Pay off mortgage principal or invest in the market?

[boarder42]

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.

[talltexan]

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.

[AdrianC]

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).

[boarder42]

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

[Dicey]

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.

[ender]

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.

[Dicey]

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.

[boarder42]

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.

[AdrianC]

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.

[talltexan]

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.