take your cash out of your taxable account and pay off your debt.  You will be forced to pay taxes on any gains which makes the math even less likely to be a good option.  Not to mention, you worked hard on building that wealth.  It will feel like it disappeared and all it bought you was the feeling of security.
2)  Based on your information, it feels like you have extra cash every month that you need to decide what to do with.
    a)  My advice is do some basic math on when you think you may retire and then increase your monthly mortgage payments so that by the time you retire your mortgage is paid off.  This gives you the best of both worlds.  Increased security when you need it most as well as increased growth on your other investments over the next few years.
   or
    b)  Open another investment account and call it your mortgage pay off fund.  Any new extra cash you make place in there with the expectation of paying off your mortgage sooner once you build enough wealth in that new account.  Make sure there is a decent amount of bonds in that account.  If times come tough you can always sell off some of those bonds to pay your monthly mortgage.  This gives you the security you may want while still keeping a mortgage.
    c)  You already have a mortgage payoff fund which is your taxable account.  To give you a little extra security increase your bond allocation to cover your mortgage payments for a few years.

Personally I like a combination of option a and option c which is exactly what I do. Several years into this and my bond allocation could pay off the mortgage tomorrow.  I also decreased the payoff date to something that coincides much closer to my retirement date.  I sleep very well at night. At the end of the day there really is no correct answer because everyone values risk differently.  Only you can decide what is right for you.

[SugarMountain]

Warren Buffett sums up the idea of paying off a 30 year fixed rate mortgage at sub 4% pretty clearly.  Note paying down your sub 4% mortgage is like buying a bond that pays the mortgage rate for 30 years.  "The idea of committing your money at roughly 3 percent for 30 years ... doesn't make any sense to me," he added.

http://www.cnbc.com/2017/02/27/buffett-doesnt-understand-30-year-bond-appeal.html

Somehow I doubt he has a mortgage on the old house in Omaha.

[talltexan]

From what I recall, he paid cash for it in the 1950's.

Of course, Mr. Buffet "retired" at 28 with a 'stache of $170,000, so, what are we complaining about exactly?