The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: Invester17 on September 18, 2017, 06:26:12 AM
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Hello,
I have a 30 year fixed loan on a mortgage for a rental property (monthly payment is $2,495 per month). I have been paying an additional $505 per month to pay down the principal faster. I currently stand at $340,000 from the original loan of $439,000. I just recently got the PMI removed so besides taxes and insurance, this payment amount will stay the same.
The question is should I now put that $500 a month into an investment or continue to put it into the principal? The rental property (weekly in summer, per month in winter) pays for itself including all maintenance, property management etc.
Thanks!
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Congratulations on paying down that balance to the point that PMI got removed. You should only make this investment if the money is going into an index like VTSAX, and if you think your life is stable enough that you can commit to not touching the money for five years or more.
If you're going to be playing individual stocks, the chances of you out-earning the mortgage rate are greatly reduced. They're just too volatile.
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Thanks!
The mortgage is at a fixed rate of 4%, I apologize for not sharing that in the original post.
I likely would automate a $500 payment into my Vanguard S&P 500 index fund (admiral shares). However, that would be the first post tax automated savings that I have implemented. It's pretty easier for me to save pre-tax since I never see it.
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Join the
https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/350/?topicseen
And have fun making piles more money.
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If you can keep to $500/month for five years, you should be investing $72,000 over that period, and gains should have you near $100,000 by late 2022. Good luck!
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How did you get those numbers?
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assumed about a 10% annualized rate of return. Inflation wasn't factored into that.
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Join the
https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/350/?topicseen
And have fun making piles more money.
^This^
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another great reason to not pay down your mortgage is that as that taxable account grows it will grow to a point you likely dont care to have an E Fund or keep extra cash on hand as that money can be tapped when needed. Helping you get more little green soldiers to work.
This is an often over looked piece of the puzzle when people try to indicate that paying down a mortgage could be better(it rarely ever is) and the biggest arguement made is you'll have this E Fund either way. Well when your taxable investments approach 50-100k an efund is a waste of resources and can be invested. BUT if you're paying down your mortgage an E Fund is still 100% necessary as you're increasing your risk of total financial failure due to a bank not caring if you paid extra over the last 20 years and now you cant make your payment today b/c you lost your job.
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Don't pay it off early. If you've only just gotten PMI removed, you're probably pretty early on in the loan and so you'll have plenty of time for fluctuations in the market to even out and yield a better than 4% return.
Additionally, you'll be building a stash of money that you can use to buy another rental property if you come across a good deal. Or you can use it if your property needs substantial renovations. And if you never use it for any of that, you'll always have the option to use the funds to pay off the mortgage when it gets high enough. You'll simply be moving your payoff date up earlier than if you applied it directly to the principal.
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It seems like the general consensus is that I shouldn't pay off my mortgage faster. Again, it's currently rented out and pays for itself (and then some). The only thing that scares me a bit is having this mortgage paid off when I'm 48 vs 43. But I guess either way that's young and I can make higher gains by not shaving those 5 years off.
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It seems like the general consensus is that I shouldn't pay off my mortgage faster. Again, it's currently rented out and pays for itself (and then some). The only thing that scares me a bit is having this mortgage paid off when I'm 48 vs 43. But I guess either way that's young and I can make higher gains by not shaving those 5 years off.
my mortgage will be paid off when i'm 59 i'm 30 right now.
you're making the correct choice come join the club!
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It seems like the general consensus is that I shouldn't pay off my mortgage faster. Again, it's currently rented out and pays for itself (and then some). The only thing that scares me a bit is having this mortgage paid off when I'm 48 vs 43. But I guess either way that's young and I can make higher gains by not shaving those 5 years off.
There is one other thing to consider, and that's inflation. And it works for you in two ways. One is the mortgage payment stays the same, but the rents go up. The other thing is that with even modest rates of inflation that mortgage payment will seem smaller and smaller over time. While $2,495 seems like a lot of money right now, and it is, in about 30 years it will be more like $1,200 of today's dollars. So if you were to pay it down, you would be using today's fully valued dollars to save future tiny inflation ravaged dollars.
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The conventional wisdom is you are better off keeping a 4% loan. I paid my 6% loan off before putting anything in non-tax-advantaged accounts. This was a matter of psychology rather than efficiency. I wanted to invest aggressively (options and use of modest leverage) and couldn't justify that approach with a mortgage hanging over my head.
If I had it to do over again, I'd keep the mortgage and sink the pay off funds into Closed End Municipal Bond funds. (See IIM, IQI, NEA, NVG and others). That way, you have the flexibility of liquidity with no net debt and make a tax arbitrage play as your mortgage interest is deductible and the muni interest is non-taxable. The CEFs will pay you more in gross interest than you pay out so the debt becomes self liquidating over time (e.g. your interest payments eventually exceed your principal and interest.)
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Exactly. I think in my head it makes more sense to pay down the mortgage. However, in reality the gains are far better by not. I also appreciate the note around inflation, makes good sense.
I have changed my mind and will now just pay the minimum. I'm going to reinvest the $500 into the S&P 500 index.
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The trick is installing an IRON CLAD system to make sure that $500 gets set aside. It's harder than it sounds.
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The conventional wisdom is you are better off keeping a 4% loan. I paid my 6% loan off before putting anything in non-tax-advantaged accounts. This was a matter of psychology rather than efficiency. I wanted to invest aggressively (options and use of modest leverage) and couldn't justify that approach with a mortgage hanging over my head.
If I had it to do over again, I'd keep the mortgage and sink the pay off funds into Closed End Municipal Bond funds. (See IIM, IQI, NEA, NVG and others). That way, you have the flexibility of liquidity with no net debt and make a tax arbitrage play as your mortgage interest is deductible and the muni interest is non-taxable. The CEFs will pay you more in gross interest than you pay out so the debt becomes self liquidating over time (e.g. your interest payments eventually exceed your principal and interest.)
I understand the tax arbitrage, which is similar to investing directly in munis. Putting the money in leveraged CEFs multiples your leverage and therefore your volatility, though. Are they really an appropriate liability match for a mortgage?
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The trick is installing an IRON CLAD system to make sure that $500 gets set aside. It's harder than it sounds.
+1. As dumb as it sounds, most of what I learned about personal investing comes down to the fact you actually have to set aside the money.
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The mortgage is not for your own house, but for investment. If you had borrowed $400K to buy into an index fund, would you pay off the loan as soon as you could? Interest rates are more likely to rise than fall in the near future, and the interest is tax deductible. There is nothing wrong with paying down the loan, because once you reach, say $100K you can borrow more and invest more. Dividends from shares help pay the loan, and in your case your tenants help pay the loan. Once you have paid down your loan you may decide to buy another rental property. It is all investment.
One advantage of index funds is that you do not need to put a large sum in. Rental property requires a large investment.
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B42, I had no idea you are so young! You are one smart dude!
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For the comments around ensuring I invest the $500 a month. I currently pay my bills (generally speaking rent/util/food etc.) and then everything goes into investments. No concerns there. In my taxable account I started investing in 2014 and it's around $93,000. I'd say I'd average 20k a year into this fund.
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B42, I had no idea you are so young! You are one smart dude!
thanks much appreciated.
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Rather than applauding boarder42 for being young, perhaps we should take his risk-increasing message about maintaining a larger mortgage balance with more caution given his youth and inexperience?
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Rather than applauding boarder42 for being young, perhaps we should take his risk-increasing message about maintaining a larger mortgage balance with more caution given his youth and inexperience?
haha ageism so i cant be smart
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My comment was typed in a clumsy and disrespectful way, boarder42, I hope my periodic contributions to the "Do NOT pay off your mortgage" board show I'm on your team.
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My comment was typed in a clumsy and disrespectful way, boarder42, I hope my periodic contributions to the "Do NOT pay off your mortgage" board show I'm on your team.
i read the sarcasm through it and know where your heads at.
that is one of the most common rebuttles from the "been around the block" crowd. You're young you havent been thru crashes and lost all this money... You're right i havent but guess what - thats why this community exists so we can keep everyone from making a bone headed decision and selling in one of those downturns.
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Rather than applauding boarder42 for being young, perhaps we should take his risk-increasing message about maintaining a larger mortgage balance with more caution given his youth and inexperience?
Or is it as a younger person, he does not have the ingrained knee jerk reaction of viewing mortgage debt in a negative way as those who lived and invested through periods of 7%, 10%, 15%, 19% interest do? I firmly believe that we are living in an unique and unprecedented moment in US history where we can lock in long term fixed debt at rates marginally above inflation thanks for government subsidization.
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Rather than applauding boarder42 for being young, perhaps we should take his risk-increasing message about maintaining a larger mortgage balance with more caution given his youth and inexperience?
Or is it as a younger person, he does not have the ingrained knee jerk reaction of viewing mortgage debt in a negative way as those who lived and invested through periods of 7%, 10%, 15%, 19% interest do? I firmly believe that we are living in an unique and unprecedented moment in US history where we can lock in long term fixed debt at rates marginally above inflation thanks for government subsidization.
I wrote a long piece, but chose to not post it.
Some food for thought:
* Nominal returns are really what matters. Throw out your perceptions of what rates are historic or not. Any nominal rates and any inflation rate are possible. Europe already has negative rates. So you cant guarantee 4% is good. I remember being told 7% was historic in the late 90s as i locked in an ARM. My ARM went down to 2.25% In a few countries today, you are being paid to hold real estate leverage. Negative mortgage rates are possible.
* History does not define the future and average rates of return are not the actual annual rate of return you will get. Sequence of returns matter a lot and greatly increase the complexity of the math.
* When holding morgage backed debt, you must also hold non performing real estate asset. This is non trivial as you hold real estate price risk and morgage rate risk. Think about how bonds can fall in value even though their rate is fixed. Morgages have similar interest rate risks. Consider whether renting and no leverage might be an even better play in terms of risk and reward.
* I have no problem with leverage, index funds or holding a non performing real estate asset to live in. It is a decent plan to accumulate wealth. It is not a fool proof plan. That is my only point.
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Rather than applauding boarder42 for being young, perhaps we should take his risk-increasing message about maintaining a larger mortgage balance with more caution given his youth and inexperience?
Or is it as a younger person, he does not have the ingrained knee jerk reaction of viewing mortgage debt in a negative way as those who lived and invested through periods of 7%, 10%, 15%, 19% interest do? I firmly believe that we are living in an unique and unprecedented moment in US history where we can lock in long term fixed debt at rates marginally above inflation thanks for government subsidization.
Amen
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Rather than applauding boarder42 for being young, perhaps we should take his risk-increasing message about maintaining a larger mortgage balance with more caution given his youth and inexperience?
Or is it as a younger person, he does not have the ingrained knee jerk reaction of viewing mortgage debt in a negative way as those who lived and invested through periods of 7%, 10%, 15%, 19% interest do? I firmly believe that we are living in an unique and unprecedented moment in US history where we can lock in long term fixed debt at rates marginally above inflation thanks for government subsidization.
I wrote a long piece, but chose to not post it.
Some food for thought:
* Nominal returns are really what matters. Throw out your perceptions of what rates are historic or not. Any nominal rates and any inflation rate are possible. Europe already has negative rates. So you cant guarantee 4% is good. I remember being told 7% was historic in the late 90s as i locked in an ARM. My ARM went down to 2.25% In a few countries today, you are being paid to hold real estate leverage. Negative mortgage rates are possible.
* History does not define the future and average rates of return are not the actual annual rate of return you will get. Sequence of returns matter a lot and greatly increase the complexity of the math.
* When holding morgage backed debt, you must also hold non performing real estate asset. This is non trivial as you hold real estate price risk and morgage rate risk. Think about how bonds can fall in value even though their rate is fixed. Morgages have similar interest rate risks. Consider whether renting and no leverage might be an even better play in terms of risk and reward.
* I have no problem with leverage, index funds or holding a non performing real estate asset to live in. It is a decent plan to accumulate wealth. It is not a fool proof plan. That is my only point.
If it's not fool proof then most of this community will fail at the entire premise of these forums.
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PizzaSteve is right (like usual). It is not fool proof.
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PizzaSteve is right (like usual). It is not fool proof.
Living past tomorrow is not fool proof. To state anything is not fool proof is just to state anything about life.
It's not fool proof the United States dollar will be solvent
It's not fool proof the sun will come up tomorrow.
You can straw man argument anything. It doesnt really add value.
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Making regularly early payments on a mortgage without paying it off completely is always a bad idea, because if you lose your job you will still have a mortgage to pay, but no money. If you make minimum payments and save/invest everything else, you will still have a mortgage and also a bunch of money. We are assuming this is somebody in the US with a 30 year mortgage at an absurdly good rate, by the way.
The only debate is then if you should pay off your mortgage in the year you FIRE as a lump sum. In this case think of keeping the mortgage as a hedge against unexpected inflation, while paying it off is a hedge against unexpected deflation. Inflation is probably more likely. Thanks to government backing, keeping the mortgage is also the best choice for expected situations. On the flip side, if there is deflation and a corresponding market crash and you have no regular income, good luck refinancing to take advantage of the new amazing rates which might be necessary to keep your house. In this case the mortgage is a risk. In all, keeping the mortgage might be best 95%ish of the time.
You might also consider your asset allocation. Someone with a lot of stocks may not benefit much from inflation protection, and might want to pay off the mortgage at FIRE to protect against that small chance of deflation. On the other hand, someone with a lot of bonds may want to keep the mortgage as protection against inflation. That is why some people say a mortgage counts as a negative bond.
In the end I am with Mr. Money Mustache and say that simply asking the question is a win-win situation, but only if you are considering paying it in one lump, hopefully because you already have all the money you expect to ever need.
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Making regularly early payments on a mortgage without paying it off completely is always a bad idea, because if you lose your job you will still have a mortgage to pay, but no money. If you make minimum payments and save/invest everything else, you will still have a mortgage and also a bunch of money. We are assuming this is somebody in the US with a 30 year mortgage at an absurdly good rate, by the way.
The only debate is then if you should pay off your mortgage in the year you FIRE as a lump sum. In this case think of keeping the mortgage as a hedge against unexpected inflation, while paying it off is a hedge against unexpected deflation. Inflation is probably more likely. Thanks to government backing, keeping the mortgage is also the best choice for expected situations. On the flip side, if there is deflation and a corresponding market crash and you have no regular income, good luck refinancing to take advantage of the new amazing rates which might be necessary to keep your house. In this case the mortgage is a risk. In all, keeping the mortgage might be best 95%ish of the time.
You might also consider your asset allocation. Someone with a lot of stocks may not benefit much from inflation protection, and might want to pay off the mortgage at FIRE to protect against that small chance of deflation. On the other hand, someone with a lot of bonds may want to keep the mortgage as protection against inflation. That is why some people say a mortgage counts as a negative bond.
In the end I am with Mr. Money Mustache and say that simply asking the question is a win-win situation, but only if you are considering paying it in one lump, hopefully because you already have all the money you expect to ever need.
very correct. asking the question is win win but as you stated at the beginning of your post there is really only one safe way to go about this and its counterinuitive to debt aversion gut feelings.
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Making regularly early payments on a mortgage without paying it off completely is always a bad idea, because if you lose your job you will still have a mortgage to pay, but no money. If you make minimum payments and save/invest everything else, you will still have a mortgage and also a bunch of money. We are assuming this is somebody in the US with a 30 year mortgage at an absurdly good rate, by the way.
The only debate is then if you should pay off your mortgage in the year you FIRE as a lump sum. In this case think of keeping the mortgage as a hedge against unexpected inflation, while paying it off is a hedge against unexpected deflation. Inflation is probably more likely. Thanks to government backing, keeping the mortgage is also the best choice for expected situations. On the flip side, if there is deflation and a corresponding market crash and you have no regular income, good luck refinancing to take advantage of the new amazing rates which might be necessary to keep your house. In this case the mortgage is a risk. In all, keeping the mortgage might be best 95%ish of the time.
You might also consider your asset allocation. Someone with a lot of stocks may not benefit much from inflation protection, and might want to pay off the mortgage at FIRE to protect against that small chance of deflation. On the other hand, someone with a lot of bonds may want to keep the mortgage as protection against inflation. That is why some people say a mortgage counts as a negative bond.
In the end I am with Mr. Money Mustache and say that simply asking the question is a win-win situation, but only if you are considering paying it in one lump, hopefully because you already have all the money you expect to ever need.
I think I'll repeat that having extra money to decide whether to put towards the mortgage or into investments is a win in my book, regardless of which way you go. You can also do a bit here and a bit there. It's actually what I do when I have extra money. A bit into my Redneck Bank 1.5% Megamoney account because I have 2 kid tuitions to periodically pay, some in my Schwab taxable, some in my Roth, some in my TDAmeritrade taxable. In a similar way, you could put some in investments and some extra towards the mortgage. I know Ric Edelman is violently against paying off the mortgage and he presents very good reasons. I paid my mortgage off 15 years ago, however and am not interested in taking out a new mortgage to increase my investments. I have plenty of them too.
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PizzaSteve is right (like usual). It is not fool proof.
Living past tomorrow is not fool proof. To state anything is not fool proof is just to state anything about life.
It's not fool proof the United States dollar will be solvent
It's not fool proof the sun will come up tomorrow.
You can straw man argument anything. It doesnt really add value.
These sorts of low-probability catastrophes sound like the time when Mustachians would do really well with our ability to live on very little and lots of skills, right?
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PizzaSteve is right (like usual). It is not fool proof.
Living past tomorrow is not fool proof. To state anything is not fool proof is just to state anything about life.
It's not fool proof the United States dollar will be solvent
It's not fool proof the sun will come up tomorrow.
You can straw man argument anything. It doesnt really add value.
These sorts of low-probability catastrophes sound like the time when Mustachians would do really well with our ability to live on very little and lots of skills, right?
I agree. Just pointing out that a higher risk, higher reward strategy is not for everyone. Asserting that it is is flat wrong. If it was that simple, T-bills and bonds would not exist as no one would buy 30 year debt with such low returns. So if stock fund are so certain, why are trillions of these instruments selling? One should ask themselves if the entire financial industry and national reserve banks are stupid?
In declining real estate markets or declining interest rate/stagnant corporate growth environments, the strategy will underperform no leverage, no real estate, safe cash like assets. You dont need a dooms day scenario for leverage and stocks to underperform. That is a distorting arguement.
So fine. Dont assert it is fool proof and should be for everyone and there is no debate necessary. No one asked for a facepunch to the OP for what is a very reasonable decision. No need for leverage once you have won the game (large enough stock stash for FIRE).
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I'd say 90% of the financial industry is a stupid racket just meant to get money from dumb people the number of people who are required by law to act as a fiduciary compared to the number who have to act in their companies best interest should prove that most of the available options are a sham .
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PizzaSteve is right (like usual). It is not fool proof.
Living past tomorrow is not fool proof. To state anything is not fool proof is just to state anything about life.
It's not fool proof the United States dollar will be solvent
It's not fool proof the sun will come up tomorrow.
You can straw man argument anything. It doesnt really add value.
Boarder42 let me just say that I agree that leveraging your house to buy stocks is probably the right strategy for you. You are 30 years old so an aggressive strategy makes sense. In fact when I was 30 I owned stocks and I had a mortgage on my house. I was 30 in 1999-2000. It worked out in the end but needless to say that wasn't the best period to leverage your house to buy stocks.
What I don't agree with is stating that this strategy is equally as fool proof as the sun coming up in the morning. Obviously we have a much longer track record of the sun rising than stocks outperforming other assets. Are there no gradations of risk and probability for you?
There are some major and unprecedented changes happening right now. The Fed is embarking on quantitative tightening. There is a technical revolution in AI and robotics. There is a widening equality gap in the US that is scrambling American politics. We don't know how these and hundreds of other changes are going to affect business and the economy. To say that we do is folly.
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I'd say 90% of the financial industry is a stupid racket just meant to get money from dumb people the number of people who are required by law to act as a fiduciary compared to the number who have to act in their companies best interest should prove that most of the available options are a sham .
While I don't agree with you, here's an article about something stupid they are doing right now.
https://www.wsj.com/articles/the-global-stock-markets-hidden-juice-1506249970
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PizzaSteve is right (like usual). It is not fool proof.
Living past tomorrow is not fool proof. To state anything is not fool proof is just to state anything about life.
It's not fool proof the United States dollar will be solvent
It's not fool proof the sun will come up tomorrow.
You can straw man argument anything. It doesnt really add value.
Boarder42 let me just say that I agree that leveraging your house to buy stocks is probably the right strategy for you. You are 30 years old so an aggressive strategy makes sense. In fact when I was 30 I owned stocks and I had a mortgage on my house. I was 30 in 1999-2000. It worked out in the end but needless to say that wasn't the best period to leverage your house to buy stocks.
What I don't agree with is stating that this strategy is equally as fool proof as the sun coming up in the morning. Obviously we have a much longer track record of the sun rising than stocks outperforming other assets. Are there no gradations of risk and probability for you?
There are some major and unprecedented changes happening right now. The Fed is embarking on quantitative tightening. There is a technical revolution in AI and robotics. There is a widening equality gap in the US that is scrambling American politics. We don't know how these and hundreds of other changes are going to affect business and the economy. To say that we do is folly.
there is always and has always been "stuff" going on in politics tech and economies that hasnt been done before or we'd be living with no laws and no way to trade goods and services and still each scavenging for food like animals.
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I think we have strayed from a question with a relatively obvious answer to one that is more nuanced.
The original question posted by the OP was whether they should invest $500/mo in the market or $500/mo in additional mortgage payments on a 4% fixed loan with newly removed PMI. I think we can all agree that additional mortgage payments as you go along is the riskiest decision you can make regarding mortgage debt. If someone lost their job and found themselves short on cash, the bank doesn't care if you've been making additional payments for 10 years.
The more nuanced question of what to do when you have amassed enough cash or cash equivalents to pay off the debt in full is another that must take into account risk tolerance and time horizon. A person nearly FIRE with 5 years left on their mortgage is in a completely different position that someone with 25 years left and many high income earning years ahead. Given that the OP has newly removed PMI, I presumed they fit much more into the mold of the latter than the former.
Also, unless it is solely with France (the only European country with long term fixed mortgage debt), comparing mortgages in Europe to the US is apples and oranges. European mortgage debt is variable rate and often shorter term.
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Rather than applauding boarder42 for being young, perhaps we should take his risk-increasing message about maintaining a larger mortgage balance with more caution given his youth and inexperience?
Nope, nope nope. I am nearly twice his age, have probably owned twice (maybe 3-4x) as many houses, and I am FIRE. B42 is so damn smart to have figured this out at such a tender age. It took me a lot longer to wrap my head around the concept.
Risk increasing? WTF?? Are you kidding me??? Have you forgotten that MMM self-insures his home? THAT'S risk-increasing!
The fact that you apparently think it is just goes to show how little the concept of mortgage as wealth-building tool is understood. You'd think people that follow this MMM path would be a little more open-minded. It costs you nothing to educate yourself. Learn, then decide.
Holding a mortgage long enough to stuff every available investment vehicle available isn't risk-taking, particularly if one is investing a la jlcollinsnh. If B42 was day trading or speculating with individual stocks, that might be a different story. Otherwise, he's wise beyond his years, just like Pete.
In ten or more years, the people who hung onto their cheap-ass fixed-rate loans are going to look like fucking geniuses.
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Rather than applauding boarder42 for being young, perhaps we should take his risk-increasing message about maintaining a larger mortgage balance with more caution given his youth and inexperience?
Nope, nope nope. I am nearly twice his age, have probably owned twice (maybe 3-4x) as many houses, and I am FIRE. B42 is so damn smart to have figured this out at such a tender age. It took me a lot longer to wrap my head around the concept.
Risk increasing? WTF?? Are you kidding me??? Have you forgotten that MMM self-insures his home? THAT'S risk-increasing!
The fact that you apparently think it is just goes to show how little the concept of mortgage as wealth-building tool is understood. You'd think people that follow this MMM path would be a little more open-minded. It costs you nothing to educate yourself. Learn, then decide.
Holding a mortgage long enough to stuff every available investment vehicle available isn't risk-taking, particularly if one is investing a la jlcollinsnh. If B42 was day trading or speculating with individual stocks, that might be a different story. Otherwise, he's wise beyond his years, just like Pete.
In ten or more years, the people who hung onto their cheap-ass fixed-rate loans are going to look like fucking geniuses.
took me 17 years to stop doing that. started trading at 10 and quit at 26/27 when i discovered this site and barely beat the market in 2013 with a well timed end of year tesla play.
and to be fair i'm pretty confident most of talltexans statement was a joke as he is a member of the DONT pay off your mortgage club. but if he feels their is truth behind his "risk increasing" statement perhaps we should explore that more as the only event that makes it risk increasing is extended periods of deflation which the federal reserve will try to limit at all costs and is a very very unlikely event. about as unlikely for the stock market to stop averaging the same returns it has for decades.
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Boarder42 is correct in that I generally support responsible investing even while maintaining a mortgage balance.
But I do believe these higher returns do come with the price of bearing more risk. In the case of OP, I think it's a risk that can be responsibly borne. Being on the hook for a mortgage is a risk. Owning a physical building is a risk.
Hell, having an investment account through a broker is a risk. Living in the US is a risk (they could revamp the tax code in a way that harms people's tax-privileged accounts). We all have to be honest about which risks make sense, because the market will compensate certain risks with higher investment returns. (We also pay for insurance to mitigate certain others)
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Boarder42 is correct in that I generally support responsible investing even while maintaining a mortgage balance.
But I do believe these higher returns do come with the price of bearing more risk. In the case of OP, I think it's a risk that can be responsibly borne. Being on the hook for a mortgage is a risk. Owning a physical building is a risk.
Hell, having an investment account through a broker is a risk. Living in the US is a risk (they could revamp the tax code in a way that harms people's tax-privileged accounts). We all have to be honest about which risks make sense, because the market will compensate certain risks with higher investment returns. (We also pay for insurance to mitigate certain others)
this has been discussed at length and even most of the people who stick their heads in to say pay it down will admit that paying down a mortgage brings with it higher risk than not paying it down and that if you want a paid off mortgage the best strategy to minimize "risk" is to lump sum pay it off.
paying down a mortgage over time vs investing the money INCREASES your Risk of total financial failure b/c you will have less money available to pay your bills resulting in a shorter time frame to find a new income source.
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...and to be fair i'm pretty confident most of talltexans statement was a joke as he is a member of the DONT pay off your mortgage club.
Elsewhere, I said I would preach this message like a Revivalist until it was well understood. I carry my soapbox wherever I go and don't hesitate to use it. My comments were directed more at the people who are still learning how this works. They might not have realized tt's position, based on just that comment.
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...and to be fair i'm pretty confident most of talltexans statement was a joke as he is a member of the DONT pay off your mortgage club.
Elsewhere, I said I would preach this message like a Revivalist until it was well understood. I carry my soapbox wherever I go and don't hesitate to use it. My comments were directed more at the people who are still learning how this works. They might not have realized tt's position, based on just that comment.
and he was clearly thinking of risk in an incorrect way b/c his later comment showed he was not aware of the risk difference. You're hard pressed to find a scenario where paying down a low fixed rate mortgage over time vs investing is lower risk
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Maybe where we see risk differently is that you think of it as variance in outcomes, and I think of it as the cost you accept for higher long-term investment returns?
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Maybe where we see risk differently is that you think of it as variance in outcomes, and I think of it as the cost you accept for higher long-term investment returns?
That's the gist. It is important to remember it is 'expected higher'. Leverage and stocks increase expected returns. But nothing is free. What do you give up to gain the higher returns? It is not nothing, because if it was, lower return investments would have no takers.
These are pretty basic finance theory concepts. Investment returns, volatility, leverage, risk. Plenty of good links referenced to go out there to the web or books and learn more. One can do well to make their own plan, by reading and learning, as none of us know everything and the world changes.
Folks can argue that the modern academic views of economics and investing is BS, but it was what I studied and used professionally for 30+ years to advise companies on their business strategies, so it it sort of is part of my thinking pretty deeply.
For those willing to accept market and leverage risks, have fun. For those seeking less volatility of returns, and perhaps a slower path to FIRE, pay down debt. Neither is bad in my opinion, as neither is spending.
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Maybe where we see risk differently is that you think of it as variance in outcomes, and I think of it as the cost you accept for higher long-term investment returns?
you take on volatility which in some situations could be riskier but in many i would say its not during accumulation ... during withdrawal volaitilty may be seen as riskier to some and they pay it off but baring the worst economic period it benefits you more than it doesnt.
risk in my mind is what would produce the best outcome more of the time. and i'm not willing to place my "bets"(money) on a strong and clear loser 99.9% of the time. so i'm taking on a historical sub 1% chance of risk to what means huge gains on the other side.
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Accumulation phase implies a high income (relative to expenses), which means you can locate at a different bundle of (assets, debt) than you would without the income. Willingness to accept risk in exchange for higher return would be different.
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I did an exercise to see what would have happened to someone with $1M buying a $500K house in So. CA in 2007 (which is when we sold our house there and moved to a LCOL area).
Scenario A they put down $100K, mortgage $400K. Payment $1900/mo.
Scenario B they pay $500K cash for the house. Contribute $1900/mo to VTSAX.
In both cases they have a $50K emergency fund and the remainder goes in VTSAX.
The $1900/mo comes from earnings. I’m ignoring taxes.
I won’t bore you with the details, here’s the results:
In Feb 2009 – market bottom – A is down 61% of net worth, B is down 40% (assumed house value now $300K, VTSAX 51% drawdown). That’s gut wrenching in both cases, obviously more so when leveraged.
In Sept 2017 A has a net worth of $2.09M, B is $1.98M.
So, leverage paid off, but not by a lot, and only if they could make it through 2009 without doing anything stupid.
Edit: added principal paid off mortgage amount ($88K).
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I did an exercise to see what would have happened to someone with $1M buying a $500K house in So. CA in 2007 (which is when we sold our house there and moved to a LCOL area).
Scenario A they put down $100K, mortgage $400K. Payment $1900/mo.
Scenario B they pay $500K cash for the house. Contribute $1900/mo to VTSAX.
In both cases they have a $50K emergency fund and the remainder goes in VTSAX.
The $1900/mo comes from earnings. I’m ignoring taxes.
I won’t bore you with the details, here’s the results:
In Feb 2009 – market bottom – A is down 61% of net worth, B is down 40% (assumed house value now $300K, VTSAX 51% drawdown). That’s gut wrenching in both cases, obviously more so when leveraged.
In Sept 2017 A has a net worth of $2.09M, B is $1.98M.
So, leverage paid off, but not by a lot, and only if they could make it through 2009 without doing anything stupid.
Edit: added principal paid off mortgage amount ($88K).
You cherry picked a start date and it still won. The fact is it wins well over 99% of the time. And those are odds you should take. Networth is including the home value is not relevant to the discussion as both people own their home and see the decrease in value. What is relevant that youre over looking is the invested value of the money. The person with the mortgage has much more easily liquidable.
And in what world is 100k more after 10 years "not alot".
In this forum people use their life value to bike to work and to mow their lawn and to hang dry clothes and cook their own meals. The value of all of that combined after 10 years barely approaches the 100k in your scenario. And the best part is not paying down your mortgage is free and takes no time other than a couple clicks at vanguard
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When it's actually $110k, it's a lot, lol.
I agree that the sample above is way too small, but I love that AdrianC is thinking about this concept.
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One interesting factor to consider is whether or not people take more/less risk based on their mortgage balance (or lack thereof).
We still have a mortgage (we are paying it down early, after tax advantaged accounts) but I can easily see myself being more willing to take risks once we have mortgage balance of $0.
Things like career moves or other things which may also have a tangible benefit financially. This is pretty much impossible to quantify though.
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One interesting factor to consider is whether or not people take more/less risk based on their mortgage balance (or lack thereof).
We still have a mortgage (we are paying it down early, after tax advantaged accounts) but I can easily see myself being more willing to take risks once we have mortgage balance of $0.
Things like career moves or other things which may also have a tangible benefit financially. This is pretty much impossible to quantify though.
After reaching FI, we sold two mortgaged, highly appreciated properties and paid cash for our current home. It's been my surprising experience that it's easier to be tempted into frivolous spending because we have no mortgage. I totally did not expect that.
I also remember that when my parents paid their house off, dad just shifted what he fretted about. Instead of mortgage payments, it became taxes and utilities, both of which never go away.
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One interesting factor to consider is whether or not people take more/less risk based on their mortgage balance (or lack thereof).
We still have a mortgage (we are paying it down early, after tax advantaged accounts) but I can easily see myself being more willing to take risks once we have mortgage balance of $0.
Things like career moves or other things which may also have a tangible benefit financially. This is pretty much impossible to quantify though.
Why would having a house paid off or not influence a career move more than having a taxable account that is larger than your mortgage balance. Also it's important to note that if these are your goals paying down the mortgage is an inefficient way to reach that goal. Your taxable account will be larger than your mortgage faster then it is paid off most of the time.
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You cherry picked a start date and it still won.
Well, like I said, 2007 is when we really did sell our house in So. CA and moved to a LCOL area. The folks who bought our house could have had the situation described. I didn't cherry pick.
And sure, with the mortgage, if they held on they won. No doubt. $110K is worth having...
In this forum people use their life value to bike to work and to mow their lawn and to hang dry clothes and cook their own meals. The value of all of that combined after 10 years barely approaches the 100k in your scenario. And the best part is not paying down your mortgage is free and takes no time other than a couple clicks at vanguard
Sure, as long as you understand what could happen. If you're confident you could hold on in a 2009 type scenario then using uncallable low interest leverage via a mortgage is the way to go. We did it early on. Unfortunately, back then interest rates were higher and stock market returns were poor, and I don't think we did win. Don't need to play the game now, though. So we don't.
I agree that the sample above is way too small, but I love that AdrianC is thinking about this concept.
It's an example from my own life. I understand the concept of uncallable low interest leverage. I simply thought this example might show what could actually have happened. Not just in theory.
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It's a deeply personal decision, but the optionality of the leverage is worth something: if you have a $400,000 mortgage on a $300,000 house, being able to walk away to take that job in another part of the company requires assuming the credit market consequences (going through a short sale, bankruptcy, or drastic credit score reduction).
Some people are able to do this. Some are not. Knowing which type you are probably shifts the needle a little bit about whether you are a payer-offer or a mortgage-to-the-hilter.