Author Topic: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!  (Read 54723 times)

PiobStache

  • Stubble
  • **
  • Posts: 204
You are absolutely correct, but to understand risk tolerances, personal balance sheet, income state, entire asset portfolio mix, and future plans you have to understand the underlying math.  The issue is people blatantly making less than opportune decisions in the millions of dollars range and worth years of FIRE blindly...  And then encouraging others to do the same without first recommending that those they are encouraging do the math first.

Every single time I have seen someone recommend keeping the mortgage, they post the math.  That is not something I have seen from the pay-it-all-down-now-asap-911-!!!!!11!11!1!! crowd.

If you understand the financial implications of paying it down early, especially when someone is not maxing out their tax-deferred accounts first, then the decision would very rarely be 'pay it down' with a 3% mortgage.

Agree on all that.  Not maxing out all tax advantaged possibilities first is fighting the math and I'd be hard pressed to create a scenario where accelerating the mortgage makes sense in such a case. 

verfrugal

  • 5 O'Clock Shadow
  • *
  • Posts: 11
  • Location: Vermont
I think the Investment Order posts cover this quite well already.

If you are maxing out your tax deferred, then you address debt, starting with your highest interest debt.

I see two competing narratives in this topic, which differ from this.  One is the debt averse emotional argument to pay it off ASAP.  The other is the return maximizing emotional argument that it's throwing money away because equities have "guaranteed" returns.  They are obviously both primarily emotional/identity driven positions since it sparks so much conflict and self-righteousness.

I'm fine with that, but I dislike when "face punching" becomes an excuse for self-righteous emotional abuse of others, or when this forum is reduced to being about maximizing returns on investments to justify that abuse.


Boofinator

  • Pencil Stache
  • ****
  • Posts: 808
You are absolutely correct, but to understand risk tolerances, personal balance sheet, income state, entire asset portfolio mix, and future plans you have to understand the underlying math.  The issue is people blatantly making less than opportune decisions in the millions of dollars range and worth years of FIRE blindly...  And then encouraging others to do the same without first recommending that those they are encouraging do the math first.

Every single time I have seen someone recommend keeping the mortgage, they post the math.  That is not something I have seen from the pay-it-all-down-now-asap-911-!!!!!11!11!1!! crowd.

If you understand the financial implications of paying it down early, especially when someone is not maxing out their tax-deferred accounts first, then the decision would very rarely be 'pay it down' with a 3% mortgage.

Agree on all that.  Not maxing out all tax advantaged possibilities first is fighting the math and I'd be hard pressed to create a scenario where accelerating the mortgage makes sense in such a case.

I agree as well. Tax-deferred accounts should be filled to the brim before it remotely makes sense to pay off the mortgage. Also, people early in their savings journey have a long time horizon and low liquidity, both of which favor investing in taxable over paying off the mortgage. Things get somewhat murkier as one gets closer to FI, since timelines reduce significantly, subsequently allowing risk to play a bigger factor. Also, hard to find a 3% mortgage these days, so the tide of possible outcomes is shifting.

So to the question of posting the math: cFIREsim shows an increase in maximum safe spend rate when someone ready to retire pays off their mortgage with five years remaining at 4.5% versus investing that money in stock. The increase is small, showing that 4.5% is probably around the breakeven point for a riskless mortgage rate.

So yes, do the math. It is why tens of thousands of dollars were spent on our high school education.

EDIT: My math was wrong, hurting my case but not disproving the point.

EDIT 2: Played around a bit more with varying ratios of payoff amount, and needless to say this has a large effect that I wasn't accounting for. Regardless, one should expect that off the 4% rule that a 4% mortgage should be about the breakeven point where paying the mortgage starts lessening risk. Under 4%, you reduce risk and expected yield, which is a bad decision any way things are sliced. (Assuming future returns resemble historical returns.)
« Last Edit: October 23, 2018, 02:54:10 PM by Boofinator »

PizzaSteve

  • Pencil Stache
  • ****
  • Posts: 501
I think we are in agreement that understanding options and what models predict are important.  That said, the models are not certain, so I avoid telling people it is 'blatantly wrong' to not want to take on market risks for a possibly better return.  It is not wrong, it is just conservative.

Stocks are likely to yield a better return and mortgage payoffs are certain to yeild a positive return.  Those are the choices, certainty vs higher likely upside.  The reason pay it off types are not citing models is that the reasons for paying debt are not that models predict a better return, it is because paying off debt has zero risk that a black swan market loss (like Japan had) destroys all your wealth.  The upside is predictability, not a higher expected outcome.  It seems that should be obvious.

FireSim is assumptions in, predictions out, like any model.  Assume future returns mirror the past and sure, you get a limited set of outcomes.  However, that is a key assumption not everyone is comfortable making.  I dont beat up someone for their assumptions vs my assumptions.  Honestly, I think it is a false strawman to say that 'all these people are advising mortgage paydowns without doing any analysis.'  Most people I read supporting mortgage payments ask about risk tolerance, likely behavior during a significant correction, and advise accordingly.

Few investors here were in the market on Black Monday, 1987.  I was and saw much leveraged capital flee the market and a lot of lost wealth.  No one knew or expected decades long bull runs to follow.  The economy seemed poor, inflation not under control, US losing jobs overseas.  Sure technology saved the economy with huge efficiencies, but most were not anticipating, massive automation saving US companies, cell phones connected to the internet spurring new markets for consumption, etc. (i was, but thats another story).
« Last Edit: October 23, 2018, 02:49:06 PM by PizzaSteve »

Radagast

  • Handlebar Stache
  • *****
  • Posts: 1421
  • Location: West of the Mountains, East of the Sea
  • hedonismbot
If I have hundreds of thousands in home equity why would I let myself get foreclosed?
Because the amount you owe the bank may be different than the market value of the house. Mortgages are like bonds, but houses are like stocks.

Few investors here were in the market on Black Monday, 1987.
I guess you don't remember 2008-2012 though? Because I know people whose houses lost 50-80% of their value. I just saw a condo in Reno whose previous sale price was $12,500 in 2009, which must have exceed the great depression as a percent loss. With houses it is not possible to "own the market" , you get your house and you take your chances. (Actually it may be possible if you have 20 or more houses with great geographical diversification.)

I am not implying houses are riskier than stocks. (Also for the record, I generally default to recommending a 45% US stock, 30% international stock, 25% bond investment portfolio.) The risk of losing mortgage payments is lower but more idiosyncratic, while the consequence is similar to that of a stock market crash if your net worth is less than say 1x expenses, but lower once your net worth is say 20x expenses. The expected return is also lower. If you would otherwise by making periodic contributions to your investment portfolio, then mortgage paying is likely similarly risky to investing, with similar consequences of failure, and clearly lower expected returns so yes it is always a bad idea unless somebody has very specific numbers to show otherwise.

Quote
mortgage payoffs are certain to yield a positive return.
Clarification: only certain to be positive after paid off entirely when the house is worth more in real terms than the purchase price.

Quote
The reason pay it off types are not citing models is that the reasons for paying debt are not that models predict a better return, it is because paying off debt has zero risk that a black swan market loss (like Japan had) destroys all your wealth.  The upside is predictability, not a higher expected outcome.  It seems that should be obvious.
It's not zero risk. It is trading the risk of one asset for the risk of another asset. Why do you keep saying that? Your house very much has risk associated with it both in absolute terms and relative to other asset classes. Once the bank no longer assumes those risks, you do. For the bank the single house is part of an abstract pool, which together are probably a good approximation of "the market." When you own the entire house, it is personal and undiversified.

You probably think the history of the world would make having a paid off mortgage seem better than the assumptions thrown around here, but it does not. What about Argentina, Australia, Israel, Germany, Japan (1940's version) or all the countries that suffered unexpected inflation or black swan hyperinflation? The US has been one of the most favorable locations to pay off a long term fixed rate mortgage in history. Other places would have been more favorable than the US was for people who kept that type of mortgage. Countries that control their currency loooove inflation. Get in a war, devalue the currency. Lose the war, hyper-devalue the currency. Revenue perpetually lower than expenses, solution: inflation. There are more black swan risks favoring keeping the mortgage than a causal look through US history since the 1930's would suggest. The worst deflationary event in the US originated when the US was on the gold standard and could not devalue the currency. There is good reason to believe that keeping a long term fixed rate mortgage is considerably more beneficial in theory than it has been even in the rosy past. Black swans are by nature unknowable, but if they result in a devalued currency then they are more likely to favor investing in a highly diversified portfolio and keeping the mortgage.

Buuut as I say all the time, if you are about to retire then paying off the mortgage can make sense. There are risks to fixed expenses in a variable return environment, and paying off the mortgage can reduce those fixed expenses. There may also be tax and legal advantages to not having a mortgage and to having money tied up in a house, respectively. If you are 35 and have $2M in liquid assets you might be an attractive lawyer target, and some places protect domiciles. Likewise the additional income needed to make mortgage payments might lower subsidies or raise taxes. So if you are within 5 years of retirement or otherwise filthy rich, I would recommend looking into paying off the mortgage. I'd give you a 50/50 chance of deciding it would be best at that point. But if you are still in the first half of your working years, I doubt a good case could be made for the paying down or off of a mortgage.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10037
  • Location: la belle province
    • Here's how you can support science today:
I think we are in agreement that understanding options and what models predict are important.  That said, the models are not certain, so I avoid telling people it is 'blatantly wrong' to not want to take on market risks for a possibly better return.  It is not wrong, it is just conservative.


I object to calling paying off ones mortgage 'conservative'.  A conservative approach is one that takes the least amount of perceived or anticipated risk.  If there's a common thread between points made by B42, myself and many others its that paying down a fixed low rate mortgage aggressively is more risky than putting that money into investments, preferably those of the tax-advantaged variety.

For all the scare-stories of recessions and investors losing money in the market, there are even more instances of homes decreasing in value, or being damaged and underinsured, or tying their owners to that spot because it was a soft market and they couldn't sell.

One can certainly pay off their mortgage aggressively and certainly there are situations where that is not a bad financial decision to make, but it isn't the 'conservative' play, despite the drum-beat from everyone from the RE insdustry (it's the best investment you'll ever make!) to Steve Ramsey (no one will ever be able to kick you out of a home you've paid cash for, and that's security!)

ChpBstrd

  • Handlebar Stache
  • *****
  • Posts: 1298
Of course I'm not going to pay off my 3.7% twenty-five year mortgage, but what happens when rates rise?

Would you buy a 100% safe bond yielding 5%? (Same decision as paying off a debt at 5% interest)

How about at 6%?
7%?
8%?
9%?
10%?

These are all mortgage rates that existed during my lifetime. Personally, I would have a hard time risking my money in the stock market rather than paying down an 8-10% mortgage. A 4% mortgage is a completely different story though. At that rate, I might take out out HELOC and put it in the markets. Between 4 and 8% is a gray area where I'd likely accellerate my payments but leave some money in the markets.

Those mid-range mortgage rates also present us with timing questions. A paid-off mortgage would liberate hundreds of dollars of cash flow each month to go into market investments. Holding a mortgage, on the other hand, leaves the lump sum invested in the markets at a loan cost of the mortgage rate (just like taking a margin loan from your broker). So for the uninvested balance at any given time, which will be higher?

1) market returns minus mortgage rate?
2) mortgage rate?

It's obvious to me the mortgage rate drives the decision, given reasonable expectations for long-term , buy-n-hold portfolio yield (i.e. 5-10%). Now that rates are rising above 5%, we've entered the gray zone where one is reasonably required to make a market prediction to make the decision.

Adam Zapple

  • Bristles
  • ***
  • Posts: 345
In this insanely long thread, has anyone addressed the time period over which the mortgage is paid off.  Maybe I'm off here but doesn't time horizon make a big difference when assessing the opportunity cost of paying off the mortgage vs. investment in the stock market?  If I pay off my mortgage in three years and the market tanks in year four, I win right?I'm not necessarily arguing this point... looking more for a clear explanation.

bacchi

  • Magnum Stache
  • ******
  • Posts: 3538
In this insanely long thread, has anyone addressed the time period over which the mortgage is paid off.  Maybe I'm off here but doesn't time horizon make a big difference when assessing the opportunity cost of paying off the mortgage vs. investment in the stock market?  If I pay off my mortgage in three years and the market tanks in year four, I win right?I'm not necessarily arguing this point... looking more for a clear explanation.

If you can predict that the market will crash in year 4, by all means, pay off the mortgage and short some futures. Most of us can't predict market crashes, however.

Otherwise, we use cFiresim. Investing in the market when holding non-callable, low interest, long-term debt is better for your portfolio and years-to-FIRE, as long as the past isn't worse than the future. In which case, none of us will be retiring until we're 70.

This will be a moot point when rates rise, as ChpBstrd mentioned.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10037
  • Location: la belle province
    • Here's how you can support science today:
In this insanely long thread
...not really for this forum.  Others on similar subjects have stretched 3-5x as long.  We like to pontificate :-)

has anyone addressed the time period over which the mortgage is paid off.  Maybe I'm off here but doesn't time horizon make a big difference when assessing the opportunity cost of paying off the mortgage vs. investment in the stock market?  If I pay off my mortgage in three years and the market tanks in year four, I win right?I'm not necessarily arguing this point... looking more for a clear explanation.

Yes, it has been addressed.  The short version is that the relevant time scale isn't the time in which you pay off your mortgage, but the original term of your mortgage at the start.  For instance, if you have a 30yr fixed mortgage and you pay it off in 3 years, in order to calculate your opportunity cost you must consider the full 30 years.  Otherwise your time frames don't match (i.e. you'd be comparing the cost of paying the minimum over 30 years + investing vs. the cost of paying out at an accelerated plan in 3 or 4 years.
It's not a coincidence that most of the 'gain' associated with staying the 30 year course occurs during the second half of the fixed mortgage.  That's when inflation has reduced the real-cost of the payments substantially, tax savings have compiled and investments have had a longer timeframe to compound.

Of course I'm not going to pay off my 3.7% twenty-five year mortgage, but what happens when rates rise?
Most of this discussion focuses on fixed-rate US mortgages, which typically have a term of 30 years (sometimes 15). The 25 year notes with shorter 3-5 year terms common in other countries like Canada are another kettle of fish.
Still, it's worth noting that (at least in the US) bond yields, inflation and the 30 year mortgage are tightly correlated.  In other words, high 30 year mortgage rates tend to co-exist with high periods of inflation. Oh, and of course there's always refinancing down the road.

PizzaSteve

  • Pencil Stache
  • ****
  • Posts: 501
I think we are in agreement that understanding options and what models predict are important.  That said, the models are not certain, so I avoid telling people it is 'blatantly wrong' to not want to take on market risks for a possibly better return.  It is not wrong, it is just conservative.


I object to calling paying off ones mortgage 'conservative'.  A conservative approach is one that takes the least amount of perceived or anticipated risk.  If there's a common thread between points made by B42, myself and many others its that paying down a fixed low rate mortgage aggressively is more risky than putting that money into investments, preferably those of the tax-advantaged variety.

For all the scare-stories of recessions and investors losing money in the market, there are even more instances of homes decreasing in value, or being damaged and underinsured, or tying their owners to that spot because it was a soft market and they couldn't sell.

One can certainly pay off their mortgage aggressively and certainly there are situations where that is not a bad financial decision to make, but it isn't the 'conservative' play, despite the drum-beat from everyone from the RE insdustry (it's the best investment you'll ever make!) to Steve Ramsey (no one will ever be able to kick you out of a home you've paid cash for, and that's security!)

I respect the passion.

In my opinion, it is important to remember that buying a home and taking on debt are separate, but linked transactions.  Once you chose to buy a house, you own it. Thats it.  Taxes, insurance, maintenence, and shelter benefits are your responsibility.  Its like a car.  You own it.  Worrying about its resale value is fruitless until you actually plan to sell it.  Every time I see a post referring to home equity as dead money, etc, I feel a need to educate because the poster doesnt understand very basic financial portfolio concepts.  Yes people can always borrow money.  Owning a valuable home and using it as collateral may make that money the cheapest source available.  Yes leveraging that debt to invest is always an option.  Yes one may chose to take on that risk and benefit.  This we all agree.

I advise that we should get out of the habit of linking a home's value to whether we want to hold debt at a specific rate to invest, given the economy, rates, etc.  Bankers dont care about your home's value, they care about the loan terms.  This is because they never plan to foreclose, they are just pricing cash flows to make money, as should we.

The debt associated with a home is a financial liability.  It will have various characteristics and is very much treated financially like bond, but for us from the issuer's perspective.   Issued debt can have partial call provisions (prepayment options or penalties) or under very limited circumstances, may be exchanged for an asset (like a home).  Deciding the financial return on `calling in' a debt is a very specific math calculation with an exact return.  It is deterministic and guaranteed.  There is no such thing as a fuzzy risk scenario with paying off debt.  Any discussion stating otherwise is really reaching.

Anyway, it is weird to be arguing the same distorted logic B42 used to use so passionately, because it is just a wrong argument.  No one would argue that logic for not paying down car debt, and it is the exact same scenario. Its just rates, timeline and your assumptions about the future.  run the numbers and decide, its a simple thing.

I've never once said not to choose to use leverage.  Its fine, but not for every situation.  Sorry to keep repeating myself, but these very odd false strawman posts are confusing and annoying because the choices are so super simple and do not need to be complicated by weird stories about those who chose a safe, fixed return over leveraged stocks as fearing armageddon.  The continued attempts to put words into peoples mouths about why they feel paying down debt is the right choice are unfair.
« Last Edit: October 24, 2018, 02:17:49 PM by PizzaSteve »

FIRE47

  • Bristles
  • ***
  • Posts: 333
I think we are in agreement that understanding options and what models predict are important.  That said, the models are not certain, so I avoid telling people it is 'blatantly wrong' to not want to take on market risks for a possibly better return.  It is not wrong, it is just conservative.


I object to calling paying off ones mortgage 'conservative'.  A conservative approach is one that takes the least amount of perceived or anticipated risk.  If there's a common thread between points made by B42, myself and many others its that paying down a fixed low rate mortgage aggressively is more risky than putting that money into investments, preferably those of the tax-advantaged variety.

For all the scare-stories of recessions and investors losing money in the market, there are even more instances of homes decreasing in value, or being damaged and underinsured, or tying their owners to that spot because it was a soft market and they couldn't sell.

One can certainly pay off their mortgage aggressively and certainly there are situations where that is not a bad financial decision to make, but it isn't the 'conservative' play, despite the drum-beat from everyone from the RE insdustry (it's the best investment you'll ever make!) to Steve Ramsey (no one will ever be able to kick you out of a home you've paid cash for, and that's security!)

You can create your own definition of risk and conservative vs aggressive asset allocations all you want, the rest of the world will continue to use a more generally accepted definition that attempts to accomplish what the goal of such definitions is in the first place - to create a portfolio that an investor is comfortable with. 

I for one am sleeping more soundly right now with part of my investments going towards what are essentially tax free bonds. Had I poured all of this extra money into stocks since I purchased my home 1.5 years ago rather than making a larger down payment and minimum 25 year payments I would be down likely tens of thousands more right now. Sure I could also have been up, but this is the reason why I allocated the way I did. Not everyone is on the US and many markets have been taking a beating for more than just the last few weeks, with not as great of a run up leading into that. Rates are only going up - they are already around 1% higher than when I took out my mortgage they could easily be in the 5-6% range within the next 5 years.
« Last Edit: October 24, 2018, 01:19:23 PM by FIRE47 »

bacchi

  • Magnum Stache
  • ******
  • Posts: 3538
I am not sure if it was covered in this thread or another but, yes, the period over which a mortgage is paid off has a substantial impact on the analysis. The shorter the period of time that someone would be paying extra to pay off their mortgage the less either decision has on the analysis. I think this contributes to the heated discussion. The question of to pay down a $100k mortgage early over a 1 year or to pay down a $750k mortgage early over 8 years are very different questions and may have different answers.

Also the faster you pay down a mortgage the higher likelihood stock market returns are negative or low during the early pay-down period.

Wait, what?

No, the timeline doesn't matter. Given $100k, putting it into the market for 29 years is (historically) better than paying off a ~4%, 30 year, non-callable mortgage.

This is a DCA vs lump-sum issue. Lump-sum is better: https://personal.vanguard.com/pdf/s315.pdf

It's certainly preferable to making extra payments (the bank doesn't give a shit if you've paid extra principal payments) but, financially, it's worse than putting it in the market.

PizzaSteve

  • Pencil Stache
  • ****
  • Posts: 501
I am not sure if it was covered in this thread or another but, yes, the period over which a mortgage is paid off has a substantial impact on the analysis. The shorter the period of time that someone would be paying extra to pay off their mortgage the less either decision has on the analysis. I think this contributes to the heated discussion. The question of to pay down a $100k mortgage early over a 1 year or to pay down a $750k mortgage early over 8 years are very different questions and may have different answers.

Also the faster you pay down a mortgage the higher likelihood stock market returns are negative or low during the early pay-down period.

Wait, what?

No, the timeline doesn't matter. Given $100k, putting it into the market for 29 years is (historically) better than paying off a ~4%, 30 year, non-callable mortgage.

This is a DCA vs lump-sum issue. Lump-sum is better: https://personal.vanguard.com/pdf/s315.pdf

It's certainly preferable to making extra payments (the bank doesn't give a shit if you've paid extra principal payments) but, financially, it's worse than putting it in the market.
This reply completely missunderstands his point, which is about sequence of returns risk. 

How can we have 30 year market returns if the home is sold in 1 year?  The mortgage must be paid when the house is sold.  This is so basic.  If the stock market was down for that year (sorry, this is a common occurance, even if weve had a historic bull market), you lose money from the leverage.

Even if you assume markets always rise over the long term (which is by no means the certain case), your reply literally assumes a wrong assumption for his example.   

Also, your prior reply states 'we use Firesim', as if it is some bible of prophecy.  Firesim is only a model that uses various assumptions to spit out projections.  It is a useful tool, but without understanding what the tools limits are, one should be careful.  No one can be certain what future market returns will be, as none of us can see the future.

So, how can you say it is financially worse.  It is unknown.  It is projected to be financially worse, sure.  Unless you saying you definitely predict the future using FireSim, which would be amazing.  If returns were that certain, no one would loan money to begin with, because it would all be in stocks (due to their superior risk free returns vs high quality debt...so why do people buy 30 year t bills then?)
« Last Edit: October 24, 2018, 06:12:30 PM by PizzaSteve »

bacchi

  • Magnum Stache
  • ******
  • Posts: 3538
I am not sure if it was covered in this thread or another but, yes, the period over which a mortgage is paid off has a substantial impact on the analysis. The shorter the period of time that someone would be paying extra to pay off their mortgage the less either decision has on the analysis. I think this contributes to the heated discussion. The question of to pay down a $100k mortgage early over a 1 year or to pay down a $750k mortgage early over 8 years are very different questions and may have different answers.

Also the faster you pay down a mortgage the higher likelihood stock market returns are negative or low during the early pay-down period.

Wait, what?

No, the timeline doesn't matter. Given $100k, putting it into the market for 29 years is (historically) better than paying off a ~4%, 30 year, non-callable mortgage.

This is a DCA vs lump-sum issue. Lump-sum is better: https://personal.vanguard.com/pdf/s315.pdf

It's certainly preferable to making extra payments (the bank doesn't give a shit if you've paid extra principal payments) but, financially, it's worse than putting it in the market.
This reply completely missunderstands his point, which is about sequence of returns risk. 

How can we have 30 year market returns if the home is sold in 1 year?  The mortgage must be paid when the house is sold.  This is so basic.  If the stock market was down for that year (sorry, this is a common occurance, even if weve had a historic bull market), you lose money from the leverage.

This reply completely missunderstands his point. Who said anything about selling the house in 1 year? Are you confusing posts?

If not, maybe you should be more clear about this scenario. Someone gets a mortgage on 1/1/18, pays it off by 12/31/18, the market declines by 50% on 1/1/19, and then they sell the house on 1/2/19. Is that correct? Or they sell first and then the market declines? Or the market declines on 12/30/18, right before they make the last payment?


Quote
Also, your prior reply states 'we use Firesim', as if it is some bible of prophecy.  Firesim is only a model that uses various assumptions to spit out projections. 

It's "cFiresim," not "Firesim."

Quote
It is a useful tool, but without understanding what the tools limits are, one should be careful.  No one can be certain what future market returns will be, as none of us can see the future.

Oh, wow, I hadn't thought about that.

Quote from: bacchi
Otherwise, we use cFiresim. Investing in the market when holding non-callable, low interest, long-term debt is better for your portfolio and years-to-FIRE, as long as the past isn't worse than the future. In which case, none of us will be retiring until we're 70.


Ha, I reversed that. ;) But you know what I meant.


« Last Edit: October 24, 2018, 07:07:50 PM by bacchi »

Boofinator

  • Pencil Stache
  • ****
  • Posts: 808
So you want to see the maths of whether paying off the mortgage will lead to a quicker FIRE using the cFIREsim model as a guide? The answer is: Almost certainly, for someone getting close to FIRE and wanting to maximize success (with some exceptions at low interest rates and long durations remaining).

Needless to say, there are many variables that might enter into this equation, but these plots just look at varying three: Loan-to-Portfolio Value (ratio of outstanding mortgage amount to amount in equities), Mortgage Interest Rate, and Years Remaining on the Loan. The variables I didn't vary (along with the values chosen): Portfolio Asset Allocation (100% equities), Retirement Duration (30 years), and Minimum Success Rate (95%), along with the other default inputs of cFIREsim. The dependent variable in these plots is the ratio of minimum spend rate for POTM to DPOYM.

Before anybody points out the obvious, yes, this only refers to someone about to FIRE. If one is early in the savings stage, paying off the mortgage will not help to FIRE earlier under just about any circumstance given today's interest rates (and assuming you can't predict the market).

Boofinator

  • Pencil Stache
  • ****
  • Posts: 808
So you want to see the maths of whether paying off the mortgage will lead to a quicker FIRE using the cFIREsim model as a guide?

So you are going to use the cFIREsim model as a tool to predict future returns...

If one is early in the savings stage, paying off the mortgage will not help to FIRE earlier under just about any circumstance given today's interest rates (and assuming you can't predict the market).

And then you assume you can't predict the market....


Its also important to consider the average American only owns a house for ~7 years, which means the 30-year line is not accurate for most people.

There is a huge difference between (1) using cFIREsim to predict the range of probable future returns and (2) being able to predict actual short-term returns using some kind of metric. To be explicit.

As to your second statement, there are dozens of variables that one can look at. I explicitly mentioned a number of them, but to add to that let's include keeping the house for 30 years. But let's look at the other scenario, where one gets a new house every so often (and ignoring all real estate transaction costs). This makes the math much worse for DPOYM, since now those payments rise with inflation every time you get a new house.

PizzaSteve

  • Pencil Stache
  • ****
  • Posts: 501
I am not sure if it was covered in this thread or another but, yes, the period over which a mortgage is paid off has a substantial impact on the analysis. The shorter the period of time that someone would be paying extra to pay off their mortgage the less either decision has on the analysis. I think this contributes to the heated discussion. The question of to pay down a $100k mortgage early over a 1 year or to pay down a $750k mortgage early over 8 years are very different questions and may have different answers.

Also the faster you pay down a mortgage the higher likelihood stock market returns are negative or low during the early pay-down period.

Wait, what?

No, the timeline doesn't matter. Given $100k, putting it into the market for 29 years is (historically) better than paying off a ~4%, 30 year, non-callable mortgage.

This is a DCA vs lump-sum issue. Lump-sum is better: https://personal.vanguard.com/pdf/s315.pdf

It's certainly preferable to making extra payments (the bank doesn't give a shit if you've paid extra principal payments) but, financially, it's worse than putting it in the market.
This reply completely missunderstands his point, which is about sequence of returns risk. 

How can we have 30 year market returns if the home is sold in 1 year?  The mortgage must be paid when the house is sold.  This is so basic.  If the stock market was down for that year (sorry, this is a common occurance, even if weve had a historic bull market), you lose money from the leverage.

This reply completely missunderstands his point. Who said anything about selling the house in 1 year? Please reread the original post you quote in your reply. He states that the time spent holding the debt impacts the analysis...Are you confusing posts? No, you state it is financially better to hold the mortgage, as if this does not depend on future unknown events. It is a fact that it is unknown whether a mortgage paydown or more investing in stock will be better.  Those are my 2 points.

If not, maybe you should be more clear about this scenario. Someone gets a mortgage on 1/1/18, pays it off by 12/31/18, the market declines by 50% on 1/1/19, and then they sell the house on 1/2/19. Is that correct? Or they sell first and then the market declines? Or the market declines on 12/30/18, right before they make the last payment?
We dont need to over complicate it.  If the market declines or increases at a rate less than the interest rate of the loan (during the period for which the debt is held), any amount of incremental dollars that goes into stocks vs. toward paying the mortgage reduces your wealth by the difference. This is the payoff works out better scenario. 

An additional hypothesis might be that: the shorter the time period one invests, the more risk exists that sequence of return variations implicit in stocks throw one into the range of outcomes for which stocks underperform, assuming future markets follow historic patterns. I am not saying this is likely, just throwing out the concept of what scenarios folks are seeking to avoid (e.g. plan to retire and sell house in 2 years, hold 2M in stocks already, so chose to pay off a 300k debt as a bondlike investment, vs keep more in stocks. 


Quote
Also, your prior reply states 'we use Firesim', as if it is some bible of prophecy.  Firesim is only a model that uses various assumptions to spit out projections. 

It's "cFiresim," not "Firesim."

Quote
It is a useful tool, but without understanding what the tools limits are, one should be careful.  No one can be certain what future market returns will be, as none of us can see the future.

Oh, wow, I hadn't thought about that.

Quote from: bacchi
Otherwise, we use cFiresim. Investing in the market when holding non-callable, low interest, long-term debt is better for your portfolio and years-to-FIRE, as long as the past isn't worse than the future. In which case, none of us will be retiring until we're 70.


Ha, I reversed that. ;) But you know what I meant.

PS, if you look at the scenario of a mobile tech worker, who is relocated every 5 years, then rolling equity into the new house vs holding a bigger stock portfolio can also significantly reduce transaction costs by allowing better loan to value ratios for cheaper money, lower points cost (origination fees and points are preportional to the loan cost).  These reduced fees bump up the ROI on holding equity.

It seems strange to defend 'it is always better to not payoff' in the face of so many clear scenarios where it might not be.  1) a loan is so expensive or has such bad terms, that the return on a payoff is better than likely stock returns 2) stocks dont do as well as expected, long term, so leverage works against the holder of debt, 3) someone moves houses a lot and rolling in home equity reduces origination loan costs, 4) one is about to retire and plans on selling the home so payoof is a sensible way to limit sequence of returns risk, 5) one knows they are subject to make emotional mistakes with large amount in the stock market, and would likely sell their stocks at a loss during a crash, but feels they would handle it ok if they are diversified with some cash, home equity, as more 'secure', etc. Again, I am not saying these scenarios will happen, just that they exist, so 'always' doesnt apply.

PPS you split hairs over my using Firesim as shorthand for models, yet say `you know what i meant' when your earlier post was flat out backwards...please.  Sorry for that. I dont use any models because we are already FIRE.  Dont need to simulate anything.
« Last Edit: October 25, 2018, 06:57:34 PM by PizzaSteve »

bacchi

  • Magnum Stache
  • ******
  • Posts: 3538
PPS you split hairs over my using Firesim as shorthand for models, yet say `you know what i meant' when your earlier post was flat out backwards...please.  Sorry for that. I dont use any models because we are already FIRE.  Dont need to simulate anything.

Yeah, I knew what you meant but was assuming you didn't know about cFiresim specifically. It wasn't an insult.

Kyle Schuant

  • Pencil Stache
  • ****
  • Posts: 664
  • Location: Melbourne, Australia

Radagast

  • Handlebar Stache
  • *****
  • Posts: 1421
  • Location: West of the Mountains, East of the Sea
  • hedonismbot
OT, but I stopped by Penfed to see current rates because of this thread. They said I could afford a $850,000 house! So I moved the slider to the "least aggressive" end. I can still afford a 750,000 house! It was all I could do to keep my finger off the "apply now" icon.

simplyjay

  • 5 O'Clock Shadow
  • *
  • Posts: 46
  • Location: Massachusetts
following to read posts.

ericrugiero

  • 5 O'Clock Shadow
  • *
  • Posts: 96
Wow, this is a hot topic with good points on both sides.  It seems to me that:

1)  Over a long time with low interest rates (<4%) and assuming historical stock market returns it is mathematically better to invest in good stocks (index funds) vs paying off the house earlier.  As interest rates rise this changes. The advantage of stocks is increased if you have room left in tax advantages savings accounts (401k, IRA, etc)

2)  Paying off a house has emotional value and can even be better mathematically in specific cases like trying to lower income to qualify for a specific medical plan in FIRE.  Many of us just feel better with a paid off house.  It takes our biggest required monthly expense and eliminates it.  If things really go South, our minimum spend is dramatically decreased. 

3)  Some people have an easier time motivating themselves to pay off a house than investing in stocks.  Sometimes behavior is more important than optimizing percentages.  That said, if those people would be disciplined enough to invest the extra money in index fund stocks they would be better off. 

4)  Many people argue with others for paying off their mortgage early but very few people criticize a 60% stock 40% bond portfolio.  The math is same here.  Stock investing is more volatile but has better historical returns.  I understand wanting more stable returns when retired but if we are talking about people who are still working, why are bonds more accepted than paying off a mortgage? 


bacchi

  • Magnum Stache
  • ******
  • Posts: 3538
Wow, this is a hot topic with good points on both sides.  It seems to me that:

1)  Over a long time with low interest rates (<4%) and assuming historical stock market returns it is mathematically better to invest in good stocks (index funds) vs paying off the house earlier.  As interest rates rise this changes. The advantage of stocks is increased if you have room left in tax advantages savings accounts (401k, IRA, etc)

2)  Paying off a house has emotional value and can even be better mathematically in specific cases like trying to lower income to qualify for a specific medical plan in FIRE.  Many of us just feel better with a paid off house.  It takes our biggest required monthly expense and eliminates it.  If things really go South, our minimum spend is dramatically decreased. 

3)  Some people have an easier time motivating themselves to pay off a house than investing in stocks.  Sometimes behavior is more important than optimizing percentages.  That said, if those people would be disciplined enough to invest the extra money in index fund stocks they would be better off. 

Great summary.

Quote
4)  Many people argue with others for paying off their mortgage early but very few people criticize a 60% stock 40% bond portfolio.  The math is same here.  Stock investing is more volatile but has better historical returns.  I understand wanting more stable returns when retired but if we are talking about people who are still working, why are bonds more accepted than paying off a mortgage?

When working? Yeah, people should go all-out on stocks while working, as much as their personal tolerance allows. Shifting to bonds, even temporarily with a bond tent, is a good idea when getting close to retirement.

effigy98

  • Bristles
  • ***
  • Posts: 319
In tech, I have seen many get layed off at the same time the market tanks. Income fire hose is gone, market has been sliced in half, you are biting your nails sending out 1000s of resumes to get another job that will probably pay half or less then you were making. Things are looking dire. If only that mortgage was gone. If your income requirements were lower, you could qualify for a lot of subsidies, but no, you went 100% stocks and leveraged the house up. You thought you were smart, math is math. Wife leaves you because you gambled the future way in her eyes, ooops that was not in the plan, 50% haircut on everything. This is just not working out, why did I listen to all these yolo investors. I should have listened to Dave Ramsey. Dammit!

DeniseNJ

  • 5 O'Clock Shadow
  • *
  • Posts: 69
Quote
In tech, I have seen many get layed off at the same time the market tanks. Income fire hose is gone, market has been sliced in half, you are biting your nails sending out 1000s of resumes to get another job that will probably pay half or less then you were making. Things are looking dire. If only that mortgage was gone. If your income requirements were lower, you could qualify for a lot of subsidies, but no, you went 100% stocks and leveraged the house up. You thought you were smart, math is math. Wife leaves you because you gambled the future way in her eyes, ooops that was not in the plan, 50% haircut on everything. This is just not working out, why did I listen to all these yolo investors. I should have listened to Dave Ramsey. Dammit

And then the SALT deductions are limited to 10K.  So instead of deducting 25K in SALT and another 10K in mortgage interest and a few other things for a total of 35K in deductions, now we can only deduct 10K SALT and 10K interest (total of 20K) and it's not even over the standad deduction, so there goes that great benefit of mortgage interest being tax deductible.  I'd have the same standard deduction with no mortgage!  That was a monkey wrench that makes me want to pay off my house.

TexasRunner

  • Pencil Stache
  • ****
  • Posts: 927
  • Age: 27
  • Location: Somewhere in Tejas
In tech, I have seen many get layed off at the same time the market tanks. Income fire hose is gone, market has been sliced in half, you are biting your nails sending out 1000s of resumes to get another job that will probably pay half or less then you were making. Things are looking dire. If only that mortgage was gone. If your income requirements were lower, you could qualify for a lot of subsidies, but no, you went 100% stocks and leveraged the house up. You thought you were smart, math is math. Wife leaves you because you gambled the future way in her eyes, ooops that was not in the plan, 50% haircut on everything. This is just not working out, why did I listen to all these yolo investors. I should have listened to Dave Ramsey. Dammit!

What a solid post of crap... lets break that down some.

(1) NO ONE IN THE DPOYMC (Don't pay off the mortgage club) says 100% stocks WITH NO EMERGENCY FUND.  You have to be a COMPLETE dumbass to do that.

(2) THAT GUY STILL HAS TENS OR HUNDREDS OF THOUSANDS OF DOLLARS IN THE MARKET.  Even if the market tanked, it should be about a 50% correction (unless you really think the days of 90% Great Depression days aren't behind us).  That means if he had 300k in stocks, he still HAS 150k in stocks.  Which can be used to support life.  Yes, it might jack up the FIRE plan, but overall its not life ending.

(3) IF YOU HAVE NO INCOME AND HAVE TO SELL STOCKS, YOU CAN STILL HAVE SUBSIDIES.  If you bought a 1.5 Million dollar house, well then that was probably a crap decision anyway.  If you bought a 300k house, then you aren't over the subsidy limit. AND YOU SHOULD STILL HAVE 6 MONTHS OR MORE OF EMERGENCY FUND INCLUDING INSURANCE COSTS.

(4) The wife leaves you because of a recession...  Really that makes it into your dim-witted rant?  What a great relationship you both must have to not make it through "for richer and for poorer".

and finally

(5) WHO THE FUCK LISTENS TO THE DAVE RAMSEY AND ACTUALLY BELIEVES HIS BULLSHIT???????  High-fee funds with front loading costs?  Save now to spend even more later?  $140 for a paperback book and some pre-recorded videos?  What a fucking shill.

This has got to be one the least reasonable and most face-punch worthy posts in this entire thread, because if you can't beat somebody out with reasoning and logic, just expound into emotional rhetoric and extreme examples that no one is actually saying.  Damn.
« Last Edit: March 22, 2019, 10:55:02 AM by TexasRunner »

bacchi

  • Magnum Stache
  • ******
  • Posts: 3538
This has got to be one the least reasonable and most face-punch worthy posts in this entire thread, because if you can't beat somebody out with reasoning and logic, just expound into emotional rhetoric and extreme examples that no one is actually saying.  Damn.

This seems to be par for the course.

If you lose your job, and the market tanks 90%, and your $300k (now $30k) in investments STILL has enough of a cap gain to make too much for medicaid, and you were laid off in February (before you made enough in the year to pass the max for medicaid), and your unemployment benefit is not enough to push you over the max for medicaid, and you don't have an emergency fund, then -- ha! -- you're going to wish you had a paid off house then!

nereo

  • Senior Mustachian
  • ********
  • Posts: 10037
  • Location: la belle province
    • Here's how you can support science today:
This has got to be one the least reasonable and most face-punch worthy posts in this entire thread, because if you can't beat somebody out with reasoning and logic, just expound into emotional rhetoric and extreme examples that no one is actually saying.  Damn.

This seems to be par for the course.

If you lose your job, and the market tanks 90%, and your $300k (now $30k) in investments STILL has enough of a cap gain to make too much for medicaid, and you were laid off in February (before you made enough in the year to pass the max for medicaid), and your unemployment benefit is not enough to push you over the max for medicaid, and you don't have an emergency fund, then -- ha! -- you're going to wish you had a paid off house then!
Let's just state the obvious - the broader market (e.g SP500) has never had a 90% selloff, and you won't have capitol gains if you sell stocks at a loss.

The greatest danger (i.e. the position where you would be most at risk) is if you prioritize paying down your house and ignore all other investments.  Then, should the SHTF *before* you finish paying off your mortgage you have little-to-no savings and you still have a mortgage.  The bank won't care if you only have 8 more payments to go...

The second greatest danger is when someone has just paid off their home after ignoring all other savings.  The cashflow is better (i.e. less) than the scenario above, but this person lacks the assets to weather the proverbial storm.  The house will go into foreclosure if you can't cover taxes and insurance (which typically eclipse the initial PI after a decade or two).

A person who has substantial investments and an E-fund will ride out any storm better than those mentioned above, regardless of whether s/he has paid off the house or not. 

OurTown

  • Handlebar Stache
  • *****
  • Posts: 1098
  • Age: 49
  • Location: Tennessee
@TexasRunner Don't hold back, tell us how you really feel!

Dicey

  • Walrus Stache
  • *******
  • Posts: 9715
  • Age: 61
  • Location: NorCal
Y'all know this guy has never made another post on this website under this name? T-R-O-L-L

nereo

  • Senior Mustachian
  • ********
  • Posts: 10037
  • Location: la belle province
    • Here's how you can support science today:
Y'all know this guy has never made another post on this website under this name? T-R-O-L-L
Sure, but it doesn't stop the thread and its many pages of comments from existing.

DadJokes

  • Bristles
  • ***
  • Posts: 378
In tech, I have seen many get layed off at the same time the market tanks. Income fire hose is gone, market has been sliced in half, you are biting your nails sending out 1000s of resumes to get another job that will probably pay half or less then you were making. Things are looking dire. If only that mortgage was gone. If your income requirements were lower, you could qualify for a lot of subsidies, but no, you went 100% stocks and leveraged the house up. You thought you were smart, math is math. Wife leaves you, ooops that was not in the plan, 50% haircut on everything. This is just not working out, why did I listen to all these yolo investors. I should have listened to Dave Ramsey. Dammit!

I canít tell if this is satire or not.

1) Donít live a lifestyle that requires two working spouses. If you canít get by on the income of the lowest earning spouse, you are in the two-income trap.

2) This is what emergency funds are for. Or you can go the route of Big ERN and use credit cards/HELOC/selling stocks to fund emergencies (obviously paying off cards before interest hits).

Boofinator

  • Pencil Stache
  • ****
  • Posts: 808
Y'all know this guy has never made another post on this website under this name? T-R-O-L-L
Sure, but it doesn't stop the thread and its many pages of comments from existing.
And, to be fair, his post was well thought out. He's batting 1.000 for quality posts!

Dicey

  • Walrus Stache
  • *******
  • Posts: 9715
  • Age: 61
  • Location: NorCal
Y'all know this guy has never made another post on this website under this name? T-R-O-L-L
Sure, but it doesn't stop the thread and its many pages of comments from existing.
And, to be fair, his post was well thought out. He's batting 1.000 for quality posts!
I fucking hate being shouted at!

Malkynn

  • Pencil Stache
  • ****
  • Posts: 692
In tech, I have seen many get layed off at the same time the market tanks. Income fire hose is gone, market has been sliced in half, you are biting your nails sending out 1000s of resumes to get another job that will probably pay half or less then you were making. Things are looking dire. If only that mortgage was gone. If your income requirements were lower, you could qualify for a lot of subsidies, but no, you went 100% stocks and leveraged the house up. You thought you were smart, math is math. Wife leaves you, ooops that was not in the plan, 50% haircut on everything. This is just not working out, why did I listen to all these yolo investors. I should have listened to Dave Ramsey. Dammit!

I canít tell if this is satire or not.

1) Donít live a lifestyle that requires two working spouses. If you canít get by on the income of the lowest earning spouse, you are in the two-income trap.

2) This is what emergency funds are for. Or you can go the route of Big ERN and use credit cards/HELOC/selling stocks to fund emergencies (obviously paying off cards before interest hits).

Plus if your wife leaves you, a paid off house is probably the last thing you want...

I get that there are scenarios where paying off the mortgage makes sense, but most people I know who prioritize paying off their mortgage don't actually understand the risks that they are increasing.

I don't think it's that the *don't* pay off your mortgage people are necessarily dogmatic (b42 is gone, he's the only one I ever saw being dogmatic), it's that we see SOOOOOO many people using nonsense logic to justify paying extra on their mortgage to feel "safer" when it is often actually putting them in a more precarious position.

Hilariously, being ultra conservative AND being ultra aggressive both favor NOT paying off the mortgage.

If you want to be as safe and flexible as possible in all lifestyle risk scenarios, then cash is king and having it tied up in a house is suboptimal. This is incidentally my personal scenario at the moment.

It starts getting a little hanky if you are over leveraged on a very expensive home relative to your income, but those of us ultra focused on flexibility wouldn't choose that option.

If you want to maximize potential returns, then not paying off the mortgage is still the best bet and we have enough mathy people here to show that.

Where paying off the mortgage works out is in a dynamic range of lifestyles that are in between maximum flexibility and maximum potential returns. Which is where most people actually live.

It's why the debate gets so nonsensical because NOT paying off the mortgage bookends all middle ground, which is why it all comes down to really looking at individual details.

It's not conservative vs aggressive, it's actually understanding how moderate you are individually and why.
Most importantly, it's understanding exactly how this decision impacts your particular life.

NOT paying off the mortgage will almost always be the best answer if you are only focusing on risk or gains, but very few of us live in such extreme ends of the spectrum, and if we do, usually only temporarily.

I am so grateful to b42 for helping me see what role my mortgage actually played in my life.

Personally, I may choose paying down my mortgage over investing in a taxable account because I don't really care about maxing returns, but I won't touch it with a ten foot pole for the next several years because I need to minimize risk until then.

ender

  • Magnum Stache
  • ******
  • Posts: 4605
I don't think it's that the *don't* pay off your mortgage people are necessarily dogmatic (b42 is gone, he's the only one I ever saw being dogmatic), it's that we see SOOOOOO many people using nonsense logic to justify paying extra on their mortgage to feel "safer" when it is often actually putting them in a more precarious position.


What I constantly tell people is that in almost all cases, paying extra on a mortgage doesn't provide any extra security/safety unless the balance is $0.



Boofinator

  • Pencil Stache
  • ****
  • Posts: 808
Y'all know this guy has never made another post on this website under this name? T-R-O-L-L
Sure, but it doesn't stop the thread and its many pages of comments from existing.
And, to be fair, his post was well thought out. He's batting 1.000 for quality posts!
I fucking hate being shouted at!
True. All caps should be reserved for actual situations where shouting would be prudent and/or funny (YOUR HAIR IS ON FIRE! would fit the bill).

joenorm

  • 5 O'Clock Shadow
  • *
  • Posts: 61
Interesting post.

After reading through much of the back and forth I have a question.

Doesn't the question of paying off mortgage 100% depend on the rate of your mortgage? Some people have a 2.5% mortgage, that's insanely low.

I, on the other hand have a mortgage rate of 4.75% so I am right in that grey area of whether it makes sense to pay off.

Fun to read, certainly an emotional topic

Blueberries

  • Stubble
  • **
  • Posts: 178

4)  Many people argue with others for paying off their mortgage early but very few people criticize a 60% stock 40% bond portfolio.  The math is same here.  Stock investing is more volatile but has better historical returns.  I understand wanting more stable returns when retired but if we are talking about people who are still working, why are bonds more accepted than paying off a mortgage?

I agree with the general sentiment of this post.

***

The amount of heated discussion over mortgages is...odd, at best.  The math is out there and now it is up to individuals to decide what is best for their situation.  Their mortgage choices aren't impacting you so why are you taking it personally?  As alluded to above, I have yet to see this type of outrage when working people [who aren't near their retirement goal] are diversifying their portfolio in multiple stock funds, bond funds, etc. 

Boofinator

  • Pencil Stache
  • ****
  • Posts: 808
Interesting post.

After reading through much of the back and forth I have a question.

Doesn't the question of paying off mortgage 100% depend on the rate of your mortgage? Some people have a 2.5% mortgage, that's insanely low.

I, on the other hand have a mortgage rate of 4.75% so I am right in that grey area of whether it makes sense to pay off.

Fun to read, certainly an emotional topic

Yes, you're correct. My opinion for the best way to look at it is to consider your time horizon. Are you just starting out? If that is the case, you need some liquidity and you want to maximize expected returns. Stocks fit the bill for both, and I would not pay off a mortgage at that rate (as others have mentioned, stocks counterintuitively increase expected returns and minimize risk).

However, the objectives for most people change when you are getting to the point where your stash can cover long-term expenses. If you want to retire early, your objective is no longer to maximize expected return but to minimize the probability of going broke, and of course you should have a ton of liquidity in your stash; at this point, you should consider paying off your mortgage to minimize the risk of running out of money. I plotted some graphs earlier in this thread showing whether it is optimal (from a 95% success scenario) to keep your mortgage or pay it off based on interest rate, duration, and loan-to-stash value (a measure of liquidity). (Granted this is all based off historical U.S. returns, which are in no way guaranteed.)
« Last Edit: March 23, 2019, 08:55:19 AM by Boofinator »

the_fixer

  • Pencil Stache
  • ****
  • Posts: 508
  • Location: Colorado
  • mind on my money money on my mind
In tech, I have seen many get layed off at the same time the market tanks. Income fire hose is gone, market has been sliced in half, you are biting your nails sending out 1000s of resumes to get another job that will probably pay half or less then you were making. Things are looking dire. If only that mortgage was gone. If your income requirements were lower, you could qualify for a lot of subsidies, but no, you went 100% stocks and leveraged the house up. You thought you were smart, math is math. Wife leaves you because you gambled the future way in her eyes, ooops that was not in the plan, 50% haircut on everything. This is just not working out, why did I listen to all these yolo investors. I should have listened to Dave Ramsey. Dammit!

What a solid post of crap... lets break that down some.

(1) NO ONE IN THE DPOYMC (Don't pay off the mortgage club) says 100% stocks WITH NO EMERGENCY FUND.  You have to be a COMPLETE dumbass to do that.

(2) THAT GUY STILL HAS TENS OR HUNDREDS OF THOUSANDS OF DOLLARS IN THE MARKET.  Even if the market tanked, it should be about a 50% correction (unless you really think the days of 90% Great Depression days aren't behind us).  That means if he had 300k in stocks, he still HAS 150k in stocks.  Which can be used to support life.  Yes, it might jack up the FIRE plan, but overall its not life ending.

(3) IF YOU HAVE NO INCOME AND HAVE TO SELL STOCKS, YOU CAN STILL HAVE SUBSIDIES.  If you bought a 1.5 Million dollar house, well then that was probably a crap decision anyway.  If you bought a 300k house, then you aren't over the subsidy limit. AND YOU SHOULD STILL HAVE 6 MONTHS OR MORE OF EMERGENCY FUND INCLUDING INSURANCE COSTS.

(4) The wife leaves you because of a recession...  Really that makes it into your dim-witted rant?  What a great relationship you both must have to not make it through "for richer and for poorer".

and finally

(5) WHO THE FUCK LISTENS TO THE DAVE RAMSEY AND ACTUALLY BELIEVES HIS BULLSHIT???????  High-fee funds with front loading costs?  Save now to spend even more later?  $140 for a paperback book and some pre-recorded videos?  What a fucking shill.

This has got to be one the least reasonable and most face-punch worthy posts in this entire thread, because if you can't beat somebody out with reasoning and logic, just expound into emotional rhetoric and extreme examples that no one is actually saying.  Damn.
Funny thing is I have 3 friends that had this exact situation happen to them in the 2008 - 2010 timeframe.

Mega Corp that we worked for laid thousands of people off,  they could not find a job despite being very qualified, burned through emergency funds, dipped into 401k funds, tried to sell house but the market was in the tank, they tried a short sale but banks were not allowing it, eventually foreclosed on and two if the three ended in divorce.

Their houses were not mega Mansions but nice houses and maybe slightly above what they should have purchased but by no means crazy.

You can stick your head in the sand and think it will never happen but it did happen to many people.


Sent from my Pixel 2 XL using Tapatalk


nereo

  • Senior Mustachian
  • ********
  • Posts: 10037
  • Location: la belle province
    • Here's how you can support science today:
Doesn't the question of paying off mortgage 100% depend on the rate of your mortgage? Some people have a 2.5% mortgage, that's insanely low.

I, on the other hand have a mortgage rate of 4.75% so I am right in that grey area of whether it makes sense to pay off.


Yes, your rate certainly matters, as does your personal investment options (e.g. do you have additional headroom in your tax-advantaged accounts?  Can you claim the mortgage interest deduction? What percentage of your net worth is tied to your home? How secure is your job?...) . It also matters what current rates are for bonds and Tbills.  For example my parents originally had a mortgage at 6.75%, but shortly thereafter Treasury bills started paying in excess of 10% and inflation ~= the mortgage rate.  Even with a mortgage rate north of 6% it still made no damn sense to overpay.  That's why the Investment Order references the rate minus the 10y treasury bill.

4.75% is still historically low, and less than half of what the median market returns have been.  If you have maxed out your tax-advantaged accounts, have good job security and a good e-fund and your home is a minority of your total NW then the choice about whether to pay off or not becomes less important. The more of those questions answered 'no' the more risky a decision to pre-pay the mortgage will be.

nereo

  • Senior Mustachian
  • ********
  • Posts: 10037
  • Location: la belle province
    • Here's how you can support science today:
Funny thing is I have 3 friends that had this exact situation happen to them in the 2008 - 2010 timeframe.

Mega Corp that we worked for laid thousands of people off,  they could not find a job despite being very qualified, burned through emergency funds, dipped into 401k funds, tried to sell house but the market was in the tank, they tried a short sale but banks were not allowing it, eventually foreclosed on and two if the three ended in divorce.

Their houses were not mega Mansions but nice houses and maybe slightly above what they should have purchased but by no means crazy.

You can stick your head in the sand and think it will never happen but it did happen to many people.
We experienced something similar living in California at the time.  Our local real-estate prices dropped >40% in just a few months, and with the credit crunch banks stopped extending HELOCs. Before too long there was a glut of foreclosures and a complete lack of buyers since even those with great credit couldn't secure a mortgage (again, this was during the credit crunch).  I witnessed a lot of people who were house-rich but cash-poor go underwater, they couldn't afford to move to new locations with better job prospects because of the 'house anchor' and they had little other savings to fall back on.

Telecaster

  • Handlebar Stache
  • *****
  • Posts: 1700
  • Location: Seattle, WA
Funny thing is I have 3 friends that had this exact situation happen to them in the 2008 - 2010 timeframe.

Mega Corp that we worked for laid thousands of people off,  they could not find a job despite being very qualified, burned through emergency funds, dipped into 401k funds, tried to sell house but the market was in the tank, they tried a short sale but banks were not allowing it, eventually foreclosed on and two if the three ended in divorce.

Their houses were not mega Mansions but nice houses and maybe slightly above what they should have purchased but by no means crazy.

You can stick your head in the sand and think it will never happen but it did happen to many people.


Great post.  No one ever thinks they will get divorced, get laid off, the company they work for will go under, get sick and can't work, etc.  But all those things happen to real people every day.   If one of those life events happen, the very last place you want your money is in your house.

Paying down the mortgage is an insanely risky strategy, which enormous downside and tiny upside. 

the_fixer

  • Pencil Stache
  • ****
  • Posts: 508
  • Location: Colorado
  • mind on my money money on my mind
Funny thing is I have 3 friends that had this exact situation happen to them in the 2008 - 2010 timeframe.

Mega Corp that we worked for laid thousands of people off,  they could not find a job despite being very qualified, burned through emergency funds, dipped into 401k funds, tried to sell house but the market was in the tank, they tried a short sale but banks were not allowing it, eventually foreclosed on and two if the three ended in divorce.

Their houses were not mega Mansions but nice houses and maybe slightly above what they should have purchased but by no means crazy.

You can stick your head in the sand and think it will never happen but it did happen to many people.


Great post.  No one ever thinks they will get divorced, get laid off, the company they work for will go under, get sick and can't work, etc.  But all those things happen to real people every day.   If one of those life events happen, the very last place you want your money is in your house.

Paying down the mortgage is an insanely risky strategy, which enormous downside and tiny upside.
Pretty much the response I expected....

Sent from my Pixel 2 XL using Tapatalk


TexasRunner

  • Pencil Stache
  • ****
  • Posts: 927
  • Age: 27
  • Location: Somewhere in Tejas
Funny thing is I have 3 friends that had this exact situation happen to them in the 2008 - 2010 timeframe.

Mega Corp that we worked for laid thousands of people off,  they could not find a job despite being very qualified, burned through emergency funds, dipped into 401k funds, tried to sell house but the market was in the tank, they tried a short sale but banks were not allowing it, eventually foreclosed on and two if the three ended in divorce.

Their houses were not mega Mansions but nice houses and maybe slightly above what they should have purchased but by no means crazy.

You can stick your head in the sand and think it will never happen but it did happen to many people.


Great post.  No one ever thinks they will get divorced, get laid off, the company they work for will go under, get sick and can't work, etc.  But all those things happen to real people every day.   If one of those life events happen, the very last place you want your money is in your house.

Paying down the mortgage is an insanely risky strategy, which enormous downside and tiny upside.
Pretty much the response I expected....

Sent from my Pixel 2 XL using Tapatalk

How, exactly, would have an additional 100k in the house have helped any of them?...

Now if you were talking about a completely paid off house-  that can be worth some discussion, but extra equity doesn't do anyone any good in that situation.

Also worth noting-  300k in extra equity in the 2008 crash could have been COMPLETELY wiped out with falling house prices.  300k in stocks still would have been 150k in stocks.  Personally, I'll take the lower risk stocks first, a fully paid off house as a distant second, and extra payments (without the note in hand) as a VERY distant third.

How many of those people had actual six-month emergency funds based on their actual spending?  Most of the news says people can't afford an unexpected $500 expense yet you are telling me that SEVERAL people you knew had 6 months plus in a secure and liquid EM fund like CDs or cash?  I find that hard to believe.

the_fixer

  • Pencil Stache
  • ****
  • Posts: 508
  • Location: Colorado
  • mind on my money money on my mind
I am of the belief that you should owe as much as possible or pay it off in a lump sum (or in a really short period) as the time between is where the risk is greatest. That is personally what I am shooting for at fire throw a large lump sum at the house and pay it off.

My response before was based on my assumption that telecaster was in the never pay it off and leverage it as much as you can.

As for exactly how much money they had in their e fund I am not sure, I know that for the first 3 months or so they say did not seem worried or stressed. They were personal friends but we did not discuss to that detail.

I know many more that struggled but managed to get by. I honestly hope that no one here has to experience it I know we were lucky to come out as good as we did compared to many others.

Sent from my Pixel 2 XL using Tapatalk


Dicey

  • Walrus Stache
  • *******
  • Posts: 9715
  • Age: 61
  • Location: NorCal
I am of the belief that you should owe as much as possible or pay it off in a lump sum (or in a really short period) as the time between is where the risk is greatest. That is personally what I am shooting for at fire throw a large lump sum at the house and pay it off.

My response before was based on my assumption that telecaster was in the never pay it off and leverage it as much as you can.

As for exactly how much money they had in their e fund I am not sure, I know that for the first 3 months or so they say did not seem worried or stressed. They were personal friends but we did not discuss to that detail.

I know many more that struggled but managed to get by. I honestly hope that no one here has to experience it I know we were lucky to come out as good as we did compared to many others.

Sent from my Pixel 2 XL using Tapatalk
A lot of the people who "managed to get by" got behind on their mortgages but avoided foreclosure. Here's a dirty little secret: the banks tacked huge fees on to those debts. A friend who was caught in the downturn got a job inspecting houses for the banks. Once a month, he checked on the properties and sent photos to the bank. Most of these properties were still occupied, behind on their payments, but yet to be foreclosed upon. This friend was very polite and respectful of the owners, as he was struggling too. One day as he was taking his photos, a woman came out to chat. She said it was always nice to see him, except that every time he came by, the bank added another $150 fee to her mortgage. Of course, my friend was only making a third of that.

Telecaster

  • Handlebar Stache
  • *****
  • Posts: 1700
  • Location: Seattle, WA
A lot of the people who "managed to get by" got behind on their mortgages but avoided foreclosure. Here's a dirty little secret: the banks tacked huge fees on to those debts. A friend who was caught in the downturn got a job inspecting houses for the banks. Once a month, he checked on the properties and sent photos to the bank. Most of these properties were still occupied, behind on their payments, but yet to be foreclosed upon. This friend was very polite and respectful of the owners, as he was struggling too. One day as he was taking his photos, a woman came out to chat. She said it was always nice to see him, except that every time he came by, the bank added another $150 fee to her mortgage. Of course, my friend was only making a third of that.


I have a similar story.  A friend was struggling with his mortgage.   I can't remember what the trigger was, but if he got far enough behind (but not so far they started to foreclose), the bank's law firm would send him a form letter explaining he had to get current or they reserved the right to start the foreclosure process.  The bank charged him $100 every time they sent the letter.