The Money Mustache Community
General Discussion => Welcome and General Discussion => Topic started by: Giro on March 17, 2015, 01:33:44 PM
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I've seen this trend over and over and now I'm really curious. A mortgage is clearly a debt, so why differentiate it from other debts?
Is it because it's a relatively long term?
not judging just trying to understand.
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Mortgages are debt, that's for sure, but I think what you may be seeing are those on the forum that could have paid off their mortgages long ago, but hold onto them so they can invest more in the market and hopefully realize gains larger than their interest expense. Not to difficult to justify when mortgage rates are in the 3% range.
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It doesn't make much sense to me. If I owe somebody money, regardless of what it's for, it's debt. I also don't view a home as an asset like many people do either.
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Debt is debt, but since you have to pay to live *somewhere* even if you rent, I think some people just view it as an expense. They're be paying rent if they didn't have a house, so they view it as a wash. And if your mortgage is affordable and not some mcmansion loan, I can see their argument. It doesn't make it not debt because you owe it, but I can see their thought process.
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I think it's a little different than other dept, to the extent that (short of buying a house cash, and if you're unable to live rent-free with parents) the alternative to a mortgage is paying rent as opposed to not paying anything, and having a mortgage could be cheaper (despite adding in the interest portion of the mortgage, property taxes, the difference in cost between homeowner's and renter's insurance, HOA fees if any, required repairs/maintenance etc.) than paying rent. It could also be a lot more expensive -- it really depends on the market conditions in your time/place.
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Can the OP provide some examples? That may help address the question.
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I've seen
"debt-free except the mortgage"
"just paid off all of my debt, now to tackle the mortgage"
It does make sense if you consider housing as an expense. I can sorta buy that. But, it's a slippery slope because some people see car loans as necessary transportation expense.
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I don't think they are not considering it debt. Just noting that they have paid off all of their higher rate CC/student/car debt.
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ok.
Just seems a little odd. I would love to say "retired early except the last 4 years of work".
which now that I type it sounds pretty darn fun to use. haha
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I don't consider it debt because it isn't really a consumer issue, I didn't take on more than I can chew in school costs, cars, random crap on a credit card. I have to live somewhere, and the payment is no different than rent.
And it makes zero sense to pay it off at such a low rate. (We have more than enough money to pay it off, and we do throw a bit extra at it because we can.)
It is a debt, obviously, but I just frame it differently, because unlike every other kind of debt (including medical, which just sucks so much because that is usually a bad luck thing) I don't see the need to pay it off anytime soon.
People don't consider rent a debt- but they have to pay that every month, and if they don't, the apartment they lease will be taken away from them. It is only at the end of the term of the lease that you can walk away no penalty.
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I think maybe people are thinking of it as "good" debt, as opposed to bad debt like CC balances.
It's still debt, though.
For me, right now I don't 100% think of mine as debt anymore, because I'm pretty sure that I will at least break even when we sell in 3 years. Meaning nothing to pay off, debt-neutral. So, in a way, I think of my mortgage payment as more like rent
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People don't consider rent a debt- but they have to pay that every month, and if they don't, the apartment they lease will be taken away from them. It is only at the end of the term of the lease that you can walk away no penalty.
This is an excellent point. People generally don't see contracts as debts, but they qualify in the technical sense. Many young people may consider themselves debt-free but they are very likely either in a cellular or cable contract. The option to buy equipment in the clear is a possibility and it is often not taken.
I suppose regarding rent, you could go on month-to-month to make a point, but in my area that can cost you around 20% more.
Some government assistance (college grants?) have some expectation to be repaid through future tax, but it would be hairy to consider this as your tax bill isn't exactly negotiable.
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Just saying the words "I'm in debt" sounds like you're in a bad situation, but paying on a mortgage is considered quite normal so separating the two makes sense in that regard. You can buy a car with cash in most circumstances, while paying cash for a home is rather rare so incurring a mortgage is just another expense rather than a debt that is dragging you down. You can live in a home while paying a mortgage and even use it to generate revenue while having credit card debt has no benefit.
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I've seen this trend over and over and now I'm really curious. A mortgage is clearly a debt, so why differentiate it from other debts?
Is it because it's a relatively long term?
not judging just trying to understand.
A house, or rental house, is something you hopefully have equity in. So many people may be making payments on a property but they do not consider themselves to be in debt because the property has a positive net value. If you own a home and have a mortgage of $200,000 but the home is now only worth $160,000, then yes indeed you are in debt. On the other hand, if you own a home worth $200,000and your balance is only $50,000, most people would not consider that being in debt even though they have a payment on the house. They could always sell the house and walk away with well over $100,000 in hand.
I think a lot of people look at their financial net worth and define it in terms of assets and liabilities. Debt is a bit of a loaded word. It is fair to say that mortgage payments do affect cash flow significantly, and that's probably a better discussion. It is certainly true in our case, the mortgages on our primary residence and our rental home are very real line items in our monthly budget, but by no stretch of the imagination would I define us as being "in debt" given the equity we have in both of them.
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A lot of people don't think of mortgage as debt because they have to live somewhere. Many places paying rent is more than mortgages. Plus its a payment out of your pocket either way unless you have a 100% paid off place to live. But those places will still often/always have home insurance and real estate taxes due, so still not free.
If you want to look at assets and debts at the most basic level. Assets put money in your pocket. Debts take money out. Then yes its a debt.
But its also often thought of as 'good debt' because it offsets the rent payment. Some portion of it will likely be tax deductible. Plus real estate over the long term does often appreciate.
I pretty much say that I am debt free, but I typically qualify that with "except for my two mortgages" (primary/rental).
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A mortgage is absolutely positively debt. You don't pay, they come get. If you're upside down on the loan as so many were in the bubble, they come get and hand you a bill.
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Mortgage is debt, rent is not. You can be debt free while renting an apartment but if you have a mortgage then you are not debt free. With that said there is nothing wrong with having mortgage as debt, especially given the current rates. I recently refinanced to a 15 year at 3.125% (I was previously on a 30 year at 4.25%).
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People might just state this because the interest rate is so low. They take care of debts 5%+, then make minimum payments on the 3% mortgage.
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I don't do drugs, except alcohol.
Alcohol is a drug that most people are comfortable with.
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I've seen
"debt-free except the mortgage"
"just paid off all of my debt, now to tackle the mortgage"
It does make sense if you consider housing as an expense. I can sorta buy that. But, it's a slippery slope because some people see car loans as necessary transportation expense.
If you are very theoretic about it, yes, a debt is a debt is a debt.
BUT. Since mortgages are usually taken for a multiple of someone's yearly income, it cannot be anything else than a long-term commitment. Cars can be bought with a few thousands (or months of average wage), so clearing/avoiding that is quite easy. You can't get out of a mortgage quickly, and saving for a few decades renders the point of buying a house moot.
"Debt-free except mortgage" is also a very worthwhile milestone to get going. Most people are paralyzed by big objectives, that is the human nature; the bigger the objective, the longer it stays in the "someday I'm gonna..." stage. I call this "The Best is the enemy of Good" effect. That is why Dave Ramsey does the debt snowball starting from the smallest debts and working up, even if it would be best to order by highest interest rate.
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Many people consider their home an investment. Every time I've put a contract on a home and agreed to pay for it, my net worth increased substantially within a few months. Now there was that time that I bought in 2005 and my net worth decreased, but because I didn't have to sell at an inopportune time, I have recovered most of the value.
The simple fact of the matter is that owning real estate is one of the best and most accessible ways to build wealth for most people. It's a way to force savings and a way to let that savings grow through land appreciation.
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The principal on the mortgage is not debt, only the interest associated with the mortgage is. Each payment you make, a percentage goes towards principal, which in effect is just transferring your money to your home equity. The interest part of the payment is the only part that vanishes, while the principal payment still contributes to your net worth.
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I think two things play into this false mind-set:
1. The idea that "everyone" has a mortgage; thus it doesn't really count as debt. Closely related is the idea that no one could ever actually pay off a mortgage.
2. The idea that a mortgage is "good debt" because it isn't consumer debt.
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I think two things play into this false mind-set:
1. The idea that "everyone" has a mortgage; thus it doesn't really count as debt. Closely related is the idea that no one could ever actually pay off a mortgage.
2. The idea that a mortgage is "good debt" because it isn't consumer debt.
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I agree. I don't see much of a difference in car payments and mortgages. We paid cash for our home. We were able to do that not because we had a bunch of cash, but because we bought a crazy cheap short sale and spent FAR less than the average home price. People on this forum advocate all of the time to buy an inexpensive vehicle for cash. Why not take the same approach to homes? Our home is gorgeous and we walked into several thousands of dollars in equity and we have no mortgage payment. It's pretty win-win.
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ok - just playing a bit of devil's advocate here...
why isn't a monthly rent considered a debt?
Sure, you pay for the current or previous month (depending on your lease) and each time you pay you are 'paid in full' much like using a credit card and paying off the balance in full each month. And most people like to lump these as 'expenses' rather than 'debt'. But from a philosophical standpoint it is money I owe to someone else in monthly installments, and if I don't pay it bad things happen.
For a broader question, why do we make such a distinction between monthly, reoccurring expenses (rent, insurance, utilities, etc) and monthly payments for a loan.
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Maybe it's not debt by strict definition, but I do see housing rent functionally very similar to debt if it's part of a term lease. Same applies to contracts for car leases and those 2-year commitments on cell phones, satellite TV and security monitoring. The cost to get out may be variable, but once you're in one of those you've committed to pay something of substance.
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Maybe it's not debt by strict definition, but I do see housing rent functionally very similar to debt if it's part of a term lease. Same applies to contracts for car leases and those 2-year commitments on cell phones, satellite TV and security monitoring. The cost to get out may be variable, but once you're in one of those you've committed to pay something of substance.
yes - that's the basis of my point. If I sign a 1 year lease or a 2 year cell-phone contract i have a monthly payment schedule that's virtually the same as if I had taken out a similar sized loan for the same periods. There may be contractual differences but practically speaking they are all expenses paid monthly.
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My impression is not so much that there are people who do not classify mortgages as debt; rather, that many people classify mortgages in a different category of debt, i.e. good debt vs. bad debt. I consider a fixed low-interest mortgage to be a good debt, because it allows me to invest more heavily than I would otherwise. Similarly, the balances on my credit cards that get paid in full at the end of each month are a good debt, because I earn cash back and rewards and I do not accrue interest. I think most people who use credit cards similarly would not report it as debt, even though it is semantically debt.
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A mortgage is debt. That said it's a debt secured by a property *usually* worth more than the balance. In that case the property is a leveraged asset: it can be sold to repay the debt, it can be rented and generate cash flow. As such, yes, one has debt and risk, but it's different from having credit card debt, or most car loans which are high interest and in negative equity.
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I would categorize it as secured debt. Whether it's good or bad, I don't know, but it is different than unsecured debt (CC, SL, etc).
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why isn't a monthly rent considered a debt?
Well spartana answered this already but you can start with the fact that words have meaning. Here is the investopedia definition of debt: (http://www.investopedia.com/terms/d/debt.asp)
DEFINITION of 'Debt'
An amount of money borrowed by one party from another. Many corporations/individuals use debt as a method for making large purchases that they could not afford under normal circumstances. A debt arrangement gives the borrowing party permission to borrow money under the condition that it is to be paid back at a later date, usually with interest.
Rent doesn't qualify for any of the important defined components of what debt is. First off, rent is paid in advance. For example, when I moved in to my current rental, I paid the security deposit as well as the first month's rent in advance of being allowed to move in. If anything, the homeowner is in debt to ME, because I am the one who paid first. Second, the definition of debt is that a loan takes place, which is present in rent. The homeowner doesn't loan me anything. Again, if anything, I loaned them the money in advance and they paid it back by letting me live in the house. Third, it states that debts are usually repaid with interest. There is no interest going on with rent. Sure, you get super shady deals like Rent-A-Center where they claim they're renting appliances to people but it's functionally an illegally high interest rate loan.
Still, with true rent you never own the object in question, thus it does not qualify as debt in any way at all.
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Sure, you get super shady deals like Rent-A-Center where they claim they're renting appliances to people but it's functionally an illegally high interest rate loan.
And there's the distinction. Most if not all debts come with an interest rate. The difference between renting, a cell phone contract, and a mortgage is the first two are known fixed amounts. A mortgage, car loan, and credit cards actually cost more the longer it takes you to pay them off. With a cell phone you could do a number of things to reduce the size of your bill and still maintain the obligation to be on contract. The question of ownership is also a factor. If you break the contract on the phone you'll owe a penalty, but that'll be the end of it. AT&T won't come to confiscate your phone while the bank or Rent A Center will take your house, car, or furniture if you still owe them money.
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It definitely is debt,
But I think when most people say I am "In Debt" they mean they have a net worth less than zero and that is seldom the case with mortgage debt.
Secondly for some reason debt has a negative conotation. There is really nothing at all wrong with having cheap secured debt. I could have paid cash for a used car I recently bought, but they offered me 2%. Hard to pass that up when the S&P dividend yield was nearly 2%. So I took on more debt but also increased my investments at the same time.
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ok - just playing a bit of devil's advocate here...
why isn't a monthly rent considered a debt?
Sure, you pay for the current or previous month (depending on your lease) and each time you pay you are 'paid in full' much like using a credit card and paying off the balance in full each month. And most people like to lump these as 'expenses' rather than 'debt'. But from a philosophical standpoint it is money I owe to someone else in monthly installments, and if I don't pay it bad things happen.
For a broader question, why do we make such a distinction between monthly, reoccurring expenses (rent, insurance, utilities, etc) and monthly payments for a loan.
pretty much what i was going to come back with.
its a bit funny to say that a mortgage is debt even though it is actually a finite expense with a defined ending, that you can actually accelerate.
but rent is an expense. even though, its basically a requirement to live (not 100% sure). and has no ending date, since you will always need a place to live, and therefore always have the 'debt' payment, no matter what you do. you cannot pay it off early (other then to prepay), and it will be there every month till death.
IMO, a mortgage in that light is LESS of a debt because you will actually own an asset once the mortgage is paid. and it will stop draining payments out of you after that mortgage term is completed. whereas rent will always be a set payment as long as you need a place to live.
we can argue debts versus expenses any both sides will be right depending on the opinion.
the end game is that BOTH are housing expenses, money going out is an expense.
but a mortgage is a housing expense that has a specific term/preset amount after which the expense is gone.
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dunhamjr, I would argue that you don't get to just make up definitions to words. A debt is something that you must pay back after money was loaned to you. A mortgage is a form of debt, although a very beneficial one to most people. Still, it is debt because it's a dollar amount you must pay back. Rent is not debt because you were never loaned money, it is an expense. Yes, it might be an expense with no sunset but that's still an expense.
The biggest difference between debt an an expense is that you can stop an expense, whereas a debt must be paid back. For example, if I rent a house for $1000/month and the housing market collapses, I can finish paying rent at the end of my term and that's it. Or technically I can stop paying early and just get hit with an early termination fee, which is usually the surrender of the security deposit.
However a mortgage has to be FULLY repaid in order to be satisfied. If I buy a house and have a $1000/month mortgage prior to that 50% drop in home prices, I do not get to just sell the house and move on. Sure, a lot of people sort of did that from 2008-2012 but it still isn't how the process works. The mortgage must be fully repaid in order to be considered fully satisfied. Unlike the rental where you can walk away regardless of the value of the underlying asset, a mortgage is debt because it must be fully repaid. Rentals don't have any loan associated with them, thus there is no "full repayment" to take place. That's the difference between an expense and debt.
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Third, it states that debts are usually repaid with interest. There is no interest going on with rent.
You do say usually- but if no interest (as in rent) is the hallmark of no debt- then is a 0% credit card offer or a 0% car loan (very common) not a debt? Absolutely not- they are incurred expenses that MUST be paid.
Heck, eating at a restaurant where you don't prepay is a debt too...
You are incurring an expense that you must pay back- it's basically a no interest loan. You are in debt to the restaurant until you settle up the bill.
People run tabs at bars- most pay at the end of the night, but there are some places that will run your tab for the week or the month- that is no different than a line of credit, except it is private with the bar.
I'd say unless you prepay on a month to month agreement, rent is definitely debt. You are in a contractual agreement to pay someone, and there are penalties if you don't pay it.
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I'd say unless you prepay on a month to month agreement, rent is definitely debt. You are in a contractual agreement to pay someone, and there are penalties if you don't pay it.
This. I've been thinking up complicated responses but I think this summarizes this (largely philisophical) discussion well. In many cases, you sign a lease for a year or more, promising to pay $X / month in exchange for housing. You are obligated to pay that amount every month for the length of the lease (synonymous with 'term'). If you don't you are in breach of contract. Typically you will loose your security deposit and that will be the end of it, although landlords can and do go after renters who fail to complete their term (depending on the local regulations).
I can make a similar argument with a cell-phone contract. Especially if the phone is subsidized, I agree to pay a certain amount each month until the end of the contract. If I don't the company can take me to collection, and I can be charged additional fees and interest. Practically speaking, I fail to see how it is any different from taking out a $1000 loan from the bank with a 2 year repayment schedule. If I miss payments to the bank I am hit with fees and interest.
Finally, since you have twice brought up the definition aspect, I challenge your definition that 'debt' must only be about money.
A debt is something that you must pay back after money was loaned to you.
A quick search for the definition of 'debt' suggests that it can include money, goods or services owed to an individual, corporation or government, or "an obligation to pay or render something to someone else" as well as "the state of being under an obligation."
Debts do not necessarily have to be monetary in nature. They also do not need to involve interest.
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It is a debt but it isn't all that bad…you lock your housing price if you have a fixed rate, except for taxes and insurance…and with time your home will go up in value usually.
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dunhamjr, I would argue that you don't get to just make up definitions to words. A debt is something that you must pay back after money was loaned to you. A mortgage is a form of debt, although a very beneficial one to most people. Still, it is debt because it's a dollar amount you must pay back. Rent is not debt because you were never loaned money, it is an expense. Yes, it might be an expense with no sunset but that's still an expense.
The biggest difference between debt an an expense is that you can stop an expense, whereas a debt must be paid back. For example, if I rent a house for $1000/month and the housing market collapses, I can finish paying rent at the end of my term and that's it. Or technically I can stop paying early and just get hit with an early termination fee, which is usually the surrender of the security deposit.
However a mortgage has to be FULLY repaid in order to be satisfied. If I buy a house and have a $1000/month mortgage prior to that 50% drop in home prices, I do not get to just sell the house and move on. Sure, a lot of people sort of did that from 2008-2012 but it still isn't how the process works. The mortgage must be fully repaid in order to be considered fully satisfied. Unlike the rental where you can walk away regardless of the value of the underlying asset, a mortgage is debt because it must be fully repaid. Rentals don't have any loan associated with them, thus there is no "full repayment" to take place. That's the difference between an expense and debt.
And I would argue that I am using the definition just fine.
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A debt generally refers to money owed by one party, the debtor, to a second party, the creditor. Debt is generally subject to contractual terms regarding the amount and timing of repayments of principal and interest.[1] The term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.
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Whether the creditor is a bank, in the case of a mortgage. Or the a landlord in the case of a rental. You still have a contract to pay that party X amount at Y time. My lease agreements spell the exact scenario as described above out, and its a rental. Just because the terms are more complex on a mortgage, or lacking interest in the case of a rental... does not mean they are not both equally definable as debts.
As for an expense being stopped. Ok, go rent a house... but stop paying rent 3 months in. How does that work out for you?
Or.
You stop paying the rent expense, because you move. Do you move to the underpass, or are you moving to a new rental?
If you remain a renter, your rental expense is still there until you die, find some method to live rent expense free, or buy a house of your own.
If you are a mortgage holder, you owe someone a debt. You can get rid of that debt by selling the house. Just as you can get rid of a rental expense by no longer renting.
And no. Mortgages do NOT need to be fully repaid to be satisfied. Foreclosures and short sales prove that every day.
If you want to keep the house yes, but the same would be said for staying in a rental unit. You don't pay the rent in full, they kick you out. You don't pay the mortgage in full, they kick you out. Same. Same.
You can walk away from both scenarios. One may be slightly more harmful to your credit for a while. But its very doable no matter mortgage or rental.
I am fine to leave the argument here because we are not likely to convert the others thinking, since both are valid ways to look at the scenario.
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A mortgage is absolutely positively debt. You don't pay, they come get. If you're upside down on the loan as so many were in the bubble, they come get and hand you a bill.
If you have no mortgage and don't pay your property taxes each year they'll come take it away from you as well so in that sense there is no way to own a home and not be in debt whether or not you have a mortgage.
I don't consider my mortgage a debt in the same category as a car loan or a LOC as it's an asset that can be sold for more than the loan is worth and the cost of operating the loan is the same as a rental. I'm just renting from myself.
So saying I'm debt-free and I have a mortgage is completely reasonable to me.
-- Vik
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It doesn't make much sense to me. If I owe somebody money, regardless of what it's for, it's debt. I also don't view a home as an asset like many people do either.
Same here. The "you have to live somewhere" argument that's often trotted out makes no sense to me. You owe money, it's debt, that simple.
I also don't view a house as an asset. They're hard to turn into decent cash in a hurry (you either have to take a big hit or wait a loooong time) and while owned, they suck down resources like the proverbial ethnic person on the ethnic drinking festival days. :-)
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It doesn't make much sense to me. If I owe somebody money, regardless of what it's for, it's debt. I also don't view a home as an asset like many people do either.
Same here. The "you have to live somewhere" argument that's often trotted out makes no sense to me. You owe money, it's debt, that simple.
I also don't view a house as an asset. They're hard to turn into decent cash in a hurry (you either have to take a big hit or wait a loooong time) and while owned, they suck down resources like the proverbial ethnic person on the ethnic drinking festival days. :-)
Hey!! I'm an ethnic person who sometimes drinks on my ethnic festival days!!!
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Nearly all other debt types - consumer, student loans, cars, etc - effectively are post-spending debt. Rarely when they are paid off do you have anything even remotely close to the value of your initial debt.
Mortgages tend to unique debt in that the assets do not depreciate to zero. The debt actually has some value after being paid off.
This is independent of the "rent vs buy" decision.
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Interesting discussion. I agree that debt as only a money obligation is too narrow. I like this definition from businessdictionary.Com:
debt
A duty or obligation to pay money, deliver goods, or render service under an express or implied agreement. One who owes, is a debtor or debitor; one to whom it is owed, is a debtee, creditor, or lender.
From this I think any agreement (contact) you sign that requires you to pay at a set interval (including any auto renew service such as Netflix) is a debt. In the case of a rental agreement the renter is owed space for the rent money they owe and the landlord is owed rent money for the space they owe the renter.
The differences (but i acknowledge - major differences) I see between rent and mortgage is the ease of ending the contract, length/term of contract, and dollar amount of the contract. note not value of - that's something you have to evaluate yourself. Personally I value the mortgage (homeownership) higher than rental contracts.
This was topped on my phone so please forgive any spelling or grammar mistakes.
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I also don't view a house as an asset. They're hard to turn into decent cash in a hurry (you either have to take a big hit or wait a loooong time)
whether something is an asset or not is not dependent on how quickly you can turn it into cash.
just that is can be turned into cash.
again. you can count things however you like.
but not counting a paid off house as an asset seems strange.
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but not counting a paid off house as an asset seems strange.
And a house with a $400K market value and a $200K mortgage is also an asset. It's a $400K asset with a $200K liability attached.
-- Vik
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Of course a mortgage is debt and a house is an asset.
My mortgage doesn't bother me especially as my interst rate is low, it is a small amount and I couldn't rent a two bedroom apartment for what I pay for a four bedroom house. But it is absolutely debt.
My house is absolutely an asset. I can sell it for considerably more than I paid for it. Even if it would be less than I owe for it, the house is,still an asset. But my liability in it is greater than the value of the asset.
It is not a liquid asset, but many very valuable things aren't terribly liquid.
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I think Vikb and Pigeon have gotten as close to the answer as you'll get. There is not disputing that a mortgage is a debt.
BUT
It is a debt against the house first, and only against the person should the proceeds from the house fail to satisfy that debt. So if the house has more equity in it that is owed on the debt, then you have no debt, but your asset is only the delta between equity and obligation. This changes the perspective. It allows for subsequent payments on the debt to be seen as an investment instead of a repayment since you have already accumulated sufficient equity to pay off the debt.
Put another way, as Vikb says, a $400,000 house with $200,000 of debt attached to the house has $200,000 in equity leftover for the owner. The failure to pay that debt forecloses, or forces a sale, of the house. Since you theoretically can sell for a $200,000 profit, you personally have no debt, simple a secured piece of real property to satisfy the debt. So therefore any payments after the equity>debt are investments into the equity.
That explains the removal of interest and taxes as they are unsecured and add no equity. It also explains the difference between rent v. mortgage, as each month a payment is made that does not accrue equity nor allow for appreciation.
I do disagree that a lease is a debt of the entire amount as it is not wholly vested as of the execution. The various exit clauses allow for termination upon agreed upon events in the lease. However, the passage of time without those events occurring therefore vests a new payment on the debt. Legal semantics, yes, but still a perspective.
The simple answer is that classification is relative and subjective. I don't classify my mortgage as a debt because my house is obligated to pay it back if I default. Since the house has more equity than the debt, I personally have an asset since I get the remainder.
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As for an expense being stopped. Ok, go rent a house... but stop paying rent 3 months in. How does that work out for you?
With a mortgaged house, if you stop paying the mortgage, they come after you for the full balance of the mortgage, regardless if the home equity is sufficient to repay the mortgage. Equity is $18,000 short? You still owe all the money including the $18,000.
Sign up for a rental and stop paying rent? Nothing happens financially. It will ding your rental history and you won't get your security deposit back, but nobody can come after you to pay the full 12 months of rent. It's simply not legal. You are NOT required to pay back the 12 months of rent if you move out after only 3 months. In fact I actually called my property management company to ask what happens if I move out early. They said as long as I give them notice, I simply don't get a refund of my security deposit. They can NOT legally come after you and force you to pay the full 12 months or however many months you have remaining. You know why?
Because rent isn't debt.
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They can NOT legally come after you and force you to pay the full 12 months or however many months you have remaining. You know why?
Because rent isn't debt.
In Iowa, if you have a lease, the landlord CAN come after you for unpaid rent if you move out before term- up until the point that a new tenant moves in, and they must show the court that they attempted to find a tenant. But if not tenant is found, you are 100% obligated to pay the debt to them. Because you signed a contract agreeing to pay that amount over a course of a year.
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Because rent isn't debt.
A lease is a contract. A contract can have unavoidable financial liabilities attached and those liabilities are essentially debt that is not realized until the appropriate circumstances outline in the contract occur.
Walking away from a contract does not mean you aren't going to have to pay the attached liabilities. The specific wording of the lease, your local laws and the desire of the property owner to pursue their legals remedies will determine what happens.
-- Vik
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With a mortgaged house, if you stop paying the mortgage, they come after you for the full balance of the mortgage, regardless if the home equity is sufficient to repay the mortgage. Equity is $18,000 short? You still owe all the money including the $18,000.
Not in a non-recourse state. The shortfall risk is held by the lender, not by the mortgagee. The borrower can walk and owe nothing.
http://www.nolo.com/legal-encyclopedia/whats-the-difference-between-recourse-nonrecourse-loan.html
Nonrecourse Loans
With a nonrecourse mortgage loan, the lender cannot do anything other than foreclose on the property. The lender may not obtain a deficiency judgment even if the sale proceeds do not repay the total debt owed on the loan.
Since the lender can't come after you for what is owed, is it still debt? :)
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So what we've learned in this thread is that EVERYTHING is debt including rent and your property taxes (see previous page) and that NOTHING is debt, so long as you have a way to avoid paying it back. Apparently this thread is schrödinger's accounting.
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"Debt free, except for next month's rent!"
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So I'm working hard to pay off the mortgage ahead of time. Because:
- I don't want to pay mortgage debt with money I've saved. It's a fractional drain on the earned compounded interest.
- If I suddenly can't pay my mortgage at some point, as some have already said, I lose the house and everything I put into paying for it
- If you default on a mortgage, it's highly unlikely you'll get another at any reasonable interest rate.
- If you pay off a mortgage, it gives you influence with lenders that may allow you to restructure burdensome future debt.
- If I were to lose my job, I wouldn't easily be able to liquidate the asset and downsize because no one's going to loan me money to buy anything at that point, even if I have money for FIRE
- If my home is paid off and I can divert that income elsewhere, it gives me a huge chunk of money out of every paycheck to push to pre-and post-tax savings like 401k, IRAs and HSAs. If my home were paid off, I could cut my time to FIRE in half!
So there's this element of risk with a mortgage no one seems to talk about, and carrying one while you begin to incur higher risk in other areas of life (health and career) seems to me as foolish a gamble as not saving at all.
So, for me, paying the mortgage off is a very high priority right next to the high savings rate for FIRE.
Now: the fly in my ointment (which I've not mentioned so far) is that while I own and pay for a modest home, it would have been possible to go far more modest - into a double-wide or a single-wide trailer, or even join in on the tiny house movement. But none of those (wonderful) alternatives are available to me so I push on with the choice I have.
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So I'm working hard to pay off the mortgage ahead of time. Because:
- I don't want to pay mortgage debt with money I've saved. It's a fractional drain on the earned compounded interest.
It is a fractional drain on the earned compound interest, but if you invest the money instead of paying off the mortgage you will have a larger principle to earn interest from. This is why, from an economic standpoint it's typically better not to pay of a mortgage earlier, especially if it's at <4%. Your logic here is backwards.
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- If I suddenly can't pay my mortgage at some point, as some have already said, I lose the house and everything I put into paying for it
No... you are still entitled to the equity in your home based on it's resale value. If your house is worth $200k and you owe the bank $50k more (i.e. you have $150k in equity), and then you loose your job and can't pay the mortgage, you don't loose everything. The bank takes over your house, sells it, takes what they are still owed and you get the rest. Sure, it's not the best scenario since the bank has no vested interest in getting the absolute best price it can for the home (since they will get what they are owed regardless) - but it's an oft-repeated fallacy that if you miss your final mortgage payment you loose everything forever.
- If you default on a mortgage, it's highly unlikely you'll get another at any reasonable interest rate.
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True. Sort-of. For a several years, but certainly not forever.
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- If you pay off a mortgage, it gives you influence with lenders that may allow you to restructure burdensome future debt.
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Um... if you don't have a mortgage you aren't dealing with a lender. If you DO have a mortgage then you can restructure future debt. This is strange logic to me... "only by not having a debt can you have influence when thinking about having a debt".
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- If I were to lose my job, I wouldn't easily be able to liquidate the asset and downsize because no one's going to loan me money to buy anything at that point, even if I have money for FIRE
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I agree. But this like an argument for renting. The ability to sell a house is fairly independent of whether you have a mortgage or if you own it in full (with the exception of being underwater, but this is rare for mustachians willing to put up a reasonable down-payment)
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- If my home is paid off and I can divert that income elsewhere, it gives me a huge chunk of money out of every paycheck to push to pre-and post-tax savings like 401k, IRAs and HSAs. If my home were paid off, I could cut my time to FIRE in half![
BUt... to pay off your mortgage early you have to divert money AWAY from savings, particularly to fund things like 401(k), IRAs, HSAs. In fact, this is one of the biggest reasons I can see why you should NOT accelerate mortgage payments. Funding your tax-advantaged accounts now instead of 5, 10 years down the road is far preferable, and gives you the double-advantage of better tax efficiency and more time for those savings to compound. Again, the assumption is that over decades+ you will earn more in your investments than you will pay at 3.x%
If paying off your mortgage gives you some great satisfaction and sense of personal accomplishment, go ahead and do it! Some people prefer to be in the "less-money/less debt" camp. But every one of your argument seems to support not making advanced payments.
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So I'm working hard to pay off the mortgage ahead of time. Because:
- I don't want to pay mortgage debt with money I've saved. It's a fractional drain on the earned compounded interest.
- If I suddenly can't pay my mortgage at some point, as some have already said, I lose the house and everything I put into paying for it
- If you default on a mortgage, it's highly unlikely you'll get another at any reasonable interest rate.
- If you pay off a mortgage, it gives you influence with lenders that may allow you to restructure burdensome future debt.
- If I were to lose my job, I wouldn't easily be able to liquidate the asset and downsize because no one's going to loan me money to buy anything at that point, even if I have money for FIRE
- If my home is paid off and I can divert that income elsewhere, it gives me a huge chunk of money out of every paycheck to push to pre-and post-tax savings like 401k, IRAs and HSAs. If my home were paid off, I could cut my time to FIRE in half!
So there's this element of risk with a mortgage no one seems to talk about, and carrying one while you begin to incur higher risk in other areas of life (health and career) seems to me as foolish a gamble as not saving at all.
So, for me, paying the mortgage off is a very high priority right next to the high savings rate for FIRE.
Now: the fly in my ointment (which I've not mentioned so far) is that while I own and pay for a modest home, it would have been possible to go far more modest - into a double-wide or a single-wide trailer, or even join in on the tiny house movement. But none of those (wonderful) alternatives are available to me so I push on with the choice I have.
Don't numbers 2 & 5 promote the idea that you should save UNTIL you can pay it all off?
#2.- If I suddenly can't pay my mortgage at some point, as some have already said, I lose the house and everything I put into paying for it
#5.-If I were to lose my job, I wouldn't easily be able to liquidate the asset and downsize because no one's going to loan me money to buy anything at that point, even if I have money for FIRE.
These are the two that keep me up at night. So I'm building a "sinking fund" to pay off the mortgage. I may reach a stage where I consider making a lump sum payment if my bank will allow me to recast for free.
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Apparently this thread is schrödinger's accounting.
:D
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I've seen this trend over and over and now I'm really curious. A mortgage is clearly a debt, so why differentiate it from other debts?
Is it because it's a relatively long term?
not judging just trying to understand.
I consider mortgage to be debt.
I just happen to have enough money to pay it off. Meaning I have a positive net worth.
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Mortgages are debt. No question about that. I would never prepay a 30 year fixed rate mortgage sub 4%. If you want to know why visit the 6 pages of fun. http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/
I believe that people get hung up on rules of thumbs, old wives tales, and many other sources of bad information that impacts their financial independence and their net worth. Debt is one of those areas. Debt is a huge blessing if used properly. A 30 year fixed rate sub 4% loan is a blessing from the United States Government. Like saying, Lotto is for people that are mathematically challenged or Lotto is a tax on those that are mathematically challenged, I would say paying off a 30 year fixed rate sub 4% loan is the same as someone who is mathematically challenged. Sure buying a Lotto ticket makes you feel good inside by having the opportunity to win millions. Just like paying off a 30 year fixed rate sub 4% mortgage. People feel like they are doing amazing by saving 4% by getting rid of the evil debt. When they are actually pissing away a huge gift that the government has given those in the US to stimulate the economy. Let's go back to the basics. Paying off a 4% fixed rate loan instead of investing in a diverse portfolio that pays out 7%+ over thirty years and has never paid out less than 4% in the history of the stock market is a bad idea.
So instead of asking why do some people not classify mortgages as debt you should be asking why do people pay off their 30 year fixed rate loans? or why don't people proudly state their 30 year fixed rate loans and interest rate? Having low interest mortgage debt is something to be proud of, we should flaunt it.
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Mortgages are debt. No question about that. I would never prepay a 30 year fixed rate mortgage sub 4%.
Okay, when people say this, do they really mean never, or do they mean at this point in their life? My plan is to have my mortgage paid off by the time I retire so that my expenses are low and so I don't have to make such large withdrawals from my accounts that can create more taxable income. Do I understand the RE game wrong? It's important to note that early retirement for me is not really early so I won't have the choice to just go get another job if the market tanks for a few years. so I'm prepaying my mortgage to a point that it will be paid off when I'm 60 vs when I'm 74. Am I doing it wrong?
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Mortgages are debt. No question about that. I would never prepay a 30 year fixed rate mortgage sub 4%.
Okay, when people say this, do they really mean never, or do they mean at this point in their life? My plan is to have my mortgage paid off by the time I retire so that my expenses are low and so I don't have to make such large withdrawals from my accounts that can create more taxable income. Do I understand the RE game wrong? It's important to note that early retirement for me is not really early so I won't have the choice to just go get another job if the market tanks for a few years. so I'm prepaying my mortgage to a point that it will be paid off when I'm 60 vs when I'm 74. Am I doing it wrong?
I'm betting with you and going for a blended approach. The game changes as we age and have less access to compounded returns. Here's my points:
1) I cannot FIRE with a mortgage or a rent payment. I'll never make a 4% SWR.
2) My mortgage is 3x all my other expenses, combined. On the day I pay off the mortgage, I achieve 4% SWR while still living my "extravagant" lifestyle, even with my clown car habit!
3) If my pool of investment money goes to zero when I die, I win.
4) My wife is not a strict mustachian and may never be. The mortgage is therefore the expense I'm targeting. She can certainly understand the power of paying that off, not some mystic argument for compounding.
5) Remember, mortgages are paid with post-tax dollars. If I could wipe out that expense and push that same money to my 401k pre-tax, then i'm saving another 18-20% that's not going to Uncle Sam.
My plan is to pay off the mortgage in less than 4 years while executing a 50% savings rate. I expect, soon, to make 60% savings rate while still paying the mortgage off on the same timetable.
I need to FIRE by 2020. I'm 53 now, 58 in 2020. I'll not see those awesome compounded returns you people speak reverently about before I FIRE. I'll be dead before that happens. I am too late to the game. My key is to make large savings contributions (dropping into as low a tax bracket as possible) and cutting my cash outflow as much as I possibly can. Low expenses = "virtual rich lifestyle".
Job loss is my biggest risk. If I lose my job via layoff and can't replace the income, paying the mortgage off in 2-4 years will have served me well. I could be a stock boy at a big-box store just for the bennies, eat lunch every day at Bojangles and still keep my current standard of living.
Why does no one seem to notice that MMM has no mortgage?!??!
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A 30 year fixed rate sub 4% loan is a blessing from the United States Government.
Yep. It doesn't happen anywhere else in the world because its crazy. If I lived in the US I would save all my money into investments because you are basically being charged the rate of inflation.
The US government and of course the people living there will pay for it but hey you had better be on the right side of the trade than the wrong side.
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1) I cannot FIRE with a mortgage or a rent payment. I'll never make a 4% SWR.
If you can save up enough to pay off your mortgage plus enough to service your other expenses (which is what you are proposing to do), then you can also FIRE while carrying a mortgage (or having a rent payment). Think of it this way: the portion of your stash that you would be using to pay off your mortgage will instead stay invested and be used to service the mortgage (or, if you sold your house, pay your rent).
If the remaining life to maturity of your mortgage is not very long, this would not make sense to do. But for anyone with anything close to 30 years left (and a low interest rate), it makes very much sense. (And anyone with an existing mortgage with a short remaining life to maturity who wishes to put themselves in that situation can do so by refinancing today.)
2) My mortgage is 3x all my other expenses, combined. On the day I pay off the mortgage, I achieve 4% SWR while still living my "extravagant" lifestyle, even with my clown car habit!
See response to #1 - paying off the mortgage isn't necessary to achieve this result.
3) If my pool of investment money goes to zero when I die, I win.
Ok, don't see how this works in favor of paying off the mortgage. If your point is that you might be leaving money on the table by prepaying a mortgage, then I agree, and that's the entire point being made by the "invest instead of prepay" camp.
4) My wife is not a strict mustachian and may never be. The mortgage is therefore the expense I'm targeting. She can certainly understand the power of paying that off, not some mystic argument for compounding.
Ok, this may be a non-mathematical reason that you should prepay your mortgage. Other valid reasons exist, like the psychological benefit you may obtain by owning your home free and clear. But math is not one of those reasons.
5) Remember, mortgages are paid with post-tax dollars. If I could wipe out that expense and push that same money to my 401k pre-tax, then i'm saving another 18-20% that's not going to Uncle Sam.
I don't follow this. You could be taking advantage of all the tax-deferral options *now* instead of diverting extra funds towards prepaying the mortgage.
Job loss is my biggest risk. If I lose my job via layoff and can't replace the income, paying the mortgage off in 2-4 years will have served me well. I could be a stock boy at a big-box store just for the bennies, eat lunch every day at Bojangles and still keep my current standard of living.
In my view, if you are worried about job loss, then *not* prepaying the mortgage is a better strategy. Because prepayments don't reduce your amortization until the entire mortgage is paid off, they do not help you if you lose your job before the mortgage is paid off in full (if you lose your job, you're still going to have to keep sending in that same monthly mortgage check every month, regardless of whether you've been prepaying up the wazoo). And once you've accumulated enough that you *can* pay the mortgage off in full, you don't have to worry about loss of employment income to service the mortgage, because you now have a big pile of investments to do it for you.
Why does no one seem to notice that MMM has no mortgage?!??!
I think most people do notice. Prepaying and investing in lieu of prepaying are both valid options. Pick the one that makes the most sense to you because it makes the most sense to you, not because it's the one our cult leader opted for.
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I have enough income we max all tax adv accounts and have to go taxable. I do not pay more on my mortgage its 3% rate is far lower than the avg market gains. And it would push out FIRE 3-4 years if I paid it down then invested. Assuming your jobs are stable there is little to no reason to pay off a low interest loan of any kind including a house as this while still being debt is very good debt.
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5) Remember, mortgages are paid with post-tax dollars. If I could wipe out that expense and push that same money to my 401k pre-tax, then i'm saving another 18-20% that's not going to Uncle Sam.
I don't follow this. You could be taking advantage of all the tax-deferral options *now* instead of diverting extra funds towards prepaying the mortgage.
I have precisely ONE pre-tax or tax-deferred savings option, my company-sponsored 401k, and I have max'ed that out (15% + $5k catch-up).
You all talk about these amazing, ultra-high-yield investment options that I'm passing up in favor of paying off my "measly low interest rate" mortgage that's costing me over $330/month every month.
Everyone's acting like I've got some huge sum of money that I can pre-capitalize an investment with that's going to beat the heck out of paying off the mortgage.
I've even tried the Betterment experiment about the same time MMM did and it's earning 3.6%. Percentagewise, that "looks better" than what I'm earning on my mortgage, but my mortgage is compounded DAILY and capitalized up-front. My wimpy little Betterment's "3.6%" is bogus because I'm funding it with post-tax money and I'll be taxed on the earnings whenever I realize those earnings.
I'll never be taxed on the "earnings" from paying off my mortgage.
I've never, ever, ever had an investment that's earned me over $300/month no matter how much money I've thrown at it. But that's definitely what I'm paying up-front on my mortgage, every month. Have I borrowed money from a company that's some kind of crazy loan-sharking deal? What's the dollar amount per month all you "don't pay off the mortgage" people are paying to borrow your jumbo $300k home loans?
So pony up peeps. I'm getting tired of the abstract blah blah blah. You keep talking interest rates like that's all that matters. No one seems to talk about daily compounding vs. what most investments can provide. I'm paying attention to actual dollar cost and monthly cash flow. The interest rate on the mortgage is the last, biggest cash flow sink I have to attack on my way down to frugal living and 4% SWR.
All of you seem as insane to me as I seem to you. How are we gonna be able to break this logjam? Do I start a case study on my mortgage vs. savings options?
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Other valid reasons exist, like the psychological benefit you may obtain by owning your home free and clear.
The quoted reason often appears in these threads, but I don't think it makes sense.
In countries like the USA and Canada, it is impossible to own land free and clear. The government owns the land. You merely own title to an estate in the land.
The government can reclaim "your" land at any time (if authorised according to legislative and constitutional considerations (such as the takings clause)). State agents can also enter your land, subject again to the law. In addition, even your interest in the structure on the land (i.e. the house) is not unrestricted, and is subject to many laws and regulations (such as building codes). Your interest in the soil under the land is also heavily regulated (for example, you can't just remove any gas pipelines that might be under there). Your interest in the air above the land is also limited.
Furthermore, the general criminal law applies on "your" land, including (in the US) regulating what substances you can inject into your body, and what plants you can cultivate. Moreover, activities on "your" land may constitute tortious conduct, or be otherwise actionable in the civil courts.
I'm not saying that there is anything wrong with the above. But it's very clear that you cannot own land free and clear in western countries.
Paying off the mortgage may remove the bank's interest in the land, but it does not cause you to own the land "free and clear". Given that it's not possible to own the land free and clear, I do not understand why a desire to achieve this impossible objective is something that motivates people to make financially suboptimal decisions. The existence of property tax means that even after obtaining clear fee simple title, you still have to pay a form of rent to the government!
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The interest rate on the mortgage is the last, biggest cash flow sink I have to attack on my way down to frugal living and 4% SWR.
Compounding works for investments too. If you believe in a 4% SWR, and your mortgage is <4%, you're delaying your FI date by prepaying the mortgage.
There's already a thread on the math involved. The math is clear.
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So pony up peeps. I'm getting tired of the abstract blah blah blah. You keep talking interest rates like that's all that matters. No one seems to talk about daily compounding vs. what most investments can provide. I'm paying attention to actual dollar cost and monthly cash flow. The interest rate on the mortgage is the last, biggest cash flow sink I have to attack on my way down to frugal living and 4% SWR.
All of you seem as insane to me as I seem to you. How are we gonna be able to break this logjam? Do I start a case study on my mortgage vs. savings options?
You are misunderstanding the math behind mortgage loans. Daily compounding doesn't matter, and back-loaded amortization of principal doesn't matter. If the annual percentage rate on your mortgage is 4%, and you can earn a 4.1% on investments, then you are better off investing than prepaying your mortgage (this ignores tax considerations, which usually work in favor of investing over prepaying to make prepaying an even more suboptimal choice). And if you're not able to earn a return on investment north of 4% over a 30 year time span, then we're all in a lot of trouble because our retirement plans are not going to work.
You don't need a huge sum of money to do better by investing than prepaying. Every dollar that you deploy towards prepaying the mortgage can instead be deployed towards investments. If the investments outperform the mortgage rate over the life of the mortgage, you're better off investing. It's as simple as that. But, according to your own plan, you will have a huge sum of money that you can invest instead of prepaying--the same huge sum of money that you're planning to use to pay off your mortgage in full.
What's your mortgage interest rate and remaining life to maturity? It's easy to plug the numbers into cfiresim and see how much money you may be leaving on the table based on historical data.
The quoted reason often appears in these threads, but I don't think it makes sense.
I share your sentiment, but I can understand why some people derive psychological pleasure from owning their home free and clear of the bank's security interest in the property. As long as they recognize the economic price they may be paying for that pleasure and do so with their eyes open, I have no problem with it.
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^^^^ Brooklynguy hit the nail on the head. I don't understand how the members of this forum are comfortable with the whole concept behind retiring early the 4% SWR but yet still pay down mortgages early with interest rates sub 5%. the 4% SWR only works if your investments avg 4% that you are with drawing plus the inflation from that year. So not even counting tax breaks it seems many are comfortable assuming paying down a mortgage at 5% is better than getting the 7% inflation adjusted avg gains.
As MMM said in one post its not a bad problem to have. and neither choice is BAD... but one is mathmatically worse, based on history. Which is what all of this entire theory is based on the HISTORY of the market. So dont go saying I dont have a crystal ball and can't see the future. You're right no one can but the whole premise behind retiring early is based on historical market returns that beat all current mortgage rates assuming you have good credit.
But the simple fact is as long as your job is steady and you dont have a risk of losing that then you're going to come out way behind by paying your low interest loans down vs investing that money.
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This has been an interesting discussion. Here is another perspective - remember I live in Canada (no income tax deductions for mortgage interest, no long-term fixed interest rates).
I am retired. I have a mortgage. I chose to put available funds into paying down higher interest debt, and am working my way to no debt other than the mortgage (why I have this debt is a whole other story, let's just remember that it was not from crazy consumer spending). The money that is going to other debt right now will go to the mortgage when that debt is gone. I have a major asset that I hope to sell this year that will also go to the mortgage. I have enough income that paying the mortgage and other associated house costs is not a problem.
I have investments that I could sell that would pay off the mortgage. Why don't I do that? Because the income from them more than pays the mortgage, and if I sold them I would be paying major capital gains that year on my income taxes. Net loss. Plus the investments are such that I am only using the income they generate, I am not selling them as part of my income, so their market value is not a major concern to me. I could easily die (in 30 years) with the same investments in place.
For me, doing the arithmetic means that I have a mortgage. What works in some circumstances won't work in others. And yes, I have been mortgage free (for 2 of the 4 houses I have owned over my life) and it is a lovely feeling. But having enough income to cover all expenses and then a bit extra is also a lovely feeling.
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Every dollar that you deploy towards prepaying the mortgage can instead be deployed towards investments.
I'm dealing with this choice right now as I am about to sign a new 5yr mortgage [Canada]. Part of me would like to knock the mortgage down very fast to get rid of my only debt and my biggest annual living cost, but the opportunity cost of not being invested is just too high.
My mortgage is a bit over 2% [variable rate]. So it's not hard to see the benefit of being in the market. That rate can climb higher, but I would be surprised if it doubles over the next 5yrs.
-- Vik
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5) Remember, mortgages are paid with post-tax dollars. If I could wipe out that expense and push that same money to my 401k pre-tax, then i'm saving another 18-20% that's not going to Uncle Sam.
I don't know what point you are trying to make:
If you are already maxing your 401k there is no benefit to paying off your mortgage.
Those post tax dollars do much better in taxable accounts than they do getting rid of minimal interest.
If you aren't already maxing your 401k. Do that. Don't wait until the mortgage is paid.
Now, if you have a high interest rate where your rate of return in the market is likely to be lower than the mortgage, then pre-pay it. But sub 4? It makes no sense.
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5) Remember, mortgages are paid with post-tax dollars. If I could wipe out that expense and push that same money to my 401k pre-tax, then i'm saving another 18-20% that's not going to Uncle Sam.
I don't know what point you are trying to make:
If you are already maxing your 401k there is no benefit to paying off your mortgage.
Those post tax dollars do much better in taxable accounts than they do getting rid of minimal interest.
If you aren't already maxing your 401k. Do that. Don't wait until the mortgage is paid.
Now, if you have a high interest rate where your rate of return in the market is likely to be lower than the mortgage, then pre-pay it. But sub 4? It makes no sense.
Yes so if you're not maxing your 401k lets say you have an extra 5k you're putting towards your mortgage. you could be maxing your 401k with that 5k making it instantly 18-20% more valuable than going to your mortgage not even accounting for gains.
Some people.
Plus your 401k has a max... you cant make up for all those missed fundings b/c you were paying down your mortgage vs maxing it.
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5) Remember, mortgages are paid with post-tax dollars. If I could wipe out that expense and push that same money to my 401k pre-tax, then i'm saving another 18-20% that's not going to Uncle Sam.
I don't follow this. You could be taking advantage of all the tax-deferral options *now* instead of diverting extra funds towards prepaying the mortgage.
I have precisely ONE pre-tax or tax-deferred savings option, my company-sponsored 401k, and I have max'ed that out (15% + $5k catch-up).
You all talk about these amazing, ultra-high-yield investment options that I'm passing up in favor of paying off my "measly low interest rate" mortgage that's costing me over $330/month every month.
Everyone's acting like I've got some huge sum of money that I can pre-capitalize an investment with that's going to beat the heck out of paying off the mortgage.
I've even tried the Betterment experiment about the same time MMM did and it's earning 3.6%. Percentagewise, that "looks better" than what I'm earning on my mortgage, but my mortgage is compounded DAILY and capitalized up-front. My wimpy little Betterment's "3.6%" is bogus because I'm funding it with post-tax money and I'll be taxed on the earnings whenever I realize those earnings.
I'll never be taxed on the "earnings" from paying off my mortgage.
I've never, ever, ever had an investment that's earned me over $300/month no matter how much money I've thrown at it. But that's definitely what I'm paying up-front on my mortgage, every month. Have I borrowed money from a company that's some kind of crazy loan-sharking deal? What's the dollar amount per month all you "don't pay off the mortgage" people are paying to borrow your jumbo $300k home loans?
So pony up peeps. I'm getting tired of the abstract blah blah blah. You keep talking interest rates like that's all that matters. No one seems to talk about daily compounding vs. what most investments can provide. I'm paying attention to actual dollar cost and monthly cash flow. The interest rate on the mortgage is the last, biggest cash flow sink I have to attack on my way down to frugal living and 4% SWR.
All of you seem as insane to me as I seem to you. How are we gonna be able to break this logjam? Do I start a case study on my mortgage vs. savings options?
Hi Mefla
I see these forums as a place for people to express their ideas and learn from one another, so I'm happy to try to illustrate the points I and others are making a bit more clearly, and also try to understand your counter-arguments a bit better. If you can give a few numbers (mortgage rate, home value/equity/amount owed, monthly applied to mortgage) I'd be happy to present a few scenarios that I think could illustrate why I believe paying down the mortgage is sub-optimal under almost every condition (job loss, post-retirement, recession, etc).
For now, here's a very simplistic scenario that still illustrates the point. Imagine you have $100k mortgage (3.5%, monthly fixed payment of $449($291 interest)) and you receive $100k post-tax from an bonus, inheritance, etc. You could either 1) pay off your mortgage or 2) put the $100k into a low-cost index fund like Vanguards SP500 (VFINX). For accounting simplicity many people choose to have a dedicated 'home-equity' fund.
scenario 1 you have no mortage, but you have no money left over. It's easy to understand and this is why it appeals to a lot of people.
Scenario 2 you still carry the $100k mortgage, but you have $100k in the index fund. Following the 4% rule, you can safely withdraw $4,000/year ($333/month) from this fund, forever, with very little chance it will run out. In fact, in 20 years no historical period would have failed to pay out 4%/year, increasing with inflation. Odds are, after 20 years you will have substantially more money in that fund than you started with.
IMO there's a few key points to why this scenario is so much more powerful
i) from day 1 your investment will pay out more than the interest you pay on your mortgage. Instant win. Plus, ever month it gets better.
ii) your mortgage is fixed in today's dollars. That means your monthly payments are eaten away by inflation. In just 5 years your $449 payment will be the equivalent of just $395 in today's dollars (given 2.5% inflation). In ten years it will be $349.
iii) in contrast, the 4% rule adjusts for inflation. This means in just 5 years you will be withdrawing $4,525. In ten years it will be $5,120.
iv) you can claim the mortgage interest deduction on your taxes. This may not help you now when you are still working, but can be a powerful (and annual) deduction in retirement.
But wait, for you it gets even better. we've shown how, by using the 4% rule and investing it you will be able to withdraw more on day 1 than you will pay on interest, and because the mortgage is fixed in today's dollars (and the 4% WR increases with inflation) your total payment will very quickly be covered by the investment. Because your goal is to increase your assets and not pay off the mortgage early you will get to draw increasingly less from this investment (the WR will go down). This practically guarantees that the fund will never be depleted. After 30 years, the mortgage will be paid off. At this point you will have an investment that's worth several time more than when you started.
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Hey nereo
There are a few points I have which might counter with what you wrote in your post. I will try express myself clearly. I am also giving some general comments not necessarily related to your post but to the things discussed in the thread in general.
1. If you had no money and no debt, would you lend money to put them in stocks/funds?
My personal answer to this is no. Stocks/funds come with a risk and I would not be willing to lend money to invest, even if the interest is as low as 2-3%. There is no guarantee I would beat that rate in the stock market, so I would rather prefer to use pure savings for investments. Hence, I would rather pay down my debts rather than postpone those payments in order to invest in stocks.
There is no right or wrong here. You need to figure out what is right for you. We all have different risk thresholds.
2. Your home is not an asset. It is a liability.
An asset is something that pays you, just like an apple tree growing apples or a stock paying dividends. A liability is something that costs money. Even if mortage free, your house still needs maintenance, property tax, electricity etc. Therefore it is a liability. A house becomes an asset if you can make a profit from renting it out.
A home becomes an asset if you can sell it and have no need to get a new home (liability).
Does it also become an asset if you can make money on changing homes (e.g. downsizing or timing the market)? I'm not quite sure, because changing homes still leaves you with liabilities and the future is only predictable in the short term.
3. Debt is a liability, because it costs money
Debt is a liability because it must be paid back. Debt in itself is not the cost. The interest is the cost. If you took out a $100k mortage to buy a $100k rental unit, and every year you clear $10k on the mortage, this is not a cost to you. It is transferring money from your bank account into your asset (rental unit). The cost is whatever interest you have to pay in addition to the downpayments. Once you get rid of the debt there is no liability, just a debt-free asset.
If you take out a mortage to buy yourself a home, you just doubled up on your liabilities. The debt comes with interest costs. The home also comes with costs. Both the debt and the home are liabilities. Both those liabilities need to be taken into account when comparing whats more efficient between buying and renting.
4. Rent is a liability, but not necessarily debt
Why is it not debt? Because it is assumably a liability that you can get rid of at any time by moving home to your parents, become a homeless or live in the wilderness. The only scenario I would agree rent = debt is when you sign a 1-2-3 year lease AND there is no escape from paying that whole lease. The only debt in the case of renting is what it will cost you to escape from the lease; usually 3 months worth of rent or so.
5. Are liabilities debt?
The reason I ask is because it seems some of you haven't thought about the difference between debt, liabilities and assets.
I also ask because people put different meaning behind those words, just like the difference between expense and cost.
A liability is something that costs you money. If you have a phone, it is going to cost you money. If you eat at a restaurant it is going to cost you money. Is it therefore a debt? I'd say: Any reoccurring liabilities that takes considerable time to get rid of is a form of debt, and the debt is then measured in the sum of all those liabilities.
Rent is therefore by definition a debt, but only measured by the total sum of liabilities you have, which is usually 3 months worth of rent. Because of the insignificance of 3 months worth of rent I don't consider it a debt personally.
Thought experiment:
You need food and food costs money. Is food a liability? A quick estimate suggests I will spend $200k worth of food for the remainder of my life. Would it therefore be correct to say I have a (food-related) debt of $200k because that is the sum of all liabilities in this category? I say no, because food is a need that cannot be escaped unless I choose to die. Housing as a liability is a need that theoretically can be escaped. The liability of having children, caring for your elderly parents, paying for shoes and clothes can also be considered escapable for the less civilized. :) Therefore, those liabilities are not debt.
This is just my line of thinking that I am presenting to you. Maybe it will serve as a supplement to Meflas points and help you and others understand them better. Related to mortage/housing, I know the housing market has a tendency to go upwards and make home owners more wealthy. I know we have something called inflation which reduces the value of debt over time. These things work well together for people who know how to take advantage of it and I have no problem seing the logic behind your points as well.
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Sure, you get super shady deals like Rent-A-Center where they claim they're renting appliances to people but it's functionally an illegally high interest rate loan.
And there's the distinction. Most if not all debts come with an interest rate. The difference between renting, a cell phone contract, and a mortgage is the first two are known fixed amounts. A mortgage, car loan, and credit cards actually cost more the longer it takes you to pay them off. With a cell phone you could do a number of things to reduce the size of your bill and still maintain the obligation to be on contract. The question of ownership is also a factor. If you break the contract on the phone you'll owe a penalty, but that'll be the end of it. AT&T won't come to confiscate your phone while the bank or Rent A Center will take your house, car, or furniture if you still owe them money.
The interest is baked in to your payment. It's just not called interest as a line item. But it's margin either way.
If we didn't place value judgments on debt, then none of this would matter. I'd rather owe $10,000 on my mortgage than debt-free with a $800/mon car lease over 5 years.
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1. If you had no money and no debt, would you lend money to put them in stocks/funds?
My personal answer to this is no. Stocks/funds come with a risk and I would not be willing to lend money to invest, even if the interest is as low as 2-3%. There is no guarantee I would beat that rate in the stock market, so I would rather prefer to use pure savings for investments. Hence, I would rather pay down my debts rather than postpone those payments in order to invest in stocks.
There is no right or wrong here. You need to figure out what is right for you. We all have different risk thresholds.
The idea that investing in lieu of prepaying cheap, long-term, fixed rate debt is "risky" focuses (myopically, in my view) on only one of many "risks."
Yes, it is true that there is no "guarantee" that your investments will outperform the loan rate, no matter how low the interest rate. By prepaying the loan, you lock in returns equal to the loan rate and completely avoid the risk of coming out behind by investing instead of prepaying.
However, by doing this, you are taking on different risks, the risks of experiencing one or more of a host of related bad outcomes: working longer than necessary, running out of money, being forced to find supplemental income and/or cut expenses, etc. etc. etc.
Historically, with mortgage rates like those available today, the risk of coming out behind by investing in lieu of prepaying is less than 5%, while the risk of coming out behind by prepaying in lieu of investing is greater than 95% (in each case, generally speaking, and depending on your specific variables such as asset allocation).
It never ceases to amaze me that the same people on these boards who parade MMM through the town square for revealing the "shockingly simple math behind early retirement" and gleefully plan their own early retirements in reliance on the 4% rule reject the idea of investing in lieu of prepaying cheap, long-term, fixed rate date as "overly risky," even though it relies on the very same underlying assumptions. If you believe in the validity of a 4% SWR, then you should necessarily believe in the optimality of investing instead of prepaying mortgage with rates like those available today.
Bjorn, you say you would not choose to carry debt even with an interest rate as low as 2% because it is too risky. I would argue that, unless you have already accumulated more than enough assets to support your expenses for the rest of your life by any reasonable standard, it is riskier to prepay cheap, long-term, fixed rate debt with today's sub-4% rates (let alone 2%) than it is to invest the loan proceeds, primarily because by doing so you are assuming the risk of being eaten alive by inflation without the mitigating inflation hedge provided by carrying the debt.
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on a different post a member mentioned using CfireSim trying to prove that in his situation paying cash for a house in retirement was less risky than carrying a mortgage. which was easily debuncted upon entering the information correctly. So in retirement lets take this scenario
Person A & B both retire with a networth of 1.2MM
Person A 1MM in investments 0.2MM in house
Person B 1.2MM in investments has 0.2MM mortgage on a house worth 0.2MM
Person A has a 93.0% success rate at 4% SWR
Person B has a 93.9% success rate at 4% SWR with a 30 year mortgage payment of 11457 annually.
ITS LESS RISKY SO STOP USING THE ARGUMENT THAT PAYING OFF LOW INTEREST DEBT IS LESS RISKY ... IT ISNT!!
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You are both right and I agree in theory, because you can't argue with historical returns and statistics, especially when assuming a 4% SWR would last forever. But in practice, being frugal and retiring early is all about reducing your expenses because that is what is easier to influence. Reducing debt reduces your immediate expenses and therefore has an everlasting positive effect on cash flow. I see being debt free as an essential part of feeling free and financially independent.
boarder42, how would the following scenario turn out:
Person A invests 1.2MM.
Person B takes a loan of 4.8MM and invests the whole sum of 6MM.
I'm not saying person A is more likely to succeed with a 4% SWR. But I'd say person B is taking on quite a lot of risk and I'd feel more free and independent if I was in person A's shoes. If the investments go to hell, person A could work part time to support his lifestyle, while person B would probably have to work full time many years to clear the debt. Person A could "start over" and make a new nest egg if desireable, while Person B would be a debt slave for the rest of his life.
Even in your scenario I would rather be in person A's shoes. I don't have any theory to tell you what's best, I just know it would be best for me.
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2. Your home is not an asset. It is a liability.
An asset is something that pays you
My opinion is that this belief is incorrect. How much would you pay to rent if you didn't own your house ? So rent saved less holding costs equals the financial benefit of owning your house in an income versus expenses breakdown. It could be therefore an asset in an ingoing and outgoing fashion simply because the cost of renting is the amount that your house pays you.
Note that this excludes any appreciation of your house.
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I disagree, because thats like saying "I am saving x amount of $ from living in this smaller house instead of that huge one, hence it is an asset". It isn't. You're still paying for it. Its a liability, albeit a smaller one and yes you are saving money versus renting but it is still a liability because there is no one paying you for owning that house. It is you who is paying to own it and live there.
I guess we disagree on what an asset really is:)
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I disagree, because thats like saying "I am saving x amount of $ from living in this smaller house instead of that huge one, hence it is an asset". It isn't. You're still paying for it. Its a liability, albeit a smaller one and yes you are saving money versus renting but it is still a liability because there is no one paying you for owning that house. It is you who is paying to own it and live there.
This is nothing at all like what I was stating.
I guess we disagree on what an asset really is:)
I don't think that this is the issue at all. I also think you contradicted yourself here.
yes you are saving money versus renting
Economically you are receiving a financial benefit equivalent to the rent on the house.
If you own a house the financial benefit every week is equal to the amount of rent you would pay less any holding costs. That is the only statement that makes economic sense. You could flip the situation pretty easily so that its makes sense. If you owned the house and rented it to someone what would it be worth to you - the answer has to be the amount of rent you are paid less any holding costs.
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You are both right and I agree in theory, because you can't argue with historical returns and statistics, especially when assuming a 4% SWR would last forever. But in practice, being frugal and retiring early is all about reducing your expenses because that is what is easier to influence. Reducing debt reduces your immediate expenses and therefore has an everlasting positive effect on cash flow. I see being debt free as an essential part of feeling free and financially independent.
boarder42, how would the following scenario turn out:
Person A invests 1.2MM.
Person B takes a loan of 4.8MM and invests the whole sum of 6MM.
I'm not saying person A is more likely to succeed with a 4% SWR. But I'd say person B is taking on quite a lot of risk and I'd feel more free and independent if I was in person A's shoes. If the investments go to hell, person A could work part time to support his lifestyle, while person B would probably have to work full time many years to clear the debt. Person A could "start over" and make a new nest egg if desireable, while Person B would be a debt slave for the rest of his life.
Even in your scenario I would rather be in person A's shoes. I don't have any theory to tell you what's best, I just know it would be best for me.
This situation is not possible at the interest rate you will receive on a house therefore can't and should not be considered.
Your expenses are the same if you pay 200k this year for a house vs 200k over 30 years for a house from the 200k standpoint your expenses over 30 years are the same... BUT technically you have just reduced your expenses thru taxes by paying the 200k over 30 years while investing that balance. So in theory your expenses over 30 years are lower if you go with a 30 year mortgage the day you retire vs a lump sum cash purchase of a house. ie (you can and should refi your house the day you retire to a 30 year loan assuming rates are still what they are AND get the cash out to invest.) Your net expenses over those 30 years will be lower than having that 200k tied up in a house.
So what have we learned.
1. assuming a 4% SWR works, at today's rates don't pay off your home in fact you should take out a larger loan at retirement to maximize your likelihood of success
2. Mortgages are inherently less risky than cash purchases of homes. (eye opener for many)
3. This only works if your mortgage payment keeps you in the 15% bracket, if it doesn't then you may come out behind due to LTCG and QD taxes
4. this assumes a 75/25 stock to bond split
5. An understanding that your house even if paid off is technically an expense costing you money each year by having money tied up in it.
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I disagree, because thats like saying "I am saving x amount of $ from living in this smaller house instead of that huge one, hence it is an asset". It isn't. You're still paying for it. Its a liability, albeit a smaller one and yes you are saving money versus renting but it is still a liability because there is no one paying you for owning that house. It is you who is paying to own it and live there.
I guess we disagree on what an asset really is:)
Bjorn, I'd say that you're using "asset" where I'd use "investment". Cash doesn't bring money in (which you've said is your definition of an asset, several times), but you'd be hard pressed to find anyone who wouldn't call it an asset. Cash is not an investment. Similarly, there are many depreciating assets. An asset just represents the positive side of a balance sheet. Liabilities are debts (including mortgages). I'd classify mortgage as a debt, but a house is an asset that backs that debt. So a home is an asset and a mortgage is a liability.
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Because if someone says "I'm debt free" you have to be a pedantic asshole to respond with "nah uh, you have to pay rent next month" or "what about your mortgage?"
I don't think many people dispute that a mortgage is a debt/liability/whatever. But the context in which most people say "I'm debt free" excludes this specific kind of debt.
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2. Mortgages are inherently less risky than cash purchases of homes. (eye opener for many)
Why?
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I don't think many people dispute that a mortgage is a debt/liability/whatever. But the context in which most people say "I'm debt free" excludes this specific kind of debt.
oh goody - this should take us right back to the beginning of this thread. If you have a mortgage, and especially if it's a particularly large one with many years remaining, it's hard for me to think "oh certainly, this person is debt free!" Compound this with the now-common practice of 'mortgage refinancement' to pay for other things (tuition, renovation projects, even vacations).
An example: My parents are retired, have lived in the same home for 36 years, and have a mortgage. The only reason they still have a mortgage is because they refinanced to help pay for tuition for their children (which I am eternally grateful for) and to raise capitol so that my father could take over his partner's practice when he wanted to leave. My father would be the first to admit that he's both retired and carries a lot of debt (over $200k at 3.x%).
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2. Mortgages are inherently less risky than cash purchases of homes. (eye opener for many)
Why?
Because, with today's super-low mortgage rates (currently 3.25% fixed 15yr) you are in essence 'locking in' a rate of return of just 3.25% for that money, *and* paying it all in today's dollars vs. utilizing inflation. That's a very low bar to overcome.
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2. Mortgages are inherently less risky than cash purchases of homes. (eye opener for many)
Why?
Because, with today's super-low mortgage rates (currently 3.25% fixed 15yr) you are in essence 'locking in' a rate of return of just 3.25% for that money, *and* paying it all in today's dollars vs. utilizing inflation. That's a very low bar to overcome.
Gotcha, I was think of "risk" in the incorrect context.
I guess the decision of which way to go with your mortgage comes down to what your situation is. For my situation and goals, taking the safe bet (paying off the mortgage as quickly as possible) is going to get me where I want to be faster than if I were to invest it elsewhere.
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2. Mortgages are inherently less risky than cash purchases of homes. (eye opener for many)
Why?
Because, with today's super-low mortgage rates (currently 3.25% fixed 15yr) you are in essence 'locking in' a rate of return of just 3.25% for that money, *and* paying it all in today's dollars vs. utilizing inflation. That's a very low bar to overcome.
Gotcha, I was think of "risk" in the incorrect context.
I guess the decision of which way to go with your mortgage comes down to what your situation is. For my situation and goals, taking the safe bet (paying off the mortgage as quickly as possible) is going to get me where I want to be faster than if I were to invest it elsewhere.
This is 100% incorrect. the only situation where this benefits you assuming you plan to FIRE is if a mortgage pushes you into the 25% tax bracket with spending... if it does not it is similar to putting your money in taxable accounts vs tax deferred. You THINK you're doing it better and being less risky but you are in fact not. I would love for you to describe your situation if it doesnt meet one of these criteria works.
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ITs so funny people think they are being safe paying off their mortgage when in fact they are doing the opposite.
assuming youre in the US with a low interest mortgage
YOU ARE BEING LESS SAFE
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Why do people keep using 2-3% interest rates on mortage as a benchmark at the same time as using historical returns on stocks and inflation? Wouldn't it be more sensible to use historical mortage rates? Todays situation is quite unique: we have historicalle low mortage rates, and as a consequence stock markets and asset classes are inflated. In light of this discussion, should we always assume there will be inflation?
If you "believe" in a 4% SWR, wouldn't it be sensible to assume historical debt rates and plan from that?
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This is 100% incorrect. the only situation where this benefits you assuming you plan to FIRE is if a mortgage pushes you into the 25% tax bracket with spending... if it does not it is similar to putting your money in taxable accounts vs tax deferred. You THINK you're doing it better and being less risky but you are in fact not. I would love for you to describe your situation if it doesnt meet one of these criteria works.
How can you say that I'm wrong when you don't know any of the details?
I would love to describe my situation to you but I'm pretty sure you're more interested in being right than you are in offering actual advice.
How is it "less safe" to pay off your mortgage when your other choice is to invest in the stock market?
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This is 100% incorrect. the only situation where this benefits you assuming you plan to FIRE is if a mortgage pushes you into the 25% tax bracket with spending... if it does not it is similar to putting your money in taxable accounts vs tax deferred. You THINK you're doing it better and being less risky but you are in fact not. I would love for you to describe your situation if it doesnt meet one of these criteria works.
How can you say that I'm wrong when you don't know any of the details?
I would love to describe my situation to you but I'm pretty sure you're more interested in being right than you are in offering actual advice.
How is it "less safe" to pay off your mortgage when your other choice is to invest in the stock market?
The same way everyone here expects to retire with a 3.5% to 4% SWR. If you believe that works then its smarter to keeper more captial liquid. It gives you much more flexibiity than putting all that money into one asset that just keeps up with inflation. and not in theory not IMO ... based on historical data the act of paying down a low interest rate mortgage in the US exposes you to more risk than investing the money. which is the same data the whole concept of FIRE is based on
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This is 100% incorrect. the only situation where this benefits you assuming you plan to FIRE is if a mortgage pushes you into the 25% tax bracket with spending... if it does not it is similar to putting your money in taxable accounts vs tax deferred. You THINK you're doing it better and being less risky but you are in fact not. I would love for you to describe your situation if it doesnt meet one of these criteria works.
How can you say that I'm wrong when you don't know any of the details?
I would love to describe my situation to you but I'm pretty sure you're more interested in being right than you are in offering actual advice.
How is it "less safe" to pay off your mortgage when your other choice is to invest in the stock market?
If you or anyone else is paying off their mortgage to be safe please do not retire until your SWR is 1% or less. The 4% rule and all other derivatives is based on the performance of the stock market since we have data. Mathematically, paying off a sub 4% fixed rate mortgage is going to create a scenario where you are less safe. You would be better off 95% of the time. The times that you would not be better off your 4% portfolio would fail as well. Inflation will kill you in retirement faster than stock market returns. Your 30 year fixed rate mortgage is a perfect hedge against inflation. Stocks also tend to do well with inflation. The scenarios where keeping a mortgage would be poor is if we had long term deflation. At that point you are worse off owning a home, stocks and other assets.
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If you or anyone else is paying off their mortgage to be safe please do not retire until your SWR is 1% or less. The 4% rule and all other derivatives is based on the performance of the stock market since we have data. Mathematically, paying off a sub 4% fixed rate mortgage is going to create a scenario where you are less safe. You would be better off 95% of the time. The times that you would not be better off your 4% portfolio would fail as well. Inflation will kill you in retirement faster than stock market returns. Your 30 year fixed rate mortgage is a perfect hedge against inflation. Stocks also tend to do well with inflation. The scenarios where keeping a mortgage would be poor is if we had long term deflation. At that point you are worse off owning a home, stocks and other assets.
My retirement will not be based directly on the performance of the stock market; I will not have to draw a single penny from my investment portfolio when I choose to retire.
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If you or anyone else is paying off their mortgage to be safe please do not retire until your SWR is 1% or less. The 4% rule and all other derivatives is based on the performance of the stock market since we have data. Mathematically, paying off a sub 4% fixed rate mortgage is going to create a scenario where you are less safe. You would be better off 95% of the time. The times that you would not be better off your 4% portfolio would fail as well. Inflation will kill you in retirement faster than stock market returns. Your 30 year fixed rate mortgage is a perfect hedge against inflation. Stocks also tend to do well with inflation. The scenarios where keeping a mortgage would be poor is if we had long term deflation. At that point you are worse off owning a home, stocks and other assets.
My retirement will not be based directly on the performance of the stock market; I will not have to draw a single penny from my investment portfolio when I choose to retire.
IT DOESNT MATTER YOU"RE STILL EXPOSING YOURSELF TO MORE RISK BY OUT RIGHT OWNING YOUR RESIDENCE. if that money were invested and you had a mortgage you would have less risk believe it or not its a plain and simple fact based on historical data. it doesnt matter where the rest of your retirement funding comes from.
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if you had any data that showed how owning your home statistically comes out ahead please display it ... my guess is it will be in the 5% tomsang mentions above
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IT DOESNT MATTER YOU"RE STILL EXPOSING YOURSELF TO MORE RISK BY OUT RIGHT OWNING YOUR RESIDENCE. if that money were invested and you had a mortgage you would have less risk believe it or not its a plain and simple fact based on historical data. it doesnt matter where the rest of your retirement funding comes from.
I'm going to need more information than "believe it or not" in order to "believe it."
Also, TYPING THE SAME THING OVER AND OVER AGAIN IN ALL CAPS DOESN'T MAKE YOU RIGHT, IT ONLY MAKES YOU ANNOYING.
Please explain to me: exactly why is it MORE RISK to pay off a house early than it is to keep a mortgage and invest in the stock market?
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If you or anyone else is paying off their mortgage to be safe please do not retire until your SWR is 1% or less. The 4% rule and all other derivatives is based on the performance of the stock market since we have data. Mathematically, paying off a sub 4% fixed rate mortgage is going to create a scenario where you are less safe. You would be better off 95% of the time. The times that you would not be better off your 4% portfolio would fail as well. Inflation will kill you in retirement faster than stock market returns. Your 30 year fixed rate mortgage is a perfect hedge against inflation. Stocks also tend to do well with inflation. The scenarios where keeping a mortgage would be poor is if we had long term deflation. At that point you are worse off owning a home, stocks and other assets.
My retirement will not be based directly on the performance of the stock market; I will not have to draw a single penny from my investment portfolio when I choose to retire.
Some people on this board are trying to retire early. Based on this statement you can go to Vegas to invest as you don't need the money in the first place. With your scenario why would you not take on more risk as it has no impact on your retirement(not that having a mortgage is riskier). You could leave it to charity or family. If you don't need the money then why would you not go with the mathematically optimal investment policy. I guess the hassle of setting up auto-pay or creating an asset management plan would be the only reasons. I guess that is nice that you have set up your life so that you don't have to care about your investments. Where is all of the retirement money coming from? SS, Pension, military benefits, etc.
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go to Cfiresim.com
enter use the default 1MIL and 40k that come up . Change the how long it lasts year at the top to 2100
run the sim
Now go back to the main page input 1.2MM and leave the 40k alone
under additional spending enter 11457 and make it not inflation adjusted set the later date to 30 years after your retire date ... run it again 11457 is the mortgage payment on a 200k home at 4% over 30 years.
His site is down right now it looks like but you will see a 3-5% difference in the likelihood of success of the latter vs the former.
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Why do people keep using 2-3% interest rates on mortage as a benchmark at the same time as using historical returns on stocks and inflation? Wouldn't it be more sensible to use historical mortage rates? Todays situation is quite unique: we have historicalle low mortage rates, and as a consequence stock markets and asset classes are inflated. In light of this discussion, should we always assume there will be inflation?
If you "believe" in a 4% SWR, wouldn't it be sensible to assume historical debt rates and plan from that?
Because we are looking at historical data about the capital markets and inflation rates in order to determine reasonable expectations about the future (the past is an imperfect tool for predicting the future, but it's the best tool we have). Historical mortgage rates, on the other hand, are irrelevant to the question of what mortgage rate you can obtain today by taking out a mortgage now; it doesn't matter if the historical average mortgage rate was 17% (a number I just made up) -- if you can lock in a 3.5% rate today, that's going to be your rate for the next 30 years. And the fact that that rate is so extraordinarily low by historical standards is the reason we are all clamoring from our soapboxes about how great it is to take out a 30 year mortgage today, invest the proceeds, and carry the loan to maturity.
EDIT: fixed typo
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Some people on this board are trying to retire early. Based on this statement you can go to Vegas to invest as you don't need the money in the first place. With your scenario why would you not take on more risk as it has no impact on your retirement. You could leave it to charity or family. If you don't need the money then why would you not go with the mathematically optimal investment policy. I guess the hassle of setting up auto-pay or creating an asset management plan would be the only reasons. I guess that is nice that you have set up your life so that you don't have to care about your investments. Where is all of the retirement money coming from? SS, Pension, military benefits, etc.
You know when they say "diversify your portfolio?" I think the spirit of that saying goes beyond simply buying different kinds of stock, or throwing bonds into the mix.
My retirement will be a combination of pension, real estate holdings, and later on in life to be guaranteed by investment savings and Social Security.
Yeah, I can "optimize my growth" by throwing it all at the stock market, and then I'm one burst bubble away from having to modify my standard of living or delaying my retirement.
Yeah boarder42, in 2100 if I ride out those ups and downs I'd have more money, but I'll be dead in 2100 so why should I care what your simulation numbers look like?
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Some people on this board are trying to retire early. Based on this statement you can go to Vegas to invest as you don't need the money in the first place. With your scenario why would you not take on more risk as it has no impact on your retirement. You could leave it to charity or family. If you don't need the money then why would you not go with the mathematically optimal investment policy. I guess the hassle of setting up auto-pay or creating an asset management plan would be the only reasons. I guess that is nice that you have set up your life so that you don't have to care about your investments. Where is all of the retirement money coming from? SS, Pension, military benefits, etc.
You know when they say "diversify your portfolio?" I think the spirit of that saying goes beyond simply buying different kinds of stock, or throwing bonds into the mix.
My retirement will be a combination of pension, real estate holdings, and later on in life to be guaranteed by investment savings and Social Security.
Yeah, I can "optimize my growth" by throwing it all at the stock market, and then I'm one burst bubble away from having to modify my standard of living or delaying my retirement.
Yeah boarder42, in 2100 if I ride out those ups and downs I'd have more money, but I'll be dead in 2100 so why should I care what your simulation numbers look like?
its a simulation that just shows how long money will last. and we can all agree we will be dead by then. you have done nothing to try to show data that says a mortgage is risky. so until that comes up all the data us soap boxers are presenting that you just choose not to believe out of some feeling ... yeah just keep feeling that way b/c feelings make the world work
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ooo just thought of a great analogy.
Flying vs driving.
Basically everyone denying the logic behind why having a mortgage is better than having one paid off is akin to the irrational fear of flying when they will gladly get into a car everyday.
Its a feeling not backed by facts and data. so yes go ahead and have a paid off home vs investing but this is akin to being afraid to fly and still driving a car.
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also in the event of this catostrophic stock market collapse that you speak of... IF that were to ever happen it would throw the world into some crazy state of anarchy. Meaning really you should be stock piling guns and bullets b/c thats what you'll need then. not real estate pensions and social security.
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Why do people keep using 2-3% interest rates on mortage as a benchmark at the same time as using historical returns on stocks and inflation? Wouldn't it be more sensible to use historical mortage rates? Todays situation is quite unique: we have historicalle low mortage rates, and as a consequence stock markets and asset classes are inflated. In light of this discussion, should we always assume there will be inflation?
If you "believe" in a 4% SWR, wouldn't it be sensible to assume historical debt rates and plan from that?
Because we are looking at historical data about the capital markets and inflation rates in order to determine reasonable expectations about the future (the past is an imperfect tool for predicting the future, but it's the best tool we have). Historical mortgage rates, on the other hand, are irrelevant to the question of what mortgage rate you can obtain today by taking out a mortgage now; it doesn't matter if the historical average mortgage rate was 17% (a number I just made up) -- if you can lock in a 3.5% rate today, that's going to be your rate for the next 30 years. And the fact that that rate is so extraordinarily low by historical standards is the reason we are all clamoring from our soapboxes about how great it is to take out a 30 year mortgage today, invest the proceeds, and carry the loan to maturity.
EDIT: fixed typo
Good point.
I didn't know you could fix the rate for 30 years. It seems like 10 years is the maximum of what banks are offering in my country.
I currently have a 1M house. Your advice for me would be to max the loan, fix the interest (currently at 3.3%) for 10 years and invest all spare cash instead of paying down the debt? What if 10 years from now the interest rates are at 8% and the RE market has crashed? Now I'm left with a high interest loan and a house that has dropped in value. Sounds risky to me.
My biggest fear when it comes to FIRE is being a debt slave and having to work just to clear debt. Without debt, that risk is zero. Yes, maybe there is a mathematically higher risk that the 4% SWR won't work without the mortage, but that is easily adjustable by spending less or making some more money. With debt you don't have as much control.
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ok - just playing a bit of devil's advocate here...
why isn't a monthly rent considered a debt?
Sure, you pay for the current or previous month (depending on your lease) and each time you pay you are 'paid in full' much like using a credit card and paying off the balance in full each month. And most people like to lump these as 'expenses' rather than 'debt'. But from a philosophical standpoint it is money I owe to someone else in monthly installments, and if I don't pay it bad things happen.
For a broader question, why do we make such a distinction between monthly, reoccurring expenses (rent, insurance, utilities, etc) and monthly payments for a loan.
I always considered a mortgage as a "long term debt" -- until OP posted this and I started to think.
Like Nero, I asked myself:
Why is Rent not debt? but a mortgage is?
Why is Leasing a car not a debt, but a car loan is?
My Conclusion:
A true debt occurs where you can not sell the item in question (reasonable easily) to "make good" on the loan.
Therefore, mortgages, title loan, Pawn shops, and margin accounts (above water) are not truly debts, but financial arrangements.
Doesn't mean I want to continue to take on risks with my "financial arrangements" turning into debts, or that I will cease paying these off, though.
Jumping in a little late - and I have not read all the replies on the last pages yet... will do so now :-).
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I didn't know you could fix the rate for 30 years. It seems like 10 years is the maximum of what banks are offering in my country.
I currently have a 1M house. Your advice for me would be to max the loan, fix the interest (currently at 3.3%) for 10 years and invest all spare cash instead of paying down the debt? What if 10 years from now the interest rates are at 8% and the RE market has crashed? Now I'm left with a high interest loan and a house that has dropped in value. Sounds risky to me.
My biggest fear when it comes to FIRE is being a debt slave and having to work just to clear debt. Without debt, that risk is zero. Yes, maybe there is a mathematically higher risk that the 4% SWR won't work without the mortage, but that is easily adjustable by spending less or making some more money. With debt you don't have as much control.
All this advocacy for exploiting low-interest mortgage debt and investing the proceeds is based on the US mortgage market, where you can obtain a 30-year, fixed rate loan with rates currently under 4%. If you only have the ability to lock in a fixed rate of 3.3% for 10 years, that's less of a slam dunk, and I would share your hesitation in doing so (unless you can get some kind of guaranteed investment return in excess of 3.3% (like a bank CD or something) to arbitrage the difference).
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Why do people keep using 2-3% interest rates on mortage as a benchmark at the same time as using historical returns on stocks and inflation? Wouldn't it be more sensible to use historical mortage rates? Todays situation is quite unique: we have historicalle low mortage rates, and as a consequence stock markets and asset classes are inflated. In light of this discussion, should we always assume there will be inflation?
If you "believe" in a 4% SWR, wouldn't it be sensible to assume historical debt rates and plan from that?
+1
I like the way you think! 5 year mortgages are the norm here, so using historical rates is needed if you run cFireSim per the previous suggestions.
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obviously this forum is 80% or greater american and all those posting on here are posting with american rates in mind ... you have very different situations in other countries.
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I didn't know you could fix the rate for 30 years. It seems like 10 years is the maximum of what banks are offering in my country.
I currently have a 1M house. Your advice for me would be to max the loan, fix the interest (currently at 3.3%) for 10 years and invest all spare cash instead of paying down the debt? What if 10 years from now the interest rates are at 8% and the RE market has crashed? Now I'm left with a high interest loan and a house that has dropped in value. Sounds risky to me.
My biggest fear when it comes to FIRE is being a debt slave and having to work just to clear debt. Without debt, that risk is zero. Yes, maybe there is a mathematically higher risk that the 4% SWR won't work without the mortage, but that is easily adjustable by spending less or making some more money. With debt you don't have as much control.
All this advocacy for exploiting low-interest mortgage debt and investing the proceeds is based on the US mortgage market, where you can obtain a 30-year, fixed rate loan with rates currently under 4%. If you only have the ability to lock in a fixed rate of 3.3% for 10 years, that's less of a slam dunk, and I would share your hesitation in doing so (unless you can get some kind of guaranteed investment return in excess of 3.3% (like a bank CD or something) to arbitrage the difference).
Now this makes a lot of sense. I have been basing all my reasoning on the fact that you can't fix the interest for 30 years. In Norway only about 10% of the people fix their rates, and you can only fix them for 3, 5 or 10 years.
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Why do people keep using 2-3% interest rates on mortage as a benchmark at the same time as using historical returns on stocks and inflation? Wouldn't it be more sensible to use historical mortage rates? Todays situation is quite unique: we have historicalle low mortage rates, and as a consequence stock markets and asset classes are inflated. In light of this discussion, should we always assume there will be inflation?
If you "believe" in a 4% SWR, wouldn't it be sensible to assume historical debt rates and plan from that?
Because we are looking at historical data about the capital markets and inflation rates in order to determine reasonable expectations about the future (the past is an imperfect tool for predicting the future, but it's the best tool we have). Historical mortgage rates, on the other hand, are irrelevant to the question of what mortgage rate you can obtain today by taking out a mortgage now; it doesn't matter if the historical average mortgage rate was 17% (a number I just made up) -- if you can lock in a 3.5% rate today, that's going to be your rate for the next 30 years. And the fact that that rate is so extraordinarily low by historical standards is the reason we are all clamoring from our soapboxes about how great it is to take out a 30 year mortgage today, invest the proceeds, and carry the loan to maturity.
EDIT: fixed typo
Good point.
I didn't know you could fix the rate for 30 years. It seems like 10 years is the maximum of what banks are offering in my country.
I currently have a 1M house. Your advice for me would be to max the loan, fix the interest (currently at 3.3%) for 10 years and invest all spare cash instead of paying down the debt? What if 10 years from now the interest rates are at 8% and the RE market has crashed? Now I'm left with a high interest loan and a house that has dropped in value. Sounds risky to me.
My biggest fear when it comes to FIRE is being a debt slave and having to work just to clear debt. Without debt, that risk is zero. Yes, maybe there is a mathematically higher risk that the 4% SWR won't work without the mortage, but that is easily adjustable by spending less or making some more money. With debt you don't have as much control.
I am not an expert, just trying to understand because I am in a similar situation, with 5 year loans.
In your above scenario you are left with a high interest loan and a house that has dropped in value, but also a lot more in investments that you wouldn't have had otherwise, that you could use, if necessary, to pay towards the high interest loan at that time, right? And, in theory, more accumulated in investments than what you would have otherwise put towards your loan, due to higher interest rates in investments, than on your mortgage.
So WHILE mortgage rates are low it is still better to put the money in investments, ya? If they go up over time, switch strategies at that point (using your investments if you have to).
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I am not an expert, just trying to understand because I am in a similar situation, with 5 year loans.
In your above scenario you are left with a high interest loan and a house that has dropped in value, but also a lot more in investments that you wouldn't have had otherwise, that you could use, if necessary, to pay towards the high interest loan at that time, right? And, in theory, more accumulated in investments than what you would have otherwise put towards your loan, due to higher interest rates in investments, than on your mortgage.
So WHILE mortgage rates are low it is still better to put the money in investments, ya? If they go up over time, switch strategies at that point (using your investments if you have to).
If your time horizon is only 5 years, it only makes sense to bet on your investments outperforming your mortgage rate if the rate is low enough that some conservative, non-volatile investment will beat that rate. Putting all the proceeds in the stock market and expecting them to outpace the mortgage rate during that short, 5-year period would be taking a pretty big gamble.
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its a simulation that just shows how long money will last. and we can all agree we will be dead by then. you have done nothing to try to show data that says a mortgage is risky. so until that comes up all the data us soap boxers are presenting that you just choose not to believe out of some feeling ... yeah just keep feeling that way b/c feelings make the world work
Your claim is that paying cash for a house is MORE RISKY than having a mortgage. YOU made that claim. NOT me.
It is not up to me to prove you right.
*My* statement was that which way you go on this decision depends on your situation. Are you so narrow minded in your approach to financial security that the only possible way to get to independence is through the 4% rule?
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I am not an expert, just trying to understand because I am in a similar situation, with 5 year loans.
In your above scenario you are left with a high interest loan and a house that has dropped in value, but also a lot more in investments that you wouldn't have had otherwise, that you could use, if necessary, to pay towards the high interest loan at that time, right? And, in theory, more accumulated in investments than what you would have otherwise put towards your loan, due to higher interest rates in investments, than on your mortgage.
So WHILE mortgage rates are low it is still better to put the money in investments, ya? If they go up over time, switch strategies at that point (using your investments if you have to).
How sure can you be that your investments will have a higher value than what you started with? In such a short timespan as 10 years you might not get historical returns.
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its a simulation that just shows how long money will last. and we can all agree we will be dead by then. you have done nothing to try to show data that says a mortgage is risky. so until that comes up all the data us soap boxers are presenting that you just choose not to believe out of some feeling ... yeah just keep feeling that way b/c feelings make the world work
Your claim is that paying cash for a house is MORE RISKY than having a mortgage. YOU made that claim. NOT me.
It is not up to me to prove you right.
*My* statement was that which way you go on this decision depends on your situation. Are you so narrow minded in your approach to financial security that the only possible way to get to independence is through the 4% rule?
Yes and with the caveats i posted there isnt a time where it is less risky to have a paid off house vs a mortgage
assuming
Current US interest rates on 30 year home loans
Historical market returns which is the backbone of FIRE
We are all just saying that you are inherently creating more risk in your life ... can i be FI on an 8% SWR you know what there may be some time in history you could have made this work ... but 95 times out of 100 carrying a mortgage is less risky than owning your home outright in today's environment. and the 4% SWR only has a 76% success rate over infinite time. SOOOO... yeah you can be financially independent however you choose but why take on extra risk for no reason. And owning a home does that.
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If you think of your personal financials as a "business" would, you need to consider the following:
Debt and Liabilities
Assets
Risk versus Return on your Investment, and
CASH FLOW
The thread so far has discussed the first three, but no one has mentioned CASH FLOW, which, as we know, is VITAL for most business' success. Even if you are earning more on your investments than you pay on your mortgage, it means little, if it ties up your cash flow beyond a comfort point.
I expect that many of us who opt to paying off a mortgage while talking about lowering risk, are also thinking about the flexibilty of available cashflow, versus tied-up investment commitments that may take 1 month to 5 years to free up. Obviously case by case dependent, but think about it. Sometimes cash flow and flexibilty is more important that absolute returns.
I would definitely agree with all the "invest" arguments, if the investment created fixed income or dividends at a rate higher than the mortgage, with similar risk as real estate.
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If you think of your personal financials as a "business" would, you need to consider the following:
Debt and Liabilities
Assets
Risk versus Return on your Investment, and
CASH FLOW
The thread so far has discussed the first three, but no one has mentioned CASH FLOW, which, as we know, is VITAL for most business' success. Even if you are earning more on your investments than you pay on your mortgage, it means little, if it ties up your cash flow beyond a comfort point.
I expect that many of us who opt to paying off a mortgage while talking about lowering risk, are also thinking about the flexibilty of available cashflow, versus tied-up investment commitments that may take 1 month to 5 years to free up. Obviously case by case dependent, but think about it. Sometimes cash flow and flexibilty is more important that absolute returns.
I would definitely agree with all the "invest" arguments, if the investment created fixed income or dividends at a rate higher than the mortgage, with similar risk as real estate.
Your house is about as unliquid an asset as you can get vs stocks that i can sell tomorrow. so Cash flow is better in a world with the money invested. your cash flow arguement holds no water in this context as the alternative to being invested in stocks is invested in a building that you would have to sell and vacate.
and dont even start the dividend arguement on here we dont need to get that going about how much you lose by trying to chase dividends. they arent printed out of thin air.
Your not backing your less risk argument - besides not having access to a 30 year 4% mortgage there hasnt been one argument that holds water.
Cash flow
Case A paid off house 200k in house. i think we can all agree this is a concrete asset
Case B invested in VTSAX taxable account. - 200k that can be taken out at any time and be in your bank in less than a week.
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its a simulation that just shows how long money will last. and we can all agree we will be dead by then. you have done nothing to try to show data that says a mortgage is risky. so until that comes up all the data us soap boxers are presenting that you just choose not to believe out of some feeling ... yeah just keep feeling that way b/c feelings make the world work
Your claim is that paying cash for a house is MORE RISKY than having a mortgage. YOU made that claim. NOT me.
It is not up to me to prove you right.
*My* statement was that which way you go on this decision depends on your situation. Are you so narrow minded in your approach to financial security that the only possible way to get to independence is through the 4% rule?
Yes and with the caveats i posted there isnt a time where it is less risky to have a paid off house vs a mortgage
assuming
Current US interest rates on 30 year home loans
Historical market returns which is the backbone of FIRE
We are all just saying that you are inherently creating more risk in your life ... can i be FI on an 8% SWR you know what there may be some time in history you could have made this work ... but 95 times out of 100 carrying a mortgage is less risky than owning your home outright in today's environment. and the 4% SWR only has a 76% success rate over infinite time. SOOOO... yeah you can be financially independent however you choose but why take on extra risk for no reason. And owning a home does that.
I have a question about this (I don't know if it impacts your numbers). You keep saying that owning a house increases risk. Do you mean buying/paying cash for a house? Does it change things if a person already owns or is given a house? I'm really interested in how that impacts risk. I think that holding a mortgage is a form of diversification and its regular payment is increasing an illiquid asset, but what about an unmortgaged house?
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Yes and with the caveats i posted there isnt a time where it is less risky to have a paid off house vs a mortgage
assuming
Current US interest rates on 30 year home loans
Historical market returns which is the backbone of FIRE
We are all just saying that you are inherently creating more risk in your life ... can i be FI on an 8% SWR you know what there may be some time in history you could have made this work ... but 95 times out of 100 carrying a mortgage is less risky than owning your home outright in today's environment. and the 4% SWR only has a 76% success rate over infinite time. SOOOO... yeah you can be financially independent however you choose but why take on extra risk for no reason. And owning a home does that.
The reason your approach doesn't work for me is timing. The HUGE risk you're not accounting for are standard market fluctuations. If another 1973, 1980, 1990, 2001, 1981, 1990, 2001, or 2008 (recessions) occurs within a year of my planned retirement I may not be able to afford to retire, because now my mortgage isn't covered unless I'm willing to take a monetary loss by drawing from a portfolio that has greatly diminished in value.
If I was waiting to retire at 65, your approach might suit me best, because I'd have decades to watch my holdings fluctuate. But I'm not waiting to retire at 65.
With a paid off house it doesn't matter if 2008 happens again, because diminished real estate value doesn't change the fact that the house continues to function as my residence.
There's no adjustment in lifestyle, there's no panic over how the payment is going to be made, there's no slaving over spreadsheets to determine how to minimize damage to my portfolio while still making that payment, and there's no applying for a position at Wal-Mart to fill in the gaps.
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its a simulation that just shows how long money will last. and we can all agree we will be dead by then. you have done nothing to try to show data that says a mortgage is risky. so until that comes up all the data us soap boxers are presenting that you just choose not to believe out of some feeling ... yeah just keep feeling that way b/c feelings make the world work
Your claim is that paying cash for a house is MORE RISKY than having a mortgage. YOU made that claim. NOT me.
It is not up to me to prove you right.
*My* statement was that which way you go on this decision depends on your situation. Are you so narrow minded in your approach to financial security that the only possible way to get to independence is through the 4% rule?
Yes and with the caveats i posted there isnt a time where it is less risky to have a paid off house vs a mortgage
assuming
Current US interest rates on 30 year home loans
Historical market returns which is the backbone of FIRE
We are all just saying that you are inherently creating more risk in your life ... can i be FI on an 8% SWR you know what there may be some time in history you could have made this work ... but 95 times out of 100 carrying a mortgage is less risky than owning your home outright in today's environment. and the 4% SWR only has a 76% success rate over infinite time. SOOOO... yeah you can be financially independent however you choose but why take on extra risk for no reason. And owning a home does that.
I have a question about this (I don't know if it impacts your numbers). You keep saying that owning a house increases risk. Do you mean buying/paying cash for a house? Does it change things if a person already owns or is given a house? I'm really interested in how that impacts risk. I think that holding a mortgage is a form of diversification and its regular payment is increasing an illiquid asset, but what about an unmortgaged house?
The math works out the same whether you are buying a brand new home cash now or Refinancing the one you have owning a home with a mortgage on it(30 year US 4%) is more risk averse by the numbers than owning your home outright.
Can you come up with a scenario where your SWR is so low that you see 100% chance of success in history yet. but as you decrease towards not 100% the person with a mortgage will still be 100% successful while the person who owns outright will start to have lower chances of success.
the only reasons i wont have a mortgage are
1. rates go up above 5% then i would probably have to run some numbers again to see what the risks were
2. Having a mortgage pushes me into the 25% tax bracket
3. I dont live in america where rates are locked in for 30 years
Mainly assuming those 3 things above the general rule of thumb for FIRE should be to pay minimum payments and to take out a mortgage for 30 years with a low rate vs paying cash for a house.
When it comes to REFI you have to run a whole different set of numbers. But it may make sense assuming equivalent or similarly low interest rates and how much the REFI costs.
seriously i'm mad at myself for being on a 15 year right now b/c its costing me money over time. I plan to move in the next few months and go back to a 30 year. i used to think the other way too.
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Yes and with the caveats i posted there isnt a time where it is less risky to have a paid off house vs a mortgage
assuming
Current US interest rates on 30 year home loans
Historical market returns which is the backbone of FIRE
We are all just saying that you are inherently creating more risk in your life ... can i be FI on an 8% SWR you know what there may be some time in history you could have made this work ... but 95 times out of 100 carrying a mortgage is less risky than owning your home outright in today's environment. and the 4% SWR only has a 76% success rate over infinite time. SOOOO... yeah you can be financially independent however you choose but why take on extra risk for no reason. And owning a home does that.
The reason your approach doesn't work for me is timing. The HUGE risk you're not accounting for are standard market fluctuations. If another 1973, 1980, 1990, 2001, 1981, 1990, 2001, or 2008 (recessions) occurs within a year of my planned retirement I may not be able to afford to retire, because now my mortgage isn't covered unless I'm willing to take a monetary loss by drawing from a portfolio that has greatly diminished in value.
If I was waiting to retire at 65, your approach might suit me best, because I'd have decades to watch my holdings fluctuate. But I'm not waiting to retire at 65.
With a paid off house it doesn't matter if 2008 happens again, because diminished real estate value doesn't change the fact that the house continues to function as my residence.
There's no adjustment in lifestyle, there's no panic over how the payment is going to be made, there's no slaving over spreadsheets to determine how to minimize damage to my portfolio while still making that payment, and there's no applying for a position at Wal-Mart to fill in the gaps.
and by making all these payments now you're costing yourself the runup in 2013 and 2014 and future runups that are basically causing the risk you're trying to prevent
you can earlier by holding a mortgage vs paying it down. so this extra year you may have to work due to a short fall would still be inside of the year you plan to retire now. i'm 28 i'm gonna retire at 35 at the latest. if i were to pay my mortgage down vs invest it pushes that out 2 years. Youre not looking at the opportunity cost of you money.
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Its a very similar concept to investing in Tax deferred accounts vs taxable.
if i invest in taxable accounts i know i'm going to have access to every penny whenever i want it with out a SEPP 72t or a Roth ladder. But i add 3-4 years to my working years by going this route. for the chance that these may not be there.
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and by making all these payments now you're costing yourself the runup in 2013 and 2014 and future runups that are basically causing the risk you're trying to prevent
you can earlier by holding a mortgage vs paying it down. so this extra year you may have to work due to a short fall would still be inside of the year you plan to retire now. i'm 28 i'm gonna retire at 35 at the latest. if i were to pay my mortgage down vs invest it pushes that out 2 years. Youre not looking at the opportunity cost of you money.
It must be nice to know the future. If I had a crystal ball, like you, I might make different decisions.
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its a simulation that just shows how long money will last. and we can all agree we will be dead by then. you have done nothing to try to show data that says a mortgage is risky. so until that comes up all the data us soap boxers are presenting that you just choose not to believe out of some feeling ... yeah just keep feeling that way b/c feelings make the world work
Your claim is that paying cash for a house is MORE RISKY than having a mortgage. YOU made that claim. NOT me.
It is not up to me to prove you right.
*My* statement was that which way you go on this decision depends on your situation. Are you so narrow minded in your approach to financial security that the only possible way to get to independence is through the 4% rule?
Yes and with the caveats i posted there isnt a time where it is less risky to have a paid off house vs a mortgage
assuming
Current US interest rates on 30 year home loans
Historical market returns which is the backbone of FIRE
We are all just saying that you are inherently creating more risk in your life ... can i be FI on an 8% SWR you know what there may be some time in history you could have made this work ... but 95 times out of 100 carrying a mortgage is less risky than owning your home outright in today's environment. and the 4% SWR only has a 76% success rate over infinite time. SOOOO... yeah you can be financially independent however you choose but why take on extra risk for no reason. And owning a home does that.
I have a question about this (I don't know if it impacts your numbers). You keep saying that owning a house increases risk. Do you mean buying/paying cash for a house? Does it change things if a person already owns or is given a house? I'm really interested in how that impacts risk. I think that holding a mortgage is a form of diversification and its regular payment is increasing an illiquid asset, but what about an unmortgaged house?
The math works out the same whether you are buying a brand new home cash now or Refinancing the one you have owning a home with a mortgage on it(30 year US 4%) is more risk averse by the numbers than owning your home outright.
Can you come up with a scenario where your SWR is so low that you see 100% chance of success in history yet. but as you decrease towards not 100% the person with a mortgage will still be 100% successful while the person who owns outright will start to have lower chances of success.
the only reasons i wont have a mortgage are
1. rates go up above 5% then i would probably have to run some numbers again to see what the risks were
2. Having a mortgage pushes me into the 25% tax bracket
3. I dont live in america where rates are locked in for 30 years
Mainly assuming those 3 things above the general rule of thumb for FIRE should be to pay minimum payments and to take out a mortgage for 30 years with a low rate vs paying cash for a house.
When it comes to REFI you have to run a whole different set of numbers. But it may make sense assuming equivalent or similarly low interest rates and how much the REFI costs.
seriously i'm mad at myself for being on a 15 year right now b/c its costing me money over time. I plan to move in the next few months and go back to a 30 year. i used to think the other way too.
I have always figured that the tax advantage of not holding/paying a mortgage would be a substantial benefit during ER. With the low interest rates that make this discussion interesting, the mortgage interest deduction is a much lower portion of the payment than principal, in my case. Still, I think that you've been pretty clear that higher mortgage interest rates would change how the risk portion of this calculation works.
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its a simulation that just shows how long money will last. and we can all agree we will be dead by then. you have done nothing to try to show data that says a mortgage is risky. so until that comes up all the data us soap boxers are presenting that you just choose not to believe out of some feeling ... yeah just keep feeling that way b/c feelings make the world work
Your claim is that paying cash for a house is MORE RISKY than having a mortgage. YOU made that claim. NOT me.
It is not up to me to prove you right.
*My* statement was that which way you go on this decision depends on your situation. Are you so narrow minded in your approach to financial security that the only possible way to get to independence is through the 4% rule?
Yes and with the caveats i posted there isnt a time where it is less risky to have a paid off house vs a mortgage
assuming
Current US interest rates on 30 year home loans
Historical market returns which is the backbone of FIRE
We are all just saying that you are inherently creating more risk in your life ... can i be FI on an 8% SWR you know what there may be some time in history you could have made this work ... but 95 times out of 100 carrying a mortgage is less risky than owning your home outright in today's environment. and the 4% SWR only has a 76% success rate over infinite time. SOOOO... yeah you can be financially independent however you choose but why take on extra risk for no reason. And owning a home does that.
I have a question about this (I don't know if it impacts your numbers). You keep saying that owning a house increases risk. Do you mean buying/paying cash for a house? Does it change things if a person already owns or is given a house? I'm really interested in how that impacts risk. I think that holding a mortgage is a form of diversification and its regular payment is increasing an illiquid asset, but what about an unmortgaged house?
The math works out the same whether you are buying a brand new home cash now or Refinancing the one you have owning a home with a mortgage on it(30 year US 4%) is more risk averse by the numbers than owning your home outright.
Can you come up with a scenario where your SWR is so low that you see 100% chance of success in history yet. but as you decrease towards not 100% the person with a mortgage will still be 100% successful while the person who owns outright will start to have lower chances of success.
the only reasons i wont have a mortgage are
1. rates go up above 5% then i would probably have to run some numbers again to see what the risks were
2. Having a mortgage pushes me into the 25% tax bracket
3. I dont live in america where rates are locked in for 30 years
Mainly assuming those 3 things above the general rule of thumb for FIRE should be to pay minimum payments and to take out a mortgage for 30 years with a low rate vs paying cash for a house.
When it comes to REFI you have to run a whole different set of numbers. But it may make sense assuming equivalent or similarly low interest rates and how much the REFI costs.
seriously i'm mad at myself for being on a 15 year right now b/c its costing me money over time. I plan to move in the next few months and go back to a 30 year. i used to think the other way too.
I have always figured that the tax advantage of not holding/paying a mortgage would be a substantial benefit during ER. With the low interest rates that make this discussion interesting, the mortgage interest deduction is a much lower portion of the payment than principal, in my case. Still, I think that you've been pretty clear that higher mortgage interest rates would change how the risk portion of this calculation works.
well assuming your money that you're paying your mortgage with is in a taxable account and you're in the 15% bracket there is no tax burden paying your mortgage. you're actually getting a tax benefit by the interest ... which inherently lowers your overall expenses.
The one issue i've thought about but hadnt brought up b/c i figured maybe one of these people, who are super risk averse but yet choose the more risky option b/c they feel they are safer with no imperical data to back, would have brought up the Obamacare subsidies. i havent done a calc to see how adding this into my spending in retirement would affect how much of a subsidy you could receive. but if in a taxable account most of that money will be already taxed and you'll just be claiming the LTCG or QDs.
i really just find it all super interesting that given data people choose to ignore it based on a feeling. maybe thats why my wife thinks i'm a little cold and unemotional. b/c facts override feelings for me.
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well assuming your money that you're paying your mortgage with is in a taxable account and you're in the 15% bracket there is no tax burden paying your mortgage. you're actually getting a tax benefit by the interest ... which inherently lowers your overall expenses.
The one issue i've thought about but hadnt brought up b/c i figured maybe one of these people, who are super risk averse but yet choose the more risky option b/c they feel they are safer with no imperical data to back, would have brought up the Obamacare subsidies. i havent done a calc to see how adding this into my spending in retirement would affect how much of a subsidy you could receive. but if in a taxable account most of that money will be already taxed and you'll just be claiming the LTCG or QDs.
i really just find it all super interesting that given data people choose to ignore it based on a feeling. maybe thats why my wife thinks i'm a little cold and unemotional. b/c facts override feelings for me.
You never spelled out the exact reason why paying cash for a house is more risky than getting a mortgage. You only supported the idea that you can make more money by carrying a mortgage and investing the money elsewhere, and nobody disputed that.
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The one issue i've thought about but hadnt brought up b/c i figured maybe one of these people, who are super risk averse but yet choose the more risky option b/c they feel they are safer with no imperical data to back, would have brought up the Obamacare subsidies. i havent done a calc to see how adding this into my spending in retirement would affect how much of a subsidy you could receive. but if in a taxable account most of that money will be already taxed and you'll just be claiming the LTCG or QDs.
The consideration of ACA subsidies and other means-tested government benefits in the context of the mortgage vs payoff question has been discussed in the forum many times. The short answer, in my view, is that the math still almost always favors carrying the mortgage even in light of those considerations. I think this is the best thread on that specific topic:
http://forum.mrmoneymustache.com/ask-a-mustachian/should-i-pay-off-my-mortgage-early/
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You never spelled out the exact reason why paying cash for a house is more risky than getting a mortgage. You only supported the idea that you can make more money by carrying a mortgage and investing the money elsewhere, and nobody disputed that.
It's less risky in the sense that getting the mortgage and investing the proceeds not only leaves you with more money, but reduces your chances of portfolio failure, unless your chances of portfolio failure are already 0% (in which case it doesn't matter which path you take -- either way you already have more than "enough").
My statement above is based on historical data, and you might say "but we don't know the future; it may not look like the past." And that's true. But the same caveat applies to everything we talk about in this forum as it pertains to retirement planning. Are you planning to retire on an X% SWR-based stash because it provides an acceptable likelihood of success? Well, that's based on history too.
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If you think of your personal financials as a "business" would, you need to consider the following:
Debt and Liabilities
Assets
Risk versus Return on your Investment, and
CASH FLOW
The thread so far has discussed the first three, but no one has mentioned CASH FLOW, which, as we know, is VITAL for most business' success. Even if you are earning more on your investments than you pay on your mortgage, it means little, if it ties up your cash flow beyond a comfort point.
I expect that many of us who opt to paying off a mortgage while talking about lowering risk, are also thinking about the flexibilty of available cashflow, versus tied-up investment commitments that may take 1 month to 5 years to free up. Obviously case by case dependent, but think about it. Sometimes cash flow and flexibilty is more important that absolute returns.
I would definitely agree with all the "invest" arguments, if the investment created fixed income or dividends at a rate higher than the mortgage, with similar risk as real estate.
Your house is about as unliquid an asset as you can get vs stocks that i can sell tomorrow. so Cash flow is better in a world with the money invested. your cash flow arguement holds no water in this context as the alternative to being invested in stocks is invested in a building that you would have to sell and vacate.
and dont even start the dividend arguement on here we dont need to get that going about how much you lose by trying to chase dividends. they arent printed out of thin air.
Your not backing your less risk argument - besides not having access to a 30 year 4% mortgage there hasnt been one argument that holds water.
Cash flow
Case A paid off house 200k in house. i think we can all agree this is a concrete asset
Case B invested in VTSAX taxable account. - 200k that can be taken out at any time and be in your bank in less than a week.
Agreed that a house is a sunk cost, for all intents and purposes... but whether you have a mortgage or not, you are still committed to the same "sunk cost" of the house purchase, for the same duration.
Again, thinking like a business --
You can choose to carry a loan on your property versus buy it outright -- this is done when you want to keep capital available for other investments (which may be more or less liquid, but with the intent to have a better rate of return) -- this is essentially your argument about the bottom line value of keeping a mortgage to allow more investments. This reduces your cash flow by increasing your monthly expenses, for a longer term gain.
OR
You can choose to eliminate / pay down mortgage, eliminating that monthly EXPENSE, and freeing up CASH FLOW, probably at the cost of reduced overall investment income (assuming you make good choices and don't have a bad year!). This is the choice if you want available monthly cash flow, for items such as making payroll, or on a personal side, for club memberships. --As most investments are rarely going to yield the same monthly / dividend income as eliminating the mortgage payment.... Over the long term it is less $$ to your balance sheet to pay off mortgage, but for some businesses, CASH FLOW is much more important, and I am willing to guess that there are personal situations where that holds true as well..
What's that you say -- why would you not just sell your investment a little every month to cover the cash flow --?? because some of the better investments don't do that well, cost a bit, or it is cumbersome / time delayed.
Just say'n -- Short term cashflow availability can be more important than overall returns, depending on the situation.
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It's less risky in the sense that getting the mortgage and investing the proceeds not only leaves you with more money, but reduces your chances of portfolio failure, unless your chances of portfolio failure are already 0% (in which case it doesn't matter which path you take -- either way you already have more than "enough").
My statement above is based on historical data, and you might say "but we don't know the future; it may not look like the past." And that's true. But the same caveat applies to everything we talk about in this forum as it pertains to retirement planning. Are you planning to retire on an X% SWR-based stash because it provides an acceptable likelihood of success? Well, that's based on history too.
What historical data shows that maintaining a mortgage reduces the chance that your stock holdings will fail? I don't understand how those two variables are in any way related.
As I said before, I am not retiring on an X% SWR-based approach. Going back to my very simple point that a few people somehow disagree with, for reasons I can't quite comprehend.... everyone's situation is different, and the decision to pay off their house or hold onto that debt is going to differ.
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What historical data shows that maintaining a mortgage reduces the chance that your stock holdings won't fail? I don't understand how those two variables are in any way related.
As I said before, I am not retiring on an X% SWR-based approach. Going back to my very simple point that a few people somehow disagree with, for reasons I can't quite comprehend.... everyone's situation is different, and the decision to pay off their house or hold onto that debt is going to differ.
It seems like you have not seen the data. I think everyone has been pointing you to Cfiresim which is a good source for the data. It appears to be down right now, http://www.firecalc.com/ is another source of the information. All the data available from 1871 to present is tracked and shown in Cfiresim. When Cfiresim is up you can see every 30 year period of time over the past 144 years and you will see that the stock market has never returned less than 4% over those 144 years. If you believe that the stock market is going to deliver returns of less than 4% over the next 30 years, then you should not retire until your SWR is in the 1% range and if your retirement is on the longer side of things then you should be sub 1% as all the models are using what has historically happened 95% of the time over those 144 year. By creating a scenarios as described above mimicking having a mortgage and investing that value vs. having no mortgage it was shown to be safer to have a mortgage at 4% and invest vs. being debt free. A mortgage is a gift from the government to stimulate the economy. It is a perfect hedge for inflation! 30 year fixed rate sub 4% mortgage is a huge asset to your balance sheet. If you pay it off you are putting yourself in a riskier position. If the future brings us increased inflation then your risk for portfolio failure increases. The 30 year fixed rate mortgage is a perfect hedge for inflation as the amounts are locked down for 30 years. The greater the inflation the greater your safety if you have invested that into an investment portfolio.
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No one is arguing that mathematically, 3.25% return (paying off mortgage) is better than 7% return (historical stock market return). You don't have to shout "THE RETURN IS NOT BETTER." No one is saying it is. What some folks are saying--and which some other folks don't seem to be hearing--is that for them, maximizing the expected return is not the absolute #1 priority. There is more than one path to FI and to a happy life. If it were only about the money, then we'd all be living in our cars while slaving away at the highest-paying jobs we could find, and we'd borrow to the hilt so we could invest more. Does everyone here have the biggest mortgages they can afford? If not, why not, when the potential market return is so great?
Paying down a mortgage has benefits that Mykl and mefla and Bjorn have exhaustively described. The security and peace of mind--and low expenses--that come from being mortgage-free are worth more than an extra 3% to them, and to a lot of other people. Can we let it go already?
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It seems like you have not seen the data. I think everyone has been pointing you to Cfiresim which is a good source for the data. It appears to be down right now, http://www.firecalc.com/ is another source of the information. All the data available from 1871 to present is tracked and shown in Cfiresim. When Cfiresim is up you can see every 30 year period of time over the past 144 years and you will see that the stock market has never returned less than 4% over those 144 years. If you believe that the stock market is going to deliver returns of less than 4% over the next 30 years, then you should not retire until your SWR is in the 1% range and if your retirement is on the longer side of things then you should be sub 1% as all the models are using what has historically happened 95% of the time over those 144 year. By creating a scenarios as described above mimicking having a mortgage and investing that value vs. having no mortgage it was shown to be safer to have a mortgage at 4% and invest vs. being debt free. A mortgage is a gift from the government to stimulate the economy. It is a perfect hedge for inflation! 30 year fixed rate sub 4% mortgage is a huge asset to your balance sheet. If you pay it off you are putting yourself in a riskier position. If the future brings us increased inflation then your risk for portfolio failure increases. The 30 year fixed rate mortgage is a perfect hedge for inflation as the amounts are locked down for 30 years. The greater the inflation the greater your safety if you have invested that into an investment portfolio.
What are you defining risk as? In your equation, what is being risked by paying off the mortgage?
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It seems like you have not seen the data. I think everyone has been pointing you to Cfiresim which is a good source for the data. It appears to be down right now, http://www.firecalc.com/ is another source of the information. All the data available from 1871 to present is tracked and shown in Cfiresim. When Cfiresim is up you can see every 30 year period of time over the past 144 years and you will see that the stock market has never returned less than 4% over those 144 years. If you believe that the stock market is going to deliver returns of less than 4% over the next 30 years, then you should not retire until your SWR is in the 1% range and if your retirement is on the longer side of things then you should be sub 1% as all the models are using what has historically happened 95% of the time over those 144 year. By creating a scenarios as described above mimicking having a mortgage and investing that value vs. having no mortgage it was shown to be safer to have a mortgage at 4% and invest vs. being debt free. A mortgage is a gift from the government to stimulate the economy. It is a perfect hedge for inflation! 30 year fixed rate sub 4% mortgage is a huge asset to your balance sheet. If you pay it off you are putting yourself in a riskier position. If the future brings us increased inflation then your risk for portfolio failure increases. The 30 year fixed rate mortgage is a perfect hedge for inflation as the amounts are locked down for 30 years. The greater the inflation the greater your safety if you have invested that into an investment portfolio.
What are you defining risk as? In your equation, what is being risked by paying off the mortgage?
Running out of money before you die (Portfolio failure). If you have paid off your mortgage you have taken money out of your portfolio. With these mortgage terms you are safer with a larger portfolio and a mortgage payment per the various models. Inflation is the number one cause of portfolio failure. Having a larger portfolio and a fixed rate 30 year inflation hedge mortgage would help mitigate the risk of portfolio failure. For those using a 4% SWR they are saying that investments will increase by 4% + inflation over a long period of time. Those are using a 3% SWR or lower they are working significantly longer to get to that level. They would speed up their retirement by keeping their mortgage and investing the difference at these rates. If our investments don't return greater than 4% then we are all screwed unless you are using a SWR of 1% or less.
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Running out of money before you die (Portfolio failure). If you have paid off your mortgage you have taken money out of your portfolio. With these mortgage terms you are safer with a larger portfolio and a mortgage payment per the various models. Inflation is the number one cause of portfolio failure. Having a larger portfolio and a fixed rate 30 year inflation hedge mortgage would help mitigate the risk of portfolio failure. For those using a 4% SWR they are saying that investments will increase by 4% + inflation over a long period of time. Those are using a 3% SWR or lower they are working significantly longer to get to that level. They would speed up their retirement by keeping their mortgage and investing the difference at these rates. If our investments don't return greater than 4% then we are all screwed unless you are using a SWR of 1% or less.
So would you say that paying off a mortgage early or paying for a house in cash is not risky if you're not depending on a portfolio to retire?
A fourth time.... the decision to pay off or keep a mortgage depends on the situation.
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Running out of money before you die (Portfolio failure). If you have paid off your mortgage you have taken money out of your portfolio. With these mortgage terms you are safer with a larger portfolio and a mortgage payment per the various models. Inflation is the number one cause of portfolio failure. Having a larger portfolio and a fixed rate 30 year inflation hedge mortgage would help mitigate the risk of portfolio failure. For those using a 4% SWR they are saying that investments will increase by 4% + inflation over a long period of time. Those are using a 3% SWR or lower they are working significantly longer to get to that level. They would speed up their retirement by keeping their mortgage and investing the difference at these rates. If our investments don't return greater than 4% then we are all screwed unless you are using a SWR of 1% or less.
So would you say that paying off a mortgage early or paying for a house in cash is NOT risky if you're NOT depending on a portfolio to retire?
A fourth time.... the decision to pay off or keep a mortgage depends on the situation.
I said that you could go to Vegas and blow every last penny if you don't need your portfolio to retire. You most likely worked much longer than needed if you don't need your portfolio to retire or to fund your retirement, healthcare, children's education, etc. So if you are in a situation that does not matter, you have no risk in buying bitcoins, tulips, investing in the stock market, etc. Your financial situation would be much better off if you kept a mortgage and invested, but if you have money to burn then it does not matter. Just like it does not matter if you invest, put your money under the mattress, give all of your portfolio away, burn the cash or anything else. For those that need to fund our future with a portfolio then it is riskier to have a paid off house. You are in a situation with zero risk either way. Statistically speaking your heirs, charities, etc will be much happier if you keep your mortgage and invest the money in the stock market.
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I said that you could go to Vegas and blow every last penny if you don't need your portfolio to retire. You most likely worked much longer than needed if you don't need your portfolio to retire or to fund your retirement, healthcare, children's education, etc. So if you are in a situation that does not matter, you have no risk in buying bitcoins, tulips, investing in the stock market, etc. Your financial situation would be much better off if you kept a mortgage and invested, but if you have money to burn then it does not matter. Just like it does not matter if you invest, put your money under the mattress, give all of your portfolio away, burn the cash or anything else. For those that need to fund our future with a portfolio then it is riskier to have a paid off house. You are in a situation with zero risk either way. Statistically speaking your heirs, charities, etc will be much happier if you keep your mortgage and invest the money in the stock market.
I'm not sure I see any difference between a portfolio worth $X amount and a life insurance check and real estate holdings worth a similar amount and the same life insurance check.
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No one is arguing that mathematically, 3.25% return (paying off mortgage) is better than 7% return (historical stock market return). You don't have to shout "THE RETURN IS NOT BETTER." No one is saying it is. What some folks are saying--and which some other folks don't seem to be hearing--is that for them, maximizing the expected return is not the absolute #1 priority. There is more than one path to FI and to a happy life. If it were only about the money, then we'd all be living in our cars while slaving away at the highest-paying jobs we could find, and we'd borrow to the hilt so we could invest more. Does everyone here have the biggest mortgages they can afford? If not, why not, when the potential market return is so great?
Paying down a mortgage has benefits that Mykl and mefla and Bjorn have exhaustively described. The security and peace of mind--and low expenses--that come from being mortgage-free are worth more than an extra 3% to them, and to a lot of other people. Can we let it go already?
Since you lose security by paying off a mortgage and since your piece of mind is only imaginary, no. For those outside the country without access to 30 year fixed rates I think we have been clear paying it down makes sense
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Since you lose security by paying off a mortgage and since your piece of mind is only imaginary, no. For those outside the country without access to 30 year fixed rates I think we have been clear paying it down makes sense
The part about not getting a 30 year fixed rate makes sense but not the part about losing security by paying off a mortgage. How do you lose security ?
In Norway only about 10% of the people fix their rates, and you can only fix them for 3, 5 or 10 years.
In Australia the rate is currently 5.5% and you can only fix for I think 5 years tops. Plus that 5.5 % gives you no tax benefits so paying off your mortgage is pretty much the best financial option.
With a paid off house it doesn't matter if 2008 happens again, because diminished real estate value doesn't change the fact that the house continues to function as my residence.
There's no adjustment in lifestyle, there's no panic over how the payment is going to be made, there's no slaving over spreadsheets to determine how to minimize damage to my portfolio while still making that payment, and there's no applying for a position at Wal-Mart to fill in the gaps.
Even in America I think that this holds true. There may be significant advantages in terms of your overall portfolio to paying off the mortgage.
A fourth time.... the decision to pay off or keep a mortgage depends on the situation.
I think that this is obvious.
I also stated earlier that you do gain benefits from owning a house. The financial benefits are the cost of renting that house less any holding costs. This means you require this much less money for life. It should reduce your expenses significantly assuming you have bought a house that makes sense. It may also have additional benefits as that income is not taxed as it is not earned. Lastly it hedges housing costs for life. These aren't trivial little details that can be glossed over by stating that stocks historically have provided better returns.
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Since you lose security by paying off a mortgage and since your piece of mind is only imaginary, no. For those outside the country without access to 30 year fixed rates I think we have been clear paying it down makes sense
The part about not getting a 30 year fixed rate makes sense but not the part about losing security by paying off a mortgage. How do you lose security ?
In Norway only about 10% of the people fix their rates, and you can only fix them for 3, 5 or 10 years.
In Australia the rate is currently 5.5% and you can only fix for I think 5 years tops. Plus that 5.5 % gives you no tax benefits so paying off your mortgage is pretty much the best financial option.
With a paid off house it doesn't matter if 2008 happens again, because diminished real estate value doesn't change the fact that the house continues to function as my residence.
There's no adjustment in lifestyle, there's no panic over how the payment is going to be made, there's no slaving over spreadsheets to determine how to minimize damage to my portfolio while still making that payment, and there's no applying for a position at Wal-Mart to fill in the gaps.
Even in America I think that this holds true. There may be significant advantages in terms of your overall portfolio to paying off the mortgage.
A fourth time.... the decision to pay off or keep a mortgage depends on the situation.
I think that this is obvious.
I also stated earlier that you do gain benefits from owning a house. The financial benefits are the cost of renting that house less any holding costs. This means you require this much less money for life. It should reduce your expenses significantly assuming you have bought a house that makes sense. It may also have additional benefits as that income is not taxed as it is not earned. Lastly it hedges housing costs for life. These aren't trivial little details that can be glossed over by stating that stocks historically have provided better returns.
Actually it does not. Your insurance and property taxes go up, only the fixed part of your mortgage does not. Having a fixed mortgage in the US at these rates, is better than paying down because that money can be earning you money. If you pay it down, all it does is lower your costs.
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Since you lose security by paying off a mortgage and since your piece of mind is only imaginary, no. For those outside the country without access to 30 year fixed rates I think we have been clear paying it down makes sense
The part about not getting a 30 year fixed rate makes sense but not the part about losing security by paying off a mortgage. How do you lose security ?
In Norway only about 10% of the people fix their rates, and you can only fix them for 3, 5 or 10 years.
In Australia the rate is currently 5.5% and you can only fix for I think 5 years tops. Plus that 5.5 % gives you no tax benefits so paying off your mortgage is pretty much the best financial option.
With a paid off house it doesn't matter if 2008 happens again, because diminished real estate value doesn't change the fact that the house continues to function as my residence.
There's no adjustment in lifestyle, there's no panic over how the payment is going to be made, there's no slaving over spreadsheets to determine how to minimize damage to my portfolio while still making that payment, and there's no applying for a position at Wal-Mart to fill in the gaps.
Even in America I think that this holds true. There may be significant advantages in terms of your overall portfolio to paying off the mortgage.
A fourth time.... the decision to pay off or keep a mortgage depends on the situation.
I think that this is obvious.
I also stated earlier that you do gain benefits from owning a house. The financial benefits are the cost of renting that house less any holding costs. This means you require this much less money for life. It should reduce your expenses significantly assuming you have bought a house that makes sense. It may also have additional benefits as that income is not taxed as it is not earned. Lastly it hedges housing costs for life. These aren't trivial little details that can be glossed over by stating that stocks historically have provided better returns.
There isnt have you paid attention to anything anyone has said? i dont think you have. if you have a 30 year fixed rate mortgage you lose the security ie increase risk of running out of money before you die. its a plain and simple fact based on historic markets. Doesnt F'n matter if 2008 happens right when you retire or not. we are not preaching this b/c you can make more money in the market than in a house over time. Its b/c a house payment is also inflation proof. A by product of the market making you more money is increased security in the event of a down market. You have more liquid capital. etc. etc.
And stop bringing up people who cant get 30 year fixed rates at low rates... we've already covered they are best paying it off.
if you retired in 2008 with a 30 year mortgage at 4% vs retiring with your home paid off and the rest invested all things being equal the retiree with the mortgage will win.
EVERY. SINGLE. TIME.
its not a feeling its not a belief its not a false piece of mind or sense of security its actual security.
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Here's another question: Why does it matter if people classify it as debt or not? Is it just so you can feel better than them that you are debt free since you rent?
My mortgage is at 3.2% for 30 years. I'm not paying it off in less than 20. Really, I shouldn't be paying extra on it at all, but I am also somewhat risk adverse and wary of the markets (which I need to stop being...) so I have to do something with the extra money. I already have too much sitting in savings/checking accounts- and those aren't earning more than the mortgage interest, so better to the mortgage than sitting in one of those.
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If "being Debt free" creates more risk and less security in my life i'll always choose the more secure side even if it involves carrying debt. if someone were to say here is a one billion dollar loan i just want you to pay me 1 billion back plus the inflation and 4% interest in 30 years i'd take that every time.
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if you retired in 2008 with a 30 year mortgage at 4% vs retiring with your home paid off and the rest invested all things being equal the retiree with the mortgage will win.
EVERY. SINGLE. TIME.
its not a feeling its not a belief its not a false piece of mind or sense of security its actual security.
The question I keep asking, and getting no answer to, is: "What Investments?" What investments are reasonable enough that they can stack up as a risk you should take versus paying off the (admittedly amazingly low interest rate) mortgage?
We keep talking about "investment" like it's this giant cash machine where you'll never lose a dime. Of course a reasonable answer is "diversification", but you can't diversify much if you don't already have a boatload of cash to invest.
I've had stocks go out from under me with alarming regularity. Specific examples I can give are SDRL and some Thermo- stocks. I wasn't a stockholder in the "Old" GM or Enron, but those come to mind as well. I nearly bought petroleum stocks to get some of those delicious dividends, but where are those stocks now?
I even had a mutual fund managed by one large brokerage firm that crashed so hard back in the early-2000's that it took five years to return to where it was when I did the asset transfer into the fund. Everyone around me saying they only lost "30% and made that back quick", where mine lost 50% and sat there for years.
And the whole time I was taking it on the chin in that mutual fund, I still had to keep paying my mortgage...and back then, it was 6%, 30 year note. My credit union ate me alive on that one.
Now look: I'm not saying I don't invest. I do, but very differently than I used to: pre-tax and much more risk-averse. What I'll grant you is that we're in this very "interesting time" when we should take advantage of the opportunities available and use that 4% mortgage as the inflation hedge you so rightly claim it is...
But if I'm going to be "smarter guy" and come out richer, how do I do it? Is it as simple as going into Vanguard indexed funds or Betterment and let'er ride?
And, if you prefer to simply direct me to threads here on MMM, that's fair. It's a huge forum and I've not been able to read even a fraction of the amazing knowledge here....
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The question I keep asking, and getting no answer to, is: "What Investments?" What investments are reasonable enough that they can stack up as a risk you should take versus paying off the (admittedly amazingly low interest rate) mortgage?
We keep talking about "investment" like it's this giant cash machine where you'll never lose a dime. Of course a reasonable answer is "diversification", but you can't diversify much if you don't already have a boatload of cash to invest.
You can invest in 3 ETFs:
- US total stock market
- International markets
- Bonds
There is no real minimum investment amount [my ETF cost/share is around $30-$40]. You are highly diversified through thousands of companies around the world plus the bond market.
My broker doesn't charge a fee to buy ETFs and the MERs are low. It's win-win-win.
-- Vik
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The question I keep asking, and getting no answer to, is: "What Investments?" What investments are reasonable enough that they can stack up as a risk you should take versus paying off the (admittedly amazingly low interest rate) mortgage?
We keep talking about "investment" like it's this giant cash machine where you'll never lose a dime. Of course a reasonable answer is "diversification", but you can't diversify much if you don't already have a boatload of cash to invest.
...
But if I'm going to be "smarter guy" and come out richer, how do I do it? Is it as simple as going into Vanguard indexed funds or Betterment and let'er ride?
...
Hi mefla
This conversation seems to have gotten a bit heated, so lately I've kept my distance (plus I've had a few RL emergencies to deal with).
A few thoughts: The 4% WR was based on the trinity study which looked at all monthly historical periods of the SP500 plus US treasury bonds. To paraphrase, it concluded that you can withdraw 4%/year regardless of market conditions and have a very low (but not 0%) probability of running out of money over any 30 year period.
The key word above is SP500. In your earlier statement you asked about "diversification" - that's exactly what an SP500 index fund gives you. You do not need "a boatload of cash to invest" to have diversification now-a-days... you only need $1,000 to put into Vanguards SP500, Total Market, or even blended index funds (which includes the SP500 + bonds). Investing in individual stocks will inherently be more risky than investing in 500 of the largest companies, because as you've rightly stated, if one tanks your portfolio can take years (or decades) to recover.
EDIT: As Vikyb rightly pointed out, there are even cheaper ways of achieving broad diversification into US and international equities plus bond funds. You can achieve a level of diversity today with a few hundred $ that we couldn't dream of just 20 years ago.
Finally, regarding 'risk' - there's two sides to every risk equation. The first side is what you stand to loose if you make an investment, and this is the side that people tend to focus on, mostly because it's easy to understand and fairly easy to calculate. If I have $100k, and the market drops 20%, I "loose" $20k (but only on paper, unless I sell). The other side of the 'risk' coin is what you loose by not making the investment. This is largely ignored, harder to calculate and I think a source of the confusion here. For example, let's say you have $100k again. If you keep it in a safety-deposit box for 20 years (or in a 0% yield insured Money Market Account) you can be assured that you will have $100k in 20 years. The risk of loss at first appears to be 0. "That's as safe as you can get!" some people will say.
But we realize that isn't true. In fact you lose out to inflation every year, so that $100k will be worth about $60.1k in 20 years (2.5% inflation). But the real 'risk' is losing out on what you could have earned had you placed it in an SP500 fund. This is admittedly hard to calculate/predict, but we can use history as a guide. For 20 year periods, the SP500 has given an annual return of 0.7% to 13% after inflation. That gives you a spread of $115k to $3.9M. That's a huge range, but in all cases it's better than cash or a savings account (at current yields). Since your mortgage is fixed (inflation hedge), the SP500 also beats out paying down a mortgage early. FYI the median return over 20 year periods would be $466k.
This is what boarder42 and others mean when they say that it's more 'risky' to pay off a mortgage at 3% - they are taking into account the loss you would incur if you had invested.
All of this of course assumes that the future will operate more-or-less the same as the recent past, which is another lively argument that comes up on these boards.
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I dont understand the What investments comment if you have read MMM at all he recommends VTSAX for US stock market exposure and the vanguard total stock market international fund. All of these have ETFs associated with them that you can invest in with vangaurd for free with no trading fees. VTI is VTSAX equivalent. and VXUS is the international stock market equivalent.
its not magic its investing in the total market every thing i've said above was run against cfiresim with an estimated 75% Equity to 25% bond exposure.
And if you are invested so conservative that you're mortgage at even 5% is less than you are making in the market then you will be working along long time b/c your SWR will be a max of 2% and probably closer to 1%.
and saying youre risk averse and choosing to keep your money not invested in the total market actually creates more risk for you unless your investment gains equal or exceed the market. you're losing to inflation etc.
Yes the market may be more volatile over the short term you may have a 2008 but if you kept your money invested and added to it during that time you came out glowing by the end of 2013. if you were retired already there are dozens of options available to you if you have to cut back to keep a good SWR. but over time you're creating more risk by not holding these investments. does that make sense. every day/month/year that goes by you choose to put 500 extra towards your mortgage compounds and creates more risk.
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If you think of your personal financials as a "business" would, you need to consider the following:
Debt and Liabilities
Assets
Risk versus Return on your Investment, and
CASH FLOW
The thread so far has discussed the first three, but no one has mentioned CASH FLOW, which, as we know, is VITAL for most business' success. Even if you are earning more on your investments than you pay on your mortgage, it means little, if it ties up your cash flow beyond a comfort point.
I expect that many of us who opt to paying off a mortgage while talking about lowering risk, are also thinking about the flexibilty of available cashflow, versus tied-up investment commitments that may take 1 month to 5 years to free up. Obviously case by case dependent, but think about it. Sometimes cash flow and flexibilty is more important that absolute returns.
I would definitely agree with all the "invest" arguments, if the investment created fixed income or dividends at a rate higher than the mortgage, with similar risk as real estate.
Your house is about as unliquid an asset as you can get vs stocks that i can sell tomorrow. so Cash flow is better in a world with the money invested. your cash flow arguement holds no water in this context as the alternative to being invested in stocks is invested in a building that you would have to sell and vacate.
and dont even start the dividend arguement on here we dont need to get that going about how much you lose by trying to chase dividends. they arent printed out of thin air.
Your not backing your less risk argument - besides not having access to a 30 year 4% mortgage there hasnt been one argument that holds water.
Cash flow
Case A paid off house 200k in house. i think we can all agree this is a concrete asset
Case B invested in VTSAX taxable account. - 200k that can be taken out at any time and be in your bank in less than a week.
Agreed that a house is a sunk cost, for all intents and purposes... but whether you have a mortgage or not, you are still committed to the same "sunk cost" of the house purchase, for the same duration.
Again, thinking like a business --
You can choose to carry a loan on your property versus buy it outright -- this is done when you want to keep capital available for other investments (which may be more or less liquid, but with the intent to have a better rate of return) -- this is essentially your argument about the bottom line value of keeping a mortgage to allow more investments. This reduces your cash flow by increasing your monthly expenses, for a longer term gain.
OR
You can choose to eliminate / pay down mortgage, eliminating that monthly EXPENSE, and freeing up CASH FLOW, probably at the cost of reduced overall investment income (assuming you make good choices and don't have a bad year!). This is the choice if you want available monthly cash flow, for items such as making payroll, or on a personal side, for club memberships. --As most investments are rarely going to yield the same monthly / dividend income as eliminating the mortgage payment.... Over the long term it is less $$ to your balance sheet to pay off mortgage, but for some businesses, CASH FLOW is much more important, and I am willing to guess that there are personal situations where that holds true as well..
What's that you say -- why would you not just sell your investment a little every month to cover the cash flow --?? because some of the better investments don't do that well, cost a bit, or it is cumbersome / time delayed.
Just say'n -- Short term cashflow availability can be more important than overall returns, depending on the situation.
THANK YOU! I can't comprehend how selling an asset would be a sound cash flow strategy. << MBAs lined up in high-five formation.>>
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If you pay it down, all it does is lower your costs.
But depending on your situation, there can be a lot of value in lowering your costs.
if you have a 30 year fixed rate mortgage you lose the security ie increase risk of running out of money before you die. its a plain and simple fact based on historic markets.
You keep saying this like it applies to everybody. It doesn't.
If you have passive income from anything other than the stock market, your equation doesn't work. Some of us have worked to create passive income streams from multiple sources to increase retirement security and have found that in our specific equation that lowering shorter term costs to the detriment of long term gains works better for us when there's no risk of completely running out of money.
Man, your approach here is fine. You've obviously done your research and you're making the numbers work for you. But your path is not the only one to take, and telling people they're "incorrect" when you don't seem to understand that there's more than one way to reach this goal is flat out rude. Then to go out and drop passive aggressive insults about "feelings" and "facts" is just disrespectful.
I'm not surprised by how you're behaving here given your age, but something you may learn in the future is that no matter how right you may be on any given subject, people are more likely to ignore your words than take them to heart if they're being insulted by the person presenting it to them.
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If you pay it down, all it does is lower your costs.
But depending on your situation, there can be a lot of value in lowering your costs.
if you have a 30 year fixed rate mortgage you lose the security ie increase risk of running out of money before you die. its a plain and simple fact based on historic markets.
You keep saying this like it applies to everybody. It doesn't.
If you have passive income from anything other than the stock market, your equation doesn't work. Some of us have worked to create passive income streams from multiple sources to increase retirement security and have found that in our specific equation that lowering shorter term costs to the detriment of long term gains works better for us when there's no risk of completely running out of money.
Man, your approach here is fine. You've obviously done your research and you're making the numbers work for you. But your path is not the only one to take, and telling people they're "incorrect" when you don't seem to understand that there's more than one way to reach this goal is flat out rude. Then to go out and drop passive aggressive insults about "feelings" and "facts" is just disrespectful.
I'm not surprised by how you're behaving here given your age, but something you may learn in the future is that no matter how right you may be on any given subject, people are more likely to ignore your words than take them to heart if they're being insulted by the person presenting it to them.
Yes the equation still does work... it is still safer to have that money in the market even if its the only money you have in the market.
Your other investments must be 100% bullet proof clad in gold stained shit. b/c there isnt a bullet proof investment. you've hinted its realestate. but if the market falls into this black hole oblivion people keep talking about your real estate money goes by the way side. your dividends go by the way side.
Passive income is still funded by the economy... the money is coming from somewhere. so unless you're printing it ... the doomsday you're afraid of will affect this passive income stream as well.
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Yes the equation still does work... it is still safer to have that money in the market even if its the only money you have in the market.
Your other investments must be 100% bullet proof clad in gold stained shit. b/c there isnt a bullet proof investment. you've hinted its realestate. but if the market falls into this black hole oblivion people keep talking about your real estate money goes by the way side. your dividends go by the way side.
Passive income is still funded by the economy... the money is coming from somewhere. so unless you're printing it ... the doomsday you're afraid of will affect this passive income stream as well.
Whatever you say man, clearly you know everything about everything.
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you still have posted nothing of your amazing FIRE plan that i assume others would love to jump on board with that is effected in no way by the economy of any kind.
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you still have posted nothing of your amazing FIRE plan that i assume others would love to jump on board with that is effected in no way by the economy of any kind.
I would have done so earlier, but when people enter a conversation with me by saying "you're wrong" before asking me to expand upon a statement it tells me that you're more interested in winning an argument than you are seeing this from another angle.
If you want to argue, that's fine, we'll argue. But don't come back later and expect that I'm going to shift to a polite exchanging of ideas when you've proven that you'd rather shit on everything I have to say.
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you havent made any argument. except for i'm special so math doesnt apply to me.
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The question I keep asking, and getting no answer to, is: "What Investments?" What investments are reasonable enough that they can stack up as a risk you should take versus paying off the (admittedly amazingly low interest rate) mortgage?
We keep talking about "investment" like it's this giant cash machine where you'll never lose a dime. Of course a reasonable answer is "diversification", but you can't diversify much if you don't already have a boatload of cash to invest.
With $1000 you could buy https://personal.vanguard.com/us/funds/snapshot?FundId=0699&FundIntExt=INT. Does that fulfill your diversification desire?
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you havent made any argument. except for i'm special so math doesnt apply to me.
BINGO
I didn't make an argument. I made a vague general statement about how decisions on a specific subject are influenced by an individual's unique situation. So telling me that I'm "incorrect" was jumping the gun a bit, eh?
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Well shortly said....
I do classify mortgage as debt and it does not matter if the house or apartment is for your own use(personal home) or investment apartment that you rent for other people.
It is always debt and I do consider it debt. However as debt goes I have no other debts... no credit card debt, no student loan, no car loan, nothing except a lot of mortgage debt... but I have passive income from 3 apartments that I rent and that income is greater then my monthly automatic debt reduction. Of course I can do extra loan reductions.
In my country(Finland, Europe) 30 year mortgage is not common. I have never ever taken such a long debt... 20 years mortgage is pretty common in my country.
What people fail to see that there exist bad debt and good debt. If the debt is for an asset that give you lot of income and you value that asset more then the negative debt then it is so called good debt.
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The question I keep asking, and getting no answer to, is: "What Investments?" What investments are reasonable enough that they can stack up as a risk you should take versus paying off the (admittedly amazingly low interest rate) mortgage?
...
You can invest in 3 ETFs:
- US total stock market
- International markets
- Bonds
There is no really minimum investment amount [my ETF cost/share is around $30-$40]. You are highly diversified through thousands of companies around the world plus the bond market. My broker doesn't charge a fee to buy ETFs and the MERs are low. It's win-win-win.
-- Vik
Thank you Vikb. EDIT: ALSO THANKS to:
nereo, boarder42, goldielocks, Mykl, Landord2015, NoraLenderbee, stevo, arebelspy
You people are the bomb, a force to be reckoned with. Thanks for your comments!
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The question I keep asking, and getting no answer to, is: "What Investments?" What investments are reasonable enough that they can stack up as a risk you should take versus paying off the (admittedly amazingly low interest rate) mortgage?
We keep talking about "investment" like it's this giant cash machine where you'll never lose a dime. Of course a reasonable answer is "diversification", but you can't diversify much if you don't already have a boatload of cash to invest.
You can invest in 3 ETFs:
- US total stock market
- International markets
- Bonds
There is no really minimum investment amount [my ETF cost/share is around $30-$40]. You are highly diversified through thousands of companies around the world plus the bond market.
My broker doesn't charge a fee to buy ETFs and the MERs are low. It's win-win-win.
-- Vik
Thank you Vikb. You are the only person who gave me an answer I can study, think about and act upon.
to be frank this is 100% what MMM says to do so being a forum member most would have thought you had discovered this already.
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MOD NOTE: Please stop sniping back and forth, boarder42 and mefla. Keep in mind forum rule #1. Thanks.
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The question I keep asking, and getting no answer to, is: "What Investments?" What investments are reasonable enough that they can stack up as a risk you should take versus paying off the (admittedly amazingly low interest rate) mortgage?
We keep talking about "investment" like it's this giant cash machine where you'll never lose a dime. Of course a reasonable answer is "diversification", but you can't diversify much if you don't already have a boatload of cash to invest.
You can invest in 3 ETFs:
- US total stock market
- International markets
- Bonds
There is no really minimum investment amount [my ETF cost/share is around $30-$40]. You are highly diversified through thousands of companies around the world plus the bond market.
My broker doesn't charge a fee to buy ETFs and the MERs are low. It's win-win-win.
-- Vik
Thank you Vikb. You are the only person who gave me an answer I can study, think about and act upon.
to be frank this is 100% what MMM says to do so being a forum member most would have thought you had discovered this already.
I've been hammering on this material for years - I've read the FAQ's, dozens (hundreds?) of forum threads, most of the website articles, but with what VikB says, I know now that I can go to E*TRADE and I know what to look for and how to work it.
Now can you please just leave me the hell alone? You look for a way to dig on me even to the very end? Damn.
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Just an FYI etrade will charge you fees to trade these ETF's thats why vanguard is recommended here.
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Just an FYI etrade will charge you fees to trade these ETF's thats why vanguard is recommended here.
Yeah, but Vanguard is for USA. I live in Finland(Europe). The pension plan in my country is pretty simple. The law dictates that from salary a portion goes to pension etc.
However IF I would live in USA yeah sure Vanguard and 401k etc....whatever, but I can't judge them I am not an expert on them.
I don't like stock investing. However my own brother will invest in stocks, but it is because he does not feel he has enough money to invest in real estate and he has children(costs) and a big mortgage. My brother does have a better career then me and he has a very high paid job/salary and his wife also works so they do pretty well.
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I've been hammering on this material for years - I've read the FAQ's, dozens (hundreds?) of forum threads, most of the website articles, but with what VikB says, I know now that I can go to E*TRADE and I know what to look for and how to work it.
Check out JLCollins' Stock Series. It's by far the best beginner resource out there for how to invest your money, IMO.
http://jlcollinsnh.com/stock-series
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you havent made any argument. except for i'm special so math doesnt apply to me.
Your argument has been "Keeping the mortgage produces a higher return than paying off the mortgage AND NOTHING ELSE COUNTS." People are telling you that to them, there are some intangible, non-measureable things that count more toward their happiness. Your calling them"imaginary" doesn't make them unimportant.
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you havent made any argument. except for i'm special so math doesnt apply to me.
Your argument has been "Keeping the mortgage produces a higher return than paying off the mortgage AND NOTHING ELSE COUNTS." People are telling you that to them, there are some intangible, non-measureable things that count more toward their happiness. Your calling them"imaginary" doesn't make them unimportant.
i was saying the feeling of safety and actually being safe are 2 different things if you want to make an less safe decision b/c it feels safer to you then you're your own person go right ahead. people do it every day when they get in their car but refuse to fly on a plane.
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Well as I see it is subjective taste...
I like Robert Kioysaki:
https://www.youtube.com/watch?v=qCFoh-WBhus
and before someone hater claims he is scammer I don't think so though I would not pay for his expensive courses. Please note that video is from a decade ago. Today's real estate market is tougher if you go for investing with thought oh my god this apartment will rise in value you might crash and burn very badly.
However I also like
David Ramsey
and most of you think that paying of debt is good. I agree.
That said consider this IF I take a new loan today I will NOT get so good loan agreements as I did a few years ago which was perfect timing for loan.
Instead of me taking a NEW LOAN with less good loan I can sell one of my apartments. Use all that money and buy another apartment or investing in something big.
Likewise instead of paying off very low interest mortgage... if you plan to invest big then saving money and using that is better then a new loan.
That said I also agree that pay of mortgage is good. Who of you wants to make the banks rich at your expense? Pay of mortgage slow as possibly and that is what you do.
This is subjective to risk taking...
You want to play safe? Do as David Ramsey tell you pay of fast mortgage.
You want to take risks? Take risks... but whatever is your fate if you become rich, wealthy, or do ok, or crash and burn... well I can not foresee the future.
For me there is a fine balance. Doing extra loan reductions is good for me, but IF I want to invest big then maybe it is time to save money and not been so keen on paying of mortgage very fast.
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if you have a 30 year fixed rate mortgage you lose the security ie increase risk of running out of money before you die. its a plain and simple fact based on historic markets. Doesnt F'n matter if 2008 happens right when you retire or not. we are not preaching this b/c you can make more money in the market than in a house over time. Its b/c a house payment is also inflation proof. A by product of the market making you more money is increased security in the event of a down market. You have more liquid capital. etc. etc.
Hang on. I just want to be clear on this. Your argument comes down to a simplistic analysis of historical stock market returns. I get it now.
The problem is that you do have diversification and decreased debt if you pay off your mortgage. Have you ever considered asset allocation. Its a pretty important topic when it comes to getting the best risk/return outcome. You are conveniently ignoring this component.
And stop bringing up people who cant get 30 year fixed rates at low rates... we've already covered they are best paying it off.
A breakthrough. Paying off the mortgage is in some instances the right option.
Just a little side point that maybe you should think about as well. The US market with regards to a mortgage is unusual. I'm pretty confident that this would never occur in a free market economy. This brings up the point on how much longer the US government will continue to prop up this market.
its not a feeling its not a belief its not a false piece of mind or sense of security its actual security.
I'm not sold on this at all. I understand that its your opinion based upon your understanding of the historical returns of the stick market compared to the housing market. I accept in the US in a lot of situations it is probably true however I think the point that you are missing is that different people will classify risk/reward criteria differently to yourself. You also have to accept that your historical returns analysis might not make a significant different with regards to your overall returns for lots of people. So the theoretical benefit of keeping your mortgage for as long as possible compared to the actual additional return with increase risk exposure might not suit everyone.
With all due respect you didn't understand the concept of earned value of owning a house. I think you have missed out on some other factors in your analysis as well.
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Actually it does not. Your insurance and property taxes go up, only the fixed part of your mortgage does not. Having a fixed mortgage in the US at these rates, is better than paying down because that money can be earning you money. If you pay it down, all it does is lower your costs.
I disagree with this comment completely. How much of a percentage are your insurance and property taxes compared to rent. Lets say its not a 100% hedge but if not its pretty close to that.
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Your argument has been "Keeping the mortgage produces a higher return than paying off the mortgage AND NOTHING ELSE COUNTS." People are telling you that to them, there are some intangible, non-measureable things that count more toward their happiness. Your calling them"imaginary" doesn't make them unimportant.
Correct. Investing isn't just about a certain % gain. Don't get me wrong as that is important but its not everything.
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you havent made any argument. except for i'm special so math doesnt apply to me.
Your argument has been "Keeping the mortgage produces a higher return than paying off the mortgage AND NOTHING ELSE COUNTS." People are telling you that to them, there are some intangible, non-measureable things that count more toward their happiness. Your calling them"imaginary" doesn't make them unimportant.
i was saying the feeling of safety and actually being safe are 2 different things if you want to make an less safe decision b/c it feels safer to you then you're your own person go right ahead. people do it every day when they get in their car but refuse to fly on a plane.
Keeping the mortgage is not safer unless you define safety exclusively as "having more money." But safety isn't just one thing to everybody. For some people, safety = "not owing money." For others, safety = "living expenses below X." For others, safety = "lowest possible risk." Mefla, for example, is someone who clearly values minimizing risk higher than maximizing gains. That doesn't make Mefla an idiot about math; it just means s/he has different values from you.
If I drive a car because I believe it's safer than flying, then yes, I'm fooling myself. But if I drive a car because it's cheaper, or because I like driving better than flying, or because I want to haul a truckload of stuff, I'm not fooling myself--I'm prioritizing something higher than the absolute risk of death.
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The question I keep asking, and getting no answer to, is: "What Investments?" What investments are reasonable enough that they can stack up as a risk you should take versus paying off the (admittedly amazingly low interest rate) mortgage?
to be frank this is 100% what MMM says to do so being a forum member most would have thought you had discovered this already.
I tried to buy VTSAX through Scottrade over two years ago and they wanted $3k minimum so I shyed away - I usually test investments with less than that.
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I updated my Note #162 above to add thanks to all of you who answered me. You have helped me tremendously...
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I'll see what I need to do for working directly with Vanguard...
mefla, anything specific you did not like about the fund in post #159 (http://forum.mrmoneymustache.com/welcome-to-the-forum/why-do-some-people-not-classify-mortgages-as-debt/msg603104/#msg603104)?
It might seem that...
Total US Stock Market Index 62.9%
Total International Stock Index 27.1%
Total US Bond Market Index 8.0%
Total International Bond Index 2.0%
...would be diversified enough, and have a low enough entry cost, but that's just a guess. Your thoughts?
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I'll see what I need to do for working directly with Vanguard...
mefla, anything specific you did not like about the fund in post #159 (http://forum.mrmoneymustache.com/welcome-to-the-forum/why-do-some-people-not-classify-mortgages-as-debt/msg603104/#msg603104)?
It might seem that...
Total US Stock Market Index 62.9%
Total International Stock Index 27.1%
Total US Bond Market Index 8.0%
Total International Bond Index 2.0%
...would be diversified enough, and have a low enough entry cost, but that's just a guess. Your thoughts?
Holy Crap, my bad, I missed that MDM, I clean missed that. Thank you!
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Mefla: Please start a new thread if you want investment advice. Your personal portfolio is not on the topic of classifying mortgages as debt.
Thanks.
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Mefla: Please start a new thread if you want investment advice. Your personal portfolio is not on the topic of classifying mortgages as debt.
Thanks.
Edited and removed this information, thank you.
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Thanks. :)
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I have mainly been following and participating in the other thread in 'Investor Alley'
http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/
I thought the following data resources might assist in the discussion:
Historical 30yr fixed mortgage rates:
http://www.freddiemac.com/pmms/pmms30.htm
Historical S&P500 total returns:
http://dqydj.net/sp-500-return-calculator/
Would be interesting to see correlation between starting level of rates and future equity returns, as well as whether average equity return outperformance vs mortgage rates over 30 years (if there is any outperformance) is statistically significant
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My definition of risk was defined based on the 4% SWR if you're not using this at all and have other means of getting all your money in retirement then the risk analysis doesnt apply to you. very few people hit this category here since thats the main source of income for most here. and if you retire based on the 4% SWR you have around a 70% chance of never running out of money. the chance of never running out of money increase by 5% if you have a 4% fixed interest mortgage for 30 years. therefore reducing your risk. so if someone is planning on even half of their retirement income coming from the stock market, then you have a higher likelihood of success if you carry a mortgage in retirement than someone who doesnt.
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i know my posts have been somewhat attacking but its b/c i believed paying off a mortgage was best as recent as 2 months ago. Just trying too hard to break peoples opinions. i'll go join the fun on investor alley that newnormal posted.
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I have mainly been following and participating in the other thread in 'Investor Alley'
http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/
Would be interesting to see correlation between starting level of rates and future equity returns, as well as whether average equity return outperformance vs mortgage rates over 30 years (if there is any outperformance) is statistically significant
See http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/msg603865/#msg603865.