### Author Topic: One man's analysis of "To Mortgage or Invest"  (Read 9159 times)

#### Tjat

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##### One man's analysis of "To Mortgage or Invest"
« on: March 21, 2016, 10:21:12 AM »
After reading the related threads and doing a bit of thinking in evaluating my own mortgage options, I realized the discussion between ‘Should I invest or Pay off my mortgage faster” is dominated by two opposing camps: The “Invest! Interest rates are so low” folks and the “My home is not an investment, I want to eliminate this debt ASAP”. Neither of these two opinions are “wrong”, but in making my decision, I found it important to model both options and see under what circumstances either opinion is optimal, and by how much. Attached is a spreadsheet that will allow you to model using the same methodology I used. While I don't think this will rock anyone's world, I found it incredibly useful to think through my own options.

Methodology
The attached worksheet considers 3 mortgage scenarios (a 30 year, 20 year, and 15 year option). For the 30-year and 20-year, two additional scenarios are modeled that pay additional principle each month. The additional principle is determined by comparing the required monthly payment vs. the borrower’s maximum monthly budget. The maximum monthly budget is comprised solely of mortgage payment and investment account. (Example: \$4,000 monthly budget. In the prepay scenarios, all 4,000 is spent on the mortgage. In the non-prepay, the minimum required payment is spent on the mortgage, the rest is invested).

Each scenario is modeled over a 30 year (360 month) time horizon across multiple annual rates of return (-2% to 10%). Note that this rate should represent an inflation-adjusted, post-tax return. After 30 years, a “Return” is calculated, which is simply the projected investment portfolio value after 30 years. Keep in mind that all options contain the same paid-for house at the end of the 30 year horizon.  The “optimal” approach is the mortgage option that produces the highest Return for a given rate of return scenario.
The attached workbook contains the model and allows the user to adjust assumptions by changing the yellow highlighted cells.

Summary of Takeaways (mostly obvious)
• In a high investment return environment, it makes sense to stretch out your low rate mortgage as long as possible and invest the difference.
• In a low return environment, following the path of #1 will assuredly produce the worst outcome.
• The “lowest risk” strategy is to pursue the shortest mortgage you can afford (note this is distinctly different from prepaying your current mortgage as you lose out on the lower interest rates that come with shorter mortgages).
• The nominal benefit of choosing the “optimal” approach diminishes as the total mortgage/investment budget increases. (E.g. Given a \$2,000 monthly mortgage, it’s more important for someone with only \$2,500 to invest than someone with \$6,000)

Key Benefit of Model
At what rate of return does it make sense to prepay a mortgage or invest?

“Realistic Environment” (using the data in the attached prepopulated spreadsheet)
For the main scenario I used in my decision process, I took the inflation adjusted returns (dividends reinvested) of the S&P 500 from 1950-present, which produces a return of 7.25%. I then took a haircut to reflect conservatism, investment fees, and taxes, producing a net return of 5%.

• In a 5% return environment, the worst option is to prepay a longer term mortgage. You are paying the highest interest rate on your mortgage AND sacrificing your investment account.
• The “best option”, is the 15 year mortgage – but some may understandably shy away from locking in the most expensive option
• Thus, the three remaining options (30 year, 20 year, and 20 year prepay) should be compared.
• Here, we see that the 20 year option generates the highest value, which prepaying the 20 year is worse than the 30-year option.
• It’s clear that if the interest rate of stock returns exceeds that of the mortgage note, it does not make sense to prepay
• While there are folks in the "hate debt" camp, this conclusion can at least help quantify what the prepay decision is costing you and you can ask yourself if it's worth it, now that a specific cost figure is known

Conclusion
The options in this spreadsheet represent my current mortgage options, with ‘Option 1’ representing my current mortgage. Based on the results of this spreadsheet, I’m moving forward with the 20-year option as I think it is the best compromise between liquidity/diversification and return. While the 30-year option has the greatest potential, I don’t think the risk of being the “worst option” in low rate environments is worth it. Obviously folks with different views on risk/reward, the importance of liquidity, or the emotional gain from a paid off mortgage may come to a different conclusion. Hope some find this interesting (despite its length!)

Endnote
Here's the final output for those that don't want to download the file.

Image reflects total budget of \$2449 a month

*Edited the attachment and post to reflect corrections made to the methodology*
« Last Edit: March 22, 2016, 09:21:34 AM by Tjat »

#### onlykelsey

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##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #1 on: March 21, 2016, 10:25:08 AM »
awesome!  Very useful.

#### primozaj

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##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #2 on: March 21, 2016, 11:21:49 AM »
This should get pinned somewhere... very good analysis.  Thanks for sharing the spreadsheet.

#### brooklynguy

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##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #3 on: March 21, 2016, 11:50:36 AM »
I'm viewing on my phone, so I can't peek under the hood of the spreadsheet.  Based on your description, am I correct in understanding that the various investment return scenarios assume constant, fixed-percentage returns?  If so, how is it possible that the leveraged-investing-via-mortgage options (i.e., the options in which you make no extra principal payments) underperform in some of the scenarios where the investment return exceeds the mortgage interest rate?  If you're assuming constant returns, the breakeven point for any option should be the scenario where the investment return equals the mortgage interest rate (for example, in your 30-year options, the two scenarios (prepay vs. no prepay) should come out identical if the investment return is 4.125% (equal to the mortgage rate), so the "no prepay" option should come out ahead with investment returns of 5%--but that's not what your chart shows).

#### Peter Parker

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##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #4 on: March 21, 2016, 01:16:40 PM »
I had a 30 year mortgage and began making extra payments....then when interest rates dropped enough, I thought about refinancing to a 15 year mortgage.  I changed my mind when I read this article http://www.edelmanfinancial.com/education-center/articles/1/11-great-reasons-to-carry-a-big-long-mortgage

After running my own numbers, I determined so long as I wanted to live in this house (which is forever), having a BIG, FAT, MORTGAGE wasn't such a bad thing--so long as invested the difference between what would have been a 15 year mortgage versus the 30.

But I completely understand why for psychological reasons, one may want to pay it off.

#### Beaker

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##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #5 on: March 21, 2016, 01:38:17 PM »
If you're assuming constant returns, the breakeven point for any option should be the scenario where the investment return equals the mortgage interest rate (for example, in your 30-year options, the two scenarios (prepay vs. no prepay) should come out identical if the investment return is 4.125% (equal to the mortgage rate), so the "no prepay" option should come out ahead with investment returns of 5%--but that's not what your chart shows).

Looking at the Excel sheet, I think the reason is that it's treating the Principal portion of the payment as if it was Interest - ie it's just lost forever. That increases the "apparent interest rate" of the loan. Stated another way, he's completely ignoring the equity in the house.

That seems like that's a pretty big hole in the analysis. Unless the OP really thinks that the house he's mortgaging for \$351k is going to be completely worthless in 30 years, in which case I would suggest renting it instead. :)

Edit to add: The text of the OP's post also compared the nominal interest rate on the mortgage to the real (inflation-adjusted) rate on the investments, which isn't particularly fair. You can fudge this back to being fair-ish by reading the investment rates as if they were also nominal - ie look at the 7% line. In that case the non-prepaid mortgages always come out ahead, even though we're still ignoring the equity in the house.
« Last Edit: March 21, 2016, 01:47:02 PM by Beaker »

#### brooklynguy

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##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #6 on: March 21, 2016, 02:21:29 PM »
Looking at the Excel sheet, I think the reason is that it's treating the Principal portion of the payment as if it was Interest - ie it's just lost forever. That increases the "apparent interest rate" of the loan. Stated another way, he's completely ignoring the equity in the house.

I don't think that's the problem -- it's fine to ignore home equity (as long as the spreadsheet is doing so consistently across all scenarios), because it's just the terminal investment balance that's being examined.  Under every alternative, at the final maturity of the original mortgage loan (once the loan is fully paid off), you're left with the same amount of home equity -- it's only your investment balance that will differ.

#### onlykelsey

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##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #7 on: March 21, 2016, 02:44:39 PM »
Quote
don't think that's the problem -- it's fine to ignore home equity (as long as the spreadsheet is doing so consistently across all scenarios), because it's just the terminal investment balance that's being examined.  Under every alternative, at the final maturity of the original mortgage loan (once the loan is fully paid off), you're left with the same amount of home equity -- it's only your investment balance that will differ.

Agreed, unless the value of your house has some relationship to the general market IRR, which it probably does.  It'd be so hard to know and be so market-dependent, though, I'm not sure how you'd calculate it.

#### Tjat

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##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #8 on: March 21, 2016, 02:45:04 PM »
awesome!  Very useful.

This should get pinned somewhere... very good analysis.  Thanks for sharing the spreadsheet.

Thanks!

If you're assuming constant returns, the breakeven point for any option should be the scenario where the investment return equals the mortgage interest rate (for example, in your 30-year options, the two scenarios (prepay vs. no prepay) should come out identical if the investment return is 4.125% (equal to the mortgage rate), so the "no prepay" option should come out ahead with investment returns of 5%--but that's not what your chart shows).

Looking at the Excel sheet, I think the reason is that it's treating the Principal portion of the payment as if it was Interest - ie it's just lost forever. That increases the "apparent interest rate" of the loan. Stated another way, he's completely ignoring the equity in the house.

That seems like that's a pretty big hole in the analysis. Unless the OP really thinks that the house he's mortgaging for \$351k is going to be completely worthless in 30 years, in which case I would suggest renting it instead. :)

Correct in that remaining equity is not considered. While you would want to consider this in real life, I don't think this would be relevant to the comparisons. After 30 years, you'll sell the home for the same price regardless of how you financed it.

When setting the investment return rate to 4.125% and comparing the two 30-year options, the investment returns do match. The difference is that in the 30 year option, you've also paid an additional 128k in interest than the 30 year prepay option. I'm thinking this is due to the fact that interest payments decrease over the life of the loan (or my calcs are wrong, of which I'd welcome a QA).

#### zephyr911

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##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #9 on: March 21, 2016, 02:48:28 PM »
I'm getting predictable leveraged returns in double digits on real estate. Even at 6% it doesn't make sense to prepay.

#### brooklynguy

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##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #10 on: March 21, 2016, 03:13:01 PM »
I'm thinking this is due to the fact that interest payments decrease over the life of the loan (or my calcs are wrong, of which I'd welcome a QA).

The calculations are wrong.  If the mortgage interest rate equals the investment rate of return, at the end of the life of the original loan you should come out in exactly the same position under either alternative (the extra interest you pay by keeping the loan outstanding should be perfectly offset by the extra returns you obtain on your investments).  Take a step back and examine the implication of your results -- it is impossible to come out behind by borrowing money at 4.125% and investing the proceeds in investments earning 5% (yet that's what your results say).

#### Beaker

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##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #11 on: March 21, 2016, 03:19:07 PM »
Looking at the Excel sheet, I think the reason is that it's treating the Principal portion of the payment as if it was Interest - ie it's just lost forever. That increases the "apparent interest rate" of the loan. Stated another way, he's completely ignoring the equity in the house.

I don't think that's the problem -- it's fine to ignore home equity (as long as the spreadsheet is doing so consistently across all scenarios), because it's just the terminal investment balance that's being examined.  Under every alternative, at the final maturity of the original mortgage loan (once the loan is fully paid off), you're left with the same amount of home equity -- it's only your investment balance that will differ.

Fair point.

After 30 years, a “Net Return” is calculated, which is simply the projected investment portfolio value after 30 years, minus the total payments made on the mortgage.

If that were the case, then assuming a 0% return shouldn't the "Net Return" be (TotalIncome - Equity - TotalInterestPaid)? Basically all your income for 360 months with no growth, minus what you paid for the mortgage? Because it's off from that by several hundred K. It looks to me like those numbers are actually generated with a future value calculation, with varying discount rates. That's what I got from all the hidden columns in the middle of the sheet, anyway, but I didn't look too closely.

#### Tjat

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##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #12 on: March 22, 2016, 06:01:10 AM »
If that were the case, then assuming a 0% return shouldn't the "Net Return" be (TotalIncome - Equity - TotalInterestPaid)? Basically all your income for 360 months with no growth, minus what you paid for the mortgage? Because it's off from that by several hundred K. It looks to me like those numbers are actually generated with a future value calculation, with varying discount rates. That's what I got from all the hidden columns in the middle of the sheet, anyway, but I didn't look too closely.

The 0% environment is a good check and illustrated in columns A-F. In comparing the two 30-year options, we see the following

What puts the net return of the prepay option so far ahead is that after the principle is repaid (after 16.5 years or 198 monthly payments), the borrower is now dumping in the entirety of their \$2,449 budget into investments. In the remaining 13.5 year (162 months), they are putting in \$396,738 into their investment account. In the 30 year (no prepay) scenario, the borrower is adding \$745.46 each month to investments, totaling only \$268,724

The reason why the "prepaying your mortgage guarantees your mortgage rate in returns" assumption is breaking down is not because of an error, but because that assumption assumes that the time period of investment is equal to the shorter mortgage term prepaying creates. This model is calculating your total return AFTER the full 30 year term expires.

This is proven in the 0% scenario. Again, after 198 months, the prepay option contributes \$485,281 to the mortgage. After 198 months, the non-prepay option contributes \$337,301 to the mortgage and an additional \$147,600 to the investment account, totaling \$484,902 (In theory, this should exactly equal the \$485,281 but for simplicity, I assumed the prepay term was 198 months rather than the more precise 198.2 months).

#### brooklynguy

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##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #13 on: March 22, 2016, 08:07:42 AM »
Ok, now that I looked at the spreadsheet in conjunction with your description, I see what the problem is.  It doesn't make sense to subtract out the lifetime mortgage payments from the total investment balance at the end of the full mortgage loan term.  You should simply be comparing the gross investment balances at that point in time, because, in calculating those balances, you've already indirectly accounted for the effect of the lifetime mortgage payments (because only the excess amounts in the budget were used to fund the investments).

Look at it this way:  according to your spreadsheet (if you add back in the lifetime mortgage payments that you had subtracted out), in the 5% market return scenario, at the end of 30 years, the mortgage-retainer has an investment balance of \$1,962,178 (plus a paid off house), and the mortgage-prepayer has an investment balance of \$1,944,068 (plus a paid off house).  You don't need to know how much each person paid in lifetime mortgage payments to see that the mortgage-retainer clearly came out ahead (and the reason she came out ahead, despite having paid more in lifetime mortgage payments, is that those extra interest payments were more than offset by the returns on the invested proceeds).

Separately, though, I believe there is also an error in the spreadsheet's actual calculations, because, in the above example, the mortgage-retainer should have come out much further ahead.  When I use this online compound interest calculator (assuming 5% market returns), after 30 years elapses, the mortgage-retainer has a total investment balance of \$1.88M (\$2357 invested per month for 360 months) while the mortgage-prepayer has a total investment balance of \$1.61M (\$4061 invested per month for 240 months (starting in month 121)).

#### Tjat

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##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #14 on: March 22, 2016, 09:11:01 AM »
Ok, now that I looked at the spreadsheet in conjunction with your description, I see what the problem is.  It doesn't make sense to subtract out the lifetime mortgage payments from the total investment balance at the end of the full mortgage loan term.  You should simply be comparing the gross investment balances at that point in time, because, in calculating those balances, you've already indirectly accounted for the effect of the lifetime mortgage payments (because only the excess amounts in the budget were used to fund the investments).

Look at it this way:  according to your spreadsheet (if you add back in the lifetime mortgage payments that you had subtracted out), in the 5% market return scenario, at the end of 30 years, the mortgage-retainer has an investment balance of \$1,962,178 (plus a paid off house), and the mortgage-prepayer has an investment balance of \$1,944,068 (plus a paid off house).  You don't need to know how much each person paid in lifetime mortgage payments to see that the mortgage-retainer clearly came out ahead (and the reason she came out ahead, despite having paid more in lifetime mortgage payments, is that those extra interest payments were more than offset by the returns on the invested proceeds).

Got it, and I agree. I've updated the spreadsheet and attached to this post. I suppose barring any other mistakes, I will update my original post.

Separately, though, I believe there is also an error in the spreadsheet's actual calculations, because, in the above example, the mortgage-retainer should have come out much further ahead.  When I use this online compound interest calculator (assuming 5% market returns), after 30 years elapses, the mortgage-retainer has a total investment balance of \$1.88M (\$2357 invested per month for 360 months) while the mortgage-prepayer has a total investment balance of \$1.61M (\$4061 invested per month for 240 months (starting in month 121)).

I do disagree here. To achieve your balances, I have to enter "1" in the interest compounding bucket.  I don't think that's accurate here, and with monthly investments should be set equal to the frequency of investment (monthly, so "12"). Making this update matches my spreadsheet exactly. This can be tested using excel and the formula "=FV(5%/12,360,-B19)" for the 5% 30-year mortgage retainer scenario. I only created those weird monthly investment tables in the hidden columns to be able to systematically account for uneven cash flows in the prepay scenarios. (Note that according to the spreadsheet, the prepayer mortgage should be paid off after 102 months - not the 120 you used).

#### brooklynguy

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##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #15 on: March 22, 2016, 09:18:53 AM »
(Note that according to the spreadsheet, the prepayer mortgage should be paid off after 102 months - not the 120 you used).

Oops - you're right on this point.  I was looking at the Excel row number rather than the loan month number.

#### missmoneymachine

• Posts: 39
##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #16 on: March 22, 2016, 10:50:42 AM »
Wow this is great.  I was actually going to calculate pretty much the same thing for myself.  This just saved me the work!

#### missmoneymachine

• Posts: 39
##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #17 on: March 22, 2016, 11:29:29 AM »
I had a 30 year mortgage and began making extra payments....then when interest rates dropped enough, I thought about refinancing to a 15 year mortgage.  I changed my mind when I read this article http://www.edelmanfinancial.com/education-center/articles/1/11-great-reasons-to-carry-a-big-long-mortgage

Great article!

#### Tjat

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##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #18 on: March 22, 2016, 05:37:47 PM »
I had a 30 year mortgage and began making extra payments....then when interest rates dropped enough, I thought about refinancing to a 15 year mortgage.  I changed my mind when I read this article http://www.edelmanfinancial.com/education-center/articles/1/11-great-reasons-to-carry-a-big-long-mortgage

Great article!

I actually disagree...quite vigorously. For starters, this seems to be a very high fee financial advisory service (2% in addition to fund fees, for balances < \$150,000). Their interest is that you pay as little to your mortgage as possible, and invest the most you can with them. I've also taken the liberty of selecting a few awful pieces of advice from the 'article.'

Quote
you should have as big a mortgage as you can get and never pay it off.

good idea. After all, the bank will loan me a massive amount of money for a mortgage. Payments are hard now, but my income surely will rise (argument used in this article)

Quote
Reasons #4 and #5: Your mortgage interest is tax-deductible.

Ah! the old pay \$100 more to save \$33 argument. That chestnut is about as refreshing as locking a fart in a soda bottle.

Quote
Still, you fret that your home’s equity is at risk. Can you protect it without having to sell? Yes! Simply get a new mortgage, and pull the equity out of the house. It’s the same thing as selling, except that you don’t have to sell!

You've got to be kidding me. Their advice is that if you're afraid your home will lose value, you should do a cash out refinance... Better get the scuba gear, as you're going underwater

Quote
Reasons #8 and #9: Mortgages allow you to invest more money and to invest it more quickly. Mortgages allow you to create more wealth than you otherwise would.

That entire section is terribly misleading. Assumes that one's income and home value will always rise...

Quote
Sure, owning a home mortgage-free is an appealing concept. But it is completely unrealistic!

uh huh...I could go on

As my earlier post shows, I can clearly see arguments some may make to stretch out a mortgage (I have done so). However, a person should do that after they understand not only the monetary reasons why but fully understand the risk factors they face and their drivers. To suggest that one can always assume that home values (and incomes) rise and no unexpected emergencies come up (until you get to the size 8 fine print at the bottom) is ludicrous. Especially when they spin that advice into taking our a HELOC to "lock in your equity" before you house loses value. They probably advocate putting that newfound cash into one of their 2% fee ETFs - a feat that in reality, an 8-year old could probably manage on their own.

</rant over>

#### onlykelsey

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##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #19 on: March 22, 2016, 05:43:30 PM »
I'm with you, tjat.  That was a horrific article.  And I am pretty firmly in the "prepaying almost never makes sense" camp.

#### MustacheAndaHalf

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##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #20 on: March 22, 2016, 07:51:36 PM »
Most people don't keep their home 30 years.  What happens when you include selling the home after 6 years, or 10 years?
« Last Edit: March 22, 2016, 07:54:05 PM by MustacheAndaHalf »

#### Tjat

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##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #21 on: March 23, 2016, 06:01:35 AM »
Most people don't keep their home 30 years.  What happens when you include selling the home after 6 years, or 10 years?

I don't think the relative differences between the 5 mortgage options would be any different. Assume that even though a person sells their house every 6 years, they still have to live somewhere for the next 30 years. It still seems to make sense to continually obtain the shorter/lowest rate loan you can find and afford and not prepay additional principle.

However, it's clear that the final number will change (likely lower). Even if the person sells and buys a home for the exact same price (when in reality, they are probably buying up), they are still incurring transactional costs (closing costs, sales commissions, moving expenses, buying new stuff for the new home, etc). Those expenses are likely coming at the cost of their investments, which will dramatically lower their "total return" at the end of the 30 years.

#### Peter Parker

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##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #22 on: March 23, 2016, 08:26:47 AM »
I thought the Ric Edelman article was pretty good, because it was free and it got me thinking.  Never felt that I had to pay 2% to do an analysis on my own and make the determination that keeping the mortgage at 30 years made a lot of financial sense for me.

I was capable of taking his idea, running the numbers myself, and investing the difference in money saved by not paying down the mortgage into a low fee, tax deferred, account--He never said "this only works if you invest with me."

Because I am able to deduct my mortgage interest AND place the money into a tax deferred account, I was able to invest MORE than the difference between paying down the mortgage and keeping the 30 year mortgage.  In the end, it became a decision of saving \$164,887 in interest by paying down the mortgage versus making \$344,824, assuming a 3% return, over the course of 15 years....

I was willing to assume I could make at least 3% on my investment.  That was a risk, I was willing to take....
« Last Edit: March 23, 2016, 08:29:24 AM by Peter Parker »

#### Tjat

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##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #23 on: March 23, 2016, 03:14:15 PM »
To be clear, several of the ideas presented in the article are legit. For instance, the inflation hedge aspect. What I was objecting to was the comment referring to the article as "great" and the free-wheeling tone of the article that advised getting underwater on your maxed-out mortgage home without any real mention of risk (aside from the tiny print at the end) solely because if everything worked out in your favor (income increases, home appreciation), you'd come out ahead.

As my post indicated, a 30 year mortgage had the highest upside of the 5 options I compared, but in a reasonable return environment, not a very statistically significant benefit over a 20-year (with greater downside risk). This article made it sound like the expected environment is double-digit investment returns that are so sure, you can continually double down on your inevitably rising equity to further leverage yourself.

#### Peter Parker

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##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #24 on: March 23, 2016, 04:08:01 PM »
To be clear, several of the ideas presented in the article are legit. For instance, the inflation hedge aspect. What I was objecting to was the comment referring to the article as "great" and the free-wheeling tone of the article that advised getting underwater on your maxed-out mortgage home without any real mention of risk (aside from the tiny print at the end) solely because if everything worked out in your favor (income increases, home appreciation), you'd come out ahead.

As my post indicated, a 30 year mortgage had the highest upside of the 5 options I compared, but in a reasonable return environment, not a very statistically significant benefit over a 20-year (with greater downside risk). This article made it sound like the expected environment is double-digit investment returns that are so sure, you can continually double down on your inevitably rising equity to further leverage yourself.

And, I guess, the part that I object to with the "pay off your mortgage" camp is there is a lack of acknowledgment that there are "risks" to paying off a mortgage too....

**If you own a paid off home and suffer a catastrophic loss that isn't covered by insurance (e.g. earthquake in California) you may find yourself owning an "asset" that is worthless.  Whereas, if you had a mortgage--the bank now owns the worthless asset.

***And of course, there are opportunity costs (as I mentioned in my post above) of paying down a mortgage with historically low rates and not investing in a market that has, historically, had an ROI of 7+%

Let me be clear--I completely understand the desire to payoff one's home.  There are a lot of good business decisions to do it.  There are also a lot of psychological reasons to do it too.  But everything in life has a yin/yang to it.  It isn't a perfect decision either way....

#### 2buttons

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##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #25 on: March 23, 2016, 04:43:53 PM »
No offense, but the idea that you would walk away from a contract you agreed to strikes me as a completely irresponsible and 1000% entitled.

#### Peter Parker

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##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #26 on: March 23, 2016, 05:20:36 PM »
No offense, but the idea that you would walk away from a contract you agreed to strikes me as a completely irresponsible and 1000% entitled.

No offense taken, 2buttons.

I completely understand your take.  Personally, I have never walked away from a contract myself.  That being said, big business always weighs the economic pros and cons of breaking contracts....sometimes it makes business sense to break it, sometimes it doesn't.  Believe me, if breaking a contract makes economic sense to a corporation, they will do it.  They may even have a fidicuiary duty to their shareholders to do so...There is a reason Donald Trump is still a billionaire even though several of his corporations have broken contracts and declared bankruptcy....

And since our Supreme Court sees "corporations" as "people" it therefore stands to reason that "people" are the same as "corporations."  Thus, People (i.e. humans) should have the same "business" opportunities available to them as corporations....If we base our finances solely as "risks" versus "rewards" then we should also include (as part of our weighing options) the opportunity to walk.  Perhaps we even have a fiduciary duty to our family to do so when it makes economic sense....There is also a reason why the "pay your mortgage down" guru, Dave Ramsey, broke contracts, declared bankruptcy and is now a multi-millionaire--It made economic sense for him to do it.  He made a business decision and it benefitted his family to do it.

If it makes business sense to walk (and suffer any consequences) there isn't much difference if it is a business or a person....Even though I haven't done it, I can't really fault someone who does.
« Last Edit: March 23, 2016, 06:55:58 PM by Peter Parker »

#### Lski'stash

• Pencil Stache
• Posts: 525
• Age: 34
• Location: West Michigan
##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #27 on: March 23, 2016, 07:07:21 PM »
Thanks! This makes the most sense from the arguments that I've seen so far. We are currently selling the house and are looking at our different options for the new house.

#### 2buttons

• Bristles
• Posts: 393
##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #28 on: March 24, 2016, 07:42:48 AM »
No offense, but the idea that you would walk away from a contract you agreed to strikes me as a completely irresponsible and 1000% entitled.

No offense taken, 2buttons.

I completely understand your take.  Personally, I have never walked away from a contract myself.  That being said, big business always weighs the economic pros and cons of breaking contracts....sometimes it makes business sense to break it, sometimes it doesn't.  Believe me, if breaking a contract makes economic sense to a corporation, they will do it.  They may even have a fidicuiary duty to their shareholders to do so...There is a reason Donald Trump is still a billionaire even though several of his corporations have broken contracts and declared bankruptcy....

And since our Supreme Court sees "corporations" as "people" it therefore stands to reason that "people" are the same as "corporations."  Thus, People (i.e. humans) should have the same "business" opportunities available to them as corporations....If we base our finances solely as "risks" versus "rewards" then we should also include (as part of our weighing options) the opportunity to walk.  Perhaps we even have a fiduciary duty to our family to do so when it makes economic sense....There is also a reason why the "pay your mortgage down" guru, Dave Ramsey, broke contracts, declared bankruptcy and is now a multi-millionaire--It made economic sense for him to do it.  He made a business decision and it benefitted his family to do it.

If it makes business sense to walk (and suffer any consequences) there isn't much difference if it is a business or a person....Even though I haven't done it, I can't really fault someone who does.

And this is why I had to pay private mortgage insurance on my last place until I had 22+% equity.  The actions of the irresponsible, have consequences for the rest of us, and we end up footing the bill, and this can be applied to a lot of areas of our lives, car insurance, people who take advantage of store return policies etc.

I see your point, but from a personal ethics position, I have a hard time squaring that circle, and its usually because someone was being irresponsible in the first place, which, to tie it back, was the majority of the tenor of the article posted that a few of us took issue with the points made.

#### Tjat

• Pencil Stache
• Posts: 570
##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #29 on: March 24, 2016, 11:07:44 AM »
Picture a scenario of paying \$3,000 a month on a house bought for \$850,000 and the market crashed causing your home value to plummet to \$400,000. If you could then buy the exact same home with cash for \$450,000, would you really continue paying \$3,000 a month on a asset worth 60% less? There's a lot you can do with \$3,000 a month...

The banks aren't left empty-handed, they are left with the house. It's a lot different than running into their vault to grab bags of cash. Secondly, maybe the banks should consider not propping up a real estate bubble with easy loans when times are good, because a crash is bound to happen.

Peter Parker is right in the sense that a mortgage is a business arrangement, not a blood oath. Banks are in it to make money...period and they owe it to their shareholders to behave like sociopaths to maximize value. Why should the individual hold themselves to a higher ethical standard than the bank? That will still result in the average person getting screwed.

#### 2buttons

• Bristles
• Posts: 393
##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #30 on: March 24, 2016, 01:16:01 PM »
Picture a scenario of paying \$3,000 a month on a house bought for \$850,000 and the market crashed causing your home value to plummet to \$400,000. If you could then buy the exact same home with cash for \$450,000, would you really continue paying \$3,000 a month on a asset worth 60% less? There's a lot you can do with \$3,000 a month...

The banks aren't left empty-handed, they are left with the house. It's a lot different than running into their vault to grab bags of cash. Secondly, maybe the banks should consider not propping up a real estate bubble with easy loans when times are good, because a crash is bound to happen.

Peter Parker is right in the sense that a mortgage is a business arrangement, not a blood oath. Banks are in it to make money...period and they owe it to their shareholders to behave like sociopaths to maximize value. Why should the individual hold themselves to a higher ethical standard than the bank? That will still result in the average person getting screwed.

This would be fair if this actually happened, but based on case schiller, and happy to be proven wrong, it appears that most have rebounded to just under previous values.  I looked at 20 city and national numbers.  Looked hard to find an actual accounting of home values pre-2007 and now, and on a quick google search the only credible stuff I saw was case schiller.

Sure it not a blood oath, that is clear, which again is why private mortgage insurance exists. Clearly someone is running the numbers on probabilities of foreclosure etc to set the mark at 78% or whatever it is these days.  Seems to me that the folks forecasting this stuff place the crossover point at that mark of a 22% drop in value, although FHA appears to be for the life of the loan these days suggesting to me that banks/gov are protecting themselves even more so.

Additionally, for the same reason banks have to be accountable to their shareholders, if you were a shareholder in a bank, wouldn't you be angry if someone skipped out on their mortgage, and left the bank holding the bag with a house, to use your example, at half the value, and have to account for an income stream that is no longer available?  I think I would.

Point being is that its all interrelated, and not entirely as black and white as suggested, which is also why mortgage backed securities didn't just upend the housing market, it was a cancer through the entire economic system, that led to the recession.

#### Tjat

• Pencil Stache
• Posts: 570
##### Re: One man's analysis of "To Mortgage or Invest"
« Reply #31 on: March 24, 2016, 01:56:13 PM »
Additionally, for the same reason banks have to be accountable to their shareholders, if you were a shareholder in a bank, wouldn't you be angry if someone skipped out on their mortgage, and left the bank holding the bag with a house, to use your example, at half the value, and have to account for an income stream that is no longer available?  I think I would.

Point being is that its all interrelated, and not entirely as black and white as suggested, which is also why mortgage backed securities didn't just upend the housing market, it was a cancer through the entire economic system, that led to the recession.

I agree. However, in a mortgage scenario the bank as all the power. To couple that with the stance that the homeowner should somehow have a higher ethical standard on top of that, puts the individuals in a tough spot to not get screwed. A bank shareholder has the luxury of multiple income streams, diversification, and reinsurance. A homeowner has a massive expense with little return (their house) and a family to look after.  I think people that gleefully abuse the system (Donald Trump to reference someone's earlier post) deserve to be vilified, but not the average homeowner who reacted in their best interest when they saw the bulk of their net worth collapse.