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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: 1larogers on December 09, 2016, 09:08:45 PM

Title: Paying off mortgage?
Post by: 1larogers on December 09, 2016, 09:08:45 PM
This must have been addressed, but I can't find a blog entry for it.

I don't understand the thinking behind paying off a primary residence if you can finance for 3% and leverage the money for other investments with a higher return? I think this is pretty standard, but it doesn't seem to be the norm on this wonderful, amazing site. Thank you for all the inspiration. 
Title: Re: Paying off mortgage?
Post by: JustTrying on December 09, 2016, 09:42:41 PM
Yes, most mustachians would agree that you should invest rather than pay off the mortgage if your interest rate is super low.
Title: Re: Paying off mortgage?
Post by: WackyTomato on December 10, 2016, 03:29:26 AM
I disagree.

You can do all the math you want, but at then end of the day, paying off debts is never a bad move in my opinion.

There is also considerable psychological satisfaction from actually owning your house 100%.  Personally, I absolutely hate paying interests.
Title: Re: Paying off mortgage?
Post by: Davids on December 10, 2016, 06:05:05 AM
I would not fault anyone who has a 3% mortgage and pays it off early. There is a psychological factor of being debt free that some people value highly.
Title: Re: Paying off mortgage?
Post by: chasesfish on December 10, 2016, 06:38:04 AM
The never settled debate....just don't spend all the money.   Option A of paying off your mortgage and Option B of investing are both good choices.  Option C of blowing the money instead of doing A & B is the poor choice.

It usually comes down to a marginally higher net worth if you leave your mortgage in place vs. the peace of mind and lower monthly obligation of paying off your mortgage in full.
Title: Re: Paying off mortgage?
Post by: ltt on December 10, 2016, 08:20:18 AM
We paid off our mortgage about 8 years ago when the financial crisis was starting.  Have never regretted it--ever.  It was a fairly large payment that hasn't been hanging over our head for the last 8 years, and it feels great---never writing a monthly mortgage check.  From a financial standpoint, I understand why people say don't pay it off, but from a personal standpoint, I thoroughly understand why people say pay it off.  In the end, it's up to the individual and what works best for them.
Title: Re: Paying off mortgage?
Post by: Linea_Norway on December 10, 2016, 08:29:06 AM
I regretted once that I had paid off the mortage. About a year later we bought a cabin and didn't have enough stash to pay for it. So we had to take up a 50% mortage for a year and a half. As the house was paid down, I could just adjust the amount of loan on the house. We had to pay a new sum for a new mortgage. It might have been cheaper tp not have removed the whole loan.
But for all other respects, it is very satisfying to not have debts.
Title: Re: Paying off mortgage?
Post by: BlueHouse on December 10, 2016, 12:03:24 PM
It's a personal decision based on one's tolerance for risk.  That's what it comes down to. 

You identify the risks and quantify them before you can determine your tolerance for each risk.  Financial risk is only one part of the equation to me. 
Title: Re: Paying off mortgage?
Post by: Retire-Canada on December 10, 2016, 12:23:37 PM
This must have been addressed, but I can't find a blog entry for it.

I don't understand the thinking behind paying off a primary residence if you can finance for 3% and leverage the money for other investments with a higher return? I think this is pretty standard, but it doesn't seem to be the norm on this wonderful, amazing site. Thank you for all the inspiration.

I'd rather have $400K extra in my portfolio and a $400K mortgage as long as rates are low like they are now.
Title: Re: Paying off mortgage?
Post by: Debts_of_Despair on December 10, 2016, 12:24:52 PM
I like waking up every morning knowing I don't own anyone a single penny.  At the same time, I also like taking all the money that was previously going to my mortgage and putting it in investment accounts.  Best of both worlds, IMO.
Title: Re: Paying off mortgage?
Post by: t5inside on December 10, 2016, 12:27:39 PM
Personally I keep going back and forth. At 2.5% on a 15 year, I don't think I can bring myself to pay any extra. Instead what I plan to do is invest, then in 5-7 years when my investment account is worth the remaining mortgage balance, re-evaluate and maybe pay it off early (otherwise just keep investing, I'm only 29 and 44 is still young enough to pay it off)
Title: Re: Paying off mortgage?
Post by: LAGuy on December 10, 2016, 12:32:18 PM
One of the best reasons for carrying a mortgage is for the interest write off while working, especially if you're in the 25% tax bracket or higher. The supposed new Trump tax plan will massively increase standard deductions. If that happens, the ability for most of the middle class to write off their mortgage interest will go away and paying off the mortgage starts to seem like a much better idea. Certainly, having your mortgage paid off once you're no longer working is an extremely good idea as it allows you to reduce the amount of money you need to take from your investments, thus reducing your tax bill (or another way of looking at it, allow you to have more spend in retirement at a lower tax bill).
Title: Re: Paying off mortgage?
Post by: Debts_of_Despair on December 10, 2016, 01:16:27 PM
Re: interest tax deduction, I never understood this logic.  Pay the bank $100 so you can save $25 on taxes.  No thanks.  I understand it effectively lowers your interest rate but I'd rather just keep the $100 to do as I please with it.
Title: Re: Paying off mortgage?
Post by: Linea_Norway on December 10, 2016, 02:27:04 PM
This must have been addressed, but I can't find a blog entry for it.

I don't understand the thinking behind paying off a primary residence if you can finance for 3% and leverage the money for other investments with a higher return? I think this is pretty standard, but it doesn't seem to be the norm on this wonderful, amazing site. Thank you for all the inspiration.

I'd rather have $400K extra in my portfolio and a $400K mortgage as long as rates are low like they are now.

Isn't the issue with stock that it in theory can go down to zero. The chance is not very big, but it could happen. In that case you would keep sitting with the mortgage. It is taking an extra chance to invest with borrowed money.
Title: Re: Paying off mortgage?
Post by: lostamonkey on December 10, 2016, 02:46:06 PM
This must have been addressed, but I can't find a blog entry for it.

I don't understand the thinking behind paying off a primary residence if you can finance for 3% and leverage the money for other investments with a higher return? I think this is pretty standard, but it doesn't seem to be the norm on this wonderful, amazing site. Thank you for all the inspiration.

I'd rather have $400K extra in my portfolio and a $400K mortgage as long as rates are low like they are now.

Isn't the issue with stock that it in theory can go down to zero. The chance is not very big, but it could happen. In that case you would keep sitting with the mortgage. It is taking an extra chance to invest with borrowed money.

Mustachians are investing in index funds. There is almost a zero chance of them becoming worthless unless there is an appocalyse or communist revolution. Even if Vanguard went under, you would be fine. If there is an appocalyse or communist revolution, your money is the last thing you will be worried about.

If you choose to pay off your low interest mortgage early instead of investing, you will likely have to work longer and reach FIRE later. If the phychological benefits of being debt free for you is worth it then have at it.
Title: Re: Paying off mortgage?
Post by: Syonyk on December 10, 2016, 08:12:30 PM
Why don't you bring up religion and politics while you're at it? :p

Oh... well, I see politics already showed up anyway.

It depends on what you expect to happen going forward, and what your personal risk tolerances are.  Looking back, investing the extra seems reasonable.  Looking forward, with the world past peak oil, global weirding affecting economies, the bit of financial shell games going on to keep "growth" going, and other related things, it's not certain that the next decades will maintain the same growth as the last decades - which would favor the guaranteed return of paying off a mortgage over the uncertainty.

And then there's my problem, which was that banks don't loan money to bums.  Two months between jobs for moving?  That's fine.  Three months, even with a signed employment contract?  Well, that's just no good, and you're a worthless bum, because you could just go to Vegas and blow all that money after getting the mortgage, couldn't you?  So I shuffled some stuff and wrote a check.  The lender was not entertained when he figured out he wasn't getting a commission this time...
Title: Re: Paying off mortgage?
Post by: waltworks on December 10, 2016, 10:11:15 PM
Throw out the "world goes to hell" shitshow scenario, because in that case, it doesn't matter whether you paid off your house or invested. If your index funds go to zero, it's because we are all dead.

If owing money drives you nuts and you are very risk averse, pay it off.

If optimizing your finances and making calculated risk type decisions is your thing, don't pay it off any faster than you have to.

-W
Title: Re: Paying off mortgage?
Post by: Syonyk on December 10, 2016, 10:20:18 PM
They don't have to go to zero. They just have to offer a lower return than a mortgage interest rate over the period of relevance.
Title: Re: Paying off mortgage?
Post by: WackyTomato on December 11, 2016, 01:21:09 AM
If you choose to pay off your low interest mortgage early instead of investing, you will likely have to work longer and reach FIRE later. If the phychological benefits of being debt free for you is worth it then have at it.

This is highly questionable and it also depends on whether you plan on changing homes a lot over the next decade or two.

Also, banks are always taking a crapload of interests on your mortgage over the first few years, likely to mitigate the risks that the consumer will switch mortgage to another bank.  Personally, I don't know why this is legal but here we are...
Title: Re: Paying off mortgage?
Post by: waltworks on December 11, 2016, 10:09:39 AM
This is highly questionable and it also depends on whether you plan on changing homes a lot over the next decade or two.

Also, banks are always taking a crapload of interests on your mortgage over the first few years, likely to mitigate the risks that the consumer will switch mortgage to another bank.  Personally, I don't know why this is legal but here we are...

If this is your understanding of how amortization works, please, please stop offering financial advice to anyone (here or elsewhere).

Wow.

-W
Title: Re: Paying off mortgage?
Post by: BlueHouse on December 11, 2016, 10:26:33 AM
This is highly questionable and it also depends on whether you plan on changing homes a lot over the next decade or two.

Also, banks are always taking a crapload of interests on your mortgage over the first few years, likely to mitigate the risks that the consumer will switch mortgage to another bank.  Personally, I don't know why this is legal but here we are...

If this is your understanding of how amortization works, please, please stop offering financial advice to anyone (here or elsewhere).


Wow.

-W

What waltworks means is that the interest RATE (fixed) is the same throughout the loan.  The reason you're paying so much more in the beginning of the loan than toward the end of the loan is because your principal balance is higher.  The math is Interest Rate * Principal Balance = Interest owed (annual).  Do the calculation at the beginning of the loan when you still owe 200,000 and again at the end of the loan when you still owe $50,000 and you'll see the difference.   
I hope that helps.
Title: Re: Paying off mortgage?
Post by: waltworks on December 11, 2016, 10:28:54 AM
They don't have to go to zero. They just have to offer a lower return than a mortgage interest rate over the period of relevance.

This only sort of true, because it ignores the liquidity (pretty important) and diversification (very important) advantages of an index fund. Your house can have problems not covered by insurance, your neighborhood can get horribly crappy, a natural disaster can make your whole area uninhabitable, etc. And if you need money (to jump on another investment, to pay a debt, etc) it's a lot easier to sell some stock than take out a HELOC (which might be impossible to get anyway if you're FIRE without regular employment).

-W
Title: Re: Paying off mortgage?
Post by: tomsang on December 11, 2016, 10:54:20 AM
Everything you could ever want to know about paying off your mortgage!!!

http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/msg66727/#msg66727

There are calculators in the pages that show you how much it pushes back your retirement date by paying it off early vs. investing the funds.  Lots of discussion on how you are safer having a mortgage and a larger portfolio.  As someone mentioned it comes down to psychology.  The math and logic support keeping the mortgage, so the key is to reset the idea of it being bad to pay interest and reset the idea that you are safer with a paid off or partially paid off mortgage.  Good luck!

Title: Re: Paying off mortgage?
Post by: HoundDog on December 11, 2016, 11:14:29 AM
I highly recommend this article:

https://www.kitces.com/blog/why-keeping-a-mortgage-and-a-portfolio-may-not-be-worth-the-risk/

A quote from the article:

Quote
... its not sufficient to just get a higher return from stocks than it costs to borrow on the mortgage. The borrowing cost of the mortgage or rather, the effective return that you get by repaying the mortgage and eliminating the associated interest cost is a guaranteed, risk-free return. Investing in stocks, on the other hand, is risky. No investor would prudently pick a highly risky return just because its barely higher than a risk-free alternative!

In other words, what people forget is that there's a concept of "risk-adjusted return." Yes, an index fund can typically beat a low-interest mortgage. But one carries a degree of risk and the other doesn't.

The whole idea of investing is that you get a reward for taking on risk. So it's not enough that your stock investments give you a better return that paying off your 3.5% mortgage early. The question is, how much better was the return -- and was it worth the added risk? Some would argue that the difference needs to be about 4% in this case. In other words, if you felt you could get a 7.5% return in an index fund, then yes, that was the right thing to do vs. paying off the mortgage. Any lower and it's a lot dicier.

My point isn't that you should do one thing or another, or that 4% is the right figure to use. I just wanted to note that the issue isn't as simple as some seem to think.


Title: Re: Paying off mortgage?
Post by: tomsang on December 11, 2016, 11:32:39 AM
I highly recommend this article:

https://www.kitces.com/blog/why-keeping-a-mortgage-and-a-portfolio-may-not-be-worth-the-risk/

A quote from the article:

Quote
... its not sufficient to just get a higher return from stocks than it costs to borrow on the mortgage. The borrowing cost of the mortgage or rather, the effective return that you get by repaying the mortgage and eliminating the associated interest cost is a guaranteed, risk-free return. Investing in stocks, on the other hand, is risky. No investor would prudently pick a highly risky return just because its barely higher than a risk-free alternative!

In other words, what people forget is that there's a concept of "risk-adjusted return." Yes, an index fund can typically beat a low-interest mortgage. But one carries a degree of risk and the other doesn't.

The whole idea of investing is that you get a reward for taking on risk. So it's not enough that your stock investments give you a better return that paying off your 3.5% mortgage early. The question is, how much better was the return -- and was it worth the added risk? Some would argue that the difference needs to be about 4% in this case. In other words, if you felt you could get a 7.5% return in an index fund, then yes, that was the right thing to do vs. paying off the mortgage. Any lower and it's a lot dicier.

My point isn't that you should do one thing or another, or that 4% is the right figure to use. I just wanted to note that the issue isn't as simple as some seem to think.

If your investments are not going to outperform 3% or less after tax benefits over a 30 year period of time, then do not plan on retiring with a Safe Withdrawal Rate over 1%.  The US stock market has never had a 30 year stretch of returns less than 7%.  The reason the 4% SWR works is to adjust for inflation and for the ups and downs of the stock market.  If you are prepaying a 3% or less after tax benefits, you are locking in a loss compared to the 4% rule.  For the 4% rule to work you need to average approximately 7% over 30 years.  If you are locking in less that 3% you by definition are pushing out your retirement date.  Check out the other blog as it is pretty detailed. 

Prepaying a mortgage also locks up your capital in an illiquid asset.  If the shit hits the fan 3 years into paying off a mortgage early, you can not call up the bank and say that I have prepaid three years of payments.  They will say, make your monthly payment or we will start foreclosure proceedings.  Read the link and you will see the math, the added risk you are taking by locking up your investment capital into a mortgage, etc.
Title: Re: Paying off mortgage?
Post by: Linea_Norway on December 11, 2016, 11:33:49 AM
I have always had some rules:
- don't borrow money for something else than buying property or financing an education
- don't invest with money that you can't afford to loose in a worst case scenario

I personally are not extremely comfortable having a lot of money in stock. I use index funds and that feels a bit safer than other stock funds. But there is allways a risk that the marked might collapse and I wouldn't want to keep sitting with a high mortgage. But it is indeed one's personal choice for risk taking.
Title: Re: Paying off mortgage?
Post by: waltworks on December 11, 2016, 11:41:32 AM
I think the concept of "risk" is being misused here. The "risk" of running out of money is HIGHER with the paid off house.

Additionally, paying off a debt backed by a single asset in one location is probably not risk-free by any reasonable standard.

I sometimes wonder if the "I'm too conservative to own stocks" folks are just not great with math, because in the scenario we're talking about here, the conservative route is really the opposite. You can just *dislike debt* for whatever reason (which is totally legitimate) but you are taking on *more* risk by paying off a mortgage (at least the low interest ones most of us now presumably have in the US).

-W
Title: Re: Paying off mortgage?
Post by: tomsang on December 11, 2016, 11:50:13 AM
http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/msg66727/#msg66727

All of this has been covered in the posts above.  An area of confusion for those living outside of the country is that The US offers/Offered 30 year fixed rate mortgages for less than 4% and in many cases 3%, plus on top of that they allow you to deduct your mortgage interest from your taxes.  These loan interest rates can not increase or change unless you sell the house.  This was a gift from the government to spark investment in the US and financial security after the great recession.  It was a once in a life time gift to mortgage holders.  If you are prepaying your mortgage at these rates you are giving back this huge gift to homeowners.  The math and how much it pushes back your financial retirement date can be calculated, the same way that you can calculate your safety through Cfiresim and other calculators. 
Title: Re: Paying off mortgage?
Post by: Retire-Canada on December 11, 2016, 12:19:59 PM
Isn't the issue with stock that it in theory can go down to zero. The chance is not very big, but it could happen. In that case you would keep sitting with the mortgage. It is taking an extra chance to invest with borrowed money.

If the global stock market went to zero having a mortgage would be the least of my worries. It would be zombie & cannibal time. The only things that would have value would be chainsaws, gasoline, shotgun shells and MREs.

I willing to take my chances that my investment portfolio doesn't go to zero.

I think there is a greater chance my home value will go to zero than that ^^^ happening.
Title: Re: Paying off mortgage?
Post by: SeaEhm on December 11, 2016, 12:47:06 PM
Do what makes you happier and lets you sleep better at night.

Not every purchase and item of ownership is in the truest form of simplicity. 
Title: Re: Paying off mortgage?
Post by: HoundDog on December 11, 2016, 12:53:09 PM
http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/msg66727/#msg66727

All of this has been covered in the posts above.  An area of confusion for those living outside of the country is that The US offers/Offered 30 year fixed rate mortgages for less than 4% and in many cases 3%, plus on top of that they allow you to deduct your mortgage interest from your taxes.  These loan interest rates can not increase or change unless you sell the house.  This was a gift from the government to spark investment in the US and financial security after the great recession.  It was a once in a life time gift to mortgage holders.  If you are prepaying your mortgage at these rates you are giving back this huge gift to homeowners.  The math and how much it pushes back your financial retirement date can be calculated, the same way that you can calculate your safety through Cfiresim and other calculators.

It's irrelevant whether or not it's a "once in a lifetime gift," by somebody's definition. Either you are getting appropriately compensated for your risk in the stock market, or you're not. And if not, I'd pre-pay the mortgage.

The relevant factors are: your mortgage rate, your expected stock market returns, and your risk tolerance (and, by extension, appropriate "risk premium").

As I said, I don't pretend to have answers for anyone. I just want to point out that it's not as simple as, "I could do better with stocks!"
Title: Re: Paying off mortgage?
Post by: tomsang on December 11, 2016, 01:08:58 PM
http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/msg66727/#msg66727

All of this has been covered in the posts above.  An area of confusion for those living outside of the country is that The US offers/Offered 30 year fixed rate mortgages for less than 4% and in many cases 3%, plus on top of that they allow you to deduct your mortgage interest from your taxes.  These loan interest rates can not increase or change unless you sell the house.  This was a gift from the government to spark investment in the US and financial security after the great recession.  It was a once in a life time gift to mortgage holders.  If you are prepaying your mortgage at these rates you are giving back this huge gift to homeowners.  The math and how much it pushes back your financial retirement date can be calculated, the same way that you can calculate your safety through Cfiresim and other calculators.

It's irrelevant whether or not it's a "once in a lifetime gift," by somebody's definition. Either you are getting appropriately compensated for your risk in the stock market, or you're not. And if not, I'd pre-pay the mortgage. The relevant factors are: your mortgage rate, your expected stock market returns, and your risk tolerance (and, by extension, appropriate "risk premium").

As I said, I don't pretend to have answers for anyone. I just want to point out that it's not as simple as, "I could do better with stocks!"

The point is if you can't beat 3% or less after tax incentives with the stock market over 30+ years, then you can not retire early with anything over a 1% Safe Withdrawal Rate.  It does not mathematically make sense.  Your life expectancy will be what drives your retirement ability, not your portfolio returns.  So those who are paying off their mortgage, should not be focused on Early Retirement as you can't get there without the stock market performing at least as good as the worst 30 year stretch, which happens to be over 7%.  This is the same logic on why you can't retire early if all of your investments are in cash.  If you are betting on the stock market to reflect an return of less than 3% pre inflation return over the next 30 years, then you are by definition expecting there to be deflation.  If you believe that deflation is in the future, then you should not own a house or other assets as they will decrease in value over the future and hurt your chances of retiring. 

If you feel otherwise, please show me the math.  Every calculator, every 4% study, and every piece of financial advice is based on people using equity to generate returns to support a retirement.  You can't pick and choose based on feelings and then say that the calculators say you are safe with a 3% or 2% Safe Withdrawal Rate.  If you put the information into any of the calculators it will show you that if you can't get a 3% fixed return pre inflation, you can't retire with a Safe Withdrawal Rate of 1% or more.   
Title: Re: Paying off mortgage?
Post by: HoundDog on December 11, 2016, 01:21:03 PM
So no one on this board has both paid off a mortgage early and retired early?
Title: Re: Paying off mortgage?
Post by: waltworks on December 11, 2016, 01:22:32 PM
So no one on this board has both paid off a mortgage early and retired early?

Of course people have. But it's not the optimal strategy mathematically. At current/recent interest rates in the US, it's arguably a *terrible* idea.

-W
Title: Re: Paying off mortgage?
Post by: tomsang on December 11, 2016, 01:24:14 PM
So no one on this board has both paid off a mortgage early and retired early?

They did it even though the math shows that they would have been significantly better off keeping the mortgage.  If they were doing it mathematically and saying that they can't expect to get a return better than 3%, then they could not justify retiring early.  It does not mathematically make sense.  You can calculate how much it is pushing back or hurting your quest to retirement with the spreadsheets in the link provided. 
Title: Re: Paying off mortgage?
Post by: HoundDog on December 11, 2016, 01:32:41 PM
So no one on this board has both paid off a mortgage early and retired early?
If they were doing it mathematically and saying that they can't expect to get a return better than 3%, then they could not justify retiring early.

It sounds like you may not have read the article I originally linked to. The point is that "a return better than 3%" is not good enough.

It's not fair to compare a risk-free return to a potential (risk-laden) stock return. Past stock performance is no guarantee of future returns. You need to be sure you're compensating yourself appropriately for the risk you're taking. If you have a 3% effective mortgage rate, I'd suggest hanging onto that mortgage and investing in stocks (or whatever other investment you like) if you think you can get a return of 7% to 8%.

Otherwise, I'd pay off the mortgage early.

It really depends on your personal situation. No two situations are the same!
Title: Re: Paying off mortgage?
Post by: doneby35 on December 11, 2016, 01:51:12 PM
If one was able to pay off the mortgage in 5 years instead of 15, with additional principal payments, and the market just so happens to be down during that period, then I would think that would make one feel more comfortable with the fact that it is a guaranteed 3% return. I don't see how risking it all with stocks when the market is down could make anyone more comfortable than not having a monthly $1000 for a mortgage payment for example.
Title: Re: Paying off mortgage?
Post by: waltworks on December 11, 2016, 01:52:52 PM
Let's define "risk" here, shall we?

You have a limited lifetime, and if you want to spend that time working as little as possible (sort of the background situation here), then you are "spending" your years accumulating assets until you have enough to not work anymore.

When you spend more time working (which, statistically, you will if you are paying off your mortgage early, or want a 2% SWR and keep saving up to get there, or blow your money on hookers and yachts), you are *guaranteeing* that you will lose some of your non-renewable supply of life.

In that context, I see the decision to pay off very low interest debt as the DEFINITION OF RISKY. You are, in essence, *betting against yourself*.

Again, if you just hate being in debt for any reason, there is a quality of life issue that makes the math meaningless - the goal is to be happy, not just to optimize your financials. If your goal is to stop working as early as possible and not run out of money in retirement, though, paying off your mortgage is probably a terrible decision.

-W
Title: Re: Paying off mortgage?
Post by: waltworks on December 11, 2016, 01:55:39 PM
If one was able to pay off the mortgage in 5 years instead of 15, with additional principal payments, and the happens just so happens to be down during that period, then I would think that would make one feel more comfortable with the fact that it is a guaranteed 3% return. I don't see how risking it all with stocks when the market is down could make anyone more comfortable than not having a monthly $1000 for a mortgage payment for example.

You are fundamentally misunderstanding the mathematics of FIRE here, as well as liquidity and diversification and how they matter.

That said, for folks who don't like math and are scared of stocks (unfortunately many people), it's probably better to pay off the house as a form of enforced savings.

-W
Title: Re: Paying off mortgage?
Post by: Telecaster on December 11, 2016, 02:08:27 PM
I highly recommend this article:

https://www.kitces.com/blog/why-keeping-a-mortgage-and-a-portfolio-may-not-be-worth-the-risk/

A quote from the article:

Quote
... its not sufficient to just get a higher return from stocks than it costs to borrow on the mortgage. The borrowing cost of the mortgage or rather, the effective return that you get by repaying the mortgage and eliminating the associated interest cost is a guaranteed, risk-free return. Investing in stocks, on the other hand, is risky. No investor would prudently pick a highly risky return just because its barely higher than a risk-free alternative!

In other words, what people forget is that there's a concept of "risk-adjusted return." Yes, an index fund can typically beat a low-interest mortgage. But one carries a degree of risk and the other doesn't.

The whole idea of investing is that you get a reward for taking on risk. So it's not enough that your stock investments give you a better return that paying off your 3.5% mortgage early. The question is, how much better was the return -- and was it worth the added risk? Some would argue that the difference needs to be about 4% in this case. In other words, if you felt you could get a 7.5% return in an index fund, then yes, that was the right thing to do vs. paying off the mortgage. Any lower and it's a lot dicier.

My point isn't that you should do one thing or another, or that 4% is the right figure to use. I just wanted to note that the issue isn't as simple as some seem to think.

Kitces is a super smart guy and I love his stuff, but he makes a persistent mistake namely he confuses volatility and risk.   Which is what they teach you in business school and lot of people make that same mistake.   However, volatility is NOT risk.   

Essentially what he is saying in that article is that you should demand a risk premium for investing in the stock market.  Since the risk free return rate is 2% (government bonds), and paying down the 4% mortgage gives you 2% over that rate.   Stocks, he says, should command a 5% bump over the risk free rate, or 7%  return.    Since we might not get 7% over the next few years, perhaps stocks aren't worth it.

But that's wrong.   Risk is the chance of the permanent loss of capital.   A typical home mortgage is 30-years.  So that's the time period of interest.  Over a 30-year period the risk of permanently losing money in the broad stock market is essentially zero.   Right?     So we don't need a risk premium.   All we need is to be reasonably confident that over that period, stocks will return greater than the mortgage interest rate.   The odds of that are really good.   

Title: Re: Paying off mortgage?
Post by: Syonyk on December 11, 2016, 03:03:51 PM
So those who are paying off their mortgage, should not be focused on Early Retirement as you can't get there without the stock market performing at least as good as the worst 30 year stretch, which happens to be over 7%.  This is the same logic on why you can't retire early if all of your investments are in cash.  If you are betting on the stock market to reflect an return of less than 3% pre inflation return over the next 30 years, then you are by definition expecting there to be deflation.  If you believe that deflation is in the future, then you should not own a house or other assets as they will decrease in value over the future and hurt your chances of retiring.

It depends on one's path towards retirement.  I think the markets are likely to be iffy at best during my remaining life, so I've been focusing on productive property investments that keep my cost of living as low as possible once I semi-retire or fully retire or whatever it is I'm planning to call it.

So, solar, gardens, greenhouses, water storage, etc - and, in the case of solar, I'm oversizing it somewhat with money now, so I can either bank kWh going forward, still be ~0 power bill as the panels degrade, power an electric car, or some combination of all of those - so by effective prepaying my power bill for (ideally) the next 50+ years, I reduce my uncertainty going forward.  I'm also planning to go with string inverters over micro inverters, so I can hook up a battery bank if I see the need for that in the future (being able to run fully or partially off grid).  And have copper run so I can interconnect my various systems if needed (my office is currently totally off grid, and I'd like to be able to power basics in the house from there if needed - which does mean I need to snag a two phase inverter for out there at some point).

Same is true for the gardens and greenhouses.  I'm working towards being able to, if required, meet most of my needs immediately on the property, with a surplus to trade/sell/take care of family/etc.  I'd like to be able to live comfortably on under $10k/yr, if I need to.  I'd prefer to have more coming in and spend more, but I'm aiming for the ability to run extremely inexpensively as an option.

I disagree that the markets are the only path towards early retirement, and am working towards proving that theory.

Nations and currencies go through their arcs and decay, and I'd rather still be flexible if something happens to the dollar (which I consider to be a reasonable enough chance during my expected remaining 60 years or so to be worth considering).  This is part of why I keep a non-trivial chunk of value in not-dollars as well (including bitcoin, because why not?).

I agree that looking backwards, tossing everything into the stock markets makes sense, but past returns are no guarantee of future performance and all that, and I see some impressive storms on the horizon that make me question the next 5 decades of market performance.

Maybe I'm wrong and I'd have been better off in the markets.  Oh well.  I do have money in the markets, and if that performs nicely, awesome bonus.  I'd rather be heavily diversified in paths to not needing a full time job (technically, I'm already there as I work part time), but if one of the variety of things I think are possible in my lifetime comes to pass, I'd rather have put some effort into hedging against that, such that it leaves me in a better place after that event.

As far as deflation and not owning assets goes, a paid off house is an entirely reasonable thing to, you know, live in.  I don't expect it to appreciate over time, as I'm not in a crowded coastal city.  I expect it to decrease in value over time as it gets older, but I intend to keep living in it for the rest of my life.

Also, the mortgage question is irrelevant to me as I wasn't able to get one anyway...
Title: Re: Paying off mortgage?
Post by: waltworks on December 11, 2016, 03:07:00 PM
If you're looking at this from a prepper frame of mind, it's totally irrelevant whether you pay off the mortgage or invest, though, right?

Why even post that? If you're that fearful, it makes sense to do everything you're doing. But it also makes sense to *pay the minimum on any low interest debt* since there's a chance you will actually never have to finish paying it, right? In the context of the OP's question, your post doesn't make much sense, except that you feel the world will be in a worse place in the future than it is now (which, as I just said, probably means pay the minimum on the mortgage, though you might "invest" in solar/greenhouse/etc in your case).

-W
Title: Re: Paying off mortgage?
Post by: Syonyk on December 11, 2016, 03:17:14 PM
If you're looking at this from a prepper frame of mind, it's totally irrelevant whether you pay off the mortgage or invest, though, right?

Not entirely.  If one assumes a catastrophic overnight event, sure.  I agree.  If one assumes things proceed as normal as nations go down the backside of their arc through history, banks are still going to be pretty upset if one doesn't pay one's mortgage for a long while.

Quote
If you're that fearful, it makes sense to do everything you're doing. But it also makes sense to *pay the minimum on any low interest debt* since there's a chance you will actually never have to finish paying it, right?

I entirely agree - in the context of unsecured debt.  I've got a bunch of money sitting on 0% CCs, and I'm not going to pay that off before it's due.  In the context of secured debt (car, house, etc), I disagree.  Plenty of things can happen that interfere with one's ability to pay that debt, and the lender is highly likely to come looking for the property securing the loan - which, in the case of a house, is rather easy to find.
Title: Re: Paying off mortgage?
Post by: HoundDog on December 11, 2016, 03:22:02 PM
If you're looking at this from a prepper frame of mind, it's totally irrelevant whether you pay off the mortgage or invest, though, right?
Most "preppers" that I've ever heard of would want zero mortgage debt. They'd want as little to do with the financial system as possible, and wouldn't enjoy the idea that their house could be taken away if their income were disrupted. Most don't like the idea of property taxes and insurance, either, but not much they can do about that.
Title: Re: Paying off mortgage?
Post by: waltworks on December 11, 2016, 03:42:06 PM
Yeah, if we're on the backside of history/about to enter a new dark age... no ER for anyone. So there is no point discussing stocks vs. mortgages. You will keep working at some level (perhaps as a subsistence farmer) until you die in that scenario, because even if your house is paid off - there is no wider scale economy in place to support passive income.

Again, irrelevant to the OP's question.

Let me be clear: there is nothing wrong with preparing for bad stuff. But if you spend all your time thinking that way, there is really no point in worrying about "retirement" in the sense that it is used on this forum (living off of passive income/doing what is most fulfilling for you whether it is "work" or not) because that sort of "retirement" won't exist in your dystopian future. 

-W
Title: Re: Paying off mortgage?
Post by: Syonyk on December 11, 2016, 03:44:48 PM
Yeah, if we're on the backside of history/about to enter a new dark age... no ER for anyone. So there is no point discussing stocks vs. mortgages. You will keep working at some level (perhaps as a subsistence farmer) until you die in that scenario, because even if your house is paid off - there is no wider scale economy in place to support passive income.

I disagree, based on the fact that the arc of nations seldom involves a cliff.  It involves slow, uneven decline - during which time there are plenty of jobs, but market returns are unlikely to be positive for long periods of time.

Quote
Let me be clear: there is nothing wrong with preparing for bad stuff. But if you spend all your time thinking that way, there is really no point in worrying about "retirement" in the sense that it is used on this forum (living off of passive income/doing what is most fulfilling for you whether it is "work" or not) because that sort of "retirement" won't exist in your dystopian future.

That depends on if one's idea of a good time involves gardening/aquaponics or not! :)
Title: Re: Paying off mortgage?
Post by: waltworks on December 11, 2016, 03:51:23 PM
Well, that's great. If you enjoy farming, you are all set regardless. It's *still* probably in your best interest to pay off the debt as slowly as possible (if you're really a prepper, hyper/high inflation should be pretty high on your list of worries).

I prefer to be optimistic about the future and embrace some uncertainty/volatility. The human race has come a long way and I see no reason that can't continue indefinitely.

-W
Title: Re: Paying off mortgage?
Post by: Cathy on December 11, 2016, 04:25:24 PM
It's clear what the correct answer is when it comes to the perennial debate (http://forum.mrmoneymustache.com/welcome-to-the-forum/new-yorker-article-on-mmm/msg998641/#msg998641) about prepaying fixed-rate non-callable government-favoured low-interest tax-deductible long-term possibly-non-recourse debt secured by an instrument on which creators are generally slow to foreclose.

The more interesting question to me is why so many Americans and Canadians get the analysis so very wrong. As an initial matter, math is hard, and is not taught very comprehensively in pre-university education, so that is probably part of the issue. However, that doesn't explain the entire problem because some very intelligent people who are normally very good at math -- such as Kitces and a certain long-term forum poster here -- still manage or managed to come to the wrong conclusion. I am starting to think that a contributing factor to the misunderstanding is the interaction of two prevailing societal norms, specifically:

The logical conclusion is that one should purchase a home and then pay off any mortgage loans as fast as possible.

Neither of the two underlying propositions makes much sense, but from my observations in everyday life, and from reading many forum threads on this topic, these seem to be widely held beliefs, which to a certain extent are even forwarded by the educational system.

I am not sure what the solution is to helping people understand this issue better. In typical forum discussions, patient explanation never seems to work, because even if somebody recognises that their original arguments are wrong, they then fall back on "but it gives me pleasure to prepay my loan" and how we can challenge that?
Title: Re: Paying off mortgage?
Post by: HoundDog on December 11, 2016, 06:04:33 PM
they then fall back on "but it gives me pleasure to prepay my loan" and how we can challenge that?
Why would it be necessary or desirable to challenge that?

Also, saying that Kitces "managed to come to the wrong conclusion" does not mean that Kitces came to the wrong conclusion.
Title: Re: Paying off mortgage?
Post by: Cathy on December 11, 2016, 06:30:51 PM
they then fall back on "but it gives me pleasure to prepay my loan" and how we can challenge that?
Why would it be necessary or desirable to challenge that?

Personally, I consider it "desirable" because I'm interested in helping people retire as early as possible. It's not "necessary" for me to provide this help of course, just like it's unnecessary to donate to charity or engage in other good work, but these are all altruistic pursuits (http://forum.mrmoneymustache.com/welcome-to-the-forum/wealth-of-people-in-their-30s-has-'halved-in-a-decade'/msg1255180/#msg1255180). In fact, it's actually probably in my financial interest for people to make bad financial decisions insofar as it prolongs their working careers, keeps them dependent on an employer, and generally drives them to continue doing work that enriches me, as somebody who owns (in part) the means of production. As it turns out, though, I'm motivated by more than just base self-interest. If we stuck to only "necessary" activities, we wouldn't be posting to this forum at all. There's more to life than what's necessary.

That said, thank you for your question. I think it's important to periodically take a step back and ask why we are doing something, even something like posting to a forum. Critical analysis should be directed inward as well, and regularly questioning our own motives is valuable.
Title: Re: Paying off mortgage?
Post by: Syonyk on December 11, 2016, 06:56:14 PM
...they then fall back on "but it gives me pleasure to prepay my loan" and how we can challenge that?

Discover what their goals are, and then go from there.

For some people, "I want to retire early as early as possible because I hate my job" is the case, they are willing to accept that past returns are a likely indicator of future performance, and at that point holding the mortgage as long as possible is probably optimum.

For others, "I don't want to have to worry about money" is a desired operating state, and while they may have a high savings rate, they don't obsess over every penny.  I fall into this category.  My wife & I both don't like debt, and I value not having to think about my checking account balance when writing a check more than having it as low as possible.  I keep around a $10k floor in there, because it means I don't have to worry about the day to day balance, and my wife doesn't have to check before she uses the debit card (some of the local grocery stores don't accept credit - cash or debit only).  It's not "optimal" in terms of a FIRE date, but it's optimal in terms of what we value, which is not having to think about money on a daily basis - it's simply there, in sufficient quantities, for whatever we want to do.  And, the path we're taking is likely to be radically more resilient to market disruptions and the like.  Again, my wife & I both value that.  And, if we're talking about "optimum," I'm not even working full time - I work 32h/wk, because I value time for random projects that may turn into future income streams, and time with my family, more than I value some extra earnings in a high tax bracket.

So it depends on what someone wants out of their involvement.
Title: Re: Paying off mortgage?
Post by: doneby35 on December 11, 2016, 08:04:02 PM
...they then fall back on "but it gives me pleasure to prepay my loan" and how we can challenge that?

Discover what their goals are, and then go from there.

For some people, "I want to retire early as early as possible because I hate my job" is the case, they are willing to accept that past returns are a likely indicator of future performance, and at that point holding the mortgage as long as possible is probably optimum.

For others, "I don't want to have to worry about money" is a desired operating state, and while they may have a high savings rate, they don't obsess over every penny.  I fall into this category.  My wife & I both don't like debt, and I value not having to think about my checking account balance when writing a check more than having it as low as possible.  I keep around a $10k floor in there, because it means I don't have to worry about the day to day balance, and my wife doesn't have to check before she uses the debit card (some of the local grocery stores don't accept credit - cash or debit only).  It's not "optimal" in terms of a FIRE date, but it's optimal in terms of what we value, which is not having to think about money on a daily basis - it's simply there, in sufficient quantities, for whatever we want to do.  And, the path we're taking is likely to be radically more resilient to market disruptions and the like.  Again, my wife & I both value that.  And, if we're talking about "optimum," I'm not even working full time - I work 32h/wk, because I value time for random projects that may turn into future income streams, and time with my family, more than I value some extra earnings in a high tax bracket.

So it depends on what someone wants out of their involvement.

Exactly this.
Title: Re: Paying off mortgage?
Post by: Telecaster on December 11, 2016, 09:46:09 PM
Also, saying that Kitces "managed to come to the wrong conclusion" does not mean that Kitces came to the wrong conclusion.

On the flipside, Kitces saying it he is right does not mean Kitces is right  :)

Kitces did get it wrong because  Kitces is using the academic definition of risk, namely risk is the same as volatility.  Risk is NOT the same as volatility.   The notion that risk is the same is volatility was popularized by William Sharpe back in the 1960s and has remained with us ever since to a certain degree.  The reason why it has persisted is because it is simple to calculate and understand. 

If you study the Sharpe Ratio you'll quickly find that one of the obvious key problems is that only downward volatility is risky. But upward volatility (the kind we want) also contributes to "risk."   So investments that only go up but go up spordacially are more "risky" than investments that lose money slowly but surely.    That makes literally no sense at all. 

A second key problem is that the volatility as used by Kitces is uncorrelated to the time period.  Stocks might lose money in one or five year time frames, but they have never lost money in a 30 year time frame.   And there is no rational reason to think they might, unless as Syonyk says society is on the edge of collapse.  In that case, good luck with your "risk-free" government bonds.   So, the broad market is about as risk free as you can get over the time frame we're interested in.   Therefore, it makes no sense for Kitces to include a risk premium in his analysis.  The risk is effectively zero. 







 



Title: Re: Paying off mortgage?
Post by: waltworks on December 11, 2016, 10:12:22 PM
Well said. I have always been baffled by the "stocks are risky!" thing. What's riskier, having something that appreciates ~7% a year but goes up or down 50% in single year sometimes, or something that stays totally stable or gains a percent or two at best (ie long term gov't bonds)? Well, if you actually want to end up with more money than you started with over the long run, it's much "riskier" to NOT invest in stocks.

I think some people just think owning stocks is literally like gambling at a casino, or like a scene out of a movie with crazy people losing and gaining fortunes at their trading desks between doing lines of coke. The reality is much, much more boring. You buy. You hold. After a while you end up with a lot more money than you started with, unless you try to outsmart yourself and start buying/selling based on your hunches or whatever. Hell, even if you try to be clever and fail MISERABLY (like the world's worst market timer: http://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/) as long as you mostly just buy and don't panic sell, you're set.

Anyway, do whatever you want. But it's worth your time to sit down with a spreadsheet and/or CFIREsim and actually figure out what happens in the different scenarios.

-W
Title: Re: Paying off mortgage?
Post by: brooklynguy on December 12, 2016, 06:52:33 AM
Stocks might lose money in one or five year time frames, but they have never lost money in a 30 year time frame.

But they have (in exceedingly rare cases) underperformed the strategy of prepaying a hypothetical 30-year mortgage loan having an interest rate equal to today's prevailing rates.  I will repeat a post I made in another thread (http://forum.mrmoneymustache.com/welcome-to-the-forum/do-you-regret-paying-off-your-mortgage-early/msg949206/#msg949206) in response to a similar claim that Kitces got the analysis "wrong" in another, similar article by him (https://www.kitces.com/blog/why-is-it-risky-to-buy-stocks-on-margin-but-prudent-to-buy-them-on-mortgage/), which seems relevant here:

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

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

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

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

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

In addition, the unstated corollary to Kitces' warning that leveraged investing exposes you to low expected-probability black swan events is that there is a high expected-probability of being rewarded.  For me, this is the biggest consideration -- effectively, by retaining my mortgage, I'm deciding to reduce my expected likelihood of working longer than necessary (and I'm willing to accept the risk that, in the unlikely (based on my expectations) event that the world implodes, I might have been better off otherwise).
Title: Re: Paying off mortgage?
Post by: Cathy on December 12, 2016, 09:05:25 AM
But they have (in exceedingly rare cases) underperformed the strategy of prepaying a hypothetical 30-year mortgage loan having an interest rate equal to today's prevailing rates.  I will repeat a post I made in another thread (http://forum.mrmoneymustache.com/welcome-to-the-forum/do-you-regret-paying-off-your-mortgage-early/msg949206/#msg949206) in response to a similar claim that Kitces got the analysis "wrong" in another, similar article by him (https://www.kitces.com/blog/why-is-it-risky-to-buy-stocks-on-margin-but-prudent-to-buy-them-on-mortgage/)...

In the article you cite, Kitces appears to have been more careful to avoid saying anything wrong, and in particular, as you say, he just points out certain risks, but doesn't explicitly say that those are the only risks involved in the calculus of prepayment, so there's nothing really "wrong" about the article.

However, in the specific article (https://www.kitces.com/blog/why-keeping-a-mortgage-and-a-portfolio-may-not-be-worth-the-risk/) cited in this thread (http://forum.mrmoneymustache.com/ask-a-mustachian/paying-off-mortgage/), Kitces goes further than in the article on which you previously commented, and he actually reaches a conclusion that is wrong. In particular, he asserts in the synopsis section of his article that "clients should prepay their mortgages unless they expect a full 9%-10%+ return on equities in the current environment". This is "wrong" because Kitces has gone beyond just identifying a single risk and remaining silent about the others; here, he is actually saying that his pet risk is the only risk relevant to the decision of whether "clients should prepay".

Kitces's latter statement is wrong because, as you know, it ignores the panoply of other, arguably more significant, risks, such the risk of income interruption, surprise expenses, major life changes, or any other situation requiring liquidity, as well as the generalised risk of postponing one's working career (as you identified). As I've noted before (http://forum.mrmoneymustache.com/welcome-to-the-forum/what's-your-job-title-and-how-much-do-you-earn/msg968688/#msg968688), I consider myself to be an extremely risk-averse individual and that is why I refrain from prepaying highly-favourable debt.

By stating that the decision of whether "clients should prepay" is controlled purely by one risk to the exclusion of all others, Kitces is wrong. The mechanism of his wrongness is "focusing on certain specific risks", but identifying the mechanism doesn't mean that he isn't wrong.
Title: Re: Paying off mortgage?
Post by: frugaliknowit on December 12, 2016, 09:18:32 AM
I think every situation is different.  One thing I have learned is diversification is very important.  If you put all or virtually all of your money into VTMX, and we have a lost decade or two, like Japan, guess what?  You're screwed.  It COULD happen.

Prepaying mortgage is a way to diversify.  It also paves the way to a more peaceful FI or retirement. 
Title: Re: Paying off mortgage?
Post by: tomsang on December 12, 2016, 10:01:10 AM
I think every situation is different.  One thing I have learned is diversification is very important.  If you put all or virtually all of your money into VTMX, and we have a lost decade or two, like Japan, guess what?  You're screwed.  It COULD happen.

Prepaying mortgage is a way to diversify.  It also paves the way to a more peaceful FI or retirement.

Prepaying for many people is not a way to diversify.  They are putting a significant chunk of their wealth in an illiquid asset that is geographically located in one spot.  In times of crisis, it is challenging at best to get money out of this asset.  Many people do not carry earthquake, tornado, hurricane, and other acts of god insurance on their house.  Most policies also exclude acts of war.  If geographically there is a problem it is challenging to pick up and leave if all of your wealth is tied up in your house.  If you are underwater, you hand the keys to the bank and say Adios!

The biggest thing that many people fail to understand is that if you are paying down your mortgage for four years and then everything hits the fan.  You can not call up the bank and say I prepaid for four years., so I am going to skip paying for a few years.  They will say, "Thank you very much.  Please have your monthly payment in or we will begin foreclosure."  There is zero value in having a partially prepaid loan.  It does not give you brownie points or anything else.  It just ties up your assets until the house is 100% paid off.  It also does that at a 3% rate vs. investing and earning more.  So you are taking on more liquidity risk and taking on appreciation risk, which pushes back your retirement date according to every retirement calculator out there.     

Owning thousands to tens of thousands of companies around the world is how to diversify not a house that becomes an anchor when the shit hits the fan. 
Title: Re: Paying off mortgage?
Post by: Retire-Canada on December 12, 2016, 10:33:47 AM
The biggest thing that many people fail to understand is that if you are paying down your mortgage for four years and then everything hits the fan.  You can not call up the bank and say I prepaid for four years., so I am going to skip paying for a few years.  They will say, "Thank you very much.  Please have your monthly payment in or we will begin foreclosure."  There is zero value in having a partially prepaid loan.  It does not give you brownie points or anything else.  It just ties up your assets until the house is 100% paid off.  It also does that at a 3% rate vs. investing and earning more.  So you are taking on more liquidity risk and taking on appreciation risk, which pushes back your retirement date according to every retirement calculator out there.     

Owning thousands to tens of thousands of companies around the world is how to diversify not a house that becomes an anchor when the shit hits the fan.

Yes this ^^^ does get overlooked. And living in an area with a cataclysmic earth quake risk I am acutely aware that my house value can go from $500K to approximately $0 in one moment with decades required for the reconstruction process. I don't insure for that risk because it's expensive and I think the likelihood of the insurance company being able to actually make the required payouts is low.

In just about any scenario I can imagine where my globally diversified stockmarket investments are worthless having or not having a mortgage will be irrelevant.
Title: Re: Paying off mortgage?
Post by: waltworks on December 12, 2016, 11:01:51 AM
Exactly. If your response is, "but zombie apocalypse!" then you should take out as big of a mortgage as you can, and pay as little of it back as possible, 'cause ain't nobody coming to collect that money.

If you think the whole world is slowly going to get crappier but all the basic systems of economy/government still function (the, "but Japan 100% equities!" scenario), then nobody is retiring anyway, so do whatever you want, but you still are probably better off not paying the mortgage off just for liquidity reasons. 

-W
Title: Re: Paying off mortgage?
Post by: frugaliknowit on December 12, 2016, 11:13:41 AM
The biggest thing that many people fail to understand is that if you are paying down your mortgage for four years and then everything hits the fan.  You can not call up the bank and say I prepaid for four years., so I am going to skip paying for a few years.  They will say, "Thank you very much.  Please have your monthly payment in or we will begin foreclosure."  There is zero value in having a partially prepaid loan.  It does not give you brownie points or anything else.  It just ties up your assets until the house is 100% paid off.  It also does that at a 3% rate vs. investing and earning more.  So you are taking on more liquidity risk and taking on appreciation risk, which pushes back your retirement date according to every retirement calculator out there.     

Owning thousands to tens of thousands of companies around the world is how to diversify not a house that becomes an anchor when the shit hits the fan.

Yes this ^^^ does get overlooked. And living in an area with a cataclysmic earth quake risk I am acutely aware that my house value can go from $500K to approximately $0 in one moment with decades required for the reconstruction process. I don't insure for that risk because it's expensive and I think the likelihood of the insurance company being able to actually make the required payouts is low.

In just about any scenario I can imagine where my globally diversified stockmarket investments are worthless having or not having a mortgage will be irrelevant.

1.  If there's an earthquake, you still owe the money on the house.
2.  Most mustachians on this site are not globally diversified  (http://paulmerriman.com/10-reasons-dont-like-vanguards-total-stock-market-index-fund/)
Title: Re: Paying off mortgage?
Post by: Retire-Canada on December 12, 2016, 11:21:16 AM

1.  If there's an earthquake, you still owe the money on the house.
2.  Most mustachians on this site are not globally diversified  (http://paulmerriman.com/10-reasons-dont-like-vanguards-total-stock-market-index-fund/)

1. You need to educate yourself on the impacts of the likely earthquake risk in my area, Nobody will be paying their mortgages. Banks will not be doing anything to the millions of affected people. It will be the largest natural disaster in history. The rebuilding will take several years until things approach normal again. And with a globally diversified stock portfolio I'll be better placed to keep paying my mortgage in any case.

2. That's foolish. I don't have that problem.
Title: Re: Paying off mortgage?
Post by: waltworks on December 12, 2016, 11:43:03 AM
If there's an earthquake, you can decide if you want to rebuild, or hand the bank the pile of rubble and walk away.

The note is secured by the house. You are not obligated to *ever* pay the mortgage, you just lose the house if you don't pay it. Pretty simple. Would you rather have a valueless pile of rubble and no money, or a valueless pile of rubble and a nice 'stache to move elsewhere?

As to the second point, you are arguing something totally different. It is indeed a bad idea to only own stocks of companies located in one country. But that (easily rectified with a few clicks of your mouse) mistake, no matter how common, does not have any bearing on paying your low interest mortgage off early.

-W
Title: Re: Paying off mortgage?
Post by: brooklynguy on December 12, 2016, 11:59:21 AM
The note is secured by the house. You are not obligated to *ever* pay the mortgage, you just lose the house if you don't pay it. Pretty simple.

This is not universally true; it depends on whether or not your mortgage loan is non-recourse, which depends in part on the law of your local jurisdiction.
Title: Re: Paying off mortgage?
Post by: waltworks on December 12, 2016, 12:20:55 PM
The note is secured by the house. You are not obligated to *ever* pay the mortgage, you just lose the house if you don't pay it. Pretty simple.

This is not universally true; it depends on whether or not your mortgage loan is non-recourse, which depends in part on the law of your local jurisdiction.

Good point, but the housing crash showed that for all practical purposes, the loans are *all* non-recourse in the US.

-W
Title: Re: Paying off mortgage?
Post by: brooklynguy on December 12, 2016, 12:36:53 PM
Good point, but the housing crash showed that for all practical purposes, the loans are *all* non-recourse in the US.

Don't know if I'd go quite that far, but, either way, I'd still rather have a valueless pile of rubble, a nice stash to move elsewhere, and a potential claim against me by a mortgage lender than a valueless pile of rubble, no money and no such potential claim against me.
Title: Re: Paying off mortgage?
Post by: Tjat on December 13, 2016, 11:35:09 AM
Caught on this thread late, but I would disagree with the notion that paying down a mortgage early is lower risk than investing. Paying OFF a lower mortage may be, but the journey to that point is fraught with risk. If you're 5 years ahead on your mortgage and lose your job, become ill, uncovered insurance loss, ... etc that money may largely be down the toilet if you get foreclosed on. While there are risks in the stock market, I can't see how diversifying your assets with ownership stakes in thousands of companies over 30 years is somehow more risky than consolidating your money into a single illiquid investment that can plummet in value for a variety of reasons.

In my mind, the "lowest risk" (as defined by minimizing loss) is building up your mortgage payoff fund in stocks and then paying your mortgage off in bulk when ready. This strategy also maximizes your flexibility (at least until you pay off your mortgage). Note, this is not the "value maximizing" strategy.

Of course, I don't have any emotional strings to pay off my mortgage early. With financial decisions, I have a hard time not being as objective and pragmatic as possible.
Title: Re: Paying off mortgage?
Post by: Paul der Krake on December 13, 2016, 07:54:14 PM
So no one on this board has both paid off a mortgage early and retired early?
Justin from rootofgood.com did both. I'm not sure if he has ever made a public post detailing his reasoning, but he's quite the analytical fella and must have seen some value in paying it off beyond what the math says.

Title: Re: Paying off mortgage?
Post by: Paul der Krake on December 13, 2016, 08:07:45 PM
A more meta note on questions of this nature:

There are a couple topics that, as many people have pointed here, do come back over and over again. Another classic question is whether to buy international stocks or stick to US companies. What makes these questions so difficult is that the problem scope is directly tied to the uncertainty of the future over decades.

Highly intelligent people that can sustain an endless conversation debating the merits of either approach. This is an indicator that it is a fool's errand to predict with certainty what the optimal solution will wound up being.

I personally think it's foolish to try and predict anything in my own life more than a decade into the future.
Title: Re: Paying off mortgage?
Post by: Syonyk on December 13, 2016, 08:33:01 PM
I personally think it's foolish to try and predict anything in my own life more than a decade into the future.

Predict accurately?  Yes, I'd agree.

Consider a range of possible futures and consider how you'd be affected by each of those, and work for a less-efficient solution that does tolerably in all of those cases?  You can certainly do that too.  It does tend to lead to messy, diverse, less "efficient" solutions - though efficiency, tolerably often, is just a nice sounding term for being incredible fragile against disruptions to the planned path.
Title: Re: Paying off mortgage?
Post by: Playing with Fire UK on December 19, 2016, 06:36:50 AM
Again for you young enthusiasts, realize that circumstances differ by person.

Once you have 'won the game' a guaranteed return looks quite fabulous.  It doesnt matter if we paid off our home or not, as the difference is fairly minor in terms of our risk for meeting our retirement goals.

This is something that I hadn't considered before. Thanks.

I plan to stop working sooner so I won't have the same certainty of 'winning the game'. There is definitely a point where more money won't make anything better, and less money would make it worse.
Title: Re: Paying off mortgage?
Post by: ender on December 19, 2016, 07:06:06 AM
The biggest thing that many people fail to understand is that if you are paying down your mortgage for four years and then everything hits the fan.  You can not call up the bank and say I prepaid for four years., so I am going to skip paying for a few years.  They will say, "Thank you very much.  Please have your monthly payment in or we will begin foreclosure."  There is zero value in having a partially prepaid loan.  It does not give you brownie points or anything else.  It just ties up your assets until the house is 100% paid off.  It also does that at a 3% rate vs. investing and earning more.  So you are taking on more liquidity risk and taking on appreciation risk, which pushes back your retirement date according to every retirement calculator out there.     

This is by far the biggest misunderstanding with mortgages.

The second is when people choose to pay down a mortgage with aftertax dollars if they can otherwise invest it pretax (401ks, 403bs, IRAs, HSAs, etc). If you have pretax accounts you are not maxing out first you are paying a huge premium (your marginal tax rate) for every additional dollar you put against your mortgage.
Title: Re: Paying off mortgage?
Post by: Playing with Fire UK on December 19, 2016, 07:12:07 AM
The biggest thing that many people fail to understand is that if you are paying down your mortgage for four years and then everything hits the fan.  You can not call up the bank and say I prepaid for four years., so I am going to skip paying for a few years.  They will say, "Thank you very much.  Please have your monthly payment in or we will begin foreclosure."  There is zero value in having a partially prepaid loan.  It does not give you brownie points or anything else.  It just ties up your assets until the house is 100% paid off.  It also does that at a 3% rate vs. investing and earning more.  So you are taking on more liquidity risk and taking on appreciation risk, which pushes back your retirement date according to every retirement calculator out there.     

This is by far the biggest misunderstanding with mortgages.

The second is when people choose to pay down a mortgage with aftertax dollars if they can otherwise invest it pretax (401ks, 403bs, IRAs, HSAs, etc). If you have pretax accounts you are not maxing out first you are paying a huge premium (your marginal tax rate) for every additional dollar you put against your mortgage.

Yes, I had an involved conversation with a relative that was a couple of years away from pension access age (different in the UK) who wanted to pay of the mortgage first. I showed them that by putting the money in the pension instead they'd save a great heap of money on tax. They basically had the opportunity to pay the mortgage off with pre-tax money by waiting a couple of years.

Everyone else had been telling them that paying off the mortgage was a no-brainer.
Title: Re: Paying off mortgage?
Post by: fredbear on January 16, 2017, 08:00:43 AM
1) If you look at an amortization table, you get a practical answer for prepaying mortgages.  To put it slightly over-simply, in the first month you pay $950 in interest, while in the 360th month you pay $50.  If you prepay an extra $1000 in the first month, you shorten the loan by about 1.5 years.  If you pay an extra $1000 in the 358th month you shorten it by about a month.  Paid in the first month the extra $1000 saves about $15 - 16K in interest.  Paid at the far end of the loan, it saves about $50.  Prepayments early in a loan have an enormous "return," if you define "saved interest" as "return."  Prepayments at the end of the loan, particularly given the erosion in money's value over time, are nugatory. 

2) If you think of your money as inhabiting various buckets, some of it is in the real estate bucket.  I use the surplus in that bucket - at least when the loan under attack is young - to prepay.  For instance, if I have excess rent coming in from a property that is paid off, I keep that money in the real estate bucket by prepaying our personal mortgage.

3) Occasionally there are cash-flow considerations that bear on the answer.  When my brother faced college expenses for his child, he had 2 - 3 years left on the mortgage, and enough money in a CD yielding essentially nothing to prepay it.  By prepaying the house, he freed up monthly money equal to about 4/5 of the monthly college costs, which let him (and the kid) avoid loans that would have had much higher interest rates. 

Title: Re: Paying off mortgage?
Post by: doneby35 on January 16, 2017, 08:20:12 AM

1.  If there's an earthquake, you still owe the money on the house.
2.  Most mustachians on this site are not globally diversified  (http://paulmerriman.com/10-reasons-dont-like-vanguards-total-stock-market-index-fund/)

1. You need to educate yourself on the impacts of the likely earthquake risk in my area, Nobody will be paying their mortgages. Banks will not be doing anything to the millions of affected people. It will be the largest natural disaster in history. The rebuilding will take several years until things approach normal again. And with a globally diversified stock portfolio I'll be better placed to keep paying my mortgage in any case.

2. That's foolish. I don't have that problem.

I thought VTSAX should be enough, at least according to JCOLLINS.
Title: Re: Paying off mortgage?
Post by: Retire-Canada on January 16, 2017, 08:23:37 AM
I thought VTSAX should be enough, at least according to JCOLLINS.

According to him it is, but a lot of people would not agree.
Title: Re: Paying off mortgage?
Post by: boarder42 on January 16, 2017, 08:27:10 AM
that statement of saving 15-16k on a 30 year mortgage at lets say 3.5% by paying 1k in month one extra is incredibly false.  a simple compound interest calculator will show you that 1k at 3.5% over 30 years is worth only. 2806 dollars.  the interest rate would have to be 9.5% which is not relevant to this conversation at all.

dont throw blatant false information around please.  it will influence those who dont care to do the math themselves.
Title: Re: Paying off mortgage?
Post by: Retire-Canada on January 16, 2017, 08:39:03 AM
that statement of saving 15-16k on a 30 year mortgage at lets say 3.5% by paying 1k in month one extra is incredibly false.  a simple compound interest calculator will show you that 1k at 3.5% over 30 years is worth only. 2806 dollars.  the interest rate would have to be 9.5% which is not relevant to this conversation at all.

dont throw blatant false information around please.  it will influence those who dont care to do the math themselves.

You also have to discount the money you would have paid later on for inflation. Which makes later mortgage payments cheaper than earlier mortgage payments.
Title: Re: Paying off mortgage?
Post by: fredbear on January 16, 2017, 09:52:44 AM
that statement of saving 15-16k on a 30 year mortgage at lets say 3.5% by paying 1k in month one extra is incredibly false. 

You're right; I was wrong.  I rechecked and it is more like 2.5 - 4 months shortening for an early prepayment, depending on interest rate.  Comes of having my first loans under Jimmy Carter.   I'll stay with the general point that it makes sense early in a loan, not much sense late unless you want to free up cash flow.
Title: Re: Paying off mortgage?
Post by: khangaroo on January 16, 2017, 10:16:07 AM
This is what I would suggest if you had the money to pay off your mortgage early.

1) Pay it off today
2) Live 3-6 months without a mortgage payment
3a) If it feels nice to you to not have a payment then leave it be
3b) If you feel like you're losing out on money then go get a mortgage against your house

When you leverage your house vs. paying off the mortgage, you're forgetting the risk involved in your investment. The interest rate is 3% but what is going to be the return rate of your investment? I'm assuming you would put it in the stock market. Long-term it has been good, but is quite volatile on the short term.

Like a previous commentor stated, I also absolutely HATE paying interest to anybody. It's just how you feel about debt and your risk tolerance, if you believe you can beat your mortgage interest rate then by all means, do it!
Title: Re: Paying off mortgage?
Post by: bacchi on January 16, 2017, 10:26:11 AM
When you leverage your house vs. paying off the mortgage, you're forgetting the risk involved in your investment. The interest rate is 3% but what is going to be the return rate of your investment? I'm assuming you would put it in the stock market. Long-term it has been good, but is quite volatile on the short term.

?? You are planning to ER, correct? How are you doing this by assuming investments won't return better than 3% over the length of a 30 year mortgage? Did you build a 1% withdrawal portfolio?

Title: Re: Paying off mortgage?
Post by: blahblahblah on January 16, 2017, 10:33:38 AM
Trying to math here, maybe I'm missing something.

A year into a low down payment 30 yr mortgage at 3.5%
Principal ~ $425
Interest ~ $742
total over 12 months =13980

If all invested with 7% returns that's $978 earned in interest per year.

If combined with higher retirement savings by $742/month that would give the same tax benefits and still allow for making ~$350/year by investing the principal amount alone.   Wouldn't this be the way to go, at least in the case of someone who is far from hitting retirement investment maxes?  It seems even more favorable to pay it off and invest as the mortgage balance lowers.
Title: Re: Paying off mortgage?
Post by: Playing with Fire UK on January 16, 2017, 10:38:57 AM
3b) If you feel like you're losing out on money then go get a mortgage against your house

So I tried to do this, and it was a total nightmare to get a cash out mortgage in the UK on an unencumbered house. Should have been possible in theory, but no lender would actually do it in case it was considered 'irresponsible lending'.

So solid in theory, but doesn't work everywhere.
Title: Re: Paying off mortgage?
Post by: boarder42 on January 16, 2017, 10:40:11 AM
Trying to math here, maybe I'm missing something.

A year into a low down payment 30 yr mortgage at 3.5%
Principal ~ $425
Interest ~ $742
total over 12 months =13980

If all invested with 7% returns that's $978 earned in interest per year.

If combined with higher retirement savings by $742/month that would give the same tax benefits and still allow for making ~$350/year by investing the principal amount alone.   Wouldn't this be the way to go, at least in the case of someone who is far from hitting retirement investment maxes?  It seems even more favorable to pay it off and invest as the mortgage balance lowers.

I have no idea what you're trying to get at here but the math answer to this equation is to not pay your mortgage down
Title: Re: Paying off mortgage?
Post by: Telecaster on January 16, 2017, 10:46:35 AM
The note is secured by the house. You are not obligated to *ever* pay the mortgage, you just lose the house if you don't pay it. Pretty simple. Would you rather have a valueless pile of rubble and no money, or a valueless pile of rubble and a nice 'stache to move elsewhere?


I don't believe that is correct, at least not universally correct.  The bank can obtain a deficiency judgement against you if you walk away. 
Title: Re: Paying off mortgage?
Post by: khangaroo on January 16, 2017, 10:58:02 AM
When you leverage your house vs. paying off the mortgage, you're forgetting the risk involved in your investment. The interest rate is 3% but what is going to be the return rate of your investment? I'm assuming you would put it in the stock market. Long-term it has been good, but is quite volatile on the short term.

?? You are planning to ER, correct? How are you doing this by assuming investments won't return better than 3% over the length of a 30 year mortgage? Did you build a 1% withdrawal portfolio?

Still on the fence about ER because I love my current day job. I'm planning on my real estate rental income to provide me with cash flow so not sure what I'm going to do with a big portfolio - I guess create generational wealth.
Title: Re: Paying off mortgage?
Post by: boarder42 on January 16, 2017, 11:06:27 AM
When you leverage your house vs. paying off the mortgage, you're forgetting the risk involved in your investment. The interest rate is 3% but what is going to be the return rate of your investment? I'm assuming you would put it in the stock market. Long-term it has been good, but is quite volatile on the short term.

?? You are planning to ER, correct? How are you doing this by assuming investments won't return better than 3% over the length of a 30 year mortgage? Did you build a 1% withdrawal portfolio?

Still on the fence about ER because I love my current day job. I'm planning on my real estate rental income to provide me with cash flow so not sure what I'm going to do with a big portfolio - I guess create generational wealth.

So how are you building your real estate. Built thru leverage is the efficient way are you paying each property off prior to buying a new one
Title: Re: Paying off mortgage?
Post by: khangaroo on January 16, 2017, 01:42:28 PM
When you leverage your house vs. paying off the mortgage, you're forgetting the risk involved in your investment. The interest rate is 3% but what is going to be the return rate of your investment? I'm assuming you would put it in the stock market. Long-term it has been good, but is quite volatile on the short term.

?? You are planning to ER, correct? How are you doing this by assuming investments won't return better than 3% over the length of a 30 year mortgage? Did you build a 1% withdrawal portfolio?

Still on the fence about ER because I love my current day job. I'm planning on my real estate rental income to provide me with cash flow so not sure what I'm going to do with a big portfolio - I guess create generational wealth.

So how are you building your real estate. Built thru leverage is the efficient way are you paying each property off prior to buying a new one

I got a note on my current commercial property that should be paid off in 2 years. From then, I'm going to save up enough to pay cash for another one rather than getting a note again. It'll probably take me another 4-5 years to buy another real estate investment depending on if I want to go commercial or residential.
Title: Re: Paying off mortgage?
Post by: boarder42 on January 16, 2017, 01:49:18 PM
When you leverage your house vs. paying off the mortgage, you're forgetting the risk involved in your investment. The interest rate is 3% but what is going to be the return rate of your investment? I'm assuming you would put it in the stock market. Long-term it has been good, but is quite volatile on the short term.

?? You are planning to ER, correct? How are you doing this by assuming investments won't return better than 3% over the length of a 30 year mortgage? Did you build a 1% withdrawal portfolio?

Still on the fence about ER because I love my current day job. I'm planning on my real estate rental income to provide me with cash flow so not sure what I'm going to do with a big portfolio - I guess create generational wealth.

So how are you building your real estate. Built thru leverage is the efficient way are you paying each property off prior to buying a new one

I got a note on my current commercial property that should be paid off in 2 years. From then, I'm going to save up enough to pay cash for another one rather than getting a note again. It'll probably take me another 4-5 years to buy another real estate investment depending on if I want to go commercial or residential.

you realize how extremely inefficient all of that is correct. 
Title: Re: Paying off mortgage?
Post by: Syonyk on January 16, 2017, 02:11:36 PM
Sounds super low risk as well.
Title: Re: Paying off mortgage?
Post by: waltworks on January 16, 2017, 02:22:22 PM
If you want super low risk, you can forget investing entirely and just hold cash (or gold). Save up enough to last you the rest of your life (times 2 or 3, for inflation protection) and you're golden...

Refusing to take any risk at all is generally a bad strategy, especially if you have the resources (as most of us here do) to shrug off down markets/intermittent losses.

-W
Title: Re: Paying off mortgage?
Post by: Telecaster on January 16, 2017, 02:40:15 PM
Sounds super low risk as well.

Really?  Sounds high risk to me.  He is putting all his cash into paying down the note on a single-commercial property.   So assets are highly concentrated in a single, non-liquid, slowly, if at all, appreciating property. 

Then is going to accumulate cash for a few years.  Definite, if small,  inflation risk there.  Then do the same thing again.   

As long as everything flows cash, it will be fine.   But I don't see a lot of safety there.   
Title: Re: Paying off mortgage?
Post by: gggggg on January 16, 2017, 03:06:10 PM
Despite knowing money-wise that it was likely better to invest the money, I paid off my mortgage. I'd do it the same way again if I could go back. It's a kickass feeling only having $400 worth of recurring bills a month, and stacking the balance.
Title: Re: Paying off mortgage?
Post by: Check2400 on January 16, 2017, 03:25:46 PM
Quote
If you look at an amortization table, you get a practical answer for prepaying mortgages.  To put it slightly over-simply, in the first month you pay $950 in interest, while in the 360th month you pay $50.  If you prepay an extra $1000 in the first month, you shorten the loan by about 1.5 years.  If you pay an extra $1000 in the 358th month you shorten it by about a month.  Paid in the first month the extra $1000 saves about $15 - 16K in interest.

Quote
You're right; I was wrong.  I rechecked and it is more like 2.5 - 4 months shortening for an early prepayment, depending on interest rate. 

Please correct me if I'm wrong, but I think that you're paying off just over 1 month's worth of mortgage payment no matter when you make that $1000 payment. If it is $1000/mo and the last month is $950 principal and $50 interest, and you pay $1000 into your mortgage at any time, the banks apply that amount to the total principal owed, but do not re-amortize or recast the note unless requested/paid to. 

In other words, hasn't your $1000 bucks paid off just the last month's payment, and then $50 of the second to last month's principal payment?  You do not have the interest amount reset as 3.5% of the new principal resulting from your additional payment, do you?  That would cause the entire amortization schedule, final payment, and interest calculations in whatever Note recorded against your property to be perpetually recalculated, which seems too favorable to the customer and not the bank.  Isn't this known return one of the reasons mortgages were able to be bundled and sold by banks a la The Big Short as well?

If my understanding is right, and you did just one payment like this, you'd save about $55 in interest (going by your $50 interest from $1000).   
If you instead put $1000 in a fund for 30 years, less one month, at 4% interest to account for inflation (plus 1% for good measure), you have $3,313.  But in the future, your tax rate is 50% because, why not, we're making a point here.  Take out your initial principal, tax the profit at half, and you end up with $1,156.75.  Plus the original $1000. 
 
Options:
You can pay the principal down and save $550. 

You can invest it and, at the same time that the paydown would be realized (the last month of year 30), you can sell the investment and come out with $1,156.75 + the $50 in interest from not paying the last month.  $1,256.75 > $55.  In a very conservative return/tax scenario. 

I am open to being wrong if you have something tangible, that would be great to convince me. 
I am talking about a standard US Fixed rate 30 year mortgage if that affects any evaluations.   

Title: Re: Paying off mortgage?
Post by: teen persuasion on January 16, 2017, 03:40:59 PM
1) If you look at an amortization table, you get a practical answer for prepaying mortgages.  To put it slightly over-simply, in the first month you pay $950 in interest, while in the 360th month you pay $50.  If you prepay an extra $1000 in the first month, you shorten the loan by about 1.5 years.  If you pay an extra $1000 in the 358th month you shorten it by about a month.  Paid in the first month the extra $1000 saves about $15 - 16K in interest.  Paid at the far end of the loan, it saves about $50.  Prepayments early in a loan have an enormous "return," if you define "saved interest" as "return."  Prepayments at the end of the loan, particularly given the erosion in money's value over time, are nugatory. 

2) If you think of your money as inhabiting various buckets, some of it is in the real estate bucket.  I use the surplus in that bucket - at least when the loan under attack is young - to prepay.  For instance, if I have excess rent coming in from a property that is paid off, I keep that money in the real estate bucket by prepaying our personal mortgage.

3) Occasionally there are cash-flow considerations that bear on the answer.  When my brother faced college expenses for his child, he had 2 - 3 years left on the mortgage, and enough money in a CD yielding essentially nothing to prepay it.  By prepaying the house, he freed up monthly money equal to about 4/5 of the monthly college costs, which let him (and the kid) avoid loans that would have had much higher interest rates.

Right now rates are low; in this environment (and with my current investing knowledge) I would opt to keep a low interest mortgage and invest excess money on index funds.  However, when I had this decision to make our mortgage rate was 9.75%, and I wasn't as knowledgeable about investing.  I knew I wanted index funds, but wasn't as clear about where and which to choose. 

I wrote out my own amortization schedule on the back of an envelope, and sat on a small inheritance for a while (DH was unemployed, decided to go to grad school to change careers, and I was SAHM to a bunch of little ones).  When DH got into a stable job, and we hadn't needed to touch either our EF or the inheritance while unemployed, it was time to begin aggressively paying down the mortgage.  That first lump paid off 8 years in one fell swoop.  I could see that early prepayment was much more advantageous than later, so I added as much as possible.  I would add at least the next two months principal payments (ridiculously small in the beginning, so easy) each month.  I also earmarked our generous tax refunds for an annual large lump payoff, trying to round up to even years (or later, months) wiped out. 

Eventually, we were at the point that principal payments were larger, so I dropped back to paying no extra, instead increasing DH's 401k contributions heavily.  We had one year left when the oldest approached college age, and contemplated paying it off from savings, or preserving cash options for first year college expenses.  We opted to let it play out on schedule, but shifted the generous tax refunds to increased retirement savings (Roth IRAs for both of us), and DH cut back on extra work. 

Over those few years of aggressively paying down the mortgage, I was learning more about investing.  I had to make some mistakes (like chasing previous year's yields when picking funds) to learn, but I made them on relatively low amounts while steadily reducing the mortgage.  I think it was a good trade-off, and we were shifting to investing heavily beginning in 2008.

Long story just to point out that conditions change - I don't expect low rates to continue forever, so any decisions should be based on all the details.
Title: Re: Paying off mortgage?
Post by: khangaroo on January 16, 2017, 03:59:50 PM
Sounds super low risk as well.

Really?  Sounds high risk to me.  He is putting all his cash into paying down the note on a single-commercial property.   So assets are highly concentrated in a single, non-liquid, slowly, if at all, appreciating property. 

Then is going to accumulate cash for a few years.  Definite, if small,  inflation risk there.  Then do the same thing again.   

As long as everything flows cash, it will be fine.   But I don't see a lot of safety there.

The only thing is that it won't be all my cash. The real estate is probably going to make up 30-40% of my overall net worth portfolio.
Title: Re: Paying off mortgage?
Post by: boarder42 on January 16, 2017, 05:08:19 PM
Sounds super low risk as well.

Really?  Sounds high risk to me.  He is putting all his cash into paying down the note on a single-commercial property.   So assets are highly concentrated in a single, non-liquid, slowly, if at all, appreciating property. 

Then is going to accumulate cash for a few years.  Definite, if small,  inflation risk there.  Then do the same thing again.   

As long as everything flows cash, it will be fine.   But I don't see a lot of safety there.

The only thing is that it won't be all my cash. The real estate is probably going to make up 30-40% of my overall net worth portfolio.

So what's the rest. If it's invest bacchis comment holds
Title: Re: Paying off mortgage?
Post by: shawndoggy on January 16, 2017, 05:59:42 PM
curious whether any of you put any value or premium on the equity in a primary residence as an asset protection strategy.  Obviously varies from state to state, but in my state a homesteaded residence will be exempt from execution for up to $550k in equity. 

I agree that the zombie apocalypse scenario isn't likely at all. But managing the risk of being a "deep pocket" against whom a judgment creditor could execute on its judgment should have some value in the discussion as well.  There are more ways to lose money than a market crash.  A car crash or some other accident could wipe YOU out, even in an up market.

It varies from state to state, obviously, but for those of us in a state with a high exemption, it's at least worth considering.
Title: Re: Paying off mortgage?
Post by: khangaroo on January 16, 2017, 06:08:07 PM
Sounds super low risk as well.

Really?  Sounds high risk to me.  He is putting all his cash into paying down the note on a single-commercial property.   So assets are highly concentrated in a single, non-liquid, slowly, if at all, appreciating property. 

Then is going to accumulate cash for a few years.  Definite, if small,  inflation risk there.  Then do the same thing again.   

As long as everything flows cash, it will be fine.   But I don't see a lot of safety there.

The only thing is that it won't be all my cash. The real estate is probably going to make up 30-40% of my overall net worth portfolio.

So what's the rest. If it's invest bacchis comment holds

In a banana stand, because there is always money in a banana stand.
Title: Re: Paying off mortgage?
Post by: boarder42 on January 16, 2017, 06:42:59 PM
curious whether any of you put any value or premium on the equity in a primary residence as an asset protection strategy.  Obviously varies from state to state, but in my state a homesteaded residence will be exempt from execution for up to $550k in equity. 

I agree that the zombie apocalypse scenario isn't likely at all. But managing the risk of being a "deep pocket" against whom a judgment creditor could execute on its judgment should have some value in the discussion as well.  There are more ways to lose money than a market crash.  A car crash or some other accident could wipe YOU out, even in an up market.

It varies from state to state, obviously, but for those of us in a state with a high exemption, it's at least worth considering.

1st question do you frequent wakeboard forums.

2nd statement. Umbrella policy is better than 550k tied up in a house
Title: Re: Paying off mortgage?
Post by: shawndoggy on January 16, 2017, 09:09:00 PM

1st question do you frequent wakeboard forums.

2nd statement. Umbrella policy is better than 550k tied up in a house

Busted!

And the umbrella policy I get.  But when you T-bone the brain surgeon, it's going to result in more liability than your 1-2M umbrella policy.  It's the idea of having unshielded cash that some may find somewhat concerning.
Title: Re: Paying off mortgage?
Post by: boarder42 on January 17, 2017, 05:07:44 AM

1st question do you frequent wakeboard forums.

2nd statement. Umbrella policy is better than 550k tied up in a house

Busted!

And the umbrella policy I get.  But when you T-bone the brain surgeon, it's going to result in more liability than your 1-2M umbrella policy.  It's the idea of having unshielded cash that some may find somewhat concerning.

at that point its just a sliding scale though.  the amount of income gained by not paying your mortgage down vs the cost to up your umbrella policy ... and at what point is enough enough.  Not to mention the statistical unlikelihood of Tboning someone of that level that the costs of them not working cost you everything you have and its 100% your fault.