The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: YTProphet on March 20, 2017, 09:02:00 AM
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I'm thiiiiiiis close to being able to pay off my house. About $100k left on it and I have nearly $100k in cash. Have $100k in my 401k and am maxing that out. 33 y/o, married with a couple kids.
I'm a box checker and someone who likes the feeling of accomplishment. Agnostic about future stock market performance. Any reason not to do it? I already have a HELOC set up so that if I need a big chunk of cash for whatever reason I can draw on it.
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What is the interest rate? Refer to this thread:
https://forum.mrmoneymustache.com/investor-alley/investment-order-65299/ (https://forum.mrmoneymustache.com/investor-alley/investment-order-65299/)
Why do you have 100k in cash? Is your 6 month emergency fund really that big? I would fill you and your spouse's IRAs, keep 6 months emergency fund, and put the rest in Vanguard.
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If your interest rate is <5% I would not. There is something to be said about liquidity.
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What is the interest rate? Refer to this thread:
https://forum.mrmoneymustache.com/investor-alley/investment-order-65299/ (https://forum.mrmoneymustache.com/investor-alley/investment-order-65299/)
Why do you have 100k in cash? Is your 6 month emergency fund really that big? I would fill you and your spouse's IRAs, keep 6 months emergency fund, and put the rest in Vanguard.
Interest rate is 3.25%. 15 year note. I happen to have a lot of cash due to a liquidity event from an investment that just paid out.
I max roth IRA's and normally keep a 6 month emergency fund, but I guess I don't really see the difference between keeping a cash emergency fund and having a readily accessible HELOC. I realize a HELOC is more volatile (interest rates could spike, the bank could take it away from me for some reason, etc), but without a mortgage my cash cushion will jump up very quickly since I currently pay $1500/month toward my mortgage.
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If your interest rate is <5% I would not. There is something to be said about liquidity.
It's 3.25%, which I know is dirt cheap money, but I just want the high from being debt free. LOL. I know that sounds a bit weird, but I'd love to just be able to say "I paid off a $200k+ house and $160k in student loans in 6 years and I'm now debt free."
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Interest rate is 3.25%.
https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/
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As long as you can pay it off without robbing your 401K or other such retirement account(s), while still leaving yourself a little liquid cash to use as emergency fund, etc., I'd say pay it off.
No mortgage frees up a bunch of cash every month for other types of spending and investing, plus it just feels good not to have debt.
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We are going to see something similar soon and decided to keep the money invested. The determining factor for us though wasn't interest rate but "How long until you plan to retire?"
If you're planning on retiring relatively soon and doing the standard 5 year IRA ladder, you'll need 5 years of expenses saved up either in taxable accounts or Roth IRA contributions while your ladder matures. This money could give you the liquidity to cover much of that period. Otherwise you'll need to look into SEPPs or taking the 10% penalty or needing to earn more than you'd like for the first 5 years of your "retirement."
If you still have a long time before retirement and you'll likely be able to save up the 5 years of liquidity between now and then, then you can decide on interest rate arbitrage vs peace of mind of no mortgage.
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As long as you can pay it off without robbing your 401K or other such retirement account(s), while still leaving yourself a little liquid cash to use as emergency fund, etc., I'd say pay it off.
No mortgage frees up a bunch of cash every month for other types of spending and investing, plus it just feels good not to have debt.
you have to spend the cash to pay it off. it creates future cash flow at a higher rate that could lead to increased spending which is bad so i dont know why you even included. But this is at the expense of 100k earning money now today. all extra cash flow should go to investing. and with that logic the best way to do it is to not pay it off and to put all cash into investments now b/c that rate is low.
your last statement on feelings is the only reason to pay off the mortgage.
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It sounds like you are looking for validation on paying off mortgage. Most here will say not to do it and stay liquid.
I would do what makes yourself feel better. It sounds like you would like to have that emotional feeling of accomplishment and having a paid off house by 33 is pretty cool.
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I just went through the same query last fall.
I decided it would suck if I lost my job, then had to start drawing on my heloc (while unemployed...). I have been "throwing grenades at it", and will be done with it in about 3 more months with some cash to spare.
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It sounds like you are looking for validation on paying off mortgage. Most here will say not to do it and stay liquid.
I would do what makes yourself feel better. It sounds like you would like to have that emotional feeling of accomplishment and having a paid off house by 33 is pretty cool.
Yeah, I think I am looking for something like emotional validation. You work so hard but there's no emotional checkpoints to take a breather and feel good. You just keep saving. At least with this, it's like a pit stop in the life long financial journey. From a mathematical perspective, I know it probably makes more sense to keep the dirt cheap debt, but then it's just more slogging along to save more money.
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Pit stops in the literal sense make it longer to cross the finish line.
So from your analogy of wanting a pit stop for a breather. Let's look at it from that sense. You could cross the finish line sooner without the pit stop. So as long as you understand your breather will cost you months and likely years on your fire date sure go ahead and take it. But a NASCAR driver with plenty of fuel and solid tires wouldn't take a pit stop for his emotional satisfaction and to take a break. But that choice is yours.
Maybe you dump it into your house and the market crashes this year and you're thinking great I made the right Calli avoided that crash. Well the problem is you are missing out on the recovery which in 15 years will likely still lead to you coming out behind. In the same way a NASCAR driver wouldn't take a pit bc a crash may happen and he can avoid it while catching a 15 second break. Done continuously he would lose his job and be fired.
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No.
Paid off house = overweight invested in a non-liquid asset. (Unless the value of the house is only 10-15% of your NW.)
Let the bank own it, and use their money to generate more little green men :)
Good luck!
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at the end of 15 years assuming 10% annual returns on your investment investing your payment is ~300k and investing the 400k now is ~420k. so youre gonna make an extra 120k over the next 15 years investing it.
so go join the dont pay off your mortgage club thread and make it a good feeling everytime you buy some more VTSAX .
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As long as you can pay it off without robbing your 401K or other such retirement account(s), while still leaving yourself a little liquid cash to use as emergency fund, etc., I'd say pay it off.
No mortgage frees up a bunch of cash every month for other types of spending and investing, plus it just feels good not to have debt.
Plus you no longer have to pay mortgage interest to the bank.
You should put aside enough to cover your property tax & insurance every year, since you will no longer have escrow.
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As long as you can pay it off without robbing your 401K or other such retirement account(s), while still leaving yourself a little liquid cash to use as emergency fund, etc., I'd say pay it off.
No mortgage frees up a bunch of cash every month for other types of spending and investing, plus it just feels good not to have debt.
Plus you no longer have to pay mortgage interest to the bank.
You should put aside enough to cover your property tax & insurance every year, since you will no longer have escrow.
biggest joke and misconception period brought up as reason to pay off a mortgage. you pay off your mortgage b/c it feels good ... not to avoid 3.25% in interest fees. if you're in the 15% tax bracket and itemize thats 2.8% real interest, which is less than inflation. so as long as you're investing it you're beating inflation itself by not paying it down. such a joke and the most annoying statement i hear about not paying down a mortgage.
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This debate goes round and round on this forum every thirty days or so. I'm firmly entrenched in the "get out of debt and quit paying interest to the bank" camp and nothing will change my mind on that. Do whatever feels good for you.
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I'm way too nervous to lose the liquidity if I made a large lump sum payment to the house.
We alternate any windfalls to Vanguard or Mortgage; but I'm not getting rid of my savings for the house. I don't want to have to sell my house to be able to buy food if I lose my job; however, the fact that I have the money to pay it off means I'd be able to keep making payments in the meantime!
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I have a desire to payoff my mortgage early for peace of mind. If we have another recession and I lose my job, I'd love to not have to worry about rent. And I'd hate to dip into my depleted investments to pay rent. I realize that the market may make me more money then my house does, so that when that recession happens I would likely have bigger cushion, but that is a risk I'm not willing to take.
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This debate goes round and round on this forum every thirty days or so. I'm firmly entrenched in the "get out of debt and quit paying interest to the bank" camp and nothing will change my mind on that. Do whatever feels good for you.
More power to you...I'm glad I didn't miss out on this year, though.
(http://i.imgur.com/qrfyJrS.png)
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You're asking the question as an either/or. Why not pay it off, wait 3-6 months, and then evaluate if you want to take out a new mortgage just so you can invest it. Think of it as an experiment rather than an all-or-nothing approach.
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If I had 100k cash I'd also hesitate to invest it as a lump in this high market. If you pay off the house you can then invest the 1200/month, i.e. dollar cost average. And get the guaranteed 3.5 % return. It's just a function of risk tolerance. I don't see anything wrong with that.
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If I had 100k cash I'd also hesitate to invest it as a lump in this high market. If you pay off the house you can then invest the 1200/month, i.e. dollar cost average. And get the guaranteed 3.5 % return. It's just a function of risk tolerance. I don't see anything wrong with that.
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Mathematically, lump sum wins over DCA.
http://www.businessinsider.com/lump-sum-vs-dollar-cost-averaging-2014-12
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If I had 100k cash I'd also hesitate to invest it as a lump in this high market. If you pay off the house you can then invest the 1200/month, i.e. dollar cost average. And get the guaranteed 3.5 % return. It's just a function of risk tolerance. I don't see anything wrong with that.
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Mathematically, lump sum wins over DCA.
http://www.businessinsider.com/lump-sum-vs-dollar-cost-averaging-2014-12
That is clearly so from the data, but in this case we have to consider:
1. that's the average over an 87 year period, not many investors are truly long haul and it may not be the case for say, every 10-yr period.
2. In the OP case, the balance would be in a 3.25% return mortgage payoff rather than in cash... so the difference is not really that huge.
3. Emotional side of the equation
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If I had 100k cash I'd also hesitate to invest it as a lump in this high market. If you pay off the house you can then invest the 1200/month, i.e. dollar cost average. And get the guaranteed 3.5 % return. It's just a function of risk tolerance. I don't see anything wrong with that.
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Mathematically, lump sum wins over DCA.
http://www.businessinsider.com/lump-sum-vs-dollar-cost-averaging-2014-12
That is clearly so from the data, but in this case we have to consider:
1. that's the average over an 87 year period, not many investors are truly long haul and it may not be the case for say, every 10-yr period.
2. In the OP case, the balance would be in a 3.25% return mortgage payoff rather than in cash... so the difference is not really that huge.
3. Emotional side of the equation
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its not a function of risk tolerance its been clearly laid out many time that those who pay down their mortgage are actually adding risk to their FIRE timeline as well as their safety once FIREd ... its volatility tolerance. but at the end of the day there is no equation you can layout that says paying down the mortgage at that rate ever makes sense.
1. this place is all about the long haul.
2. the difference is huge i dont know what 120k means to you but thats an extra 5k per year you can spend or a year or 2 off your FIRE timeline
3. Yes when you take logic and math out of the equation and rely on emotion this is how you can feel better about making a mathmatically flawed decision.
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If I had 100k cash I'd also hesitate to invest it as a lump in this high market. If you pay off the house you can then invest the 1200/month, i.e. dollar cost average. And get the guaranteed 3.5 % return. It's just a function of risk tolerance. I don't see anything wrong with that.
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Yeah, I think it's really 2 things for me:
1. Emotional validation
2. I'm a little bit leery given the fact that we've been in a nice bull market for 8 years and they almost never last longer than that. I realize market timing is taboo around here, but cmon. 8 year bull market and no one else would be nervous about dropping $100k into the market?
On the flip side, I do worry about having my net worth predominantly tied up in one asset (it's a little more liquid than others since I love in a very hot r.e. market).
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If I had 100k cash I'd also hesitate to invest it as a lump in this high market. If you pay off the house you can then invest the 1200/month, i.e. dollar cost average. And get the guaranteed 3.5 % return. It's just a function of risk tolerance. I don't see anything wrong with that.
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Yeah, I think it's really 2 things for me:
1. Emotional validation
2. I'm a little bit leery given the fact that we've been in a nice bull market for 8 years and they almost never last longer than that. I realize market timing is taboo around here, but cmon. 8 year bull market and no one else would be nervous about dropping $100k into the market?
On the flip side, I do worry about having my net worth predominantly tied up in one asset (it's a little more liquid than others since I love in a very hot r.e. market).
you can worry all you want but you can predict anything. the shiller PE isnt all that high right now. 1 year of a flat market with stable earnings would put it right back in line. Its also inflated b/c of the incredibly low 2009 earnings which will be dropping off in 2 years. so who cares.. my dad is about to gift me 20k tomorrow... its going straight into the market. You CANNOT market time. but even if the market were to fall and you'd put that money in your house, when it recovers that money is still just sunk in your house, it cant then be invested. it could but not at a 3.25% loan most likely as rates are rising right now.
The oracle of omaha himself even said its the greatest gift ever. 30 year fixed low interest debt. you're at 15 years but still. take emotion out and make future you happier when you can quit the rat race a year sooner b/c old you made the smart decision and dumped it in the market.
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This debate goes round and round on this forum every thirty days or so. I'm firmly entrenched in the "get out of debt and quit paying interest to the bank" camp and nothing will change my mind on that. Do whatever feels good for you.
More power to you...I'm glad I didn't miss out on this year, though.
(http://i.imgur.com/qrfyJrS.png)
Folks that were mortgage free last year had a whole lot more available cash on hand to invest in the market if they saw fit to do so.
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I bought my house for cash, but you've already paid the fees and everything else to have the mortgage. It's a great rate; why waste the expense you went to in setting it up?
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This debate goes round and round on this forum every thirty days or so. I'm firmly entrenched in the "get out of debt and quit paying interest to the bank" camp and nothing will change my mind on that. Do whatever feels good for you.
More power to you...I'm glad I didn't miss out on this year, though.
(http://i.imgur.com/qrfyJrS.png)
Folks that were mortgage free last year had a whole lot more available cash on hand to invest in the market if they saw fit to do so.
this is asinine and a terrible statement ... if you cant see that i cant help you. you have 10s to 100s of thousands sunk in your house that missed that run up b/c you paid it off. it made whatever houses appreciated at in your area - which is wait for it exactly what houses would have made without a mortgage so all that money sunk into your house essentially returned -17% Year over Year vs the stock market, b/c a mortgage could have been easily had for 4% last year ...
the concept you are presenting is an assbackwards way to think about it.
YOU CANNOT HAVE MORE MONEY IN THE MARKET b/c of a paid off house than someone who has been investing the whole time given the same starting point and funding ...
Your very statement just presents the point as to the problem with people who really dont understand math and you clearly think you're making a better mathematical choice. Just a joke.
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this is asinine and a terrible statement ... if you cant see that i cant help you. you have 10s to 100s of thousands sunk in your house that missed that run up b/c you paid it off. it made whatever houses appreciated at in your area - which is wait for it exactly what houses would have made without a mortgage so all that money sunk into your house essentially returned -17% Year over Year vs the stock market, b/c a mortgage could have been easily had for 4% last year ...
the concept you are presenting is an assbackwards way to think about it.
YOU CANNOT HAVE MORE MONEY IN THE MARKET b/c of a paid off house than someone who has been investing the whole time given the same starting point and funding ...
Your very statement just presents the point as to the problem with people who really dont understand math and you clearly think you're making a better mathematical choice. Just a joke.
We're never going to agree on this.
My house has been paid for, for for a long time. All I need is a little money for taxes, utilities and upkeep and I have a roof over my head for nearly nothing.
It's never an "all or nothing" thing. You can still pay off a house rapidly while investing along the way as you see fit.
People in your camp talk as if the stock market is a guaranteed steady return we can all count on. That's simply not the case and there are thousands of people who have lost everything putting too much faith in the stock market. I'll take sitting free and clear of debt with real assets, cash on hand, and other investments within my realm of control over scattering all of my money in the stock market, through a broker, in unknown companies and investments.
Having said the above, I do invest in the market and have about 20% of my net worth riding there. It's a good tool and should be part of just about anyone's investment portfolio. A paid off home is nice to be sitting on too.
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Folks that were mortgage free last year had a whole lot more available cash on hand to invest in the market if they saw fit to do so.
Let's look at some math since you gave a specific time period we can calculate instead of speculating about the future:
End of December 2015, you have $100k in cash, $100k mortgage balance at 3.25% fixed for 15 years on a house worth $100k. Your principal/interest mortgage payment is $703/month.
Scenario 1: Pay off mortgage. $0 cash, $703/month invested. Value of portfolio on January 2017: $9122.54 (https://dqydj.com/sp-500-dividend-reinvestment-and-periodic-investment-calculator/) + $100k equity + 1.6% 2016 house inflation = $110,722.54
Scenario 2: Keep the mortgage. $100k invested immediately. Value of portfolio on January 2017 $120,909 (https://dqydj.com/sp-500-return-calculator/) + $5,259.92 equity + 1.6% 2016 house inflation = $127,768.92
That's a $17k difference (or 15% more) for only one year, no compounding!
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Folks that were mortgage free last year had a whole lot more available cash on hand to invest in the market if they saw fit to do so.
Let's look at some math since you gave a specific time period we can calculate instead of speculating about the future:
End of December 2015, you have $100k in cash, $100k mortgage balance at 3.25% fixed for 15 years on a house worth $100k. Your principal/interest mortgage payment is $703/month.
Scenario 1: Pay off mortgage. $0 cash, $703/month invested. Value of portfolio on January 2017: $9122.54 (https://dqydj.com/sp-500-dividend-reinvestment-and-periodic-investment-calculator/) + $100k equity + 1.6% 2016 house inflation = $110,722.54
Scenario 2: Keep the mortgage. $100k invested immediately. Value of portfolio on January 2017 $120,909 (https://dqydj.com/sp-500-return-calculator/) + $5,259.92 equity + 1.6% 2016 house inflation = $127,768.92
That's a $17k difference (or 15% more) for only one year, no compounding!
A major portion of the "I want to pay off my mortgage" argument is because it "feels good." That really should be the entire argument -- pretending that the math supports it is futile at best.
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Folks that were mortgage free last year had a whole lot more available cash on hand to invest in the market if they saw fit to do so.
Let's look at some math since you gave a specific time period we can calculate instead of speculating about the future:
End of December 2015, you have $100k in cash, $100k mortgage balance at 3.25% fixed for 15 years on a house worth $100k. Your principal/interest mortgage payment is $703/month.
Scenario 1: Pay off mortgage. $0 cash, $703/month invested. Value of portfolio on January 2017: $9122.54 (https://dqydj.com/sp-500-dividend-reinvestment-and-periodic-investment-calculator/) + $100k equity + 1.6% 2016 house inflation = $110,722.54
Scenario 2: Keep the mortgage. $100k invested immediately. Value of portfolio on January 2017 $120,909 (https://dqydj.com/sp-500-return-calculator/) + $5,259.92 equity + 1.6% 2016 house inflation = $127,768.92
That's a $17k difference (or 15% more) for only one year, no compounding!
A major portion of the "I want to pay off my mortgage" argument is because it "feels good." That really should be the entire argument -- pretending that the math supports it is futile at best.
yes 100% ... if you want to claim we wont get avg market returns for 30 years and you dont plan for the stock market to support part of your retirement plan then sure go ahead and work with whatever your other investment is but i'd say greater than 90% of this forum plans to use some version of the 4% rule and if thats the case paying down your mortgage for fear or feelings about getting a fixed rate means you had better just avoid the stock market all together and look to real estate or bonds etc. b/c if you dont trust the market enought to not pay down sub 4% fixed debt then how the hell can you trust it to fund your retirement.
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Peace of Mind is VERY expensive.
Make sure its really worth it to you deep down. Is a completely arbitrary bragging right (paid off house) worth the likely future cost?
I'll reinforce considering diversification. I personally wouldn't want to be too heavy in any one asset class, and definitely not if a personal residence represents the bulk of the RE class.
If the OP favors Real Estate, they are better off getting investment property for that $100k and generating an additional income stream.
If the OP wants a checkbox, I suggest milestones for Net Worth or reaching asset class balance targets.
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I don't feel I need to invest every spare dime into the market, given we're already putting in a large sum. We already max all tax advantaged accounts, and invest a significant amount after tax each month on top of that. What to do with the extra cash? We could buy bonds, but it seems to make more sense to retire mortgage debt.
Totally agree that mortgage prepayment is better than bonds. In fact, that's kind of what I've done, but I am OLDER and considered "pre-retirement" age.
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I think the answer depends on what you'll do with the money if you don't pay it off.
If you would leave it in savings or buy bonds with it, then yes, I would pay it off.
Heck, if my remaining mortgage amount were under $100k, I'd just pay it off for the hell of it. I agree it would feel great to have a paid off mortgage.
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This goes round and round because it's an emotional decision. Some people simply get a high amount of satisfaction from paying off their mortgage early. That's fine, and if that's you, go ahead.
On the other hand, the math is extremely clear. If you can get a better return in the market, you are better off riding the mortgage and investing the excess, period. That should not be up for debate. With today's sub-4 mortgage rates, you will lose money by paying the mortgage off early rather than investing. It's still a totally reasonable thing to do if you want to reduce risk or if you have an emotional gain from a paid off house. Just don't argue that the math says paying off early is financially beneficial.
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Read through this thread if you truly want to understand the math, risks of paying off a mortgage and how badly it pushes back your FI or retirement date.
https://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/
The attached Excel file calculates how paying off your mortgage effects your financial well being.
Paying off a 30 year fixed rate sub 4% mortgage is purely an emotional decision that hurts your financial well being. Don't let emotions make you do something that will hurt your financial well being. Just like don't let emotions make you buy a new car every year, or a new purse, or any other capitalistic trinket. You would be significantly better off if your emotions were to buy new shoes or clothes vs. paying off your mortgage.
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If you can get a better return in the market, you are better off riding the mortgage and investing the excess, period. That should not be up for debate. With today's sub-4 mortgage rates, you will lose money by paying the mortgage off early rather than investing. It's still a totally reasonable thing to do if you want to reduce risk or if you have an emotional gain from a paid off house. Just don't argue that the math says paying off early is financially beneficial.
Past performance is not indicative of future results.
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Past performance is not indicative of future results.
If you are not very confident that you can beat sub 4% nominal over 30 years, then you had better make sure that your Safe Withdrawal Rate is less than 1%. All models are based on a nominal return of over 7% as that has been the worst stretch in history.
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Financial well being is not all there is to it. We paid off our mortgage at the 10 year (of 30) mark, which you might say was silly, but it meant we had a large enough HELOC available on our house that when a piece of land we wanted to pick up with plans to eventually build-our-own-house / retire-to came up but with such huge issues for the (too many tiny) buildings on it that banks were balking at financing it, we paid cash via the HELOC.
Consider your goals, your values, and the context they set. Make your decision based on those. Did paying it off early hurt my financial well being? Maybe. Is it aligned with my goals? Turns out yes, it was. Should I have done it? Current answer: yes!
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You could have sold stock vs having money tied up in an asset that keeps pace with inflation and you likely would have still come out ahead. Your scenario actually screams you should have invested.
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Financial well being is not all there is to it. We paid off our mortgage at the 10 year (of 30) mark, which you might say was silly, but it meant we had a large enough HELOC available on our house that when a piece of land we wanted to pick up with plans to eventually build-our-own-house / retire-to came up but with such huge issues for the (too many tiny) buildings on it that banks were balking at financing it, we paid cash via the HELOC.
Consider your goals, your values, and the context they set. Make your decision based on those. Did paying it off early hurt my financial well being? Maybe. Is it aligned with my goals? Turns out yes, it was. Should I have done it? Current answer: yes!
I'd like to know how much your mortgage was, what year you paid it off, and what year you needed the money.
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So what Is advised when your mortgage gets paid off in 30 years? Get another mortgage and put all the money in the market in a lump sum?
thats what i would do assuming a similar rate scenario. I'd keep refinancing if rates are lower thru out the mortgage as well. Personally i'm at a 3.25 on a 30 year i dont think i'll see those rates again. but i think there is some math that could be done to figure out when to REFI based on increasing a rate even depending on equity etc. I havent reached a point of equity its worth it yet.
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Past performance is not indicative of future results.
If you are not very confident that you can beat sub 4% nominal over 30 years, then you had better make sure that your Safe Withdrawal Rate is less than 1%. All models are based on a nominal return of over 7% as that has been the worst stretch in history.
That's very much a circular argument. Someone may choose to look at more than just the past XX number of years of the US stock market.
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Past performance is not indicative of future results.
If you are not very confident that you can beat sub 4% nominal over 30 years, then you had better make sure that your Safe Withdrawal Rate is less than 1%. All models are based on a nominal return of over 7% as that has been the worst stretch in history.
That's very much a circular argument. Someone may choose to look at more than just the past XX number of years of the US stock market.
so whats your point....
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Past performance is not indicative of future results.
If you are not very confident that you can beat sub 4% nominal over 30 years, then you had better make sure that your Safe Withdrawal Rate is less than 1%. All models are based on a nominal return of over 7% as that has been the worst stretch in history.
That's very much a circular argument. Someone may choose to look at more than just the past XX number of years of the US stock market.
If you don't believe the entire history of the US stock market is a valid source, how are you determining how much money you will need before you can stop working?
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and also whats your answer that your statement cant be applied to basically any investment period.
if you own rentals - but rent has been xyz in the past so it wiill be so in the future.
where do you draw the line at making the ridiculous statement of "past performance is not indictative of future results" - yes we all understand that may not be the case but where in the finance world do you draw the line and how do you plan to retire ever. how do you go thru life with this assumption. I mean this can litterally apply to every thing in life and any investment one were to make to secure their future.
you could save piles til none were needed to be invested but then you have inflation risk. what if we have 2million percent inflation for a year. wait thats never happened before ... but past performance is not indicative of future results.
what if you get cancer and die at 35 while you were living by that moto and saving til youre 50 to make it work ... That statement is thrown around far too much by those who dont understand the math period. yes its a factual statement no it doesnt really hold water, and i'd like to know your FIRE plan that doesnt require any past results as groundwork for its safety once FIREd
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So what Is advised when your mortgage gets paid off in 30 years? Get another mortgage and put all the money in the market in a lump sum?
I maintain that it's financially beneficial to hold a low-interest mortgage, given that your horizon is long enough. By the time you pay off a 30 year mortgage, you may be looking at a short enough horizon that you aren't willing to invest completely in the market. In this case you may be better off keeping the house paid off to lower your volatility.
Again, these are all financial arguments. Unless you are unwilling to use the entire history of the US stock market as a guide, you will be better off in the long run holding on to a low-rate mortgage. It will give you better returns. It will give you more flexibility. It will give you a bigger and more liquid safety net.
BUT, there are valid non-financial reasons to pay off a mortgage early. People can receive a huge emotional boost from living in a paid off house. I'm not arguing that those are invalid. I'm simply arguing that the math is very clear on the financial side.
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My house is paid for, but I have more in investments than the value of my house. I tend to like the feeling of security (ignoring the lost investment opportunity math for now). However, diversification is also important and I would not be comfortable having the majority of my net worth tied up in a single asset.
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My house is paid for, but I have more in investments than the value of my house. I tend to like the feeling of security (ignoring the lost investment opportunity math for now). However, diversification is also important and I would not be comfortable having the majority of my net worth tied up in a single asset.
I know you and many others believe this, but I find it strange. I get more security knowing that I have much more than my mortgage in investments. To me, the security is that if it all hits the fan I can dump the house and move with my investments to provide me security. When you add in loss of investment returns, tax breaks for mortgage rates, sub 4% mortgage rates given to us by the government to save us from an economic depression, distribution of my assets throughout the world, and the fact that I live in a state that is expected to have an earthquake any day or in 1,000 years makes me feel like a house is not a great place to store my assets. To me having a paid off house is not very secure, where having investments makes me feel more secure and much wealthier.
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Question for those in the "keep the mortgage" camp.
So at 30 years old you borrow for a house and get a 30 year loan. At age 60 you pay it off, then what? Would you take a big home equity loan against it for another 10-20-30 years, throw that money in the market and continue to make payments so you don't miss out on the investment gains?
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Question for those in the "keep the mortgage" camp.
So at 30 years old you borrow for a house and get a 30 year loan. At age 60 you pay it off, then what? Would you take a big home equity loan against it for another 10-20-30 years, throw that money in the market and continue to make payments so you don't miss out on the investment gains?
Maybe, maybe not. If rates were low enough, that would be the appropriate mathematical choice. You would probably find that some of the "keep the mortgage" camp would keep the paid-off house while recognizing that it's an emotional decision.
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Question for those in the "keep the mortgage" camp.
So at 30 years old you borrow for a house and get a 30 year loan. At age 60 you pay it off, then what? Would you take a big home equity loan against it for another 10-20-30 years, throw that money in the market and continue to make payments so you don't miss out on the investment gains?
Personally, at 60, I would likely consider my horizon too short to leverage the house (assuming the rates were favorable). I'd probably just keep the house paid off at that point.
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Question for those in the "keep the mortgage" camp.
So at 30 years old you borrow for a house and get a 30 year loan. At age 60 you pay it off, then what? Would you take a big home equity loan against it for another 10-20-30 years, throw that money in the market and continue to make payments so you don't miss out on the investment gains?
Assuming interest rates were still low (less than 4%, including closing costs) I would definitely consider taking out a home equity loan. It would be the mathematical choice. Though at age 60 I expect to be long since retired so I would already presumably have more than enough money invested so I might deem it more hassle than it's worth (depending on the interest rate and what percentage of my net worth the house represents).
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Time horizon the the 100K is critical: http://paulmerriman.com/decade-returns/
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I had the same scenario. $200k left on mortgage with 15 years remaining and enough cash to pay it off completely. I also originally liked the emotional satisfaction of paying it off early and have no mortgage payments. I compromised. I set up a separate account with some stocks and limited bonds of which the mortgage payment draws from. I don't consider this part of my stache. In my mind, my house is "paid for" and I'm still getting returns and have an effective interest rate of 2.4%.
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I had the same scenario. $200k left on mortgage with 15 years remaining and enough cash to pay it off completely. I also originally liked the emotional satisfaction of paying it off early and have no mortgage payments. I compromised. I set up a separate account with some stocks and limited bonds of which the mortgage payment draws from. I don't consider this part of my stache. In my mind, my house is "paid for" and I'm still getting returns and have an effective interest rate of 2.4%.
I like it. It's a nice way to get the emotional benefit while still taking advantage of the investment opportunities!
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My house is paid for, but I have more in investments than the value of my house. I tend to like the feeling of security (ignoring the lost investment opportunity math for now). However, diversification is also important and I would not be comfortable having the majority of my net worth tied up in a single asset.
I know you and many others believe this, but I find it strange. I get more security knowing that I have much more than my mortgage in investments. To me, the security is that if it all hits the fan I can dump the house and move with my investments to provide me security. When you add in loss of investment returns, tax breaks for mortgage rates, sub 4% mortgage rates given to us by the government to save us from an economic depression, distribution of my assets throughout the world, and the fact that I live in a state that is expected to have an earthquake any day or in 1,000 years makes me feel like a house is not a great place to store my assets. To me having a paid off house is not very secure, where having investments makes me feel more secure and much wealthier.
What makes me feel secure is not necessarily the same thing that makes you feel secure and that is okay. I don't feel the need to convince you and you shouldn't feel the need to convince me. The feeling of security is subjective and can change depending upon the situation. I think there are pros and cons each way (some of which are subjective) and each person has to make the decision for themselves. The value of my house is about 20% of my net worth, so I feel that I am fairly diversified and am willing to forego potential stock market gains on the money tied up in my home. In fairness, I also had other legal concerns when I paid cash for my home that contributed to my decision. Now that those concerns no longer exist, I still have no desire to trade the equity in my home for more cash to invest.
However, I also do not think it is prudent to have the majority of your net worth tied up in a single asset.
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I'm in an odd boat. I'm a Dave Ramsey listener and before I found this forum we put down $100k on our mortgage. Now with $52k left I'm on the fence of paying it off; we have the cash plus 6 months EM. We could pay off the house and invest an extra $1k/month or invest the $50k.
Ramsey puts it this way, 'would you take out a $200k low interest loan to invest in the stock market?'
I like the idea of paying it off, but @frugaliknowit makes a good point with his link of past decades returns.
Sent from my Nexus 6P using Tapatalk
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I'm a Dave Ramsey listener
Stop listening. He's useless after step one (establish emergency fund) and the urgency to pay off your debt. Possibly even harmful, if you follow his investment advice.
You didn't mention your mortgage interest rate, but if it's below 4% it's usual best to focus on investments instead of paying it down.
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Stop listening. He's useless after step one (establish emergency fund) and the urgency to pay off your debt. Possibly even harmful, if you follow his investment advice.
You didn't mention your mortgage interest rate, but if it's below 4% it's usual best to focus on investments instead of paying it down.
We're through all the steps except the mortgage. It's interesting to listen to at work non the less.
Interest rate is 3.75%. I should take a step tomorrow and move the money to an investment.
A rental property is also on the table. We can comfortably afford a good 3 bed 1 bath, ~$100k. Would the market be better over an investment property?
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Regarding the "emotional" benefit... when my roommate and I paid a house off I expected this nice feeling of "ahh..job well done. Now it's 'mine'". Then I budgeted for the insurance and taxes and all of those feelings evaporated.
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Question for those in the "keep the mortgage" camp.
So at 30 years old you borrow for a house and get a 30 year loan. At age 60 you pay it off, then what? Would you take a big home equity loan against it for another 10-20-30 years, throw that money in the market and continue to make payments so you don't miss out on the investment gains?
Depending on the interest rate I'd just refinance near the end of the loan, or leave it paid off. A mortgage is a great thing to have depending on the economic climate.
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and also whats your answer that your statement cant be applied to basically any investment period.
if you own rentals - but rent has been xyz in the past so it wiill be so in the future.
where do you draw the line at making the ridiculous statement of "past performance is not indictative of future results" - yes we all understand that may not be the case but where in the finance world do you draw the line and how do you plan to retire ever. how do you go thru life with this assumption. I mean this can litterally apply to every thing in life and any investment one were to make to secure their future.
you could save piles til none were needed to be invested but then you have inflation risk. what if we have 2million percent inflation for a year. wait thats never happened before ... but past performance is not indicative of future results.
what if you get cancer and die at 35 while you were living by that moto and saving til youre 50 to make it work ... That statement is thrown around far too much by those who dont understand the math period. yes its a factual statement no it doesnt really hold water, and i'd like to know your FIRE plan that doesnt require any past results as groundwork for its safety once FIREd
"Ridiculous" as it may be, that statement is required for all listed companies. The math supports investing in stocks rather than the market ... until it doesn't. I am not saying that anyone should do one vs. the other. What I am saying is that people talk about "the math" as if there is no variable involved. There absolutely is, and that is stock return. It is not a fixed 7 percent, and we do not know what it will be. Yes, the historical average returns of U.S. stocks may support that, but that's far from a guarantee.
All we can do is take our best guess in predicting the return, based on whatever factors we think are reasonable to look at. Some may look at historical returns of U.S. stocks and figure that's good enough, while others may look at other stock markets historically worldwide, at political conditions, or whatever else.
It is not accurate to say, "The math says you'll lose money if you pay off your mortgage vs. investing in stocks." It's only reasonable to say, "Based on the factors I choose to consider, it seems likely that you'll do better investing in stocks."
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and also whats your answer that your statement cant be applied to basically any investment period.
if you own rentals - but rent has been xyz in the past so it wiill be so in the future.
where do you draw the line at making the ridiculous statement of "past performance is not indictative of future results" - yes we all understand that may not be the case but where in the finance world do you draw the line and how do you plan to retire ever. how do you go thru life with this assumption. I mean this can litterally apply to every thing in life and any investment one were to make to secure their future.
you could save piles til none were needed to be invested but then you have inflation risk. what if we have 2million percent inflation for a year. wait thats never happened before ... but past performance is not indicative of future results.
what if you get cancer and die at 35 while you were living by that moto and saving til youre 50 to make it work ... That statement is thrown around far too much by those who dont understand the math period. yes its a factual statement no it doesnt really hold water, and i'd like to know your FIRE plan that doesnt require any past results as groundwork for its safety once FIREd
"Ridiculous" as it may be, that statement is required for all listed companies. The math supports investing in stocks rather than the market ... until it doesn't. I am not saying that anyone should do one vs. the other. What I am saying is that people talk about "the math" as if there is no variable involved. There absolutely is, and that is stock return. It is not a fixed 7 percent, and we do not know what it will be. Yes, the historical average returns of U.S. stocks may support that, but that's far from a guarantee.
All we can do is take our best guess in predicting the return, based on whatever factors we think are reasonable to look at. Some may look at historical returns of U.S. stocks and figure that's good enough, while others may look at other stock markets historically worldwide, at political conditions, or whatever else.
It is not accurate to say, "The math says you'll lose money if you pay off your mortgage vs. investing in stocks." It's only reasonable to say, "Based on the factors I choose to consider, it seems likely that you'll do better investing in stocks."
Sure if you want to model that stock returns are lower than the interest rate on your mortgage feel free. Then you'd also probably be proposing different investment vehicles for a FIRE attempt anyway.
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Speaking only for myself here...
We agonized over whether or not to do this for months. We did extensive analyses on other investment potential, etc. I even emailed Mr. Money Mustache himself about it and he kindly wrote back!
We paid off the house. We have never, ever, ever regretted it, for a second. It is the best feeling to know we paid none of that interest, and are secure as long as we can pay our (fixed) property taxes. We DID have other savings, so we did not clean ourselves out, but we have never regretted a house, free and clear, FOREVER.
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That's a lot of money to spend to "feel good". Hey, wait a minute! Isn't that kinda related to how so many sukkas get into stupid debt in the first place?
You wanna feel good? Invest that money in smart equities and watch your money grow like wildfire. Meanwhile, your cheap-ass mortgage will never increase. As inflation eats away at your buying power, your mortgage will seem smaller and smaller, especially when compared to your balooning investment account balances.
Want more? Check this out:
https://goo.gl/images/ypF8If
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"Ridiculous" as it may be, that statement is required for all listed companies. The math supports investing in stocks rather than the market ... until it doesn't. I am not saying that anyone should do one vs. the other. What I am saying is that people talk about "the math" as if there is no variable involved. There absolutely is, and that is stock return. It is not a fixed 7 percent, and we do not know what it will be. Yes, the historical average returns of U.S. stocks may support that, but that's far from a guarantee.
All we can do is take our best guess in predicting the return, based on whatever factors we think are reasonable to look at. Some may look at historical returns of U.S. stocks and figure that's good enough, while others may look at other stock markets historically worldwide, at political conditions, or whatever else.
It is not accurate to say, "The math says you'll lose money if you pay off your mortgage vs. investing in stocks." It's only reasonable to say, "Based on the factors I choose to consider, it seems likely that you'll do better investing in stocks."
I agree, though this essentially boils down to what one considers a safe withdrawal rate. If you trust a 4% withdrawal rate then you should also trust investing instead of paying down a mortgage at less than 4%. If you don't think the stock market is going to do as well, let's say [edit]you're expecting[/edit] an ultra-conservative 3% [edit]SWR[/edit], then you should pay off any loans you have that are above 3%.
[edit]I am ignoring tax deduction on mortgage interest and probably some other fine tuning that could be calculated[/edit]
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"Ridiculous" as it may be, that statement is required for all listed companies. The math supports investing in stocks rather than the market ... until it doesn't. I am not saying that anyone should do one vs. the other. What I am saying is that people talk about "the math" as if there is no variable involved. There absolutely is, and that is stock return. It is not a fixed 7 percent, and we do not know what it will be. Yes, the historical average returns of U.S. stocks may support that, but that's far from a guarantee.
All we can do is take our best guess in predicting the return, based on whatever factors we think are reasonable to look at. Some may look at historical returns of U.S. stocks and figure that's good enough, while others may look at other stock markets historically worldwide, at political conditions, or whatever else.
It is not accurate to say, "The math says you'll lose money if you pay off your mortgage vs. investing in stocks." It's only reasonable to say, "Based on the factors I choose to consider, it seems likely that you'll do better investing in stocks."
I agree, though this essentially boils down to what one considers a safe withdrawal rate. If you trust a 4% withdrawal rate then you should also trust investing instead of paying down a mortgage at less than 4%. If you don't think the stock market is going to do as well, let's say an ultra-conservative 3%, then you should pay off any loans you have that are above 3%.
this is incorrect. the 3% SWR assumes returns that keep up with inflation making the returns on the market 6% for that so even if you dont count the tax savings from itemizing your mortgage interest your assumption of 3% is pretty far off and quite misleading.
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"Ridiculous" as it may be, that statement is required for all listed companies. The math supports investing in stocks rather than the market ... until it doesn't. I am not saying that anyone should do one vs. the other. What I am saying is that people talk about "the math" as if there is no variable involved. There absolutely is, and that is stock return. It is not a fixed 7 percent, and we do not know what it will be. Yes, the historical average returns of U.S. stocks may support that, but that's far from a guarantee.
All we can do is take our best guess in predicting the return, based on whatever factors we think are reasonable to look at. Some may look at historical returns of U.S. stocks and figure that's good enough, while others may look at other stock markets historically worldwide, at political conditions, or whatever else.
It is not accurate to say, "The math says you'll lose money if you pay off your mortgage vs. investing in stocks." It's only reasonable to say, "Based on the factors I choose to consider, it seems likely that you'll do better investing in stocks."
I agree, though this essentially boils down to what one considers a safe withdrawal rate. If you trust a 4% withdrawal rate then you should also trust investing instead of paying down a mortgage at less than 4%. If you don't think the stock market is going to do as well, let's say an ultra-conservative 3%, then you should pay off any loans you have that are above 3%.
this is incorrect. the 3% SWR assumes returns that keep up with inflation making the returns on the market 6% for that so even if you dont count the tax savings from itemizing your mortgage interest your assumption of 3% is pretty far off and quite misleading.
I think you're interpreting what I typed and not what I meant... I meant 3% SWR, not 3% stock market return. Post is edited now.
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still think its incorrect. even at a 3% SWR which is crazy conservative you still shouldnt be paying down a mortgage thats sub 5% and probably sub 6%. i like MDMs rule of thumb in comparison to the 10 year treasury note.
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still think its incorrect. even at a 3% SWR which is crazy conservative you still shouldnt be paying down a mortgage thats sub 5% and probably sub 6%. i like MDMs rule of thumb in comparison to the 10 year treasury note.
Okay. I think it's at least fair to treat your intended SWR as the floor for debts to pay down faster. If it's below the SWR then it should be obvious not to pay it off. If it's above then some more calculations could be done.
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I'm in the paid of my home camp. The mortgage interest deduction on a a 100k sub 4% mortgage is not likely to beat the standard deduction by much so it's not really tax deductible (at least it wasn't for my situation with a wife). It still wound have been a better decision financially to keep the money invested but the numbers for me didn't work out to be enough to sacrifice the emotional aspect of having someplace to live if everything goes to shit. Living in a cheaper home changes the argument.
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I'm in the paid of my home camp. The mortgage interest deduction on a a 100k sub 4% mortgage is not likely to beat the standard deduction by much so it's not really tax deductible (at least it wasn't for my situation with a wife). It still wound have been a better decision financially to keep the money invested but the numbers for me didn't work out to be enough to sacrifice the emotional aspect of having someplace to live if everything goes to shit. Living in a cheaper home changes the argument.
if everything goes to shit having a place to live is the least of your worries. in any economic collapse large enough it makes sense to have paid down your home ... you better have been buying bullets ammo and beans b/c thats all that would be worth anything.
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I'm in the paid of my home camp. The mortgage interest deduction on a a 100k sub 4% mortgage is not likely to beat the standard deduction by much so it's not really tax deductible (at least it wasn't for my situation with a wife). It still wound have been a better decision financially to keep the money invested but the numbers for me didn't work out to be enough to sacrifice the emotional aspect of having someplace to live if everything goes to shit. Living in a cheaper home changes the argument.
if everything goes to shit having a place to live is the least of your worries. in any economic collapse large enough it makes sense to have paid down your home ... you better have been buying bullets ammo and beans b/c thats all that would be worth anything.
LOL. Very true. I point out to my wife a lot that we're never guaranteed we'll never have to work again. I'm sure Russians 20 years ago did not know what was going to happen to their economy. It still didn't add up to enough savings for me to give up the benefits of having it paid off. For one, not having to write and/or account for monthly payments going out. Each of us makes the right decision based on what our criteria of what's important.