Author Topic: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!  (Read 45923 times)

bacchi

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The statement which led to (made by SwordGuy) was a joke, indicated by the smiley emoticon at the end.

*whoosh* I missed that bit of sarcasm. It didn't make sense given the context of the rest of his post but I accepted it anyway. I was probably too stunned from the other posts in this thread.

Midwest

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If you just started a 30-year mortgage the 4% rule is a great guideline for determining how much you would need to have saved to cover the mortgage payment. Using cFIREsim you would need a portfolio of $330,000 to cover a $1,000 per month principle and interest payment in every historical scenario which is a withdrawal rate of 3.6%.

The statement which led to your response (made by SwordGuy) was a joke, indicated by the smiley emoticon at the end.  Clearly if you have a mortgage balance of $100,000, you do not need $250,000 or $330,000 to cover it.  That's absurd. 
What you would need is to factor in an additional $1,000/mo to your anticipated expenses for the duration of the mortgage.  When you do that you'll notice that you need substantially less than you would putting that money towards your mortgage, in part because it is a fixed amount and the real value decreases with inflation (and yes, also because the market's average returns exceed current fixed mortgage rates).

(edited for clarity)

Nereo:

If you have a portion of your portfolio in bonds, shouldn't you use a weighted average return as a comparison point at a minimum.  If you bond portfolio is equal to or greater than your mortgage, I would argue that is the return you should be comparing to rather than the market as a whole.

I have no mortgage and almost no bonds.  My mortgage payoff has replaced my bond portfolio. 

MW


libertarian4321

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I paid my mortgage off very early and I know for a fact that I made money by doing so.

Maybe I just got lucky.  But people need to remember that statistics can only tell you that you MIGHT do better investing rather than paying off, it is not a sure thing.

BTW, I did not pay it off "to make money."  I paid it off because I do not do debt if I can possibly help it.

Avoiding debt may not always "statistically" be the best financial move, but it's worked pretty well for us.

nereo

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Nereo:

If you have a portion of your portfolio in bonds, shouldn't you use a weighted average return as a comparison point at a minimum. 
Yes.  It's important to compare apples to apples here, which isn't being done. If you have a 90/10 split you can compare the weighted average returns, using the bond prices available (which is known) and the market returns (which is unknown but historically available).
Likewise, 30 year fixed mortgages exist, so that's the relevant time frame.  If we were limited to 10 or 15yr mortgages the outcomes play out differently... but, we're not limited.

If you bond portfolio is equal to or greater than your mortgage, I would argue that is the return you should be comparing to rather than the market as a whole.
I disagree.  It's about what you would invest the money in if you weren't paying down the mortgage at an accelerated rate.  It doesn't matter if you have a $200k mortgage but $250k in bonds and $750k in stocks (a 75/25 split, but more bonds than your mortgage).  Under that scenario and assuming you maintain the same AA you should compare returns over the relevant time period to a 75/25 portfolio.

Also - it should go without saying but what we are talking about is current and recent 30y fixed mortgage rates.  If someone had a 6+% mortgage rate and couldn't refinance I'd obviously recommend paying that down ASAP, but typically bond rates scale. FIL's first mortgage was in excess of 10% (in the early 80s), but bonds were paying in excess of 10% as well.

Midwest

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If you bond portfolio is equal to or greater than your mortgage, I would argue that is the return you should be comparing to rather than the market as a whole.
I disagree.  It's about what you would invest the money in if you weren't paying down the mortgage at an accelerated rate.  It doesn't matter if you have a $200k mortgage but $250k in bonds and $750k in stocks (a 75/25 split, but more bonds than your mortgage).  Under that scenario and assuming you maintain the same AA you should compare returns over the relevant time period to a 75/25 portfolio.

Nereo - I removed all the things we agree on (which is a lot in this case).  With regard to the relevant benchmark, my strategy has been to pay down the mortgage instead of buying bonds as part of my portfolio.

Using my portfolio as an example, I'm 75% equity and 25% debt free real estate.  Almost no bonds in my portfolio.  If I still had a mortgage, I would be replacing the real estate debt with bonds not equities to maintain the asset allocation.  Given that scenario, it seems that bond yields are the appropriate comparison rather than equities.

If you are paying down your mortgage at an accelerated rate and failing to adjust your asset allocation for this factor, I would agree with your weighted average.  If you are making the adjustment I am using, bonds yields would be more appropriate.

As an aside, my 10 year average rate of return on my portfolio is 7.3% (almost 100% equities).  Mortgage was 4.25% when I paid it off.  If I had included bonds in that portfolio, my portfolio yield would have been even less than 7.3%.   

Thanks for the intelligent discussion on the topic.

nereo

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Nereo - I removed all the things we agree on (which is a lot in this case).  With regard to the relevant benchmark, my strategy has been to pay down the mortgage instead of buying bonds as part of my portfolio.

Using my portfolio as an example, I'm 75% equity and 25% debt free real estate.  Almost no bonds in my portfolio.  If I still had a mortgage, I would be replacing the real estate debt with bonds not equities to maintain the asset allocation.  Given that scenario, it seems that bond yields are the appropriate comparison rather than equities.
...
Thanks for the intelligent discussion on the topic.

Ah... ok, I get what you are saying now!  Yes, if your stated AA was to replace your real-estate component with bonds, then yes it would be relevant to make that comparison. 
Personally, my choice would be between paying down a mortgage at an accelerated rate or investing more in my index fund.  Since we are unable to fully max out our tax-advantaged account as is, the argument for investing vs. paydown is even stronger.

I fully acknolwedge that there's no one-sized fits all strategy.  Most of what I'm objecting to in this thread is the stated premise that it is (usually or never) mathmatically/statistically adventageous to invest more and pay down less.  Different strokes for different folks, and ultimately either approach can work.

Midwest

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Nereo - I removed all the things we agree on (which is a lot in this case).  With regard to the relevant benchmark, my strategy has been to pay down the mortgage instead of buying bonds as part of my portfolio.

Using my portfolio as an example, I'm 75% equity and 25% debt free real estate.  Almost no bonds in my portfolio.  If I still had a mortgage, I would be replacing the real estate debt with bonds not equities to maintain the asset allocation.  Given that scenario, it seems that bond yields are the appropriate comparison rather than equities.
...
Thanks for the intelligent discussion on the topic.

Ah... ok, I get what you are saying now!  Yes, if your stated AA was to replace your real-estate component with bonds, then yes it would be relevant to make that comparison. 
Personally, my choice would be between paying down a mortgage at an accelerated rate or investing more in my index fund.  Since we are unable to fully max out our tax-advantaged account as is, the argument for investing vs. paydown is even stronger.

I fully acknolwedge that there's no one-sized fits all strategy.  Most of what I'm objecting to in this thread is the stated premise that it is (usually or never) mathmatically/statistically adventageous to invest more and pay down less.  Different strokes for different folks, and ultimately either approach can work.

I would state it a little differently.  If you specified AA was to replace your mortgage debt with bonds, then the bond rate is a more appropriate measure.  In addition, if your  AA includes bonds, then you might consider paying down the mortgage instead of investing in bonds. 

I would would not be surprised if many of the proponents of holding a mortgage long term are holding significant bonds in their portfolio.  If that's the case, I would argue they should measure that yield against the potential mortgage pay down yield (assuming after-tax accounts) versus an equity yield or even a blended yield.

The spread between bonds and mortgages is thin.  If you factor in a HELOC for liquidity, it could make sense to prepay the mortgage versus investing in bonds. 

If, however, paying down the mortgage is causing you not to invest in equities and/or skewing your asset allocation towards lower yield investments, that might not be a good choice.

nereo

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I fully acknolwedge that there's no one-sized fits all strategy.  Most of what I'm objecting to in this thread is the stated premise that it is (usually or never) mathmatically/statistically adventageous to invest more and pay down less.  Different strokes for different folks, and ultimately either approach can work.

I completely agree with you on this Nereo. My argument is not that an individual should not invest until they have the mortgage paid off, but rather that paying off the mortgage is not mathematically incorrect.

You completely agree?  Then why on earth did you begin this thread by saying (in part):
Quote
So when we run the numbers with a comparable rate of return, paying off the mortgage produces a larger net worth over time. Even if your investments generated no tax burden and you could find a risk free investment that matched your mortgage rate, paying off your mortgage is still better.
Your analysis claims its pretty black and white, and that paying off the mortgage produces a larger net worth over time even when investments are in tax-deferred accounts.
For reasons enumerated in this thread, that's not going to be the case under the majority of circumstances.
Is it "bad" to pre-pay your low rate fixed mortgage assuming you continue also have other savings available? No, not at all. Are there some benefits?  Sure. Will it result in having a higher net worth over time? It depends - but in most circumstances the answer will most likely "no".

CorpRaider

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I suppose the "correct" answer is not knowable ex ante.  After tax returns versus after tax avoided interest expense. 

I don't sleep any better at night with illiquid, immovable, concentrated, maintenance capital requiring, real estate as a larger portion of my net worth than securities, despite more frequent quoted price fluctuations.  You can always purchase accommodations.  Outside factors can triple your property taxes, run a highway through your neighborhood, rezone it for strip clubs and toxic waste, sandy can come and leave a ghost/mold town....

Probabilities very much favor higher after tax returns for any investment versus a 4% tax deductible fixed rate for 30 years loan.  You couldn't even get that loan in most of the world.

It is a seemingly common and very Anglo-Saxon preference for the real property that is the final determinate for many.
« Last Edit: January 11, 2017, 01:42:20 PM by CorpRaider »

nereo

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If you examine my analysis you would notice that I used a comparable investment to make the comparison you are referring too. When using a risk free rate of return (currently 0.5%) for the comparison those statements are true.

I've read your analysis and the myriad of objections to your assumptions.
If you wanted to say "Paying down a 15yr mortgage is favorable over the current lowest-risk rates of return (currently at 0.5%)" - i don't think that many would be objecting to that, though I wonder why you choose this over the somewhat higher rates of short-term bond funds or 10y treasury notes, given that home ownership itself (nor payoff) meets the definition of the concept of risk free rate of return.

However, that's not what people on these forums are advocating when they talk about investing being favorable to paying down a mortgage at today's rates.  Again, volatility is not risk, even if there is a correlation between the two.  Also, there is risk in having more money in your home as I and others have outlined.
Choosing a 15y time frame or ignoring the tax benefits of investing in tax-advantaged accounts and retaining the mortgage interest rate "because it's simpler" isn't a fair thing to do either.  When making these decisions one must consider taxes, and this heavily favors investing for most of us.

Scandium

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Because of cash flows. Paying off your mortgage significantly increases your monthly cash flows every month.


How? I paid my mortgage bill last month, but my cash flow this month is exactly the same!

Or do you mean it will increase cash flow after many years when you pay it off? True I suppose, but I don't see the benefit.
a) Having many $100k in equity stuck in my house make me uncomfortable.
b) If I invested the same amount in T-bills, with equal yield as in your example, I could pay off my mortage at the same time and I'd have way more liquid assets during those years! Diversified and liquid!

Midwest

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Because of cash flows. Paying off your mortgage significantly increases your monthly cash flows every month.


How? I paid my mortgage bill last month, but my cash flow this month is exactly the same!

Or do you mean it will increase cash flow after many years when you pay it off? True I suppose, but I don't see the benefit.
a) Having many $100k in equity stuck in my house make me uncomfortable.
b) If I invested the same amount in T-bills, with equal yield as in your example, I could pay off my mortage at the same time and I'd have way more liquid assets during those years! Diversified and liquid!

T bills have a 30 year yield of 3% and taxable interest.  If your mortgage is at above 3% https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield, you are losing money on that deal.  If you are worried about liquidity, get a Heloc and pay interest only when you need the liquidity.

CrazyIT

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Maybe someone touched on this.  I read through most of the posts yesterday.  Here is my take.

As a kid my parents owned rental property.  I never thought I would own any rental property myself but did not want to rent (ever).  Graduated High school with a plan on being a home owner and bought my first house at 18.  Back then they called them handy-man specials.  I fixed it up and had it paid for when I was 22.  Sold that place, put the equity in to the next one and moved on.  I did this several times in my life even with a wife and kids.  I always felt paying off the mortgage was paying myself first.  Its something thats real.  Its a place to raise the family and such.  When the real-estate market goes up you can sell the property for more but the next one will cost more too.
I suppose I could have made minimum payments and invested the rest in the stock market (ie Index funds) but I sleep better in my owned house in my owned bed knowing that a stock market crash nor anyone else is going to take it away from me.

Now 30 plus years later I own a few rental properties as well as my own house.  Fired my Ameriprise and moved all my funds to Vanguard Index funds.  Kids are grown and life is good!

Mathematically correct of not.  Do it!

Scandium

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Because of cash flows. Paying off your mortgage significantly increases your monthly cash flows every month.


How? I paid my mortgage bill last month, but my cash flow this month is exactly the same!

Or do you mean it will increase cash flow after many years when you pay it off? True I suppose, but I don't see the benefit.
a) Having many $100k in equity stuck in my house make me uncomfortable.
b) If I invested the same amount in T-bills, with equal yield as in your example, I could pay off my mortage at the same time and I'd have way more liquid assets during those years! Diversified and liquid!

T bills have a 30 year yield of 3% and taxable interest.  If your mortgage is at above 3% https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield, you are losing money on that deal.  If you are worried about liquidity, get a Heloc and pay interest only when you need the liquidity.

more lists:
a) paying mortgage you also loose out on the tax deduction, no?
b) yes, when shit hits the fan and I desperately need cash what I really want to do is take out a loan..

Midwest

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Because of cash flows. Paying off your mortgage significantly increases your monthly cash flows every month.


How? I paid my mortgage bill last month, but my cash flow this month is exactly the same!

Or do you mean it will increase cash flow after many years when you pay it off? True I suppose, but I don't see the benefit.
a) Having many $100k in equity stuck in my house make me uncomfortable.
b) If I invested the same amount in T-bills, with equal yield as in your example, I could pay off my mortage at the same time and I'd have way more liquid assets during those years! Diversified and liquid!

T bills have a 30 year yield of 3% and taxable interest.  If your mortgage is at above 3% https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield, you are losing money on that deal.  If you are worried about liquidity, get a Heloc and pay interest only when you need the liquidity.

more lists:
a) paying mortgage you also loose out on the tax deduction, no?
b) yes, when shit hits the fan and I desperately need cash what I really want to do is take out a loan..

a) You may lose out on the deduction depending on your tax bracket and circumstances.  Assuming you benefit from the deduction 100% (best case scenario), that allows you to compare pre-tax rates to pre-tax rates in comparing t-bills to your mortgage.  If you don't benefit 100% from the mortgage deduction, situation with having a mortgage and purchasing t-bills would actually be worse.

b) If you have a mortgage when the SHTF, you have loan.  If you have a HELOC available to draw on when the SHTF, you have a loan.  What is the difference other than the fact you don't have to take out the HELOC if you don't need it.

Incidentally, I have a cash emergency fund for SHTF stuff.  The HELOC is icing on the cake for opportunities and/or if SRHTF (Shit REALLY HTF).

Scandium

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b) If you have a mortgage when the SHTF, you have loan.  If you have a HELOC available to draw on when the SHTF, you have a loan.  What is the difference other than the fact you don't have to take out the HELOC if you don't need it.

Incidentally, I have a cash emergency fund for SHTF stuff.  The HELOC is icing on the cake for opportunities and/or if SRHTF (Shit REALLY HTF).

I've never used, or barely looked at a HELOC. Is it just added to your balance? Are the terms the same as your mortgage? Rate, payback period? If I take a $50k HELOC do I get ~20 years to pay it back, or is it less?

This is all kinda moot since, as OP points out, I have the safety/option to take more risk and put the money into the stock market instead for an expected higher return. No, if couldn't handle that volatility paying off mortgage is probably better than 3% T-bills. But I don't remember seeing anyone advocating that. So congrats, great analysis..?

Midwest

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b) If you have a mortgage when the SHTF, you have loan.  If you have a HELOC available to draw on when the SHTF, you have a loan.  What is the difference other than the fact you don't have to take out the HELOC if you don't need it.

Incidentally, I have a cash emergency fund for SHTF stuff.  The HELOC is icing on the cake for opportunities and/or if SRHTF (Shit REALLY HTF).

I've never used, or barely looked at a HELOC. Is it just added to your balance? Are the terms the same as your mortgage? Rate, payback period? If I take a $50k HELOC do I get ~20 years to pay it back, or is it less?

This is all kinda moot since, as OP points out, I have the safety/option to take more risk and put the money into the stock market instead for an expected higher return. No, if couldn't handle that volatility paying off mortgage is probably better than 3% T-bills. But I don't remember seeing anyone advocating that. So congrats, great analysis..?

I took this comment by you (see below), to advocate investing in t-bills rather than paying down the mortgage. 
 

b) If I invested the same amount in T-bills, with equal yield as in your example, I could pay off my mortage at the same time and I'd have way more liquid assets during those years! Diversified and liquid!

A Heloc is a line of credit secured by the non-leveraged equity in your house.  There are different types, but typically they will loan up to 80% of the value on a HELOC.  You can set the thing up and never use it or you can use it an pay it back over and over.  Typically they have a 5 or 10 year term with rates around prime or below.

For example, if you have a $200k house w/$100k mortgage, they will loan you up another $60k (80% loan to value).  Same house without a mortgage, they will loan you $160k.  If you aren't using the HELOC, no interest.  If you need the liquidity for some reason, you being paying interest.  If your objection to paying down a mortgage is lack of liquidity, a HELOC can avoid that issue.

If I look at your example and compare  investing in T-bills and having a mortgage, to paying down the mortgage and having a HELOC, HELOC will probably win in my book.

Lastly, if you are looking at SHTF situation and liquidity (your example), the stock market is not where that type of cash should be.  Stock markets are liquid, but you need a long selling horizon.  SHTF money should not be in the stock market.
« Last Edit: January 11, 2017, 03:30:17 PM by Midwest »

nereo

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nereo,

Yup - in my case, 3.75% mortgage rate, but all of my interest and taxes reduce my burden in the 25% tax bracket, so it's effectively 2.8%. In my case, I already max my available tax-advantaged accounts, so we could compare mortgage payoff to taxable investments, but why would I dump all of my investments in a guaranteed 0.5% vehicle when I can take on a theoretically risky (but historically profitable) index fund that will almost certainly return well above the 3.5% I need before tax to beat that mortgage interest savings?

- neo

For clarity - I pay my monthly mortgage (and no more) and invest as much as I can according to my AA, which is predominately equities in two index funds. That is also what I recommend to people who can secure a mortgage below 4%
I would never recommend investing in a 0.5% vehicle, "lowest risk" or not, because as you said you are loosing out to inflation, and far better returns can be found elsewhere - I mentioned it only because those are the assumptions that Virtus has used (which I also objected to). 
My broader point is that for anyone that isn't maxing out their tax-deferred space the risk/reward skews even more favorably towards investing into that tax-advantaged spaces instead of making extra payments. 

~n~

pegleglolita

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This thread is so great!  All of these calculations seem to assume a house purchased at price X that only increases to X+(average yearly appreciation)(#years).  But for many of the mustachian persuasion, we are strategic in our purchases and buy the crappiest house on the block, invest +++ sweat equity and a little capital, and substantially raise the value of the home.  Surely you have to consider that when running these numbers, right?  What does it do to the numbers if you markedly increase the value of the home in the first 5 years by adding square footage, renovating and modernizing, etc.?  Can someone run a simulation where you purchase a house for 150K and it ends up being worth 250K in 5 years?  What would you do in that situation...still invest extra $$ in equities or pay off the mortgage knowing that if the SHTF and the bank had a fire-sale foreclosure you'd probably only be losing the cost of sweat equity rather than "real" money?     

Indexer

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I keep reading posts where people say "it is not mathematically correct to pay off your mortgage early" or "The only benefit of paying your mortgage off early is the physiological benefit". The problem is both of these statements are incorrect. The individuals that make these statements are only considering the expected return of their investment portfolio over an extended period of time with the rate paid on the debt. This is flawed comparison because it leaves out risk.

Without jumping into the calculation battle I just wanted to chime in with the ultimate answer to this question...

It depends.

You can argue this back and forth forever because the variables can move.

My mortgage is 2.75%. After the tax deduction the effective rate is probably closer to 2.5%. I'm going to pay it down as slowly as possible and invest the rest.
1. I hope I can earn more than 2.5% in the market. Even better, if rates rise a bit more I should be able to get more than 2.5% in something close to risk free like a short term bond fund.
2. I would rather have extra money than a smaller mortgage since in an emergency I can use said money to make the mortgage payment. Less risk of foreclosure in an extreme event. 

NOW, that is me. If my mortgage was 4.5% I would sing a different tune.

Telecaster

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This thread is so great!  All of these calculations seem to assume a house purchased at price X that only increases to X+(average yearly appreciation)(#years).  But for many of the mustachian persuasion, we are strategic in our purchases and buy the crappiest house on the block, invest +++ sweat equity and a little capital, and substantially raise the value of the home.  Surely you have to consider that when running these numbers, right?  What does it do to the numbers if you markedly increase the value of the home in the first 5 years by adding square footage, renovating and modernizing, etc.?  Can someone run a simulation where you purchase a house for 150K and it ends up being worth 250K in 5 years?  What would you do in that situation...still invest extra $$ in equities or pay off the mortgage knowing that if the SHTF and the bank had a fire-sale foreclosure you'd probably only be losing the cost of sweat equity rather than "real" money?     

The part in bold in isn't really correct.  The appreciation doesn't factor into the equation, because you get the appreciation regardless if you pay it off early or wait the full 30 years.  The question really just boils down to the best long term use of funds.

Now, you can get a lot of bang for your buck with sweat equity, but that's something different than what we are talking about here. 

In a SHTF situation, I am hard pressed to think of a scenario where you are better off having money in the house.  I much rather would have it in something liquid.  If the money is tied up in the house it will be expensive and time consuming to access the funds. 


aspiringnomad

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I don't sleep any better at night with illiquid, immovable, concentrated, maintenance capital requiring, real estate as a larger portion of my net worth than securities, despite more frequent quoted price fluctuations.  You can always purchase accommodations.  Outside factors can triple your property taxes, run a highway through your neighborhood, rezone it for strip clubs and toxic waste, sandy can come and leave a ghost/mold town....


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

steveo

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I keep reading posts where people say "it is not mathematically correct to pay off your mortgage early" or "The only benefit of paying your mortgage off early is the physiological benefit". The problem is both of these statements are incorrect. The individuals that make these statements are only considering the expected return of their investment portfolio over an extended period of time with the rate paid on the debt. This is flawed comparison because it leaves out risk.

Without jumping into the calculation battle I just wanted to chime in with the ultimate answer to this question...

It depends.

You can argue this back and forth forever because the variables can move.

My mortgage is 2.75%. After the tax deduction the effective rate is probably closer to 2.5%. I'm going to pay it down as slowly as possible and invest the rest.
1. I hope I can earn more than 2.5% in the market. Even better, if rates rise a bit more I should be able to get more than 2.5% in something close to risk free like a short term bond fund.
2. I would rather have extra money than a smaller mortgage since in an emergency I can use said money to make the mortgage payment. Less risk of foreclosure in an extreme event. 

NOW, that is me. If my mortgage was 4.5% I would sing a different tune.

Yes it depends. My mortgage was about 5.5% and any increase in my property value does not get taxed so it's basically a 5.5 % return after tax. It would be hard to beat that plus I'm paying down debt. It's a no brainer for me to pay off my mortgage.

For information:- I live in Australia and this is standard plus houses are really expensive. My house has probably doubled in value in about 7 years and we paid the mortgage off at the start of last year. It was the best financial decision that we've made and will probably ever make.

MoonLiteNite

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I have decided to pay off my house, personal loan to my father, rather than investing into tax accounts.
I did the math and of course the long term, yes 7% is more than the 3.75% that i am paying for the house loan. But i figured it is 100% 3.75% gains, can't beat that! No risk in order to save money!

Should have him paid back within 24 months!

Midwest

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I don't sleep any better at night with illiquid, immovable, concentrated, maintenance capital requiring, real estate as a larger portion of my net worth than securities, despite more frequent quoted price fluctuations.  You can always purchase accommodations.  Outside factors can triple your property taxes, run a highway through your neighborhood, rezone it for strip clubs and toxic waste, sandy can come and leave a ghost/mold town....


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

Real estate and real estate debt are 2 different things.  If you have already made the decision to purchase real estate, then you have real estate risk. 

If you have no other non-retirement assets, defaulting on the mortgage could be an option in the event real estate tanks.  On the other hand, in many states, the bank will come after your liquid assets.  Given the bent on this board to being super savers, defaulting on a primary mortgage won't be an option for many.

Lastly, there was some discussion in this thread regarding the appropriate measure of yield against mortgage debt.  Depending on your asset allocation and holdings, it may or may not be equities.

pegleglolita

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This thread is so great!  All of these calculations seem to assume a house purchased at price X that only increases to X+(average yearly appreciation)(#years).  But for many of the mustachian persuasion, we are strategic in our purchases and buy the crappiest house on the block, invest +++ sweat equity and a little capital, and substantially raise the value of the home.  Surely you have to consider that when running these numbers, right?  What does it do to the numbers if you markedly increase the value of the home in the first 5 years by adding square footage, renovating and modernizing, etc.?  Can someone run a simulation where you purchase a house for 150K and it ends up being worth 250K in 5 years?  What would you do in that situation...still invest extra $$ in equities or pay off the mortgage knowing that if the SHTF and the bank had a fire-sale foreclosure you'd probably only be losing the cost of sweat equity rather than "real" money?     

The part in bold in isn't really correct.  The appreciation doesn't factor into the equation, because you get the appreciation regardless if you pay it off early or wait the full 30 years.  The question really just boils down to the best long term use of funds.

Now, you can get a lot of bang for your buck with sweat equity, but that's something different than what we are talking about here. 

In a SHTF situation, I am hard pressed to think of a scenario where you are better off having money in the house.  I much rather would have it in something liquid.  If the money is tied up in the house it will be expensive and time consuming to access the funds.

But isn't "House appreciation" a line item in the calculation?  And I may be wrong but it appears to be calculated as a fixed average of real estate appreciation in aggregate.  If you have substantially improved your house with little capital input and much sweat equity, then the amount you have invested (or continue to invest, in the case of paying off the mortgage) in the house as a percentage of the total market value of the house goes down, right?  Doesn't that correspond in some way to an increased rate of return on capital investment and also a reduced risk of capital loss in an emergency foreclosure fire sale situation?  This may be straying from the mathematical to the philosophical... 

nereo

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This thread is so great!  All of these calculations seem to assume a house purchased at price X that only increases to X+(average yearly appreciation)(#years).  But for many of the mustachian persuasion, we are strategic in our purchases and buy the crappiest house on the block, invest +++ sweat equity and a little capital, and substantially raise the value of the home.  Surely you have to consider that when running these numbers, right?  What does it do to the numbers if you markedly increase the value of the home in the first 5 years by adding square footage, renovating and modernizing, etc.?  Can someone run a simulation where you purchase a house for 150K and it ends up being worth 250K in 5 years?  What would you do in that situation...still invest extra $$ in equities or pay off the mortgage knowing that if the SHTF and the bank had a fire-sale foreclosure you'd probably only be losing the cost of sweat equity rather than "real" money?     

The part in bold in isn't really correct.  The appreciation doesn't factor into the equation, because you get the appreciation regardless if you pay it off early or wait the full 30 years.  The question really just boils down to the best long term use of funds.

Now, you can get a lot of bang for your buck with sweat equity, but that's something different than what we are talking about here. 

In a SHTF situation, I am hard pressed to think of a scenario where you are better off having money in the house.  I much rather would have it in something liquid.  If the money is tied up in the house it will be expensive and time consuming to access the funds.

But isn't "House appreciation" a line item in the calculation?  And I may be wrong but it appears to be calculated as a fixed average of real estate appreciation in aggregate.  If you have substantially improved your house with little capital input and much sweat equity, then the amount you have invested (or continue to invest, in the case of paying off the mortgage) in the house as a percentage of the total market value of the house goes down, right?  Doesn't that correspond in some way to an increased rate of return on capital investment and also a reduced risk of capital loss in an emergency foreclosure fire sale situation?  This may be straying from the mathematical to the philosophical...
"Sweat Equity" can be done whether you pay the monthly minimum or pay down your mortgage at an accelerated rate.
One could argue that paying less per month allows money to be diverted to a home improvement budget, which would argue for not paying down a house any faster. However, your 'return' on improvements would have to exceed the money (and time) put in X interest rate.  It's possible to lose money on improvement projects as well.

Frugancial Advisor

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Why can't people understand that it depends on the individual situation?

The invest vs. mortgage debate is not black and white and never will be. In order to argue either side, you need to determine which assumptions are going to be used ahead of time:

1. How quickly can the mortgage be paid off?
2. Will having no mortgage allow you to reduce your expenses to a point where certain financial assistance increases? (Canada child benefit, GIS, medical expenses, etc.)
3. What is your risk tolerance? If you choose to invest rather than pay off the mortgage, are you a 40/60 investor? Are you investing in GICs/CDs? Have you been investing longer than 10 years and therefore have seen your equity decline by 30% in one year, or are you naively assuming your risk tolerance is high due to the recent bull market?
4. Which country are you in? In Canada, mortgage interest is not tax-deductible, and rates are not guaranteed for 30 years. You may very well be forced to renew to a much higher rate in 5, 10, 15 years.
5. Do you have contribution room in your tax-advantaged accounts which could produce a significant return just from the tax-deduction?
6. Are you comfortable with leverage? You can easily take out a mortgage against your home equity at a very low rate and use the proceeds to invest in a non-registered account in which the interest is tax-deductible and the dividend and capital gain income tax-efficient
7. Will you be collecting taxable pension income in retirement which would be added to your other taxable investment income? Will you need to withdrawal more to cover your mortgage payments, therefore bumping yourself into a higher tax bracket?

This is not even mentioning the obvious (and often described) psychological benefit that some people receive from either watching their investment account grow, or seeing their mortgage balance decrease.

The debate is beating a dead horse, and is essentially asking whether you prefer Coke or Pepsi.

Telecaster

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Why can't people understand that it depends on the individual situation?

The invest vs. mortgage debate is not black and white and never will be. In order to argue either side, you need to determine which assumptions are going to be used ahead of time:

1. How quickly can the mortgage be paid off?
2. Will having no mortgage allow you to reduce your expenses to a point where certain financial assistance increases? (Canada child benefit, GIS, medical expenses, etc.)
3. What is your risk tolerance? If you choose to invest rather than pay off the mortgage, are you a 40/60 investor? Are you investing in GICs/CDs? Have you been investing longer than 10 years and therefore have seen your equity decline by 30% in one year, or are you naively assuming your risk tolerance is high due to the recent bull market?
4. Which country are you in? In Canada, mortgage interest is not tax-deductible, and rates are not guaranteed for 30 years. You may very well be forced to renew to a much higher rate in 5, 10, 15 years.
5. Do you have contribution room in your tax-advantaged accounts which could produce a significant return just from the tax-deduction?
6. Are you comfortable with leverage? You can easily take out a mortgage against your home equity at a very low rate and use the proceeds to invest in a non-registered account in which the interest is tax-deductible and the dividend and capital gain income tax-efficient
7. Will you be collecting taxable pension income in retirement which would be added to your other taxable investment income? Will you need to withdrawal more to cover your mortgage payments, therefore bumping yourself into a higher tax bracket?

This is not even mentioning the obvious (and often described) psychological benefit that some people receive from either watching their investment account grow, or seeing their mortgage balance decrease.


You are making it way, way, way, way, way too hard.   If you emotionally feel you don't want a mortgage, then simply pay it off.  You don't even have to do the calculation, and none of that stuff even matters.    Many of your points are entirely separate questions e.g "Should I invest in stocks at all?" or "Should I borrow against the house to invest?"  Worth considering perhaps, but separate questions.    If you don't feel comfortable investing in stocks, then you don't even get to the question of pay off or invest.  You simply don't invest.  Easy peasy.   

The question "Should I pay off the house or invest?" is pretty straight forward.   And the answer is that over a 30-year period, at today's mortgage rates, and assuming a historically low rate of stock returns, "invest" wins hands down, and it isn't close. 

Now, if it was close, then you might want to dive a little deeper, at look at the effect of the mortgage interest deduction, etc. but that requires making assumptions that hold true over a 30-year period.  In a practical sense, if it is that close then it won't matter which one you do financially, taking into account of course the much higher risk of paying down the mortgage.  But you could mitigate that risk in a number of ways, including splitting the difference. 

Again, if you don't want a mortgage, or you don't want to invest in the market, then you don't even have to do the calculation or make any assumptions at all.   Easy peasy.   


FIPurpose

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If you own a Russian mortgage of 15%, you should probably pay that off first.

SwordGuy

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I don't sleep any better at night with illiquid, immovable, concentrated, maintenance capital requiring, real estate as a larger portion of my net worth than securities, despite more frequent quoted price fluctuations.  You can always purchase accommodations.  Outside factors can triple your property taxes, run a highway through your neighborhood, rezone it for strip clubs and toxic waste, sandy can come and leave a ghost/mold town....


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

I'm not sure that's really true.

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

if I buy and fix up a property that's worth $80,000 for $45,000, how is that risky?   

It's insured so there's little risk of major loss due to fire, etc.

It's paid for and the taxes are low, so little risk of confiscation due to that.

Rents tend to track with inflation.

It will throw off about $4800 in profit for the year, after setting aside repair and vacancy money and subtracting out expenses.

That's a 10.6% return on investment each year and a $30,200 gain in net worth on top of that (and that's subtracting out the 6% realtor commission if I sell).

It could lose 50% in value in a time period where I have to sell it (for unrelated reasons) and my losses would only be $9,800 (or 22%) and that includes paying the realtor 6%.   

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

So how is that risky?

Now, if you were referring to buying a very expensive home to live in a well-established real estate boom, where you've only got 5% equity in it before prices drop 50%, then yeah, that's risky.  :)



SuperMex

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There is only one nuance I want to add.

It was stated that when you own your property it is 100% yours. "That is false"

You always rent your property from the government. They choose how much rent they are going to charge you by setting your property tax rate and assessing its value.

Any time they want they can evict you by eminent domain.

They can also strip the value of your property at will by declaring it unbuildable do to it being a Cyprus preserve, land management are, rural preserve, etc.

Don't forget you are always renting your property from Uncle Sam.   

boarder42

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Mathematically - Option C is the obvious winner.

Yes it is.

If you really are keen on being mortgage free invest the extra payments into index funds and once you have accumulated enough to kill the mortgage in one go - do it. Of course just keeping your money invested and keeping the mortgage is a better idea from the stand point of risk and wealth building. However, if living in paid off home is worth many thousands of lost $$ in wealth than go for it. It's your money.

It depends on the time period. Over some historical periods paying off the house early results in a higher net worth over the long-term.

show me a 30 year period where this is true if invested in an S&P 500 index fund.

Tjat

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Mathematically - Option C is the obvious winner.

Yes it is.

If you really are keen on being mortgage free invest the extra payments into index funds and once you have accumulated enough to kill the mortgage in one go - do it. Of course just keeping your money invested and keeping the mortgage is a better idea from the stand point of risk and wealth building. However, if living in paid off home is worth many thousands of lost $$ in wealth than go for it. It's your money.

It depends on the time period. Over some historical periods paying off the house early results in a higher net worth over the long-term.

show me a 30 year period where this is true if invested in an S&P 500 index fund.

30 year? Pssh, you're ignoring the OP's custom 2-year term mortgage from 2007-2008.


boarder42

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Mathematically - Option C is the obvious winner.

Yes it is.

If you really are keen on being mortgage free invest the extra payments into index funds and once you have accumulated enough to kill the mortgage in one go - do it. Of course just keeping your money invested and keeping the mortgage is a better idea from the stand point of risk and wealth building. However, if living in paid off home is worth many thousands of lost $$ in wealth than go for it. It's your money.

It depends on the time period. Over some historical periods paying off the house early results in a higher net worth over the long-term.

show me a 30 year period where this is true if invested in an S&P 500 index fund.

30 year? Pssh, you're ignoring the OP's custom 2-year term mortgage from 2007-2008.

dang forgot to look at cherry picking a 2 years vs considering the total time value of all the money. 

Scandium

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I don't sleep any better at night with illiquid, immovable, concentrated, maintenance capital requiring, real estate as a larger portion of my net worth than securities, despite more frequent quoted price fluctuations.  You can always purchase accommodations.  Outside factors can triple your property taxes, run a highway through your neighborhood, rezone it for strip clubs and toxic waste, sandy can come and leave a ghost/mold town....


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

I'm not sure that's really true.

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

if I buy and fix up a property that's worth $80,000 for $45,000, how is that risky?   

How do you know it's worth $80,000? And if it is why would anyone sell it to you for $45,000? When that's the premise, of course any deal will look awesome and risk free, duh!
"If I can buy a penny stock for $0.01 that's really worth $1 what's the risk?"

Also, in an area with sub $50k houses I'd guess there's the risk nobody want to live there.. The worst parts of Baltimore or abandoned areas of Detroit have houses in that range and lower. But hardly what I'd call low-risk investments..

actionjackson

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This seems to be a debate between 2 options, save money to invest, or use it to pay off mortgage.

What about option c - sell house, get rid of mortgage, and rent?

In some areas of the world - this is actually net positive, as the cost of renting vs. mortgage on the same property, taking into account transaction and maintenance costs etc. actually works out cheaper. As per this MMM post - http://www.mrmoneymustache.com/2015/07/27/rent-vs-buy/

Personally, this is my cup of tea. Gives me the flexibility to move wherever I can in the world to work where I can make the most money. Additionally, in places like Australia, or Canada, where there are clearly housing bubbles in some areas and future capital gains are unlikely, renting allows you to avoid exposure to the downside risk of a property crash.

actionjackson

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What about option c - sell house, get rid of mortgage, and rent?

IT'S NOT MATHEMATICALLY CORRECT TO SELL HOUSE, GET RID OF MORTGAGE, AND RENT!

If your rent costs more than it costs to pay your mortgage, then it isn't better, financially.

Woah dude! Fingers off the all caps.

In general terms perhaps, but you can't simply say that repayments on a property is x, and rent for an equivalent property is x+100, therefore you're better off owning vs. renting. There are transaction and maintenance costs involved with purchasing and owning a property that are not incurred in rent, plus you have the opportunity cost of the capital tied up in the house. You have to take all of these into account, and the article from MMM himself links a great calculator that you can use to work that out.

The point is there is no single correct answer, it depends, and I just wanted to point out that there was an option C, that in some cases, could be more beneficial. All three possibilities should be considered.

Option A - paying down mortgage
Option B - paying minimum amount on mortgage and investing money where it will get a higher return
Option C - selling, renting and investing

boarder42

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If you assume investments are worse than a fixed rate below 5% you must work til a 2% swr or lower

actionjackson

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Gotcha, sarcasm doesn't translate too well on the net.

Not everyone in the world is getting a fixed rate of 5% - not all central banks are running it hot off the printing press!

boarder42

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Gotcha, sarcasm doesn't translate too well on the net.

Not everyone in the world is getting a fixed rate of 5% - not all central banks are running it hot off the printing press!

This debate is always held with the premise of the low long term fixed rate mortgage climate in the States. If you're else where the math is different but the OP isn't making that point

marty998

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if I buy and fix up a property that's worth $80,000 for $45,000, how is that risky?   

It's insured so there's little risk of major loss due to fire, etc.

It's paid for and the taxes are low, so little risk of confiscation due to that.

Rents tend to track with inflation.

It will throw off about $4800 in profit for the year, after setting aside repair and vacancy money and subtracting out expenses.

That's a 10.6% return on investment each year and a $30,200 gain in net worth on top of that (and that's subtracting out the 6% realtor commission if I sell).

I have always found it bizarre in America that you can buy a house for less than the cost of a car.

boarder42

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if I buy and fix up a property that's worth $80,000 for $45,000, how is that risky?   

It's insured so there's little risk of major loss due to fire, etc.

It's paid for and the taxes are low, so little risk of confiscation due to that.

Rents tend to track with inflation.

It will throw off about $4800 in profit for the year, after setting aside repair and vacancy money and subtracting out expenses.

That's a 10.6% return on investment each year and a $30,200 gain in net worth on top of that (and that's subtracting out the 6% realtor commission if I sell).

I have always found it bizarre in America that you can buy a house for less than the cost of a car.

10.6% plus your management time and your labor to fix them. Vs just index investing and getting the same ROI. Or better yet buying that property for 45k with 9k down financed and flipping it for 80k. If it's so easy to find why aren't you just buying a 45k property weekly and making 35k a week

actionjackson

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if I buy and fix up a property that's worth $80,000 for $45,000, how is that risky?   

It's insured so there's little risk of major loss due to fire, etc.

It's paid for and the taxes are low, so little risk of confiscation due to that.

Rents tend to track with inflation.

It will throw off about $4800 in profit for the year, after setting aside repair and vacancy money and subtracting out expenses.

That's a 10.6% return on investment each year and a $30,200 gain in net worth on top of that (and that's subtracting out the 6% realtor commission if I sell).

I have always found it bizarre in America that you can buy a house for less than the cost of a car.

10.6% plus your management time and your labor to fix them. Vs just index investing and getting the same ROI. Or better yet buying that property for 45k with 9k down financed and flipping it for 80k. If it's so easy to find why aren't you just buying a 45k property weekly and making 35k a week

2008.... a house worth 80k can quickly become worth 40k.

superannuationfreak

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It strikes me as odd to say it is not mathematically correct to pay off your mortgage early.  It's like saying it's not mathematically correct to buy beer, because you would have more money (with no risk!) if you didn't buy beer.

I understand what the expected-value folks are saying - I have a degree in Mathematics and postgrad Economics (mostly thinking about how to model preferences), I work in Investments (after previously working in Risk).  But it's not about mathematically correct.  There's nothing mathematically wrong with someone's preferences for less risk (whether measured as short-term volatility, disliking losses more than they like gains, or permanent loss of capital).  Even if there was a degree of certainty about the long-term probabilistic distributions of returns (and modern financial history is far too short to suggest there is), it still wouldn't be mathematically incorrect.

Have your goals and preferences but let others have theirs.

boarder42

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It strikes me as odd to say it is not mathematically correct to pay off your mortgage early.  It's like saying it's not mathematically correct to buy beer, because you would have more money (with no risk!) if you didn't buy beer.

I understand what the expected-value folks are saying - I have a degree in Mathematics and postgrad Economics (mostly thinking about how to model preferences), I work in Investments (after previously working in Risk).  But it's not about mathematically correct.  There's nothing mathematically wrong with someone's preferences for less risk (whether measured as short-term volatility, disliking losses more than they like gains, or permanent loss of capital).  Even if there was a degree of certainty about the long-term probabilistic distributions of returns (and modern financial history is far too short to suggest there is), it still wouldn't be mathematically incorrect.

Have your goals and preferences but let others have theirs.

The entire premise that most people are using to fire here is based on those returns. So to be comfortable retiring and living for 40-50 years on expected returns but then to pay down a mortgage at the same time does not make sense. ESP when saying it's riskier. It's riskier to pay down a mortgage than it is to invest if we assume today's us rates. We have a pending climate unlike anywhere else in the world I'm locked for 30 years at 3.25%. Inflation avgs more than that.

This horse has been beat to death upside down backwards and sideways. Paying it down is emotional and that's fine. The mathematically optimal move if you have a low fixed rate and plan to fire on the 4% rule or some variation of that is to not pay a mortgage down and instead invest 

superannuationfreak

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It strikes me as odd to say it is not mathematically correct to pay off your mortgage early.  It's like saying it's not mathematically correct to buy beer, because you would have more money (with no risk!) if you didn't buy beer.

I understand what the expected-value folks are saying - I have a degree in Mathematics and postgrad Economics (mostly thinking about how to model preferences), I work in Investments (after previously working in Risk).  But it's not about mathematically correct.  There's nothing mathematically wrong with someone's preferences for less risk (whether measured as short-term volatility, disliking losses more than they like gains, or permanent loss of capital).  Even if there was a degree of certainty about the long-term probabilistic distributions of returns (and modern financial history is far too short to suggest there is), it still wouldn't be mathematically incorrect.

Have your goals and preferences but let others have theirs.

I'm rather confused. You're saying math isn't math, because people disagree?

It's fair to say "it's mathematically incorrect to say you'll have more money after buying beer." The fact that some people prefer (value) beer over money is just fine - let them buy beer! - but that doesn't change the math!

I'm saying you're assuming people have linear preferences over risk at some early retirement date, preferences of the form Utility = Expected[Value of portfolio in 20 years]

it's very well established that most people do not have linear preferences.  Whether standard deviation is a good measure of risk or not (it probably isn't for many purposes), whatever your preferred measure of risk preferences are more likely to look something like

Utility = Expected[Value of portfolio in 20 years] - Some Risk Measure

(Risk could be standard deviation, could be probability of loss when I peek at my returns relative to the last time I peeked, could be probability of not meeting some target value of portfolio in X years).

Going deeper still, it would be perfectly reasonable to be sceptical about the expected return (and risk) assumptions based on a very short period of history with a fairly comparable institutional framework.  That is, there's nothing mathematically wrong with scepticism about a given set of assumed stock market returns.  Sure, I'm probably more blase about market risk than those who stuff their mattresses with cash.  But I'm probably also less optimistic than you about global expected returns today vs. the last 50 years in the US or Australia.

Preferences over risk may appear abstract but they're very real to the people who experience them, as real as preferences over spending money on beer, or preferring to retire early (and having less money than if you worked 5 more years).  Just because they're not your preferences (i.e. a model of your emotions) doesn't make them mathematically incorrect (in a model of their emotions).  Remember, happiness is the goal.

Telecaster

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Preferences over risk may appear abstract but they're very real to the people who experience them, as real as preferences over spending money on beer, or preferring to retire early (and having less money than if you worked 5 more years).  Just because they're not your preferences (i.e. a model of your emotions) doesn't make them mathematically incorrect (in a model of their emotions).  Remember, happiness is the goal.

Right, but the OP of this thread was claiming that it was financially advantageous to pay down the mortgage rather than invest, based on the expected returns.  That raises the question if his assumptions and calculations are reasonable (they aren't).

As I said above, if your preference is to have no mortgage debt, then you don't even have to do the calculation.  You just pay down the mortgage. 

But if you are not sure which one is more financially advantageous, then you do have to do the calculation.   

And you are going to do the calculation, then you must use reasonable assumptions in order to get a reasonable result.  Otherwise you are just fooling yourself.



 

superannuationfreak

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Preferences over risk may appear abstract but they're very real to the people who experience them, as real as preferences over spending money on beer, or preferring to retire early (and having less money than if you worked 5 more years).  Just because they're not your preferences (i.e. a model of your emotions) doesn't make them mathematically incorrect (in a model of their emotions).  Remember, happiness is the goal.

Right, but the OP of this thread was claiming that it was financially advantageous to pay down the mortgage rather than invest, based on the expected returns.  That raises the question if his assumptions and calculations are reasonable (they aren't).

As I said above, if your preference is to have no mortgage debt, then you don't even have to do the calculation.  You just pay down the mortgage. 

But if you are not sure which one is more financially advantageous, then you do have to do the calculation.   

And you are going to do the calculation, then you must use reasonable assumptions in order to get a reasonable result.  Otherwise you are just fooling yourself.
 

I acknowledge not finding the particular calculations in OP compelling.

I still disagree that it is clear "which one is more financially advantageous" for all (or even most) individuals in all instances.  Financially advantageous is not expected value to most individuals.  Financially advantageous may include, for example, the probability of meeting one's financial goals.  And the confidence intervals (and true uncertainty) of financial returns estimates (such as the often-quoted historical average return of the S&P 500) are much too wide to say it is not mathematically correct to pay off your mortgage early.  Are there instances where investing, even in taxable, will skew the expected value in your favour?  Sure.  Are there reasonable assumptions and more realistic preferences (for most of the population) than maximising portfolio value after 10 or 20 years where an individual is expected to be better off (under those preferences) by paying off the mortgage?  Yes.