Author Topic: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!  (Read 54951 times)

boarder42

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Having a goal of paying down a mortgage doesn't make it mathematically superior.

aspiringnomad

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And the confidence intervals (and true uncertainty) of financial returns estimates (such as the often-quoted historical average return of the S&P 500) are much too wide to say it is not mathematically correct to pay off your mortgage early. 

Not true if you're talking about a long period of time 20+ years, which most people are when referencing real estate and which most Mustachians are when talking about buying and holding equities.


aspiringnomad

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Exactly. Real estate is riskier than a diversified stock portfolio. I track my liquid-to-illiquid equity ratio along with a variety of other net worth stats, and while I'll happily take any gains whatsoever, I always prefer more liquidity (i.e., more market gains than real estate appreciation).

I'm not sure that's really true.

I live in a town that's not a in boom real estate times.   So I'm only expecting regular old real estate appreciation via inflation.

.....

Yeah, riots or earthquakes could trash it. Same could happen to a company, either directly or indirectly hampering its profits in the affected area.   

So how is that risky?

Then you are risking near certain loss of return over time by not receiving any real return on your investment.

And lots of things can happen to any individual company, which is why I said a diversified portfolio of equities (say 2,500 companies) was less risky than owning one home, stuck on one piece of land, subject to all the things that can happen around that land.

doneby35

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I ended up doing the following, I am not sure if it's the right decision or not but I feel comfortable with it.
1. max out all tax advantaged accounts
2. make extra payments towards mortgage AND invest in a taxable account (1000 extra for mortgage and 1000 for taxable account)

boarder42

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I ended up doing the following, I am not sure if it's the right decision or not but I feel comfortable with it.
1. max out all tax advantaged accounts
2. make extra payments towards mortgage AND invest in a taxable account (1000 extra for mortgage and 1000 for taxable account)

It will cost you both time til FIRE and some safety in FIRE but if you're OK with that it's fine. I have 2k+ leftover as well and all goes to taxable.

To be truly safe all your 2k should be going to taxable and then lump some pay off the mortgage when you have enough. The bank doesn't care how much extra you've been paying if you have to start missing payments.

Retire-Canada

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I'm considering both extending the amortization of my mortgage and pulling equity back out once it builds up enough. Any extra funds I get will be invested. As long as rates stay this low it doesn't make a ton of sense to have a huge chunk of my NW tied up in a house. Living in Canada and using variable rate mortgages [currently sub-2%] I don't have the long-term stability your US 30yr mortgages provide, but I do have sufficient financial agility to deal with significant changes to interest rates and my mortgage is very flexible on accelerated repayment should I want to do that.
« Last Edit: January 15, 2017, 11:50:39 AM by Retire-Canada »

bacchi

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I'm considering both extending the amortization of my mortgage and pulling equity back out once it builds up enough. Any extra funds I get will be invested. As long as rates stay this low it doesn't make a ton of sense to have a huge chunk of my NW tied up in a house. Living Canada and using variable rate mortgages [currently sub-2%] I don't have the long-term stability your US 30yr mortgages provide, but I do have sufficient financial agility to deal with significant changes to interest rates and my mortgage is very flexible on accelerated repayment should I want to do that.

Pulling out equity is one of the better financial decisions I've made.

boarder42

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Hoping rates stay low so I can keep doing refinancing and pulling out equity

Retire-Canada

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Hoping rates stay low so I can keep doing refinancing and pulling out equity

I assume rates will rise a bit, but when you look at the impact of a 1% rate hike on Canadian mortgages I can't see them going up 2% - 3% fast. It would be devastating on the market. That said no matter what happens I'll be in a better financial position to deal with it than 80%+ of the other folks with a mortgage in Canada.

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Hoping rates stay low so I can keep doing refinancing and pulling out equity

I assume rates will rise a bit, but when you look at the impact of a 1% rate hike on Canadian mortgages I can't see them going up 2% - 3% fast. It would be devastating on the market. That said no matter what happens I'll be in a better financial position to deal with it than 80%+ of the other folks with a mortgage in Canada.

Historically rate-increases of 2-3% within a single 12 month period have been fairly common.  That's one of the things that deeply concerns me about the Canadian economy right now; after several years of super-low rates people have forgotten how much rates can change in a relatively short period of time, and many households simply aren't prepared to start paying 5%+ mortgage rates.  If it happens, it could really suck.


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Are there reasonable assumptions and more realistic preferences (for most of the population) than maximising portfolio value after 10 or 20 years where an individual is expected to be better off (under those preferences) by paying off the mortgage?  Yes.

You're making a common mistake.  If you are doing an A vs. B scenario of paying off the mortgage early or investing, then the comparison makes sense if and only if the time period includes the entire length of the loan in both scenarios.  If you don't, then the whole exercise is is meaningless because you can't compare the two.

PAstash

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commenting for follow. also going to throw my 0.02 in.

If you owe money to anyone. You are not building your wealth you are paying someone else interest. All for buying a house that fits your needs then aggressively paying it down. It just looks good to say i have no debt and exponentially growing wealth to me then saying i've got growing wealth but i still owe this huge chunk of money on real estate.

With my house paid off if i lose my high paying good job i could go work at a gas station in walking distance to my home and not stress one bit. Flip that.

 I lose my job then i can hope the market is on a upswing to sell enough equities to pay off my house. I could hang onto the mortgage and make payments while withdrawing from my shares slowly hoping the market makes a come back if it's down(which it likely will be). The problem is when it rains it pours. If i lose my job it's reasonable given most people in middle to late stage careers in their life that it reflects the market they are in. Which means stocks will be down i'll be out of a job and i'll be in a huge amount of real estate debt. Finding a job in that market that covers my life style will not be easy or fun. Low stress existence all the way. Asset protection is the key to wealth accumulation not chasing returns.

Cathy

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This is flawed comparison because it leaves out risk.

I agree with you that many participants in the various mortgage loan threads have a poor (or at least incomplete) understanding of risk. Many respondents fail to take stock of risks such as, but by no means limited to,
  • the risk of job loss or other interruption of income;
  • the risk of a major life event that makes it convenient or necessary to move or otherwise have access to significant amounts of liquid cash; and, most significantly,
  • the risk of having to work at a job for longer than necessary before being able to retire.

After analysing all of the relevant risks, many (if not most) prospective or actual early retirees will reach the conclusion that it can be an overwhelmingly risky decision to prepay fixed-rate non-callable government-favoured low-interest tax-deductible long-term possibly-non-recourse debt secured by an instrument on which creators are generally slow to foreclose. Indeed, it's because I'm so risk-averse that I keep favourable debt outstanding.
« Last Edit: January 15, 2017, 06:00:41 PM by Cathy »

Retire-Canada

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If you owe money to anyone. You are not building your wealth you are paying someone else interest.

This ^^^ is not even remotely true. If you want to say you don't "feel" comfortable with debt that's fine. But strategic use of debt is the way most wealth around us has and is being built.

boarder42

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commenting for follow. also going to throw my 0.02 in.

If you owe money to anyone. You are not building your wealth you are paying someone else interest. All for buying a house that fits your needs then aggressively paying it down. It just looks good to say i have no debt and exponentially growing wealth to me then saying i've got growing wealth but i still owe this huge chunk of money on real estate.

With my house paid off if i lose my high paying good job i could go work at a gas station in walking distance to my home and not stress one bit. Flip that.

 I lose my job then i can hope the market is on a upswing to sell enough equities to pay off my house. I could hang onto the mortgage and make payments while withdrawing from my shares slowly hoping the market makes a come back if it's down(which it likely will be). The problem is when it rains it pours. If i lose my job it's reasonable given most people in middle to late stage careers in their life that it reflects the market they are in. Which means stocks will be down i'll be out of a job and i'll be in a huge amount of real estate debt. Finding a job in that market that covers my life style will not be easy or fun. Low stress existence all the way. Asset protection is the key to wealth accumulation not chasing returns.

You're assuming your homenisnpaid off when you get laid off. Say you have 50k left of your aggressive pay down on a 200k mortgage. The guy investing even if selling shares for a loss has much more time to find a job and keep his house while you've now lost everything.  Cathy said it much more eloquently than I did above this. But wealth is built with smartly leveraged debt.

And this doesn't begin to consider whether you're maxing alltax advantaged accounts first.

Low interest debt is good debt. ESP when it fixed

actionjackson

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Hoping rates stay low so I can keep doing refinancing and pulling out equity

I assume rates will rise a bit, but when you look at the impact of a 1% rate hike on Canadian mortgages I can't see them going up 2% - 3% fast. It would be devastating on the market. That said no matter what happens I'll be in a better financial position to deal with it than 80%+ of the other folks with a mortgage in Canada.

Historically rate-increases of 2-3% within a single 12 month period have been fairly common.  That's one of the things that deeply concerns me about the Canadian economy right now; after several years of super-low rates people have forgotten how much rates can change in a relatively short period of time, and many households simply aren't prepared to start paying 5%+ mortgage rates.  If it happens, it could really suck.

Central banks are targeting inflation though, with an eye on the unemployment rate. If household spending is highly elastic to increases in the interest rate, then only a small interest rate increase is required to tame the inflation rate. I read that article and I don't understand why the Canadian central bank would increase interest rates in a scenario with high unemployment and low inflation - they just wouldn't need to do it, they would crank the interest rate right down to stimulate demand. The only reason, I would think, for an interest rate increase would be during a period with relatively low unemployment, with inflation pushing upwards of 3%.

ChpBstrd

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First of all, nobody is choosing between paying off the mortgage or buying 1-year treasuries. They're talking about borrowing at low risk and investing at a higher risk in the stock market - risk arbitrage.

I take the standard deduction, so paying off my 3.65% mortgage would be exactly like buying a 3.65% bond that was tax-free, or maybe a 5% bond taxed (too lazy to math right now).

If I could borrow $1M at 3.65%, I would. All day long I would! I would buy ETFs, earn maybe 7-8% long-term, and keep the difference. The reason nobody will loan me that (unless I put down collateral) is because they would be taking the same risk as the stock market and earning half the return!

nereo

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Hoping rates stay low so I can keep doing refinancing and pulling out equity

I assume rates will rise a bit, but when you look at the impact of a 1% rate hike on Canadian mortgages I can't see them going up 2% - 3% fast. It would be devastating on the market. That said no matter what happens I'll be in a better financial position to deal with it than 80%+ of the other folks with a mortgage in Canada.

Historically rate-increases of 2-3% within a single 12 month period have been fairly common.  That's one of the things that deeply concerns me about the Canadian economy right now; after several years of super-low rates people have forgotten how much rates can change in a relatively short period of time, and many households simply aren't prepared to start paying 5%+ mortgage rates.  If it happens, it could really suck.

Central banks are targeting inflation though, with an eye on the unemployment rate. If household spending is highly elastic to increases in the interest rate, then only a small interest rate increase is required to tame the inflation rate. I read that article and I don't understand why the Canadian central bank would increase interest rates in a scenario with high unemployment and low inflation - they just wouldn't need to do it, they would crank the interest rate right down to stimulate demand. The only reason, I would think, for an interest rate increase would be during a period with relatively low unemployment, with inflation pushing upwards of 3%.

THe central banks (both US and Canada) have been keeping rates low to try to stimulate the economy, and they've been able to do so because inflation has been practically non-existent for the last 6+ years.  BUT if inflation suddenly started to rise they'd ratchet up rates very quickly, particularly since neither country has a particularly high unemployment rate right now. It probably won't happen in the next 3 months, but next year... who knows.

My point is basically that rates sometimes shoot up,  and tens of thousands of Canadian households are in a particularly poor position to handle rate increases right now. If it happens, it could be very ugly.

boarder42

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Hoping rates stay low so I can keep doing refinancing and pulling out equity

I assume rates will rise a bit, but when you look at the impact of a 1% rate hike on Canadian mortgages I can't see them going up 2% - 3% fast. It would be devastating on the market. That said no matter what happens I'll be in a better financial position to deal with it than 80%+ of the other folks with a mortgage in Canada.

Historically rate-increases of 2-3% within a single 12 month period have been fairly common.  That's one of the things that deeply concerns me about the Canadian economy right now; after several years of super-low rates people have forgotten how much rates can change in a relatively short period of time, and many households simply aren't prepared to start paying 5%+ mortgage rates.  If it happens, it could really suck.

Central banks are targeting inflation though, with an eye on the unemployment rate. If household spending is highly elastic to increases in the interest rate, then only a small interest rate increase is required to tame the inflation rate. I read that article and I don't understand why the Canadian central bank would increase interest rates in a scenario with high unemployment and low inflation - they just wouldn't need to do it, they would crank the interest rate right down to stimulate demand. The only reason, I would think, for an interest rate increase would be during a period with relatively low unemployment, with inflation pushing upwards of 3%.

THe central banks (both US and Canada) have been keeping rates low to try to stimulate the economy, and they've been able to do so because inflation has been practically non-existent for the last 6+ years.  BUT if inflation suddenly started to rise they'd ratchet up rates very quickly, particularly since neither country has a particularly high unemployment rate right now. It probably won't happen in the next 3 months, but next year... who knows.

My point is basically that rates sometimes shoot up,  and tens of thousands of Canadian households are in a particularly poor position to handle rate increases right now. If it happens, it could be very ugly.

yeah thats a US 2008 style crash.  esp. with how fast your markets are appreciating currently.

actionjackson

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Hoping rates stay low so I can keep doing refinancing and pulling out equity

I assume rates will rise a bit, but when you look at the impact of a 1% rate hike on Canadian mortgages I can't see them going up 2% - 3% fast. It would be devastating on the market. That said no matter what happens I'll be in a better financial position to deal with it than 80%+ of the other folks with a mortgage in Canada.

Historically rate-increases of 2-3% within a single 12 month period have been fairly common.  That's one of the things that deeply concerns me about the Canadian economy right now; after several years of super-low rates people have forgotten how much rates can change in a relatively short period of time, and many households simply aren't prepared to start paying 5%+ mortgage rates.  If it happens, it could really suck.

Central banks are targeting inflation though, with an eye on the unemployment rate. If household spending is highly elastic to increases in the interest rate, then only a small interest rate increase is required to tame the inflation rate. I read that article and I don't understand why the Canadian central bank would increase interest rates in a scenario with high unemployment and low inflation - they just wouldn't need to do it, they would crank the interest rate right down to stimulate demand. The only reason, I would think, for an interest rate increase would be during a period with relatively low unemployment, with inflation pushing upwards of 3%.

THe central banks (both US and Canada) have been keeping rates low to try to stimulate the economy, and they've been able to do so because inflation has been practically non-existent for the last 6+ years.  BUT if inflation suddenly started to rise they'd ratchet up rates very quickly, particularly since neither country has a particularly high unemployment rate right now. It probably won't happen in the next 3 months, but next year... who knows.

My point is basically that rates sometimes shoot up,  and tens of thousands of Canadian households are in a particularly poor position to handle rate increases right now. If it happens, it could be very ugly.

Inflation just doesn't go up without a cause. You're talking about stagflation - high inflation, coupled with high unemployment. That was last caused by the oil crisis in the 70's. Oil prices are not going to cause it anymore, given horizontal drilling and fracturing tech will keep a lid on prices for the foreseeable future, so it would have to come from somewhere else.

Then again, something weird could happen and we could re-write the economics textbooks, again.

boarder42

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not to mention electric cars coming of age and starting to decrease the dependence on oil

SuperMex

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Inflation happens as a consequence of our fiat system printing more money. The U.S. has created almost 15 trillion dollar in debt in the last 8 years. Therefore inflation is a given at some point I am actually shocked it hasn't happened yet. When it does happen the federal reserve will have to raise interest rates and tighten the money supply to try and slow it down. When this happens all of those individuals living on the edge and in debt are in serious trouble. Of course those appreciating assets will ride this out comfortably. 

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Inflation just doesn't go up without a cause. You're talking about stagflation - high inflation, coupled with high unemployment.
No, I'm not talking about stagflation.  Unemployment isn't currently very high in either Canada (6.9%) or the US (4.7%).
Inflation can be caused by things other than oil prices, like (over)printing money.

ChpBstrd

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Inflation happens as a consequence of our fiat system printing more money. The U.S. has created almost 15 trillion dollar in debt in the last 8 years. Therefore inflation is a given at some point I am actually shocked it hasn't happened yet. When it does happen the federal reserve will have to raise interest rates and tighten the money supply to try and slow it down. When this happens all of those individuals living on the edge and in debt are in serious trouble. Of course those appreciating assets will ride this out comfortably.

This classical theory of inflation - that current units are diluted by creation of new units as if they were shares in a company - is not supported by the data. The US, for example, greatly increased the supply of dollars in the past several years and this has been accompanied not by hyperinflation as the theory would predict, but by historically low inflation. More modern understandings of inflation consider monetary velocity to be the key factor, not the absolute number of units in circulation. Modern theory better fits the data, although it is more complicated.

A false understanding of the causes of inflation drove many investors into the wrong investments over the past few years (e.g. TIPS, metals). Thus, it is important to ensure one's economic theory is as correct (fits data, makes correct predictions) as possible. It is also important to be willing to drop underperforming theories. Your retirement might depend on it.

PAstash

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If you owe money to anyone. You are not building your wealth you are paying someone else interest.

This ^^^ is not even remotely true. If you want to say you don't "feel" comfortable with debt that's fine. But strategic use of debt is the way most wealth around us has and is being built.

I never said FEEL.

It is plain and mathematical. If I have 100k earning me 1% I am earning money. If I have 50K earning 1% and 50k mortgage that I am paying 1% I am not making any money. to say nothing of the risk associated with debt. Being lean and liquid allows me to capitalize on good investment opportunities when they show up. If that money is tied up in a mortgage I don't have that option. Having the debt is costing you money not earning you money.

PAstash

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commenting for follow. also going to throw my 0.02 in.

If you owe money to anyone. You are not building your wealth you are paying someone else interest. All for buying a house that fits your needs then aggressively paying it down. It just looks good to say i have no debt and exponentially growing wealth to me then saying i've got growing wealth but i still owe this huge chunk of money on real estate.

With my house paid off if i lose my high paying good job i could go work at a gas station in walking distance to my home and not stress one bit. Flip that.

 I lose my job then i can hope the market is on a upswing to sell enough equities to pay off my house. I could hang onto the mortgage and make payments while withdrawing from my shares slowly hoping the market makes a come back if it's down(which it likely will be). The problem is when it rains it pours. If i lose my job it's reasonable given most people in middle to late stage careers in their life that it reflects the market they are in. Which means stocks will be down i'll be out of a job and i'll be in a huge amount of real estate debt. Finding a job in that market that covers my life style will not be easy or fun. Low stress existence all the way. Asset protection is the key to wealth accumulation not chasing returns.

You're assuming your homenisnpaid off when you get laid off. Say you have 50k left of your aggressive pay down on a 200k mortgage. The guy investing even if selling shares for a loss has much more time to find a job and keep his house while you've now lost everything.  Cathy said it much more eloquently than I did above this. But wealth is built with smartly leveraged debt.

And this doesn't begin to consider whether you're maxing alltax advantaged accounts first.

Low interest debt is good debt. ESP when it fixed

Yes the home being paid off is part of the assumption. Because you are using part of the assumption of having higher savings. Even tho in a market where you are getting laid off it's very reasonable to assume you would be selling shares at a serious loss.

The first problem is with a 200k mortgage(you say nothing about income so that could change my following tangent). If you can't afford that home you shouldn't be purchasing it. I know that's hard to say but MMM and many others tell people on this forum the right way to spend money very frequently. So I am going to tell it to you like this. If you purchase a properly sized house for the right price with the right down payment your scenario falls apart at the beginning.

The idea of the market is to accumulate wealth. Not to sell back stock at a loss to hold a illiquid poorly appreciating asset like real estate! The best holding period is forever. You have a emergency fund. If your E-fund is not big enough to carry you thought job loss and it exceeds 6 months savings ... I am sorry but you over reached and have purchased too much house.

doing that which needs not done efficiently is twice as bad.

PizzaSteve

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Cant we let this thread die?  These arguements are so assumption driven.  A good savings rate is what will drive most personal wealth creation, not whether one chooses to save as a stock investment or home equity.  Stop splitting hairs and spend less/invest more.  If someone chooses an asset class slightly less efficient because they are risk adverse, who cares.

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Cant we let this thread die?  These arguements are so assumption driven.  A good savings rate is what will drive most personal wealth creation, not whether one chooses to save as a stock investment or home equity.  Stop splitting hairs and spend less/invest more.  If someone chooses an asset class slightly less efficient because they are risk adverse, who cares.

Can we at least just all agree "it's not mathematically correct to pay off your mortgage"?

;-)

boarder42

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Cant we let this thread die?  These arguements are so assumption driven.  A good savings rate is what will drive most personal wealth creation, not whether one chooses to save as a stock investment or home equity.  Stop splitting hairs and spend less/invest more.  If someone chooses an asset class slightly less efficient because they are risk adverse, who cares.

Can we at least just all agree "it's not mathematically correct to pay off your mortgage"?

;-)

and riskier to pay it down.

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It is not mathematically correct to pay off your mortgage early.* ** *** **** *****

*In today's interest rate environment.
**Assuming it's a fixed, low interest rate mortgage.
***Assuming you will invest the money you would use to pay it down early into something that returns more than the mortgage rate.
****Assuming you won't sell said investment low, or anything like that
*****etc. etc. etc.

If the title of the thread was "Stop saying 'It is not correct to pay off your mortgage early.' " I'd agree.  Sometimes it IS correct to pay off the mortgage early.

But it's very, very rarely mathematically correct to do so, in the current environment.
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Really it's the same argument over rent vs buy, often renting makes more sense but buying has a an emotional element. For my and I our mortgage is gone in 8 years and we really don't need to pay it off but there is something about saying only (after next week) 3 more lump sum payments plus 4 months and this baby is gone. It's exciting especially after years of financial struggles!!!!!

boarder42

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Really it's the same argument over rent vs buy, often renting makes more sense but buying has a an emotional element. For my and I our mortgage is gone in 8 years and we really don't need to pay it off but there is something about saying only (after next week) 3 more lump sum payments plus 4 months and this baby is gone. It's exciting especially after years of financial struggles!!!!!

You're also in germany so the pay off the mortgage debate likely doesnt apply to you as you dont have the rate and long term fixed mortgages the USA has.

Retire-Canada

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You're also in germany so the pay off the mortgage debate likely doesnt apply to you as you dont have the rate and long term fixed mortgages the USA has.

Some of factors are different, but the same question is important. In Canada we have 5yr mortgages that get renewed 5 times during a 30yr amortization. At each point you can choose to pay off the mortgage if you have saved enough, take equity out, renew the same amortization or speed up/slow down repayment. The choice isn't as cut and dried as in the US, but deciding whether your money is best tied up in your house or used to invest is still something to consider.

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We paid off a mortgage of 244k in 6 years and 8 months.  During that time the value of our house has gone up 106k.  Of course I would have to sell it to get that return.  I am a huge fan of no debt.  No one can come take my house. 

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We paid off a mortgage of 244k in 6 years and 8 months.  During that time the value of our house has gone up 106k.  Of course I would have to sell it to get that return.  I am a huge fan of no debt. No one can come take my house.

Uhhh the government can and has.  Not likely, but it happens.  And it still doesn't change the fact that its not mathematically correct, it's just that your debt averse.

Retire-Canada

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We paid off a mortgage of 244k in 6 years and 8 months.  During that time the value of our house has gone up 106k.  Of course I would have to sell it to get that return.  I am a huge fan of no debt.  No one can come take my house.

Your house would have gone up $106K if you had a mortgage as well and stop paying your property taxes and they will take your house.

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We paid off a mortgage of 244k in 6 years and 8 months.  During that time the value of our house has gone up 106k.  Of course I would have to sell it to get that return.  I am a huge fan of no debt.  No one can come take my house.

Your house would have gone up $106K if you had a mortgage as well ...
^ this.  In your particular case you had a leveraged 'investment' that increased by ~ 43% in 6.6 years for an annual 'return' of 6.4%
That's not bad, but hardly good either (in fact its below the market average).  You did not state which time period this was, but if it was in the last 9 years the market thoroughly thumped the return on your home.
Had you left the home leveraged by not paying it off your 'returns' would have been much greater, since you would have spent less money to reap the same reward. Inflation, while low lately, would have only benefited you.

Of course as you said realizing this gain would require selling the home.

jessicat

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I am debt averse.  Without debt we can live on a lot less.  Especially if something bad happened.  When you are a family of 8 that makes a huge difference.  It was also part of an agreement I made with dh.  He can now take all of them money we were putting into paying off our house and invest all of it.  My need for security has been met.  My life long dream has been met.  we lived in arizona in 2008 and sold our house there in 2009.  Our house value there dropped 150k in less than a year.  We were one of the lucky ones that still sold for more than we paid for.  But we know a lot of people who ended up massively upside down.  I don't think you all have taken that into account.  Sometimes you can get screwed in real estate too.  And that  is why paying off my house was so important to me. 

nereo

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I am debt averse.  Without debt we can live on a lot less.  Especially if something bad happened.  When you are a family of 8 that makes a huge difference.  It was also part of an agreement I made with dh.  He can now take all of them money we were putting into paying off our house and invest all of it.  My need for security has been met.  My life long dream has been met.  we lived in arizona in 2008 and sold our house there in 2009.  Our house value there dropped 150k in less than a year.  We were one of the lucky ones that still sold for more than we paid for.  But we know a lot of people who ended up massively upside down.  I don't think you all have taken that into account.  Sometimes you can get screwed in real estate too.  And that  is why paying off my house was so important to me.
I have no problem with you choosing to pay off your home because you are debt adverse.  As many have said throughout this thread, there are multiple factors to weigh and each person will give these factors different weight.

I was merely pointing out that your example about how the price of your home rising (and at that rate) actually favors not paying it off.

Retire-Canada

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I am debt averse.  Without debt we can live on a lot less.  Especially if something bad happened.

Not trying to hammer on you, but having money invested and mortgage gives you more options to deal with a serious problem than a paid off house and small or no investments. I get that feels better to you being debt free, but that's not the same as it being better and it's a very expensive feeling to make happen.

PAstash

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Cant we let this thread die?  These arguements are so assumption driven.  A good savings rate is what will drive most personal wealth creation, not whether one chooses to save as a stock investment or home equity.  Stop splitting hairs and spend less/invest more.  If someone chooses an asset class slightly less efficient because they are risk adverse, who cares.

Can we at least just all agree "it's not mathematically correct to pay off your mortgage"?

;-)

and riskier to pay it down.

Tap into your crystal ball and tell me what the powerball number will be tonight then. I mean since you know about how risky the market will be in the next few years.

Retire-Canada

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Tap into your crystal ball and tell me what the powerball number will be tonight then. I mean since you know about how risky the market will be in the next few years.

Risk is an assessment of the probability and impact of future events. Once you know the actual outcomes it's no longer a risk.

boarder42

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Cant we let this thread die?  These arguements are so assumption driven.  A good savings rate is what will drive most personal wealth creation, not whether one chooses to save as a stock investment or home equity.  Stop splitting hairs and spend less/invest more.  If someone chooses an asset class slightly less efficient because they are risk adverse, who cares.

Can we at least just all agree "it's not mathematically correct to pay off your mortgage"?

;-)

and riskier to pay it down.

Tap into your crystal ball and tell me what the powerball number will be tonight then. I mean since you know about how risky the market will be in the next few years.

its not a crystal ball its not how risky it will be the next few years.  its how risky the market is over 30 years.  and its proven to not be risky historically.  if you dont believe this than you can never retire using the 4% rule

meanwhile tap your crystal ball and confirm for me you wont be laid off in the middle of paying down your mortgage and lose your house b/c the bank doesnt care that you've been paying extra. 

arebelspy

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Tap into your crystal ball and tell me what the powerball number will be tonight then. I mean since you know about how risky the market will be in the next few years.

Risk is an assessment of the probability and impact of future events. Once you know the actual outcomes it's no longer a risk.

Well said.

Also, PAstach, you seem to be confusing volatility with risk.

Over 30 years, the length of the mortgage, I think the probability of seeing market returns of 0% real (i.e. about the same as inflation, which is where mortgage rates are) year after year after year for 30 years is approximately zero itself.

Thinking of all those companies out there churning out products, selling services, information, etc... and we're going to have flat returns for three decades in a row?  I'm super skeptical of that.
« Last Edit: January 25, 2017, 02:03:49 PM by arebelspy »
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Mr Mark

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It is a common refrain on this forum from some posters that 'there could be a 50% crash in the stock market!', 'bonds have peaked!' or 'hyperinflation is coming!'. In general, volatility and uncertainty is commonly equated to 'risk'.

With the implication that the best strategy is to stay in cash or gold (of course, if you really think hyperinflation/fiat currency collapse is coming, getting a HUUUUGE 30yr non-callable fixed rate mortgage and investing the proceeds would actually be a great strategy IMHO, but I digress).

I think we agree with the OP that IF* your choice for a marginal 'stach dollar is limited between either paying off a bit of a 4% mortgage vs buying short dated US treasuries yielding 0.25%, the mortgage is probably the better option. Sure. [tho' even this most basic thought experiment implies a whole heap of 'all things being equal/liquidity/location/cashflow/no other debt' type assumptions, hence the 4 pages of follow up discussion].

The assumptions create the 'answer' that 0.25% < 4%. The issue is actually with the implicit conclusion that therefore, the OP's decision to pay off their mortgage is the best & lowest risk decision from an investment strategy point of view, and anyone who does not agree with that action is incapable of understanding basic mathematics...

That in the past few years, many posters have espoused a 'strategy' of holding a large % of cash over a diversified AA tax-optimised investment portfolio and have been proven incorrect in terms of subsequent total returns doesn't seem to make a blind bit of difference.

I guess fear and loss aversion are more difficult to overcome than I thought, perhaps especially when you have only a really small 'stach that you've had to struggle to assemble and you're simply super afraid of loosing it?





arebelspy

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That in the past few years, many posters have espoused a 'strategy' of holding a large % of cash over a diversified AA tax-optimised investment portfolio

What long time posters advocate for this as a strategy?

The people holding hundreds of thousands in cash seem to be new posters asking how they get over the hump of investing when the market is at an all time high, and we all shout at them to do it.  For years now.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Mr Mark

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That in the past few years, many posters have espoused a 'strategy' of holding a large % of cash over a diversified AA tax-optimised investment portfolio

What long time posters advocate for this as a strategy?

The people holding hundreds of thousands in cash seem to be new posters asking how they get over the hump of investing when the market is at an all time high, and we all shout at them to do it.  For years now.

Exactly. I believe i didn't say long term posters. :-)

PAstash

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Tap into your crystal ball and tell me what the powerball number will be tonight then. I mean since you know about how risky the market will be in the next few years.

Risk is an assessment of the probability and impact of future events. Once you know the actual outcomes it's no longer a risk.
forgive my ignorance. It would appear to me you are claiming to know future events. Could you please explain how I am misinterpting this?

PAstash

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Cant we let this thread die?  These arguements are so assumption driven.  A good savings rate is what will drive most personal wealth creation, not whether one chooses to save as a stock investment or home equity.  Stop splitting hairs and spend less/invest more.  If someone chooses an asset class slightly less efficient because they are risk adverse, who cares.

Can we at least just all agree "it's not mathematically correct to pay off your mortgage"?

;-)

and riskier to pay it down.

Tap into your crystal ball and tell me what the powerball number will be tonight then. I mean since you know about how risky the market will be in the next few years.

its not a crystal ball its not how risky it will be the next few years.  its how risky the market is over 30 years.  and its proven to not be risky historically.  if you dont believe this than you can never retire using the 4% rule

meanwhile tap your crystal ball and confirm for me you wont be laid off in the middle of paying down your mortgage and lose your house b/c the bank doesnt care that you've been paying extra.

"its how risky the market is over 30 years" " and its proven to not be risky historically." past performance does not =  blah blah blah.... that's all I am saying. Personal risk of having zero debt means more to me. It's like getting crushed all at once in a game of poker vs just getting half your stack taken. If you have been paying down on your mortage when you get canned.... Your mortgage payment will be less. You will still have your emergency fund and being mustashian at least something in the market. I feel it's a safer play capital preservation and preserving your ability to continue to earn capital supersedes a slightly juiced return over time.

If your a true believer in your position you should never buy real estate and only rent.

PAstash

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Tap into your crystal ball and tell me what the powerball number will be tonight then. I mean since you know about how risky the market will be in the next few years.

Risk is an assessment of the probability and impact of future events. Once you know the actual outcomes it's no longer a risk.

Well said.

Also, PAstach, you seem to be confusing volatility with risk.

Over 30 years, the length of the mortgage, I think the probability of seeing market returns of 0% real (i.e. about the same as inflation, which is where mortgage rates are) year after year after year for 30 years is approximately zero itself.

Thinking of all those companies out there churning out products, selling services, information, etc... and we're going to have flat returns for three decades in a row?  I'm super skeptical of that.

I more or less agree with you. However in the game of wealth building over the course of your entire life not just this market cycle i disagree. Wealth preservation is key. Perhaps i don't fully understand your position would you care to go into greater detail risk vs volatility? Perhaps you could sway me. I feel like any persons greatest asset is their ability to earn more money via labor over anyone's life time especially those of us blue collar white collar workers. So having a solid home in a area where they could easily find another job(even if it's not as high paid) paid off seems like a wonderful position of strength to be in.