Author Topic: Invest vs Mortgage payoff topic not discussed  (Read 3012 times)

drwest

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Invest vs Mortgage payoff topic not discussed
« on: July 13, 2019, 10:36:36 AM »
I see a lot of comments and posts about people not paying off mortgages early because you can beat the interest rate in returns. However, wouldn't it make more sense to see how much interest you'd be saving (or not paying) by paying off your mortgage early vs what your "potential" gains could be from investing instead?????

Sure if you have a low average rate of 4% and you have usually gained 7% returns on your investments, that seems nice. However, if you'd save $100k+ in interest payments by paying off your house in 4 years using the same money you'd invest wouldn't that be a better option? If you gain $100k from investments but pay $100k in interest, it's a wash. But if you pay off your house and dont have to pay the $100k interest, you'll have all the extra investment money and the original monthly mortgage to invest with after the pay off. That seems like a better deal to me

SwordGuy

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #1 on: July 13, 2019, 11:30:01 AM »
This topic has been very extensively covered in this thread:

https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/

Please just delete the thread you've started, read the other thread, and ask any questions you come up with that haven't already been answered.   It will be a challenge to come up with a question that hasn't already been asked... :)

ender

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #2 on: July 13, 2019, 12:53:34 PM »
Just do the math.

  • Situation 1: $100k invested returning @7% return, $100k in mortgage@4%
  • Situation 2: $0k invested, $100k house paid for

Look at net worth after 30 years.

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #3 on: July 15, 2019, 10:13:17 AM »
This topic has been beat to death around here.... But still I will chime in....

I'm one that supports the idea of paying off your house, mostly for ease of sleep at night reasons. Anyone that has lost their house or been in serious danger of loosing their house due to being laid off will tell you there is real comfort and peace in having your home paid for. For us it makes sense, its mostly peace of mind.

dandarc

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #4 on: July 15, 2019, 10:17:49 AM »
This topic has been beat to death around here.... But still I will chime in....

I'm one that supports the idea of paying off your house, mostly for ease of sleep at night reasons. Anyone that has lost their house or been in serious danger of loosing their house due to being laid off will tell you there is real comfort and peace in having your home paid for. For us it makes sense, its mostly peace of mind.
You know what can help you not lose your house? Having a lot of money.

You know what helps you have a lot more money? Not paying off your house and investing the lots of money you would have directed into the house.

Make no mistake - in all probability, a paid off house costs you a 6 or even 7 figure sum at the end of a 30 year term.

Car Jack

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #5 on: July 15, 2019, 10:58:13 AM »
Paying off mortgage = guaranteed

Investing = not guaranteed

/thread

bacchi

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #6 on: July 15, 2019, 11:46:11 AM »
if SWR_belief == True:
   mortgage_payoff = False


/thread

SwitchActiveDWG

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #7 on: July 15, 2019, 12:27:16 PM »
I see a lot of comments and posts about people not paying off mortgages early because you can beat the interest rate in returns. However, wouldn't it make more sense to see how much interest you'd be saving (or not paying) by paying off your mortgage early vs what your "potential" gains could be from investing instead?????

Sure if you have a low average rate of 4% and you have usually gained 7% returns on your investments, that seems nice. However, if you'd save $100k+ in interest payments by paying off your house in 4 years using the same money you'd invest wouldn't that be a better option? If you gain $100k from investments but pay $100k in interest, it's a wash. But if you pay off your house and dont have to pay the $100k interest, you'll have all the extra investment money and the original monthly mortgage to invest with after the pay off. That seems like a better deal to me

You will find that when things are reduced to purely mathematics, investing yields superior return over paying down your mortgage for a sufficient time horizon.

This is a philosophical issue that has been debated extensively as others have said. Both routes can be great choices, pick your poison.

Malcat

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #8 on: July 15, 2019, 12:38:48 PM »
You have 8 posts.

"Not discussed"???
Do you mean not discussed *by you* specifically, because this is discussed ad nauseum in many, many threads.

Welcome to the forum where this is the single most discussed topic that never ever dies and has two major threads dedicated to opposing sides of the issue.

As for the numbers in your initial post, they make no sense.
It's not 100K here or there, you have to actually run the numbers to see the difference, and in many cases, the differences are massive.

I recommend reading both major threads on the topic here, they are extremely informative.

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #9 on: July 15, 2019, 04:16:56 PM »
This topic has been beat to death around here.... But still I will chime in....

I'm one that supports the idea of paying off your house, mostly for ease of sleep at night reasons. Anyone that has lost their house or been in serious danger of loosing their house due to being laid off will tell you there is real comfort and peace in having your home paid for. For us it makes sense, its mostly peace of mind.
You know what can help you not lose your house? Having a lot of money.

You know what helps you have a lot more money? Not paying off your house and investing the lots of money you would have directed into the house.

Make no mistake - in all probability, a paid off house costs you a 6 or even 7 figure sum at the end of a 30 year term.


Lots and lots of money put in the stock market that dives in half, or even by 1/3, combined with long term loss of income is not the time to have to sell stocks to pay for a mortgage. Its usually not the best time to be forced into selling your house either. But in our case we could move back into our cabin in the mountains (that is paid for), and rent the house in town (that is paid for) to generate income to live off without selling our stocks or house until things recover. I've probably got enough socked away that we could maybe even pick up a fire sale piece of land, another rental, or lots more stocks in a down market. We couldnt do that if we had to pay a mortgage still, we wouldnt have that kind of flexibility if we followed the status qou.

For most people, it probably works out great to never pay off your mortgage and stick all extra money away in stocks. For me, I dont care what the numbers employed in a perfect scenario say. Life doesnt always play out that way and having the house paid off will offer much greater stability and flexibility in a down economy, maybe even great opportunity. I'm much more interested in building a bullet proof financial foundation than earning a few extra percent. I'm probably over paranoid about that sort of thing, but I'm ok with that.


nereo

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #10 on: July 15, 2019, 05:45:53 PM »
Slow clap @drwest for throwing this molotov cocktail.  Nice trolling.  Not discussed? Ha!

insufFIcientfunds

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #11 on: July 16, 2019, 05:44:58 AM »
You have 8 posts.

"Not discussed"???
Do you mean not discussed *by you* specifically, because this is discussed ad nauseum in many, many threads.

Welcome to the forum where this is the single most discussed topic that never ever dies and has two major threads dedicated to opposing sides of the issue.

As for the numbers in your initial post, they make no sense.
It's not 100K here or there, you have to actually run the numbers to see the difference, and in many cases, the differences are massive.

I recommend reading both major threads on the topic here, they are extremely informative.

My last house was paid off. Sold it/invested most of equity and building a house in a better school district and going to take out a loan. Maybe that was dumb. I mean I do only have like 9 posts :)

Greenback Reproduction Specialist

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #12 on: July 16, 2019, 08:30:58 AM »
Slow clap @drwest for throwing this molotov cocktail.  Nice trolling.  Not discussed? Ha!

Lol and look how easy we fall for it!! Its a hot topic every time : )

Davnasty

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #13 on: July 16, 2019, 09:00:20 AM »
Paying off mortgage = guaranteed

Investing = not guaranteed

/thread

Nothing in life is guaranteed

Davnasty

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #14 on: July 16, 2019, 09:02:38 AM »
Paying off mortgage = guaranteed to extend your working life

Investing = not guaranteed

/thread

Ignore my last post, this is better :)

Psychstache

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #15 on: July 16, 2019, 09:09:47 AM »
This topic has been beat to death around here.... But still I will chime in....

I'm one that supports the idea of paying off your house, mostly for ease of sleep at night reasons. Anyone that has lost their house or been in serious danger of loosing their house due to being laid off will tell you there is real comfort and peace in having your home paid for. For us it makes sense, its mostly peace of mind.

My parents got foreclosed on and we lost our house when I was a teenager. I have not paid one additional penny towards my mortgage in all my home owning years and don't plan to start now.

effigy98

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #16 on: July 16, 2019, 09:10:09 AM »
People are hypocrites here. They will keep a mortgage but not leverage up their stock positions with "free" money. Do whatever feels right. Highly leveraged have won in this amazing bull market. Conservative people have not won as much. People waiting to get back in have lost big.

Psychstache

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #17 on: July 16, 2019, 09:23:04 AM »
People are hypocrites here. They will keep a mortgage but not leverage up their stock positions with "free" money. Do whatever feels right. Highly leveraged have won in this amazing bull market. Conservative people have not won as much. People waiting to get back in have lost big.

As has been discussed about 1 million times in the other threads, US mortgages are non-callable, fixed interest rates loans with a 30 year timeframe for repayment. This is in no way comparable to the terms of a margin loan from a financial institution.

effigy98

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #18 on: July 16, 2019, 09:27:20 AM »
People are hypocrites here. They will keep a mortgage but not leverage up their stock positions with "free" money. Do whatever feels right. Highly leveraged have won in this amazing bull market. Conservative people have not won as much. People waiting to get back in have lost big.

As has been discussed about 1 million times in the other threads, US mortgages are non-callable, fixed interest rates loans with a 30 year timeframe for repayment. This is in no way comparable to the terms of a margin loan from a financial institution.

That is an excuse. M1 finance loans are not callable either unless your portfolio drops by 70% or so. Why not borrow your max (1/3rd value of portfolio) and invest back into stocks?

Davnasty

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #19 on: July 16, 2019, 09:40:11 AM »
People are hypocrites here. They will keep a mortgage but not leverage up their stock positions with "free" money. Do whatever feels right. Highly leveraged have won in this amazing bull market. Conservative people have not won as much. People waiting to get back in have lost big.

As has been discussed about 1 million times in the other threads, US mortgages are non-callable, fixed interest rates loans with a 30 year timeframe for repayment. This is in no way comparable to the terms of a margin loan from a financial institution.

That is an excuse. M1 finance loans are not callable either unless your portfolio drops by 70% or so. Why not borrow your max (1/3rd value of portfolio) and invest back into stocks?

That's a pretty big difference. What if your portfolio drops by 70%?

Also, it looks like M1 rates are variable, correct?

dandarc

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #20 on: July 16, 2019, 11:13:18 AM »
People are hypocrites here. They will keep a mortgage but not leverage up their stock positions with "free" money. Do whatever feels right. Highly leveraged have won in this amazing bull market. Conservative people have not won as much. People waiting to get back in have lost big.

As has been discussed about 1 million times in the other threads, US mortgages are non-callable, fixed interest rates loans with a 30 year timeframe for repayment. This is in no way comparable to the terms of a margin loan from a financial institution.

That is an excuse. M1 finance loans are not callable either unless your portfolio drops by 70% or so. Why not borrow your max (1/3rd value of portfolio) and invest back into stocks?

That's a pretty big difference. What if your portfolio drops by 70%?

Also, it looks like M1 rates are variable, correct?
Yep - variable, callable, not at all the same thing as a typical fixed rate mortgage in the US. Rate is comparable currently though 4-4.25%. If they gave a 30-year fixed rate with no margin calls, then I'd do it, but that's not the deal.

Plus there's the whole "can't trade on margin in retirement accounts" problem, albeit that doesn't apply to 100% of everyone's investments.

Telecaster

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #21 on: July 16, 2019, 11:55:29 AM »

That is an excuse. M1 finance loans are not callable either unless your portfolio drops by 70% or so. Why not borrow your max (1/3rd value of portfolio) and invest back into stocks?

Every margin agreement I've seen says they can change the amount that triggers a margin call at will and without prior notice.  Back in the dot.com heyday, it was popular to load up on margin because the tech stocks and the stock market in general was going up so fast.   As the market started to decline over the months, brokers got neverous and called their loans.   A lot of people suffered serious damage this way.   

Must_ache

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #22 on: July 16, 2019, 12:18:10 PM »
Concepts of risk aversion and utility must be taken into consideration.  If I can manage a 5% return on my investments, I think I can retire before age 60 with $2M.

To get 5%, you can invest in less risky stuff that is more likely to achieve your goal.  I could try for a 10% return and end up with $3M, but:

1) I don't need $3M (utility), and
2) There is more risk around trying to achieve 10% returns (risk aversion).

Each person has to determine the opportunity cost.  Would you rather have a 4% mortgage and assets trying to earn more, or would you rather take the 4% return paying down your mortgage.  My mortgage is 2.625% so it is not getting paid down.  But if it were 5% I probably would pay some of it down and consider that diversification.

FIREstache

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #23 on: July 16, 2019, 12:22:55 PM »
OP didn't spend much time reading - this has been beat to death in other threads, at least one long one that is still active with recent activity.

Davnasty

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #24 on: July 16, 2019, 12:35:53 PM »
OP didn't spend much time reading - this has been beat to death in other threads, at least one long one that is still active with recent activity.

Is this irony? I'm never quite sure what qualifies as irony.

This topic has been very extensively covered in this thread:

https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/

This topic has been beat to death around here.... But still I will chime in....

This is a philosophical issue that has been debated extensively as others have said. Both routes can be great choices, pick your poison.

Do you mean not discussed *by you* specifically, because this is discussed ad nauseum in many, many threads.

Welcome to the forum where this is the single most discussed topic that never ever dies and has two major threads dedicated to opposing sides of the issue.

Slow clap @drwest for throwing this molotov cocktail.  Nice trolling.  Not discussed? Ha!

A Fella from Stella

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #25 on: July 16, 2019, 12:47:09 PM »
I have an extremely low interest mortgage, so it waits behind other debts. Since it's just academic for me, I'm not sure if I'd pay it off ahead of maxing out my Roth and TSP. Perhaps if my incomes exceeded $200k and I had no other debts, then I'd at least max them out before paying down the mortgage.

I'm just not sure.

nereo

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #26 on: July 17, 2019, 08:44:48 AM »
I have an extremely low interest mortgage, so it waits behind other debts. Since it's just academic for me, I'm not sure if I'd pay it off ahead of maxing out my Roth and TSP. Perhaps if my incomes exceeded $200k and I had no other debts, then I'd at least max them out before paying down the mortgage.

I'm just not sure.

Have you seen the excellent Investment Order sticky?  It outlines not only a generalized order in which to apply your excess funds, but also gives detailed reasons behind each step. Oodles of background information/discussion linked there too, as well as relevant tax information.




drwest

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #27 on: July 17, 2019, 02:38:08 PM »
Sorry, I should've specified the question/topic better in my initial question. The comparison or example "majority" of the time I see is comparing on the 30 year time line.  What I was asking is............

If you can use the extra/investment money to pay off the mortgage in only a few years (say 3 to 4) and then invest all of the money (extra plus original loan monthly payment), do the numbers still favor investing by such a huge gap at the end of the same 30 years?

To use the example of 30 years...... if you only take three and a half years to pay off the mortgage (not some other timeline such as 15 years) and still have 26.5 years left to invest with lower expenses, wouldn't you catch up and potentially surpass the individual that is doing both (paying mortgage and investing at the same time for 30 years)?

I tried to look for such an example in the other thread that was linked early on, but stopped looking after people turned into yelling at each other. Wasnt trying to troll anyone or any topic. New to all of this and there is a LOT of information all over the place. I used a few different calculators online and was verifying what they were giving for results (assuming I used them correctly).

Sorry to those of you I offended.


nereo

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #28 on: July 17, 2019, 03:50:49 PM »

If you can use the extra/investment money to pay off the mortgage in only a few years (say 3 to 4) and then invest all of the money (extra plus original loan monthly payment), do the numbers still favor investing by such a huge gap at the end of the same 30 years?


Yes, the numbers still favor paying off the mortgage slowly vs. paying off a mortgage aggressively in 3-4 years.

"By how much" depends on such factors as whether you are foregoing tax-advantaged accounts, what your loan rate is, what your tax situation looks like, etc.

FIREstache

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #29 on: July 17, 2019, 04:41:20 PM »
OP didn't spend much time reading - this has been beat to death in other threads, at least one long one that is still active with recent activity.

Is this irony? I'm never quite sure what qualifies as irony.

This topic has been very extensively covered in this thread:

https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/

This topic has been beat to death around here.... But still I will chime in....

This is a philosophical issue that has been debated extensively as others have said. Both routes can be great choices, pick your poison.

Do you mean not discussed *by you* specifically, because this is discussed ad nauseum in many, many threads.

Welcome to the forum where this is the single most discussed topic that never ever dies and has two major threads dedicated to opposing sides of the issue.

Slow clap @drwest for throwing this molotov cocktail.  Nice trolling.  Not discussed? Ha!

Not ironic, those were exactly the responses I was expecting when I saw the subject!  LOL

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #30 on: July 17, 2019, 04:58:14 PM »
Sorry, I should've specified the question/topic better in my initial question. The comparison or example "majority" of the time I see is comparing on the 30 year time line.  What I was asking is............

If you can use the extra/investment money to pay off the mortgage in only a few years (say 3 to 4) and then invest all of the money (extra plus original loan monthly payment), do the numbers still favor investing by such a huge gap at the end of the same 30 years?

To use the example of 30 years...... if you only take three and a half years to pay off the mortgage (not some other timeline such as 15 years) and still have 26.5 years left to invest with lower expenses, wouldn't you catch up and potentially surpass the individual that is doing both (paying mortgage and investing at the same time for 30 years)?

I tried to look for such an example in the other thread that was linked early on, but stopped looking after people turned into yelling at each other. Wasnt trying to troll anyone or any topic. New to all of this and there is a LOT of information all over the place. I used a few different calculators online and was verifying what they were giving for results (assuming I used them correctly).

Sorry to those of you I offended.

I just ran my own personal numbers on this, we are in the process of doing what you described. We have only a couple more payments until we are completely paid off, took us 3.2yrs. We also bought well and the home is worth 2.3x what we paid for it, could also rent out and produce 10% ROI. You always make your money when you buy, our home was a great buy.

All else being equal in 30yrs, not paying off the house would come out about 157k ahead vs paying it off first... But there are a lot of assumptions and variables that can wildly change that scenario over a 30yr period. For example, long term unemployment, lower than average stock market returns(which happens from time to time), changes in regulations, changes is taxation, changes in interest rates, the allure of taking out home equity at some point, forced sale of assets in a down market......... There is a lot that could change the numbers.

For me, I work in a the construction industry which has its booms and busts, sometimes I get laid off or am forced to move, or take a pay cut, or cut in hours. I like having the house paid for, it is just another layer of security when times get tough and it gives me more options. I dont have this big hole draining away my savings. Instead of renting the house out and only cash flowing maybe $100 a month, I could cashflow $1000 per month. If rents drop, guess what, I'm highly competitive and go much lower than someone with a mortgage payment to keep that money coming in without high vacancy rates. Or I could probably even sell right now and fund paying for 2 rentals in a low cost of living city and add a little more cashflow. Or I can sell and pay for another house in cash if we move.

But I get the argument a large portion of people here will make, if you have a big rainy day fund and put the rest away in stocks its a good way to go too. But sometimes its what helps you sleep at night, and at the end of 30 yrs if we are talking 6.9 million vs 7.1 million does it really matter? Its a win either way.

Anyway... those are my thoughts.

BuddyXL

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #31 on: July 17, 2019, 06:50:10 PM »
I paid mine off ASAP just to be 100% debt free.  Don't owe anyone anything and damn proud of it.

Sure, I wish I had more in savings and investments but it sure is nice to not owe anyone money each month.

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #32 on: July 17, 2019, 08:19:45 PM »
To use the example of 30 years...... if you only take three and a half years to pay off the mortgage (not some other timeline such as 15 years) and still have 26.5 years left to invest with lower expenses, wouldn't you catch up and potentially surpass the individual that is doing both (paying mortgage and investing at the same time for 30 years)?
The median S&P500 return has been 9.0% after 3.5 years versus 9.9% after 30 years. 70th percentile at 3.5 years was 4.8%, versus 7.8% over 30 years. Mean return was about the same 9.4% for both lengths. So the odds are still against you. Lots of noise in those numbers though.  See https://dqydj.com/sp-500-historical-return-calculator/ and make sure you do not correct for inflation.

I actually feel like we have reached a nearly forum-wide consensus on this. Do not make early payments on your mortgage. Save the money in an investment account of your choice, and once that has enough to pay off the mortgage in a lump sum while still having a comfortable emergency fund, then you may pay off the mortgage if you want. If you were investing into an allocation that includes stocks it especially makes sense to pay it off like this just before you leave steady employment. You are most likely to have enough money to pay it off in a market which has done well recently, which makes this method more likely to capture a beneficial sequence of returns.

DadJokes

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #33 on: July 18, 2019, 08:21:10 AM »
Sorry, I should've specified the question/topic better in my initial question. The comparison or example "majority" of the time I see is comparing on the 30 year time line.  What I was asking is............

If you can use the extra/investment money to pay off the mortgage in only a few years (say 3 to 4) and then invest all of the money (extra plus original loan monthly payment), do the numbers still favor investing by such a huge gap at the end of the same 30 years?

To use the example of 30 years...... if you only take three and a half years to pay off the mortgage (not some other timeline such as 15 years) and still have 26.5 years left to invest with lower expenses, wouldn't you catch up and potentially surpass the individual that is doing both (paying mortgage and investing at the same time for 30 years)?

I tried to look for such an example in the other thread that was linked early on, but stopped looking after people turned into yelling at each other. Wasnt trying to troll anyone or any topic. New to all of this and there is a LOT of information all over the place. I used a few different calculators online and was verifying what they were giving for results (assuming I used them correctly).

Sorry to those of you I offended.



I ran a test comparing the same $200k mortgage at 4%. The minimum payment on a 30 year fixed is $954.83. In the first scenario, I made payments of $4,515.81 to pay the loan off in 4 years. Then I invested that same amount in the market at a paltry 6%. In the second scenario, I made minimum payments and invested the remaining $3,560.98 at the same rate. After 30 years, here are the results:

1) $3,378,150
2) $3,577,058

Making the minimum payment and investing the difference nets you an additional $198,908 after 30 years (less capital gains tax). And that is with an abominably low 6% market return over that period.

What if we have a recession looming, and the market tanks 20%? I ran a third scenario, in which the market has 0% growth for year 1, a 20% drop in year 2, 0% growth in years 3-4, and returns to 6% growth in years 5-30. In that outcome, the 30 year payoff still outperformed the 4 year mortgage payoff route by $41,402 over 30 years.

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #34 on: July 18, 2019, 09:02:13 AM »

I ran a test comparing the same $200k mortgage at 4%. The minimum payment on a 30 year fixed is $954.83. In the first scenario, I made payments of $4,515.81 to pay the loan off in 4 years. Then I invested that same amount in the market at a paltry 6%. In the second scenario, I made minimum payments and invested the remaining $3,560.98 at the same rate. After 30 years, here are the results:

1) $3,378,150
2) $3,577,058

Making the minimum payment and investing the difference nets you an additional $198,908 after 30 years (less capital gains tax). And that is with an abominably low 6% market return over that period.

What if we have a recession looming, and the market tanks 20%? I ran a third scenario, in which the market has 0% growth for year 1, a 20% drop in year 2, 0% growth in years 3-4, and returns to 6% growth in years 5-30. In that outcome, the 30 year payoff still outperformed the 4 year mortgage payoff route by $41,402 over 30 years.

Interesting analysis, thanks for running it. 
So even under conditions that I'd consider very favorable for paying down a mortgage (a recession, a very short payoff period, well-below-average returns) not paying off a mortgage still nets an individual a substantial sum.

when conditions are more typical of the past 100 years it's a difference of six-figures between the two, favoring not paying down the mortgage.

Car Jack

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #35 on: July 18, 2019, 09:07:17 AM »
Paying off mortgage = guaranteed to extend your working life

Investing = not guaranteed

/thread

Ignore my last post, this is better :)



I'm happy with my guaranteed choice.  Mortgage paid off 17 years ago.  Sitting on over 50X spending.  Working for insurance and college payments and because wife honestly believes that we could not retire even with $100M. 

nereo

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #36 on: July 18, 2019, 09:20:48 AM »

I'm happy with my guaranteed choice.  Mortgage paid off 17 years ago.  Sitting on over 50X spending.  Working for insurance and college payments and because wife honestly believes that we could not retire even with $100M.

yikes.  Good luck with that.  That puts Suze Orman to shame. Assuming an early retirement age of 40 and an abnormally long life that's still a spend-rate of over $138,000/month, with no asset appreciation (market gains) whatsoever.  $5k per day.  Wow.

For some people no level is 'enough' to feel secure. 

newloginuser

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #37 on: July 18, 2019, 09:33:01 AM »
Has anyone every run a simulation without the "average X rate of return" to figure out if certain dips in the market would impact this one way or the other?

For example, I imagine (have not tested so this may be incorrect thinking) if you paid off your mortgage from 2005-2009 or sometime around there, you may come out ahead by paying off your mortgage early due to the significant drop in the market then.

Or what if there was something like a 25% drop in year 26, with something like 6-8% for years 27-30? I feel like the numbers would be different than a straight average of X% over 30 years, but again I could be wrong.

nereo

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #38 on: July 18, 2019, 09:39:58 AM »
Has anyone every run a simulation without the "average X rate of return" to figure out if certain dips in the market would impact this one way or the other?
Yes, many, many times.  You can see many of the analyses by reading through the various threads on the subject.

You can also run similar simulations using cFireSim, which allows you to adjust the amount you save each month/year and when you will start retirement.  By running two scenarios (one with an accelerated payoff, one with a normal payoff) you can compare the results and include not just the median ending value but also the spread (range). 

What is harder to do is calculate refinancing opportunities, though I'm skeptical that rates will drop much further from current values to make refinancing 'worth it' in the future.  This was not the case when rates were >8%.

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #39 on: July 18, 2019, 09:44:36 AM »
Paying off mortgage = guaranteed to extend your working life

Investing = not guaranteed

/thread

Ignore my last post, this is better :)


I'm happy with my guaranteed choice.  Mortgage paid off 17 years ago.  Sitting on over 50X spending.  Working for insurance and college payments and because wife honestly believes that we could not retire even with $100M.

My intent is not to criticize anyone's choice, there are legitimate justifications for either decision. But I still think it's incorrect to refer to paying off the mortgage as "guaranteed", especially if someone is making extra payments rather than all at once. That can be quite risky without an emergency fund. It's more complicated than your post implies and I think it's important that we're honest about that for readers who are still be in the position to make a choice.

newloginuser

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #40 on: July 18, 2019, 10:04:27 AM »
Has anyone every run a simulation without the "average X rate of return" to figure out if certain dips in the market would impact this one way or the other?
Yes, many, many times.  You can see many of the analyses by reading through the various threads on the subject.

You can also run similar simulations using cFireSim, which allows you to adjust the amount you save each month/year and when you will start retirement.  By running two scenarios (one with an accelerated payoff, one with a normal payoff) you can compare the results and include not just the median ending value but also the spread (range). 

What is harder to do is calculate refinancing opportunities, though I'm skeptical that rates will drop much further from current values to make refinancing 'worth it' in the future.  This was not the case when rates were >8%.

Thanks, I'll have to check cFireSim sometime. I should have mentioned I'm not of the camp that paying off the mortgage is the financially better decision. I didn't want it to come across like I was arguing for that side, just curious is all.

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #41 on: July 18, 2019, 01:51:27 PM »
Iíve run my own cFIREsim simulations many times and always come to that same conclusion: not paying off early = more $$.

I want to ask explicitly, since this has been tickling the back of my head a lot lately. I canít square this with ERNís work looking at how having a mortgage in retirement worsens sequence of returns risk.
https://www.google.com/amp/s/earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/amp/


Iíve tried modeling with a reverse equity glidepath and static asset allocations and I canít reproduce using cFIREsim what he finds in his model. I also looked at paying down chunks and 100% success rates vs something lower like 90%. In each case I find always that keeping the mortgage is better, but that contradicts his findings. Iím going some genius can help me identify the discrepancy because what he writes about makes intuitive sense (having higher fixed expenses is risky in the very worst cases or market dumps).

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #42 on: July 18, 2019, 02:19:17 PM »
@ysette9 - quite a few differences in that model vs CFireSim. Monthly vs. annual data. He also says in the article that he's assumed constant 2% inflation on the mortgage payments and then using actual runs of real returns - not sure how valid it is to do it that. Inflation has been low and consistent lately, so maybe the thinking behind that is that the government has gotten much better at controlling inflation? ERN is also projecting returns out into the future - called January 2000 a failure time to retire even though account values aren't actually to zero yet. So I have no idea if this a better way to look at it or not, but it is certainly different in a lot of ways.


ysette9

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #43 on: July 18, 2019, 03:50:17 PM »
@ysette9 - quite a few differences in that model vs CFireSim. Monthly vs. annual data. He also says in the article that he's assumed constant 2% inflation on the mortgage payments and then using actual runs of real returns - not sure how valid it is to do it that. Inflation has been low and consistent lately, so maybe the thinking behind that is that the government has gotten much better at controlling inflation? ERN is also projecting returns out into the future - called January 2000 a failure time to retire even though account values aren't actually to zero yet. So I have no idea if this a better way to look at it or not, but it is certainly different in a lot of ways.
Thanks for the response. I'm curious if you have any gut feel on the validity of his analysis vs. cFIREsim?

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #44 on: July 18, 2019, 08:31:11 PM »
Has anyone every run a simulation without the "average X rate of return" to figure out if certain dips in the market would impact this one way or the other?

For example, I imagine (have not tested so this may be incorrect thinking) if you paid off your mortgage from 2005-2009 or sometime around there, you may come out ahead by paying off your mortgage early due to the significant drop in the market then.

Or what if there was something like a 25% drop in year 26, with something like 6-8% for years 27-30? I feel like the numbers would be different than a straight average of X% over 30 years, but again I could be wrong.
You can use portfolio visualizer to see what real funds would have done in real time, constrained by the starting month of each fund.

Here is an example comparing a balanced allocation to the S&P500. You can use a mortgage calculator to get dollar amounts for invest vs. payoff. Personally I just compare the rate of return of a string of new investments (or withdrawals) to the rate of return of a lump sum to compare the two. Time Weighted Return (TWRR) represents a decision not to lump sum pay a mortgage. Money Weighted Return (MWRR) represents a decision to pay off a mortgage and then invest the resulting additional cash flow, or can also represent the return from investing a string of new money instead of using it to pay a mortgage.

We can see the year 2000 would have been a good time to lump sum a mortgage with all money available. Conversely, the period 2000-2019 would have been a good period to plow a series of new money into the market instead of making regular extra mortgage payments.

Here is an example with withdrawals.. For withdrawals you certainly would have been better paying of the mortgage in 2000.

In terms of knowing when mortgage payoff time rolls around (if you are not about to retire), there are a few crude methods.
1) Mortgage rate > 1/CAPE10 + Inflation +0.5%
2) Mortgage rate > dividend + dividend growth rate
3) Mortgage rate > 10yr Treasury Bond Yield + 3% (thanks MDM in https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153).

Right now
1) = 1/30.5 + 1.8% + 0.5% = about 5.6%
2) = 1.87% + 5%? = 6.9%
3) = 2.04% + 3% = 5.1%
So you would not likely consider paying off a mortgage lower than 5%, and strongly consider doing so if it was 7% or more. (depending on your life situation). Of course you could probably refinance to 4%...

Good source:
https://www.multpl.com/s-p-500-pe-ratio

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #45 on: July 19, 2019, 09:12:53 AM »
because wife honestly believes that we could not retire even with $100M.

This could be my #1 problem. I think when the time comes, just going to rip off the bandaid and come home one day saying I am retired.

nereo

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Re: Invest vs Mortgage payoff topic not discussed
« Reply #46 on: July 19, 2019, 09:21:55 AM »
because wife honestly believes that we could not retire even with $100M.

This could be my #1 problem. I think when the time comes, just going to rip off the bandaid and come home one day saying I am retired.
Surprise!!!