Author Topic: Paying off mortgage?  (Read 15556 times)

Syonyk

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Re: Paying off mortgage?
« Reply #50 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.

doneby35

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Re: Paying off mortgage?
« Reply #51 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.

Telecaster

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Re: Paying off mortgage?
« Reply #52 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. 







 




waltworks

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Re: Paying off mortgage?
« Reply #53 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

brooklynguy

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Re: Paying off mortgage?
« Reply #54 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 in response to a similar claim that Kitces got the analysis "wrong" in another, similar article by him, 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).

Cathy

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Re: Paying off mortgage?
« Reply #55 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 in response to a similar claim that Kitces got the analysis "wrong" in another, similar article by him...

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 cited in this thread, 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, 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.
« Last Edit: December 12, 2016, 09:14:04 AM by Cathy »

frugaliknowit

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Re: Paying off mortgage?
« Reply #56 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. 
« Last Edit: December 12, 2016, 09:39:23 AM by frugaliknowit »

tomsang

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Re: Paying off mortgage?
« Reply #57 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. 

Retire-Canada

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Re: Paying off mortgage?
« Reply #58 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.
« Last Edit: December 12, 2016, 11:06:38 AM by Retire-Canada »

waltworks

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Re: Paying off mortgage?
« Reply #59 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

frugaliknowit

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Re: Paying off mortgage?
« Reply #60 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/)

Retire-Canada

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Re: Paying off mortgage?
« Reply #61 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.
« Last Edit: December 12, 2016, 11:30:29 AM by Retire-Canada »

waltworks

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Re: Paying off mortgage?
« Reply #62 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
« Last Edit: December 12, 2016, 11:46:22 AM by waltworks »

brooklynguy

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Re: Paying off mortgage?
« Reply #63 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.

waltworks

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Re: Paying off mortgage?
« Reply #64 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

brooklynguy

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Re: Paying off mortgage?
« Reply #65 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.

Tjat

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Re: Paying off mortgage?
« Reply #66 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.

Paul der Krake

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Re: Paying off mortgage?
« Reply #67 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.


Paul der Krake

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Re: Paying off mortgage?
« Reply #68 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.

Syonyk

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Re: Paying off mortgage?
« Reply #69 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.

Playing with Fire UK

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Re: Paying off mortgage?
« Reply #70 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.

ender

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Re: Paying off mortgage?
« Reply #71 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.

Playing with Fire UK

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Re: Paying off mortgage?
« Reply #72 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.

fredbear

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Re: Paying off mortgage?
« Reply #73 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. 


doneby35

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Re: Paying off mortgage?
« Reply #74 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.

Retire-Canada

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Re: Paying off mortgage?
« Reply #75 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.

boarder42

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Re: Paying off mortgage?
« Reply #76 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.

Retire-Canada

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Re: Paying off mortgage?
« Reply #77 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.

fredbear

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Re: Paying off mortgage?
« Reply #78 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.

khangaroo

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Re: Paying off mortgage?
« Reply #79 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!

bacchi

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Re: Paying off mortgage?
« Reply #80 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?


blahblahblah

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Re: Paying off mortgage?
« Reply #81 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.

Playing with Fire UK

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Re: Paying off mortgage?
« Reply #82 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.

boarder42

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Re: Paying off mortgage?
« Reply #83 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

Telecaster

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Re: Paying off mortgage?
« Reply #84 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. 

khangaroo

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Re: Paying off mortgage?
« Reply #85 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.

boarder42

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Re: Paying off mortgage?
« Reply #86 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

khangaroo

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Re: Paying off mortgage?
« Reply #87 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.

boarder42

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Re: Paying off mortgage?
« Reply #88 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. 

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Re: Paying off mortgage?
« Reply #89 on: January 16, 2017, 02:11:36 PM »
Sounds super low risk as well.

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Re: Paying off mortgage?
« Reply #90 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

Telecaster

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Re: Paying off mortgage?
« Reply #91 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.   

gggggg

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Re: Paying off mortgage?
« Reply #92 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.

Check2400

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Re: Paying off mortgage?
« Reply #93 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.   


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Re: Paying off mortgage?
« Reply #94 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.

khangaroo

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Re: Paying off mortgage?
« Reply #95 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.

boarder42

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Re: Paying off mortgage?
« Reply #96 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

shawndoggy

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Re: Paying off mortgage?
« Reply #97 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.

khangaroo

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Re: Paying off mortgage?
« Reply #98 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.

boarder42

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Re: Paying off mortgage?
« Reply #99 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