Author Topic: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!  (Read 54747 times)

arebelspy

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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.

Initially, when starting out with nothing, sure.

When you accumulate a stache that can earn more than you can?  No.

For an extreme example: Would you say Bill Gates' greatest asset is his ability to earn money through labor?

Once you get to that point, the "solid home in an area where they can easily find another job" is much less important.
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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.

"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.

Incorrect last statement. Buying vs renting is a math game.

Also incorrect that if you've been paying down your mortgage your payment is lower it's not your payment is the same.

There is an entire 20something page thread devoted to why paying down your mortgage is suboptimal and in most cases riskier than investing. If you want to be swayed put aside your current false pretenses and go read all of that then come back here and explain what your conclusion is.

tyort1

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For me, there's a tipping point - if I'm close to paying off the mortgage, I would accelerate it to remove a monthly cost.  If I was far away from paying off my mortgage, I would dump as much as possible into my 80/20 stock/bond split. 

Retire-Canada

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For me, there's a tipping point - if I'm close to paying off the mortgage, I would accelerate it to remove a monthly cost.  If I was far away from paying off my mortgage, I would dump as much as possible into my 80/20 stock/bond split.

If interests rates were this low when I was getting close to having a paid off house I'd get a new mortgage and pull out a big chunk of the equity to invest it. So that's a third option.

boarder42

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For me, there's a tipping point - if I'm close to paying off the mortgage, I would accelerate it to remove a monthly cost.  If I was far away from paying off my mortgage, I would dump as much as possible into my 80/20 stock/bond split.

If interests rates were this low when I was getting close to having a paid off house I'd get a new mortgage and pull out a big chunk of the equity to invest it. So that's a third option.

yep i'd do the same.

PAstash

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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.

Initially, when starting out with nothing, sure.

When you accumulate a stache that can earn more than you can?  No.

For an extreme example: Would you say Bill Gates' greatest asset is his ability to earn money through labor?

Once you get to that point, the "solid home in an area where they can easily find another job" is much less important.

So what networth level do you draw that line? in your opinion.

boarder42

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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.

Initially, when starting out with nothing, sure.

When you accumulate a stache that can earn more than you can?  No.

For an extreme example: Would you say Bill Gates' greatest asset is his ability to earn money through labor?

Once you get to that point, the "solid home in an area where they can easily find another job" is much less important.

So what networth level do you draw that line? in your opinion.

also having a home in case of losing a job so you can find another job is a hinderance to finding another job.  you've just attached yourself to an very fixed position thats much harder to liquidate than investments. 

if you really want to know why its bad mathmatically go read the thread i mentioned with an open mind and come back and explain why your new way of thinking changed.

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.

Incorrect last statement. Buying vs renting is a math game.

Also incorrect that if you've been paying down your mortgage your payment is lower it's not your payment is the same.

There is an entire 20something page thread devoted to why paying down your mortgage is suboptimal and in most cases riskier than investing. If you want to be swayed put aside your current false pretenses and go read all of that then come back here and explain what your conclusion is.

i have. many other articles many other books. Tons of blog posts. Countless audiobooks pod casts and subjective personal experience backs how i feel. Math is not always reflective of real life. it's a good measurement tool not great when you lose your house your job cause of correlative sectors. Getting rich slowly is the key. I'll stand on that.

NESailor

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Fascinating thread...again...lol. 

not to derail the discussion but I'd like to derail the discussion to my specific case.  I only owe another 90K on our mortgage.  We invest approximately 60-70K a year into index funds.   Sometimes I'm tempted to say...to hell with it, and pay the balance in 1.5 years...but have not done so precisely for the reasons mentioned up and down this thread and countless others before.  Can anyone lay out a logical reason to actually pay it off asap? For what it's worth, our house is worth around 180 to 200K as it is and the note only has another 10 years or so left.

Cheers!

PAstash

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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.

Initially, when starting out with nothing, sure.

When you accumulate a stache that can earn more than you can?  No.

For an extreme example: Would you say Bill Gates' greatest asset is his ability to earn money through labor?

Once you get to that point, the "solid home in an area where they can easily find another job" is much less important.

So what networth level do you draw that line? in your opinion.

also having a home in case of losing a job so you can find another job is a hinderance to finding another job.  you've just attached yourself to an very fixed position thats much harder to liquidate than investments. 

if you really want to know why its bad mathmatically go read the thread i mentioned with an open mind and come back and explain why your new way of thinking changed.

You can remove liquidity pretty easy. about 80-90% without much of a problem at all and still have the asset to live in or rent. Heloc easily. Take another mortage out on it. Hard money lend. there are countless options for using real estate as a way to leverage. Say you have a stock portfolio. Market crashes. that's okay right cause you will just hang on. That's all well and good but now your NW is eviscerated until market recovers. There have been far fewer housing market crashes then stock market crashes in history. It is a more stable asset for building wealth. So long as you buy properly. 

Retire-Canada

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Fascinating thread...again...lol. 

not to derail the discussion but I'd like to derail the discussion to my specific case.  I only owe another 90K on our mortgage.  We invest approximately 60-70K a year into index funds.   Sometimes I'm tempted to say...to hell with it, and pay the balance in 1.5 years...but have not done so precisely for the reasons mentioned up and down this thread and countless others before.  Can anyone lay out a logical reason to actually pay it off asap? For what it's worth, our house is worth around 180 to 200K as it is and the note only has another 10 years or so left.

Cheers!

What is the size of your investment portfolio? How secure is your income?

Telecaster

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i have. many other articles many other books. Tons of blog posts. Countless audiobooks pod casts and subjective personal experience backs how i feel.

I wish people would just start off saying it is about feelings rather than trying to construct a financial argument. 

PAstash

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Fascinating thread...again...lol. 

not to derail the discussion but I'd like to derail the discussion to my specific case.  I only owe another 90K on our mortgage.  We invest approximately 60-70K a year into index funds.   Sometimes I'm tempted to say...to hell with it, and pay the balance in 1.5 years...but have not done so precisely for the reasons mentioned up and down this thread and countless others before.  Can anyone lay out a logical reason to actually pay it off asap? For what it's worth, our house is worth around 180 to 200K as it is and the note only has another 10 years or so left.

Cheers!

I'd say do it. Here is why.

Yes you COULD lose some gains. The market is however at a all time high. I am not suggesting you change your asset allocation. You will still capture gains in the market from your current position + dividends. At the same time you will in 1.5 years significantly remove your risk position from real estate. Your debt v equity position looks significantly better to any lender. If you are really feeling ballsy say the market crashes and your house pays off you can always take a lean against it to invest in the market.

If you had nothing in the market i wouldn't advise this. However once you have a significant position in the market already well diversified. Why wouldn't you get rid of a huge risk position if it was easily accomplished.

I am 6 months from having my montage paid off on my fully renovated house. prior to this for five years i maxed tax differed accounts and got a bit of money into my taxable accounts. I also started a rental property. The further you diversify your assets the safer you will be. The easier it is to weather the storm when it inevitably comes.

I won't take anything away from the full equity investment people. It's a strategy every strategy comes with different levels of risk. I'd happily sacrifice some % of returns to avoid the bankruptcy button. Need some motivation go look at some images of people in poverty or take a spin though the ghetto. I love the endless positiveness of MMM and his cohorts on here. I've been a reader since the first year of the blog. If i need a pick me up this is where i come. Reality sometimes doesn't care.

PAstash

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i have. many other articles many other books. Tons of blog posts. Countless audiobooks pod casts and subjective personal experience backs how i feel.

I wish people would just start off saying it is about feelings rather than trying to construct a financial argument.

You are misreading the useage of the word feel here. Feel meaning based on my judgement this is what i think is the correct way to build wealth. Nice cherry pick.

PAstash

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Fascinating thread...again...lol. 

not to derail the discussion but I'd like to derail the discussion to my specific case.  I only owe another 90K on our mortgage.  We invest approximately 60-70K a year into index funds.   Sometimes I'm tempted to say...to hell with it, and pay the balance in 1.5 years...but have not done so precisely for the reasons mentioned up and down this thread and countless others before.  Can anyone lay out a logical reason to actually pay it off asap? For what it's worth, our house is worth around 180 to 200K as it is and the note only has another 10 years or so left.

Cheers!

What is the size of your investment portfolio? How secure is your income?

You know you didn't even bother to ask me any of these questions when i expressed my opinion Canada. I just don't see how you could switch your position at this point in the thread regardless of what he/she says. You have taken the position so far that he should always be investing no matter what. He/she already said that they have been investing 70kish a year so that gives you a good idea of NW.

Telecaster

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Fascinating thread...again...lol. 

not to derail the discussion but I'd like to derail the discussion to my specific case.  I only owe another 90K on our mortgage.  We invest approximately 60-70K a year into index funds.   Sometimes I'm tempted to say...to hell with it, and pay the balance in 1.5 years...but have not done so precisely for the reasons mentioned up and down this thread and countless others before.  Can anyone lay out a logical reason to actually pay it off asap? For what it's worth, our house is worth around 180 to 200K as it is and the note only has another 10 years or so left.

Cheers!

I'm not in favor, but since you asked  :)   Most people say "I get a guaranteed 4% a year by paying of my mortgage!"  That's really not correct.  But what you do get is future imputed income (or future savings if you want to look at it that way)  from living in a house with no mortgage.  Back of the envelope says your mortgage is $1,000/month.  So you plunk down $90K and get on the order of $120K worth of savings over the next ten years.    And presumably, you can get the $90K back when you sell the house.   

I don't think it is optimal, but it isn't crazy.   


Retire-Canada

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You know you didn't even bother to ask me any of these questions when i expressed my opinion Canada. I just don't see how you could switch your position at this point in the thread regardless of what he/she says. You have taken the position so far that he should always be investing no matter what. He/she already said that they have been investing 70kish a year so that gives you a good idea of NW.

No it doesn't. If this is year #2 of high savings vs. year #10 his NW would be quite different. The issue around income stability matters as well.

When you read this thread the prime concerns with people paying down their mortgage faster is that until it's paid off you are at more risk than saving/investing the extra money. At least with a paid off house that part of the equation is removed and you are just left with poor financial optimization.

So if the poster is able to pay off their house and has stable income and high NW that's not crazy talk it's just not optimized. I wouldn't recommend it or do it myself, but I "get" that some folks feel better without a mortgage. I think then our job on this forum is just to make sure they understand the true costs of that decision.

OTOH if the poster has low NW and poor income stability paying down the mortgage is crazy talk and they need to be aware of the increased risks. So at least we can suggest they accumulate the full mortgage balance in investments and then pay off the mortgage in one shot. That takes the risks around losing their incomes and then losing an almost paid off house away.

None of that changes my personal view that paying down your mortgage faster is a sub-optimal decision in the current low interest rate environment.
« Last Edit: January 31, 2017, 11:41:53 AM by Retire-Canada »

Mr Mark

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The maths is pretty clear when in accumulation mode. We're all implicitly assuming long term total nominal pretax returns of about 9% in the markets. It's what underpins FIRE for most.

Mortgages of 4% nominal pretax are less. Plus inflation is low and higher inflation erodes the debt while boosting market returns.

There's a reason no other country in the world provides 30 year low rate noncallable loans on property.  In the USA we can leverage our status as the world's reserve currency and safe haven aided by huge government guaranteed intervention in the market by the Fed and pseudo gov Freddie and Frannie .

Borrowing money at low fixed rates to gain higher returns in the market is optimised. Yes as long as you do save and invest the money and keep cash flow and leverage sensible.

Later post FIRE the calculations can be very different. Paid house by definition is then untaxed income and an effective bond investment substitute. 

Mr Mark

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You know you didn't even bother to ask me any of these questions when i expressed my opinion Canada. I just don't see how you could switch your position at this point in the thread regardless of what he/she says. You have taken the position so far that he should always be investing no matter what. He/she already said that they have been investing 70kish a year so that gives you a good idea of NW.

No it doesn't. If this is year #2 of high savings vs. year #10 his NW would be quite different. The issue around income stability matters as well.

When you read this thread the prime concerns with people paying down their mortgage faster is that until it's paid off you are at more risk than saving/investing the extra money. At least with a paid off house that part of the equation is removed and you are just left with poor financial optimization.

So if the poster is able to pay off their house and has stable income and high NW that's not crazy talk it's just not optimized. I wouldn't recommend it or do it myself, but I "get" that some folks feel better without a mortgage. I think then our job on this forum is just to make sure they understand the true costs of that decision.

OTOH if the poster has low NW and poor income stability paying down the mortgage is crazy talk and they need to be aware of the increased risks. So at least we can suggest they accumulate the full mortgage balance in investments and then pay off the mortgage in one shot. That takes the risks around losing their incomes and then losing an almost paid off house away.

None of that changes my personal view that paying down your mortgage faster is a sub-optimal decision in the current low interest rate environment.

Yep. It's when I see this as an extension of the "the market could always crash so I'm losing my risk with this strategy" that it annoys me. It's just incorrect.  And it scares the very people who should be investing in usually tax advantaged accounts with low NW into hurting their time to FIRE by either  sitting on cash or the next worse thing - over paying a mortgage.

tyort1

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You can remove liquidity pretty easy. about 80-90% without much of a problem at all and still have the asset to live in or rent. Heloc easily. Take another mortage out on it. Hard money lend. there are countless options for using real estate as a way to leverage. Say you have a stock portfolio. Market crashes. that's okay right cause you will just hang on. That's all well and good but now your NW is eviscerated until market recovers. There have been far fewer housing market crashes then stock market crashes in history. It is a more stable asset for building wealth. So long as you buy properly.

Stock Market crash plus job loss - isn't that why we do 80% stocks and 20% bonds around here?  If stocks are down and you need cash, raid the bonds.  When stocks recover, replenish your bonds.  That's what I'd do....

Retire-Canada

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You can remove liquidity pretty easy. about 80-90% without much of a problem at all and still have the asset to live in or rent. Heloc easily. Take another mortage out on it. Hard money lend. there are countless options for using real estate as a way to leverage. Say you have a stock portfolio. Market crashes. that's okay right cause you will just hang on. That's all well and good but now your NW is eviscerated until market recovers. There have been far fewer housing market crashes then stock market crashes in history. It is a more stable asset for building wealth. So long as you buy properly.

Stock Market crash plus job loss - isn't that why we do 80% stocks and 20% bonds around here?  If stocks are down and you need cash, raid the bonds.  When stocks recover, replenish your bonds.  That's what I'd do....

If you have a decent portfolio - say $600K and you lose your job on the day the market crashes 40% you are fine - even with a 100% stock asset allocation. You can ride things out get a new job and pay your mortgage without any risk.

If you are paying off your mortgage fast and lose your job with $60K left on a $300K home and no investments because you are "hammering" your mortgage then you are screwed. You lose your home and can't pay your bills for anything else either.

tyort1

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Oh, I agree with you - I was just pointing out that stocks are even less risky if you do an 80/20 or 70/30 split.  You can use bonds as cash in the short term and not touch stocks at all, even with job loss.


boarder42

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You can remove liquidity pretty easy. about 80-90% without much of a problem at all and still have the asset to live in or rent. Heloc easily. Take another mortage out on it. Hard money lend. there are countless options for using real estate as a way to leverage. Say you have a stock portfolio. Market crashes. that's okay right cause you will just hang on. That's all well and good but now your NW is eviscerated until market recovers. There have been far fewer housing market crashes then stock market crashes in history. It is a more stable asset for building wealth. So long as you buy properly.

Stock Market crash plus job loss - isn't that why we do 80% stocks and 20% bonds around here?  If stocks are down and you need cash, raid the bonds.  When stocks recover, replenish your bonds.  That's what I'd do....

If you have a decent portfolio - say $600K and you lose your job on the day the market crashes 40% you are fine - even with a 100% stock asset allocation. You can ride things out get a new job and pay your mortgage without any risk.

If you are paying off your mortgage fast and lose your job with $60K left on a $300K home and no investments because you are "hammering" your mortgage then you are screwed. You lose your home and can't pay your bills for anything else either.

exactly if the perfect storm ever happens ala 2008 again all of these pay down your mortgage folk that are not investing outside of it could be majorly screwed.  Its a bigger risk than the volatiliy in the market yet they all see it as "safe"


Later post FIRE the calculations can be very different. Paid house by definition is then untaxed income and an effective bond investment substitute. 

yes i actually will run these numbers when we FIRE.  we will straddle the 15% line and if LTCGs and QDs are still 0% in the 15% we may need to pay down our mortgage to stay in that bracket.  depending on a few things.  but still its a math equation.  feeling safer and being safer are 2 very unrelated things and i dont quite understand why emotions run so high in what is in general a very simple math function.  and typically the risk lies in paying it down vs investing.

Mr Mark

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You can remove liquidity pretty easy. about 80-90% without much of a problem at all and still have the asset to live in or rent. Heloc easily. Take another mortage out on it. Hard money lend. there are countless options for using real estate as a way to leverage. Say you have a stock portfolio. Market crashes. that's okay right cause you will just hang on. That's all well and good but now your NW is eviscerated until market recovers. There have been far fewer housing market crashes then stock market crashes in history. It is a more stable asset for building wealth. So long as you buy properly.

Stock Market crash plus job loss - isn't that why we do 80% stocks and 20% bonds around here?  If stocks are down and you need cash, raid the bonds.  When stocks recover, replenish your bonds.  That's what I'd do....

If you have a decent portfolio - say $600K and you lose your job on the day the market crashes 40% you are fine - even with a 100% stock asset allocation. You can ride things out get a new job and pay your mortgage without any risk.

If you are paying off your mortgage fast and lose your job with $60K left on a $300K home and no investments because you are "hammering" your mortgage then you are screwed. You lose your home and can't pay your bills for anything else either.@

That's the problem with banks. When you don't need credit you'll get offers all day. When you really need it the liquidity dries up.

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yes i actually will run these numbers when we FIRE.  we will straddle the 15% line and if LTCGs and QDs are still 0% in the 15% we may need to pay down our mortgage to stay in that bracket.   

In that scenario, continuing to carry the mortgage loan and maintaining a cash reserve (or equivalent assets that can be liquidated without increasing your income (and therefore without impacting your tax bracket)) to be tapped as necessary in order to service part of your mortgage payments without pushing you into the next tax bracket might be preferable to paying off the mortgage.  The drag on performance caused by the relatively small cash holdings could easily be offset by the returns on the assets that would remain invested instead of being used to pay off the mortgage.

(When determining the size of the cash reserve needed for this strategy, or whether any cash reserve is even needed to avoid being pushed into the next tax bracket in the first place, don't forget that having required mortgage payments does not translate into a need for additional income on a dollar-for-dollar basis (because a significant portion of the proceeds of the invested assets that will be used to service the mortgage payments will represent return of principal, rather than income), which is a very common mistake around here.)

NESailor

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You know you didn't even bother to ask me any of these questions when i expressed my opinion Canada. I just don't see how you could switch your position at this point in the thread regardless of what he/she says. You have taken the position so far that he should always be investing no matter what. He/she already said that they have been investing 70kish a year so that gives you a good idea of NW.

No it doesn't. If this is year #2 of high savings vs. year #10 his NW would be quite different. The issue around income stability matters as well.

When you read this thread the prime concerns with people paying down their mortgage faster is that until it's paid off you are at more risk than saving/investing the extra money. At least with a paid off house that part of the equation is removed and you are just left with poor financial optimization.

So if the poster is able to pay off their house and has stable income and high NW that's not crazy talk it's just not optimized. I wouldn't recommend it or do it myself, but I "get" that some folks feel better without a mortgage. I think then our job on this forum is just to make sure they understand the true costs of that decision.

OTOH if the poster has low NW and poor income stability paying down the mortgage is crazy talk and they need to be aware of the increased risks. So at least we can suggest they accumulate the full mortgage balance in investments and then pay off the mortgage in one shot. That takes the risks around losing their incomes and then losing an almost paid off house away.

None of that changes my personal view that paying down your mortgage faster is a sub-optimal decision in the current low interest rate environment.

Good points all around.   I'm playing coy because I'm actually a (young) CPA so the math is not foreign to me ;)  Our investment stash IS rather small since our incomes jumped quite significantly in the past 2 years...as has the motivation to FIRE.  We're at 130K invested - all in tax deferred accounts.  That said, the incomes are relatively safe.  I can find an above-average paying job if it came down to it...or open my own practice at significantly below average earnings for a while.  Wife is a non-tenured state teacher so not the safest job out there but once the "non-tenured" part is taken care of we're pretty much set as long as we stay healthy.

Btw, if the math on the note doesn't square up it's because it's a 15 year one.  If I had to do it again I'd probably have kept a 30 year but the balance and rate is so low that I'm getting no tax break either way AND we have enough cashflow to max out all tax deferred options anyway.

Well...still playing around with the idea.  Maybe I'll wait until the tenure bit by which point we could be looking at around half a million stash anyway.

boarder42

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yes i actually will run these numbers when we FIRE.  we will straddle the 15% line and if LTCGs and QDs are still 0% in the 15% we may need to pay down our mortgage to stay in that bracket.   

In that scenario, continuing to carry the mortgage loan and maintaining a cash reserve (or equivalent assets that can be liquidated without increasing your income (and therefore without impacting your tax bracket)) to be tapped as necessary in order to service part of your mortgage payments without pushing you into the next tax bracket might be preferable to paying off the mortgage.  The drag on performance caused by the relatively small cash holdings could easily be offset by the returns on the assets that would remain invested instead of being used to pay off the mortgage.

(When determining the size of the cash reserve needed for this strategy, or whether any cash reserve is even needed to avoid being pushed into the next tax bracket in the first place, don't forget that having required mortgage payments does not translate into a need for additional income on a dollar-for-dollar basis (because a significant portion of the proceeds of the invested assets that will be used to service the mortgage payments will represent return of principal, rather than income), which is a very common mistake around here.)

yes i'm considering that since the first 5 years will be the time that are most at risk when using the Roth ladder. since i will be spending taxable and converting for future use.  it may make sense to just carry a cash account to make up for that difference during those year. 

elaborate on your last statement please.

AdrianC

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The maths is pretty clear when in accumulation mode. We're all implicitly assuming long term total nominal pretax returns of about 9% in the markets. It's what underpins FIRE for most.

So 80/20 stocks/bonds, 6% on stocks and 3% on bonds equals 9%!

Just kidding.

9% is quite optimistic for stocks. I'd use 5% nominal for stocks and 2.5% for bonds. The math still works, it's just not the huge win you might be expecting.

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elaborate on your last statement please.

When comparing the "mortgage" and "no mortgage" alternatives, many times people are under the mistaken impression that the "mortgage" alternative necessarily requires you to have additional income in an amount equal to the required mortgage payments.  But that's not true.  If your required mortgage payments (principal + interest) total, say, $20K per year, that does not necessarily mean that keeping the mortgage requires you to have an extra $20K of income beyond what you would need if you paid off the mortgage.  In the "mortgage" alternative, as long as your investments generate some portion of their returns through capital appreciation, then when you sell those assets to service the mortgage payments, part of the proceeds will represent return of principal (and not capital gains/income).  If your investments generate their returns primarily through capital appreciation (as stock index funds do), then, in the early years of your retirement, most of the proceeds of the investment asset sales are likely to represent return of principal (not income), so your income will probably be only slightly higher under the "mortgage" alternative.  Over time, your income will drift up as your overall cost basis in the investments decreases, but that could happen slowly enough to keep the scales titled in favor of retaining the mortgage loan, even though you straddle the 15% tax bracket.

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The maths is pretty clear when in accumulation mode. We're all implicitly assuming long term total nominal pretax returns of about 9% in the markets. It's what underpins FIRE for most.

So 80/20 stocks/bonds, 6% on stocks and 3% on bonds equals 9%!

Just kidding.

9% is quite optimistic for stocks. I'd use 5% nominal for stocks and 2.5% for bonds. The math still works, it's just not the huge win you might be expecting.
Because you expect stock returns to be half of the historic CAGR on the S&P500?  That's overly pessimistic, in my opinion.

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The maths is pretty clear when in accumulation mode. We're all implicitly assuming long term total nominal pretax returns of about 9% in the markets. It's what underpins FIRE for most.

So 80/20 stocks/bonds, 6% on stocks and 3% on bonds equals 9%!

Just kidding.

9% is quite optimistic for stocks. I'd use 5% nominal for stocks and 2.5% for bonds. The math still works, it's just not the huge win you might be expecting.


Personally I'm not expecting outstanding (or even historically average) nominal returns for stocks.  I am expecting a return to ~3% inflation sometime over the next decade, perhaps with forays into the 4-5%.  THAT is my greatest reason for holding a mortgage (expected market returns of ~5-6% real are just icing on that cake)

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IT's NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!

AdrianC

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The maths is pretty clear when in accumulation mode. We're all implicitly assuming long term total nominal pretax returns of about 9% in the markets. It's what underpins FIRE for most.

So 80/20 stocks/bonds, 6% on stocks and 3% on bonds equals 9%!

Just kidding.

9% is quite optimistic for stocks. I'd use 5% nominal for stocks and 2.5% for bonds. The math still works, it's just not the huge win you might be expecting.
Because you expect stock returns to be half of the historic CAGR on the S&P500?  That's overly pessimistic, in my opinion.

What do you think long term stock returns will be from here, and why?

PAstash

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You know you didn't even bother to ask me any of these questions when i expressed my opinion Canada. I just don't see how you could switch your position at this point in the thread regardless of what he/she says. You have taken the position so far that he should always be investing no matter what. He/she already said that they have been investing 70kish a year so that gives you a good idea of NW.

No it doesn't. If this is year #2 of high savings vs. year #10 his NW would be quite different. The issue around income stability matters as well.

When you read this thread the prime concerns with people paying down their mortgage faster is that until it's paid off you are at more risk than saving/investing the extra money. At least with a paid off house that part of the equation is removed and you are just left with poor financial optimization.

So if the poster is able to pay off their house and has stable income and high NW that's not crazy talk it's just not optimized. I wouldn't recommend it or do it myself, but I "get" that some folks feel better without a mortgage. I think then our job on this forum is just to make sure they understand the true costs of that decision.

OTOH if the poster has low NW and poor income stability paying down the mortgage is crazy talk and they need to be aware of the increased risks. So at least we can suggest they accumulate the full mortgage balance in investments and then pay off the mortgage in one shot. That takes the risks around losing their incomes and then losing an almost paid off house away.

None of that changes my personal view that paying down your mortgage faster is a sub-optimal decision in the current low interest rate environment.

they said saving 70k for year(s) so atleast 140k That gives you a good idea of the type of NW they would have. other then that well played argument.

PAstash

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You can remove liquidity pretty easy. about 80-90% without much of a problem at all and still have the asset to live in or rent. Heloc easily. Take another mortage out on it. Hard money lend. there are countless options for using real estate as a way to leverage. Say you have a stock portfolio. Market crashes. that's okay right cause you will just hang on. That's all well and good but now your NW is eviscerated until market recovers. There have been far fewer housing market crashes then stock market crashes in history. It is a more stable asset for building wealth. So long as you buy properly.

Stock Market crash plus job loss - isn't that why we do 80% stocks and 20% bonds around here?  If stocks are down and you need cash, raid the bonds.  When stocks recover, replenish your bonds.  That's what I'd do....

If you have a decent portfolio - say $600K and you lose your job on the day the market crashes 40% you are fine - even with a 100% stock asset allocation. You can ride things out get a new job and pay your mortgage without any risk.

If you are paying off your mortgage fast and lose your job with $60K left on a $300K home and no investments because you are "hammering" your mortgage then you are screwed. You lose your home and can't pay your bills for anything else either.

Yea but you wouldn't have NO investments you might have 60k invested + E-fund

PAstash

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yes i actually will run these numbers when we FIRE.  we will straddle the 15% line and if LTCGs and QDs are still 0% in the 15% we may need to pay down our mortgage to stay in that bracket.   

In that scenario, continuing to carry the mortgage loan and maintaining a cash reserve (or equivalent assets that can be liquidated without increasing your income (and therefore without impacting your tax bracket)) to be tapped as necessary in order to service part of your mortgage payments without pushing you into the next tax bracket might be preferable to paying off the mortgage.  The drag on performance caused by the relatively small cash holdings could easily be offset by the returns on the assets that would remain invested instead of being used to pay off the mortgage.

(When determining the size of the cash reserve needed for this strategy, or whether any cash reserve is even needed to avoid being pushed into the next tax bracket in the first place, don't forget that having required mortgage payments does not translate into a need for additional income on a dollar-for-dollar basis (because a significant portion of the proceeds of the invested assets that will be used to service the mortgage payments will represent return of principal, rather than income), which is a very common mistake around here.)

"don't forget that having required mortgage payments does not translate into a need for additional income on a dollar-for-dollar basis (because a significant portion of the proceeds of the invested assets that will be used to service the mortgage payments will represent return of principal, rather than income), which is a very common mistake around here.)"

Maybe this is what I haven't been getting.

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IT's NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
I like your sense of humor :P

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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.

Initially, when starting out with nothing, sure.

When you accumulate a stache that can earn more than you can?  No.

For an extreme example: Would you say Bill Gates' greatest asset is his ability to earn money through labor?

Once you get to that point, the "solid home in an area where they can easily find another job" is much less important.

So what networth level do you draw that line? in your opinion.

Probably right around the time you're FI.   :)
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The maths is pretty clear when in accumulation mode. We're all implicitly assuming long term total nominal pretax returns of about 9% in the markets. It's what underpins FIRE for most.

So 80/20 stocks/bonds, 6% on stocks and 3% on bonds equals 9%!

Just kidding.

9% is quite optimistic for stocks. I'd use 5% nominal for stocks and 2.5% for bonds. The math still works, it's just not the huge win you might be expecting.
Because you expect stock returns to be half of the historic CAGR on the S&P500?  That's overly pessimistic, in my opinion.

What do you think long term stock returns will be from here, and why?

Better than long term returns from bonds or cash and certainly more than 4% nominal (which is roughly what the long term fixed mortgage rate is).

Plus mortgage interest usually tax deductible while earnings in a tax protected account are tax free.

It really is a no brainer when in accumulation mode.

AdrianC

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Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
« Reply #189 on: February 01, 2017, 07:26:41 AM »
What do you think long term stock returns will be from here, and why?
Better than long term returns from bonds or cash and certainly more than 4% nominal (which is roughly what the long term fixed mortgage rate is).

Plus mortgage interest usually tax deductible while earnings in a tax protected account are tax free.

It really is a no brainer when in accumulation mode.

For most people wanting to FIRE and with rates so low, sure, it's a no brainer. I'd be doing it now in accumulation. But in FIRE, nah, I can't be bothered.

Now, is it mathematically correct to have a mortgage and have bonds in your investment portfolio?

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Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
« Reply #190 on: February 01, 2017, 09:05:29 AM »
elaborate on your last statement please.

When comparing the "mortgage" and "no mortgage" alternatives, many times people are under the mistaken impression that the "mortgage" alternative necessarily requires you to have additional income in an amount equal to the required mortgage payments.  But that's not true.  If your required mortgage payments (principal + interest) total, say, $20K per year, that does not necessarily mean that keeping the mortgage requires you to have an extra $20K of income beyond what you would need if you paid off the mortgage.  In the "mortgage" alternative, as long as your investments generate some portion of their returns through capital appreciation, then when you sell those assets to service the mortgage payments, part of the proceeds will represent return of principal (and not capital gains/income).  If your investments generate their returns primarily through capital appreciation (as stock index funds do), then, in the early years of your retirement, most of the proceeds of the investment asset sales are likely to represent return of principal (not income), so your income will probably be only slightly higher under the "mortgage" alternative.  Over time, your income will drift up as your overall cost basis in the investments decreases, but that could happen slowly enough to keep the scales titled in favor of retaining the mortgage loan, even though you straddle the 15% tax bracket.

essentially what you're saying is that if you have a 1500 a month mortage payment you dont need 1500*12*25 ... and yes i understand that. if you're not saying that throw some math down ... i understand numbers better than words.

boarder42

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Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
« Reply #191 on: February 01, 2017, 09:08:00 AM »
What do you think long term stock returns will be from here, and why?
Better than long term returns from bonds or cash and certainly more than 4% nominal (which is roughly what the long term fixed mortgage rate is).

Plus mortgage interest usually tax deductible while earnings in a tax protected account are tax free.

It really is a no brainer when in accumulation mode.

For most people wanting to FIRE and with rates so low, sure, it's a no brainer. I'd be doing it now in accumulation. But in FIRE, nah, I can't be bothered.

Now, is it mathematically correct to have a mortgage and have bonds in your investment portfolio?

well then you need to throw in SSA that you'll have at whatever age it will be then as well.  ... if SSA still exists and my counts are correct we will have 0 bonds once we start acruing that down for 10% we plan to have with our mortgage n FIRE.

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Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
« Reply #192 on: February 01, 2017, 09:10:19 AM »
essentially what you're saying is that if you have a 1500 a month mortage payment you dont need 1500*12*25 ... and yes i understand that. if you're not saying that throw some math down ... i understand numbers better than words.

What he is saying is if your mortgage is $1K/month or $12K/yr and you pay for it by selling $12K of investments from your taxable account only a portion of the $12K [let's say $2K] is taxed as capital gains. The $10K principal is after-tax money you've already paid the taxman for so there is no additional tax.
« Last Edit: February 01, 2017, 09:14:30 AM by Retire-Canada »

boarder42

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Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
« Reply #193 on: February 01, 2017, 09:13:40 AM »
essentially what you're saying is that if you have a 1500 a month mortage payment you dont need 1500*12*25 ... and yes i understand that. if you're not saying that throw some math down ... i understand numbers better than words.

What he is saying is if you mortgage is $1K/month or $12K/yr and you pay for it by selling $12K of investments from your taxable account only a portion of the $12K [let's say $2K] is taxed as capital gains. The $10K principal is after-tax money you've already paid the taxman for so there is no additional tax.

ahh yes i understand that as well.  i was confusing the word principal in his statement.  with mortgage principal. 

arebelspy

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Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
« Reply #194 on: February 01, 2017, 09:43:42 AM »
Now, is it mathematically correct to have a mortgage and have bonds in your investment portfolio?

Many of us think 100% stocks is best, regardless of mortgage status.

If you have bonds it's usually not for their return, but either:
A) Because rebalancing, or
B) Because smoother ride

Having a mortgage instead of bonds helps with neither (heloc could maybe help with the first, but traditional fixed long term mortgage, no).

So in either of those cases where you're wanting bonds, the correct option could be to take a mortgage out to put it into bonds, to give you the ability to rebalance easily, and to give your portfolio the smoother ride.

I'd still go stocks, but I don't see holding bonds as a reason to sell them to pay off the mortgage, when the point of them isn't return, but probably one of the above two.
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Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
« Reply #195 on: February 01, 2017, 10:00:06 AM »
essentially what you're saying is that if you have a 1500 a month mortage payment you dont need 1500*12*25 ... and yes i understand that. if you're not saying that throw some math down ... i understand numbers better than words.

What he is saying is if your mortgage is $1K/month or $12K/yr and you pay for it by selling $12K of investments from your taxable account only a portion of the $12K [let's say $2K] is taxed as capital gains. The $10K principal is after-tax money you've already paid the taxman for so there is no additional tax.

Right, and in that scenario there is only $2k of income that counts for purposes of determining your tax bracket.  So if you're straddling a tax bracket cutoff, and a mere $2k of income would push you into the next bracket, you can simply sell a little less investments and access cash reserves to make up the difference to avoid being pushed into the next tax bracket.

If the "keep mortgage" vs "pay off mortgage" cost-benefit analysis otherwise favors keeping the mortgage over paying it off, it's hard to imagine a scenario where the fact that you straddle the 15% tax bracket line will tip the scales back in favor of paying it off (as long as you're using investments that generate their returns primarily through capital appreciation (like stocks)).  Just keep a cash reserve on hand that can be used as necessary to avoid being pushed into the next tax bracket -- unless you have a really big mortgage loan, I would think the leveraged-investing-via-mortgage strategy, even with the drag on performance caused by the relatively small cash allocation, would still outperform the mortgage payoff strategy under virtually all circumstances where the leveraged-investing-via-mortgage strategy would otherwise win out.

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Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
« Reply #196 on: February 01, 2017, 05:23:07 PM »
Now, is it mathematically correct to have a mortgage and have bonds in your investment portfolio?

Many of us think 100% stocks is best, regardless of mortgage status.

If you have bonds it's usually not for their return, but either:
A) Because rebalancing, or
B) Because smoother ride

A "smoother ride" is an emotional need. Rather like wanting to be debt free. It's not math.

arebelspy

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Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
« Reply #197 on: February 01, 2017, 07:26:55 PM »
Now, is it mathematically correct to have a mortgage and have bonds in your investment portfolio?

Many of us think 100% stocks is best, regardless of mortgage status.

If you have bonds it's usually not for their return, but either:
A) Because rebalancing, or
B) Because smoother ride

A "smoother ride" is an emotional need. Rather like wanting to be debt free. It's not math.

Right. The math is 100% stocks and mortgage, except possibly in rebalancing cases where slightly less stocks could be better (scenario A). 

As I said at the outset: If you have bonds, it's usually not for their return.  The return is math.
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Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
« Reply #198 on: February 01, 2017, 09:55:54 PM »
I think some simulations show 90/10 can slightly out perform 100% stock due to impact of rebalancing helping to sell high buy low? but effect is marginal.

I don't think taking a mortgage to buy bonds is a good idea tho. Which was OP's original point.

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Resurrecting this excellent thread in honor of Boarder42...
R.I.P. Boarder42 -
I enjoyed your commentary, though at times you ran hot under the collar and crossed the line between 'attack and argument' and 'attack another poster'.

I will forever be reminded of you when some bloke suggests accelerated payoff of a fixed-rate mortgage...