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Learning, Sharing, and Teaching => Investor Alley => Topic started by: LLL on January 10, 2017, 12:04:20 PM

Title: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: LLL on January 10, 2017, 12:04:20 PM
It just makes you look silly.

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.

Stock and bond fund returns are not comparable to a mortgage rate because of risk which is typically measured in volatility. See below, they behave very differently.
(https://s29.postimg.org/rcu0tmyav/Chart.png) (https://postimg.org/image/gd8ti17vn/)free image uploading (https://postimage.org/)
A mortgage is much closer to the risk free rate of return. Even this is not a perfect comparison because you mortgage likely has less risk then the risk free rate due to the homestead exemption. All or a portion of the equity in a primary residence is subject to a homestead exemption in most states which protects it from lawsuits and bankruptcy, treasuries and bank accounts don't have these protections. When we compare the risk free rate of return 0.52% (typically the 3 month treasury is used as a proxy for this rate) to the 30-Year fixed rate 4.375% or the 15-Year fixed rate of 3.18% it becomes clear that paying off the mortgage is a great idea. 

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

(https://s24.postimg.org/nqt5x34w5/FS_Comparison.png) (https://postimg.org/image/3w74aypoh/)photo uploading websites (https://postimage.org/)

With all this said I think a mixture of investing and paying down the mortgage early is optimal after you have an emergency fund. This is partly because we have a limited amount of space each year in our tax advantaged accounts which cannot not be caught up after we pay off the mortgage.

An individuals net worth is not a pie that is uniform but a conglomerate of unique pieces with different purposes. The emergency fund provides our net worth with liquidity. The debt free house decreases our monthly cash flow and deleverages our net worth. The tax advantaged accounts provide long-term growth which allows them to withstand the volatility of a 100% stock portfolio.

A final thought. If someone offered to loan you $100 million for 5 years at 9.90% interest, given that the long-term rate of return in the stock market has been above 10% would you take the deal? That represents an expected arbitrage of ~$500,000 over 5 years. Most people wouldn't because in an extreme example the risk is clear.
 
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Cwadda on January 10, 2017, 12:14:55 PM
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Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Greenback Reproduction Specialist on January 10, 2017, 12:26:48 PM
+1 and I will take some pop corn too : )
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Telecaster on January 10, 2017, 12:27:17 PM
It just makes you look silly.

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.

You are making the rookie mistake of confusing volatility with risk.   Volatility is not risk.  Risk is the chance of the permanent loss of capital.   There are no 30-year periods when the broader market lost money.   An asteroid could hit, or Canada could invade or something and change that, but the actual risk of losing money in the market over that length of time is effectively zero. 

A second minor mistake is that you assumed that the risk free return rate would stay constant at 0.52% for the entire 30 year period.   The long term average is more like 4%. 

Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Greenback Reproduction Specialist on January 10, 2017, 12:31:48 PM
It just makes you look silly.

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.

You are making the rookie mistake of confusing volatility with risk.   Volatility is not risk.  Risk is the chance of the permanent loss of capital.   There are no 30-year periods when the broader market lost money.   An asteroid could hit, or Canada could invade or something and change that, but the actual risk of losing money in the market over that length of time is effectively zero. 

I agree with the use of the words risk and volatility.

But you are assuming that the portfolio in question is going to meet market rates of return, which we know is not always true.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Car Jack on January 10, 2017, 12:39:28 PM
Virtus:  I would like to violently agree with your ideas!

:lol:

Ok....back when I was actively paying off debt and reached a point where nothing was left but the mortgage, I started paying it off.  I had plenty of friends who dissuaded me from doing this and suggested everything from buying railroad cars to getting an apartment building.  Even the stock market was too risky for me and my wife at the time and my retort was always "What investment is there with a GUARANTEED return better than paying off the mortgage?".  I honestly was looking for an answer.  Amway?  Circle of gold?  Oh yah, I had all of these suggestions and went merrily along and paid off my mortgage.  It is a safe, risk free way to reduce your debt.  Can the stock market bring better returns?  Sure it can.  So what?  If you're looking for safe, guaranteed returns, then pay off the mortgage.

What I found when the mortgage was paid off?  All these friends telling me not to pay it off still had mortgages and nothing from their fly by night investments.  Do I invest in index funds now?  Yah, I do.

Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: RichMoose on January 10, 2017, 12:52:02 PM
When we compare the risk free rate of return 0.52% (typically the 3 month treasury is used as a proxy for this rate) to the 30-Year fixed rate 4.375% or the 15-Year fixed rate of 3.18% it becomes clear that paying off the mortgage is a great idea. 

With all this said I think a mixture of investing and paying down the mortgage early is optimal after you have an emergency fund. This is partly because we have a limited amount of space each year in our tax advantaged accounts which cannot not be caught up after we pay off the mortgage.
Are you making a fair comparison that is in line with the argument many have about early mortgage payoff on this site?

We generally compare mortgage paydown vs. index investing, not mortgage paydown vs. T-bills. Big difference.

That being said, the second highlighted part is key here. After maxing out tax-advantaged accounts, mortgage payoff becomes increasingly attractive. But it's important not to concentrate your net worth in one asset - your house. While mortgage rates might be a steady 3.18% for 15 years, your house will go up and down in value similar to stocks or bonds. If your house is your only asset, it becomes more than just a roof over your head.

It is realistic in the long term to expect a 80/20 stock bond index fund to return 9% a year (Vanguard said 9.4%). Your house on the other hand will appreciate a little more than the rate of inflation over the long term (Case-Shiller says around 3.4%). Would you rather focus on growing an asset that returns 9%, or paying down a possibly tax-deductible loan on an asset that returns 3.4%?

I also believe cash flow is important, but not when you sacrifice growth and diversification.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on January 10, 2017, 12:53:21 PM
pass the popcorn please!
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Telecaster on January 10, 2017, 12:56:27 PM
It just makes you look silly.

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.

You are making the rookie mistake of confusing volatility with risk.   Volatility is not risk.  Risk is the chance of the permanent loss of capital.   There are no 30-year periods when the broader market lost money.   An asteroid could hit, or Canada could invade or something and change that, but the actual risk of losing money in the market over that length of time is effectively zero. 

I agree with the use of the words risk and volatility.

But you are assuming that the portfolio in question is going to meet market rates of return, which we know is not always true.

Where did I assume that?  :)

Here's the correct way to frame the question.  Is a mortgage rate of ____ % likely to be more or less than the expected 30 year rate of return of the market (minus fees and taxes)?   Determining the mortgage is easy, mine is 3.5%.   Now we have to guess what the stock market will do for 30 years.   History says that the worst 30-year period since 1926 was about 8%.   That's was the worst case, not the average.

So even if assume the future will be worse than any time in the past, you still have have a reasonable margin where you would safely outperform.   So I am making an assumption, but I don't need the market to perform at average levels for this strategy to make sense. 
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: FIreDrill on January 10, 2017, 12:57:32 PM
The one thing I would point out is that shoving money towards a mortgage does come with risk itself.  If you shove 100k at your mortgage and then get foreclosed on (for whatever reason),  you lose that entire sum.  This may be an extreme example that may not apply to most mustachians, because we have safeguards in place like emergency funds and other investments, but it should be taken into consideration regarding risk of early principal payments on your mortgage.  Principal payoff only gauntness a "risk" free rate of return when assuming there is no risk of foreclosure.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: stoaX on January 10, 2017, 01:02:10 PM
On a side note, one of the reasons I hear about why you shouldn't pay your mortgage off is because of the tax deduction for the interest.  Yet with the last mortgage I had I ended up taking the standard deduction because it was greater than the sum of my itemized deductions. So there wasn't any tax benefit.  And this was the case only a few years into the mortgage's term, not the end when the payment is mostly principal.

And many early retirees have low enough taxable income that the tax deductibility a non-issue.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Joel on January 10, 2017, 01:06:02 PM
A final thought. If someone offered to loan you $100 million for 5 years at 9.90% interest, given that the long-term rate of return in the stock market has been above 10% would you take the deal? That represents an expected arbitrage of ~$500,000 over 5 years. Most people wouldn't because in an extreme example the risk is clear.

I'm just going to address one statement. I would not accept a 5-year loan at 9.9% interest to put the money into the stock market. However, I would absolutely accept a 30-year loan at 0% interest to put money into the stock market.  Same with any loan up to 3%. When it starts creeping into the 4-6% range, that's where it becomes less clear to me. There is no hard and fast rule for all people though. That's it. Enjoy the conversation.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Midwest on January 10, 2017, 01:17:45 PM
The one thing I would point out is that shoving money towards a mortgage does come with risk itself.  If you shove 100k at your mortgage and then get foreclosed on (for whatever reason),  you lose that entire sum.  This may be an extreme example that may not apply to most mustachians, because we have safeguards in place like emergency funds and other investments, but it should be taken into consideration regarding risk of early principal payments on your mortgage.  Principal payoff only gauntness a "risk" free rate of return when assuming there is no risk of foreclosure.

If there is remaining equity after the debt and fees are paid, you do not lose that entire sum. 

Conversely, in some states, if you have no equity and are foreclosed, you remain liable for the shortfall.  If you have substantial non-retirement assets in that situation, I would assume the lender would attempt to collect.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on January 10, 2017, 01:18:11 PM
The one thing I would point out is that shoving money towards a mortgage does come with risk itself.  If you shove 100k at your mortgage and then get foreclosed on (for whatever reason),  you lose that entire sum.  This may be an extreme example that may not apply to most mustachians, because we have safeguards in place like emergency funds and other investments, but it should be taken into consideration regarding risk of early principal payments on your mortgage.  Principal payoff only gauntness a "risk" free rate of return when assuming there is no risk of foreclosure.

Not only when there is no risk of foreclosure, but also when there is no risk that the property will decrease in value, as it might in a natural disaster.
Ignoring the ethical arguments for a second, generally speaking retirement accounts are protected in bankruptcy. Ergo, holding the mortgage and funding your retirement accounts is a sound strategy.

Quote
Here's the correct way to frame the question.  Is a mortgage rate of ____ % likely to be more or less than the expected 30 year rate of return of the market (minus fees and taxes)?   Determining the mortgage is easy, mine is 3.5%.
Absolutely, but let's make sure not to forget the effect of taxes, which can be considerable. If you are not already maxing out your tax-advantaged accounts and are in a higher (say the 25%) tax bracket, every $100 extra you pay towards your mortgage is another $25 in taxes.  You'll also lose your mortgage interest deduction quicker.

Quote
Paying down a mortgage does not increase the amount of real-estate you have on your balance sheet. Paying down the mortgage reduces the debt on an individuals balance sheet which means the appreciation on the house is irreverent to this decision.
Conceptually, it increases the proportion that you own.  See above for how htis is relevant.
Also - I'm hoping you meant to right "irrelevant" and not "irreverent".  Otherwise you are just being unnecessarily hostile.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Telecaster on January 10, 2017, 01:19:21 PM

Although volatility is not the same as risk it is often used as a proxy for risk.

In the chart, I used the historical return from 2001 to 2016 for VMMXX to get a feel for how historic market rates for a similar risk investment stack up. In the calculation I used a point in time risk free rate because trying to predict the risk free rate over the next 15-years would be a speculation.

But you still speculated. You assumed the risk free rate would remain constant for the next 30 years, and at a rate so low it hadn't been seem before in the our lifetimes of our parents, grandparents, or great grandparents in this country.   Is that a good, safe assumption, or is it on the risky side?   

Just 35 years ago, the 3-month was at 15%.  Knowing that, is it smart to plan on 0.5%?   Or is it kind of risky? 




Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on January 10, 2017, 01:23:34 PM
The one thing I would point out is that shoving money towards a mortgage does come with risk itself.  If you shove 100k at your mortgage and then get foreclosed on (for whatever reason),  you lose that entire sum.  This may be an extreme example that may not apply to most mustachians, because we have safeguards in place like emergency funds and other investments, but it should be taken into consideration regarding risk of early principal payments on your mortgage.  Principal payoff only gauntness a "risk" free rate of return when assuming there is no risk of foreclosure.

This is not correct. If you are foreclosed on the mortgage company sells your house. The net proceeds are used to pay off the mortgage. If there is any money left over the mortgage company mails you a check for the difference. If the net proceeds don't cover the mortgage they can sue you for the difference. If they sue you there really is no difference on being foreclosed on with equity of -10% or 99%.

Laws differ from state to state, but regardless of that - if a bank has to foreclose on a property it is in their best interest to do so as quickly as possible, unloading the property at a steep discount and without any of the normal improvements homeowners might do to fetch the best price.  why?  Because what they want is to get their money back, not to make YOU money or protect YOUR equity.
An example:  suppose you've paid off 50% of $250k mortgage when 'bad stuff' happens and it goes into foreclosure.  You still owe the bank $125k.  The bank may sell very well list the property at $175k (30% below market) for a quick sell.  They get their money back, subtract closing costs and fees, and you may be lucky to get $30k of the $125k in equity you've put into the home.

That's risk.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: ysette9 on January 10, 2017, 01:24:19 PM
In my decision analysis classes we first learned the concept of an expected value, which is simply the expected payout multiplied by the probability of getting it. I think most people understand that concept, especially when we talk about the lottery. As an example, I'll offer you a $1 wager that when I flip a coin if it is heads I'll give you $2 and if it is tails I'll give you nothing. The expected value of this is exactly the cost of the wager. HOWEVER, this does not take into account risk tolerance.

Once you take into effect risk tolerance, you start multiplying these expectations by another factor (how to determine your own risk tolerance is another topic entirely). Pretend I am risk intolerant so I will multiply my expected values by 0.9. Suddenly the wager above is unattractive to me because I would pay $1 for a $0.90 expected value. Conversely, my friend might love risk and get a little thrill out of this wager, and have a risk tolerance factor of 1.1. That means for my friend, the expected value of the above wager is above $1, so it is worth it to him/her to flip the coin.

I say all of this as a preface to the debate on paying off the mortgage or not. We can run the strict numbers for probabilities and expected value, but that ignores each person's individual risk tolerance. This is real and important and influences decision making. It doesn't matter if the numbers say that holding the mortgage for 30 years is the best option if my second friend can't sleep at night and would rather take the lower, less volatile return. It isn't WRONG or RIGHT, it is one's individual risk tolerance. The important thing is to understand that and factor it in accordingly.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: FIPurpose on January 10, 2017, 01:26:15 PM
Ehh I think a lot of people talk past each other on this because housing markets are so different across the world.

If you're an engineer working in the mid-west and you own a $90k home. Who cares? When compared to the size of a typical stache around here. It's small potatoes. But when you're talking San Fran 750k condo, that becomes a very different question. You're looking at multiple years of you salary instead of just 1 or less. And due to the compounding nature of investments the growing number of years delaying investing is a lot bigger dollar amount for the person living in San Fran. If you can pay off your mortgage in a year or two, then yeah, avoid the hassle and just live without it. If it's going to take 10-15 years of payments at the expense of investing, don't do that.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Telecaster on January 10, 2017, 01:28:05 PM

The problem is you don't even use the above question to make the decision. You can obtain a margin loan of 100% for 5.5% which is less than the expected market return but I bet you don't have every investment that you own leveraged at 100%.

A mortgage is fixed rate, long term, and most important for purposes of this discussion, non-callable.   Margin loans are callable, and typically they are called at the least convenient time.   That really can lead to permanent loss of capital and that's the thing I'm trying to avoid.   

If I could get a 30-year 5.5% fixed interest non-callable margin loan I'd be all over it.   Such creatures don't exist. 

Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Midwest on January 10, 2017, 01:30:55 PM
The one thing I would point out is that shoving money towards a mortgage does come with risk itself.  If you shove 100k at your mortgage and then get foreclosed on (for whatever reason),  you lose that entire sum.  This may be an extreme example that may not apply to most mustachians, because we have safeguards in place like emergency funds and other investments, but it should be taken into consideration regarding risk of early principal payments on your mortgage.  Principal payoff only gauntness a "risk" free rate of return when assuming there is no risk of foreclosure.

This is not correct. If you are foreclosed on the mortgage company sells your house. The net proceeds are used to pay off the mortgage. If there is any money left over the mortgage company mails you a check for the difference. If the net proceeds don't cover the mortgage they can sue you for the difference. If they sue you there really is no difference on being foreclosed on with equity of -10% or 99%.

Laws differ from state to state, but regardless of that - if a bank has to foreclose on a property it is in their best interest to do so as quickly as possible, unloading the property at a steep discount and without any of the normal improvements homeowners might do to fetch the best price.  why?  Because what they want is to get their money back, not to make YOU money or protect YOUR equity.
An example:  suppose you've paid off 50% of $250k mortgage when 'bad stuff' happens and it goes into foreclosure.  You still owe the bank $125k.  The bank may sell very well list the property at $175k (30% below market) for a quick sell.  They get their money back, subtract closing costs and fees, and you may be lucky to get $30k of the $125k in equity you've put into the home.

That's risk.

If you have substantial equity, you are going to have a better chance of avoiding the foreclosure process.  If I lose my job with no equity and mostly retirement assets, tough for me to sell the house or avoid foreclosure.  If I lose my job with substantial equity, much easier to sell the house.  I'm much more motivated than the bank to save money and my credit.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Midwest on January 10, 2017, 01:35:38 PM
Ehh I think a lot of people talk past each other on this because housing markets are so different across the world.

If you're an engineer working in the mid-west and you own a $90k home. Who cares? When compared to the size of a typical stache around here. It's small potatoes. But when you're talking San Fran 750k condo, that becomes a very different question. You're looking at multiple years of you salary instead of just 1 or less. And due to the compounding nature of investments the growing number of years delaying investing is a lot bigger dollar amount for the person living in San Fran. If you can pay off your mortgage in a year or two, then yeah, avoid the hassle and just live without it. If it's going to take 10-15 years of payments at the expense of investing, don't do that.

It really comes down to diversification.  If you are putting every $ into paying down your mortgage (the San Francisco example) at the expense of all other investments and retirement, that probably doesn't make sense. 

Conversely, if paying down the mortgage is part of your overall strategy which involves saving and retirement, it might make sense.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Joel on January 10, 2017, 01:36:53 PM
A final thought. If someone offered to loan you $100 million for 5 years at 9.90% interest, given that the long-term rate of return in the stock market has been above 10% would you take the deal? That represents an expected arbitrage of ~$500,000 over 5 years. Most people wouldn't because in an extreme example the risk is clear.

I'm just going to address one statement. I would not accept a 5-year loan at 9.9% interest to put the money into the stock market. However, I would absolutely accept a 30-year loan at 0% interest to put money into the stock market.  Same with any loan up to 3%. When it starts creeping into the 4-6% range, that's where it becomes less clear to me. There is no hard and fast rule for all people though. That's it. Enjoy the conversation.

I love it! The recognition that all leverage carries risk. How did you pick 4-6% as the point where the reward no longer out weighed the risk?

I look at debt paydown as a guaranteed return of the APR, while I'm conservative in estimating how my stock market index investments will do over the long-term. Around 4-6% is where I start feeling like it's probably going to be a wash. I'll be maxing my retirement contributions each year before contributing extra to my mortgage, but I will likely contribute extra to my mortgage before making taxable contributions. We will see. This 28 year old still rents because it's much more affordable to rent than buy where I live in California.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: FIreDrill on January 10, 2017, 02:21:11 PM
The one thing I would point out is that shoving money towards a mortgage does come with risk itself.  If you shove 100k at your mortgage and then get foreclosed on (for whatever reason),  you lose that entire sum.  This may be an extreme example that may not apply to most mustachians, because we have safeguards in place like emergency funds and other investments, but it should be taken into consideration regarding risk of early principal payments on your mortgage.  Principal payoff only gauntness a "risk" free rate of return when assuming there is no risk of foreclosure.

This is not correct. If you are foreclosed on the mortgage company sells your house. The net proceeds are used to pay off the mortgage. If there is any money left over the mortgage company mails you a check for the difference. If the net proceeds don't cover the mortgage they can sue you for the difference. If they sue you there really is no difference on being foreclosed on with equity of -10% or 99%.

Laws differ from state to state, but regardless of that - if a bank has to foreclose on a property it is in their best interest to do so as quickly as possible, unloading the property at a steep discount and without any of the normal improvements homeowners might do to fetch the best price.  why?  Because what they want is to get their money back, not to make YOU money or protect YOUR equity.
An example:  suppose you've paid off 50% of $250k mortgage when 'bad stuff' happens and it goes into foreclosure.  You still owe the bank $125k.  The bank may sell very well list the property at $175k (30% below market) for a quick sell.  They get their money back, subtract closing costs and fees, and you may be lucky to get $30k of the $125k in equity you've put into the home.

That's risk.

If you have substantial equity, you are going to have a better chance of avoiding the foreclosure process.  If I lose my job with no equity and mostly retirement assets, tough for me to sell the house or avoid foreclosure.  If I lose my job with substantial equity, much easier to sell the house.  I'm much more motivated than the bank to save money and my credit.

If your selling the house at "retail" it really doesn't matter if you have 80% equity or 10% equity, buyers aren't going to give a crap.

I'm assuming you're saying selling the house would be easier with equity because you could discount the sale in order to move it quicker.  In that case, you are still losing money by selling the asset at a discount,  fees on the sale alone would eat up 15k-20k on a 250k house sale.

It really boils down to diversifying assets in order to ride out the storm when it comes and the reason for the diversification comes from the risk you take on when shoving all your money towards a mortgage.  Take the following scenarios..

A. 250k house with 75% equity and no savings.
B. 250k house with 50% equity and 62K in savings.
C. 250k house with 25% equity, 42k in savings, and 100k in retirement accounts (increased amount due to tax savings on retirement contributions)

I personally lean towards scenario C for these reasons.

1. Instant 20% return on investments into pre-tax accounts.
2. Higher expected growth rate in retirement accounts than principal pay down. (Assuming 9% long term market return compared to 3-4% mortgage pay down)
3. MUCH more flexibility if we hit hard times by accessing taxable investments/saving accounts.

Really, the instant 20% return for pre-tax accounts is just way too good to pass up for a measly 4% return on our mortgage.

Everyones situation is going to be different though.  Some may not have access to tax advantaged accounts, others may make so much money that they don't care if they miss out on a couple percent returns.

In my case.

Mathematically - Option C is the obvious winner.

Emotionally      - Loaded question....





Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Fishindude on January 10, 2017, 02:25:44 PM
Analyze the numbers any way you want but no mortgage payment means I've got a whole lot more money each month to invest or do as I please with. 
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Greenback Reproduction Specialist on January 10, 2017, 02:32:11 PM
I personally lean towards scenario C for these reasons.

1. Instant 20% return on investments into pre-tax accounts.
2. Higher expected growth rate in retirement accounts than principal pay down. (Assuming 9% long term market return compared to 3-4% mortgage pay down)
3. MUCH more flexibility if we hit hard times by accessing taxable investments/saving accounts.

Reason 3, for me at least is what really puts me in the other column. I would much rather be in a paid off house with an emergency fund in the event we fall on hard times financially. Really, both are good options. However, for our family it would be a lot easier to leave the nest egg untouched and go earn $1k per month to get by, than to worry about the additional $700 to $1k needed to continue to pay the mortgage or pay rent.

No job with no house payment or rent = no worries in my opinion.

Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Greenback Reproduction Specialist on January 10, 2017, 02:32:47 PM
Analyze the numbers any way you want but no mortgage payment means I've got a whole lot more money each month to invest or do as I please with. 
+1 and that is true for the rest of your life.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Retire-Canada on January 10, 2017, 02:33:01 PM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Midwest on January 10, 2017, 02:33:04 PM
The one thing I would point out is that shoving money towards a mortgage does come with risk itself.  If you shove 100k at your mortgage and then get foreclosed on (for whatever reason),  you lose that entire sum.  This may be an extreme example that may not apply to most mustachians, because we have safeguards in place like emergency funds and other investments, but it should be taken into consideration regarding risk of early principal payments on your mortgage.  Principal payoff only gauntness a "risk" free rate of return when assuming there is no risk of foreclosure.

This is not correct. If you are foreclosed on the mortgage company sells your house. The net proceeds are used to pay off the mortgage. If there is any money left over the mortgage company mails you a check for the difference. If the net proceeds don't cover the mortgage they can sue you for the difference. If they sue you there really is no difference on being foreclosed on with equity of -10% or 99%.

Laws differ from state to state, but regardless of that - if a bank has to foreclose on a property it is in their best interest to do so as quickly as possible, unloading the property at a steep discount and without any of the normal improvements homeowners might do to fetch the best price.  why?  Because what they want is to get their money back, not to make YOU money or protect YOUR equity.
An example:  suppose you've paid off 50% of $250k mortgage when 'bad stuff' happens and it goes into foreclosure.  You still owe the bank $125k.  The bank may sell very well list the property at $175k (30% below market) for a quick sell.  They get their money back, subtract closing costs and fees, and you may be lucky to get $30k of the $125k in equity you've put into the home.

That's risk.

If you have substantial equity, you are going to have a better chance of avoiding the foreclosure process.  If I lose my job with no equity and mostly retirement assets, tough for me to sell the house or avoid foreclosure.  If I lose my job with substantial equity, much easier to sell the house.  I'm much more motivated than the bank to save money and my credit.

If your selling the house at "retail" it really doesn't matter if you have 80% equity or 10% equity, buyers aren't going to give a crap.

I'm assuming you're saying selling the house would be easier with equity because you could discount the sale in order to move it quicker.  In that case, you are still losing money by selling the asset at a discount,  fees on the sale alone would eat up 15k-20k on a 250k house sale.


Banks don't sell houses at retail in the foreclosure process.  They unload them at a substantial discount.

I'm assuming that a) owner with equity could choose to discount, but still discount less than a foreclosure b) owner could choose to avoid hiring a seller's agent c) owner occupied home in good repair will generate a higher price than a bank owned property d) bank will have more fees in foreclosure than an owner sale and e) owner with 1 house to sell might be more motivated to get the best price than a large agency with hundreds of thousands of homes.

If you have liquid non-retirement assets, you could employ a similar strategy.  However, if your money is all (or nearly all) tied up in retirement accounts in that scenario, you are much more at the mercy of the bank.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: FIreDrill on January 10, 2017, 02:37:25 PM
Analyze the numbers any way you want but no mortgage payment means I've got a whole lot more money each month to invest or do as I please with.

You do realize the title of this post implies analyzing the numbers, right? lol
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: bacchi on January 10, 2017, 02:56:43 PM
One reason I'm accelerating my mortgage payoff is that payment is a barrier to FI.

How is that possible if you had saved the difference in investment accounts?
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: bacchi on January 10, 2017, 02:58:44 PM
All or a portion of the equity in a primary residence is subject to a homestead exemption in most states which protects it from lawsuits and bankruptcy, treasuries and bank accounts don't have these protections.

From my understanding, this is only true in 2 states, Florida and Texas.*

This is why OJ Simpson bought a house in Florida rather than stay in California. His Florida house is not subject to civil lawsuit forfeiture.


* Eta: 44 states have homestead protection to some extent. California's protection is $75k for individuals below the age of 65.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: CmFtns on January 10, 2017, 03:05:07 PM
I disagree with you... call me silly or any names you want to

We are talking about the difference between over-prepared and over-prepared... There is not much difference in risk here... whether you are dumping money into stocks, mortgage, or a mix of the two you are doing a million times better than 99% of the world and to me none of these options are risky. Now when I see two non-risky options and historically one option has performed better every single time guess which one I would be picking.

Now all these talks about coin flipping and 10 million dollar loans at 9.99% or whatever are completely different stories because there is huge risk in all these things and are not comparable.

TL;DR
When i see two scenarios with equal or minimal risk between them I go with the better returns
I would absolutely not pay down a sub 4% mortgage... it makes zero sense to me
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: DrF on January 10, 2017, 03:08:01 PM
Some great analysis done buy Ern at EarlyRetirementNow.com

https://earlyretirementnow.com/2016/11/02/why-would-anyone-have-a-mortgage-and-a-bond-portfolio/
https://earlyretirementnow.com/2016/11/16/housing-choices-in-early-retirement-rent-vs-own/
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: ysette9 on January 10, 2017, 03:11:17 PM
As someone in a HCOL area (where can I get a $750k SF condo?? What a deal!) it probably does make a big difference how much the mortgage is total. When I run cFIREsim scenarios with house prices in the $800-1000k range, there is a noticeable difference in success probability between carrying a 30 year mortgage versus paying all cash or even putting 50% down. Keeping the mortgage for as long as possible wins. Then again, there is the emotional aspect of it. Will I actually feel comfortable enough to keep the mortgage while living off of investments? Back in the era when we had a car loan, that sucker didn't live its full natural life because seeing that balance bugged me.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Landlady on January 10, 2017, 03:27:24 PM
One reason I'm accelerating my mortgage payoff is that payment is a barrier to FI. 
I'm in the same boat. The minute I pay off my property my net rental income shoots up to an amount which takes me to FI.
I could have chosen to put the money in stocks, but my timeline to FI gets longer because I already have a big chunk of the mortgage paid down and will still have payments. Diversification hurts me here for the short term I guess.
If I sell the house and immediately put the money in stocks, I miss out on tons of passive income from the rental property in future years so that's not good either. Currently, the returns are better than the stock market on this house.
So my decision for FI is to pay off the property and then use the surplus income to then invest in the market.

I'm never sure if it's the right thing to do, but it's certainly the path that gets me to FIRE the quickest.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: RichMoose on January 10, 2017, 03:27:35 PM
Are you making a fair comparison that is in line with the argument many have about early mortgage payoff on this site?

We generally compare mortgage paydown vs. index investing, not mortgage paydown vs. T-bills. Big difference.

That being said, the second highlighted part is key here. After maxing out tax-advantaged accounts, mortgage payoff becomes increasingly attractive. But it's important not to concentrate your net worth in one asset - your house. While mortgage rates might be a steady 3.18% for 15 years, your house will go up and down in value similar to stocks or bonds. If your house is your only asset, it becomes more than just a roof over your head.

It is realistic in the long term to expect a 80/20 stock bond index fund to return 9% a year (Vanguard said 9.4%). Your house on the other hand will appreciate a little more than the rate of inflation over the long term (Case-Shiller says around 3.4%). Would you rather focus on growing an asset that returns 9%, or paying down a possibly tax-deductible loan on an asset that returns 3.4%?

I also believe cash flow is important, but not when you sacrifice growth and diversification.

Paying down a mortgage does not increase the amount of real-estate you have on your balance sheet. Paying down the mortgage reduces the debt on an individuals balance sheet which means the appreciation on the house is irreverent to this decision.

Partially true, but my point is concentration of assets in your house. So it paying down a mortgage fast might not increase the amount of real estate on your balance sheet, but it will increase the net value of real estate on your balance sheet.

For example, let's say my real estate is valued at $500,000. If I put $100,000 down and pay it off in 15 years that's a monthly payment of about $2900. Compared to about $1900 if I pay off in 30 years.

Scen. A: If I only pay off my mortgage, in 15 years I have a house worth about $825,000 at the 3.4% return. If I run stuck and need some cash, I have to obtain a loan, probably against the house. That means an appraisal, legal fees, and interest costs.

Scen. B: If I invest that extra $1000 at 9%, in 15 years I have about $375,000 in the bank, plus a $825,000 house - $255,000 mortgage for equity of $570,000. That's a total networth of $945,000. Also, if needed the $375,000 in investments could toss off $15,000 a year at the 4% rule. If I run stuck somewhere and need a bit of cash, I can sell some of my investments at virtually no cost.

In 30 years, when the mortgage is paid off in Scenario B, the difference is even bigger because of the compounding factor on your investments. Scen. A gives you a paid off house and $1.08 million in investments (if you divert the $2900 to investing). Scen. B gives you a paid off house and $1.77 million in investments. That's a difference of three-quarters a million dollars.

It's a personal decision, but I'll take the extra $700,000 for no extra effort. Added bonus: I have the security of diversification the whole 30 year journey.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: FIreDrill on January 10, 2017, 03:52:01 PM
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.

You would really have to cherry pick the data in order to support your argument over a 30 year investment timeframe.  And remember, you have to front load the investment side with an instant 20% gain due to tax savings by contributing to pre-tax accounts...

Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Retire-Canada on January 10, 2017, 04:03:41 PM
You would really have to cherry pick the data in order to support your argument over a 30 year investment timeframe.  And remember, you have to front load the investment side with an instant 20% gain due to tax savings by contributing to pre-tax accounts...

And factor in the diversification risk of having all your NW tied up in one asset.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: theolympians on January 10, 2017, 06:31:17 PM
My argument is not strictly mathematical. Paying off your mortgage early allows for FIRE and stability/peace of mind.

Volatility is risk. A home owned free and clear is safety.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: SwordGuy on January 10, 2017, 07:02:30 PM
One reason I'm accelerating my mortgage payoff is that payment is a barrier to FI.

How is that possible if you had saved the difference in investment accounts?

Let's say I have a $1000 a month mortgage payment on a $100,000 mortgage balance.

Using the 4% "rule", I will need $25,000 invested to make one month's payment.   To make 12 payments I'll need $250,000 invested.

Or, I can just save up $100,000 and pay the damn thing off, and retire $150,000 quicker.

That's how. :)


The important thing to remember is that pre-paying the mortgage is NOT a guaranteed return.  It is only a return if we make all the mortgage payments.  If, for some reason we can't, the bank will sell the house for a price that gives them the money we owe them.  They don't care about our portion of the equity in the house.   The more we've pre-payed the mortgage in this situation, the easier it is for the bank to sell our old house cheaply - because they only need to sell it for enough to clear our debt to them.  If we're foreclosed and the bank sells the property for cheap, we get zero return on those extra payments.

That's why pre-paying a lot on the mortgage is risky if you have inadequate reserves to handle a loss of income for a lengthy period.   Major illnesses or accidents that prevent people from working are, if I remember correctly,  one of the leading reason for foreclosures.  The other is job loss due to economic downturns.

Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: bacchi on January 10, 2017, 09:21:00 PM
One reason I'm accelerating my mortgage payoff is that payment is a barrier to FI.

How is that possible if you had saved the difference in investment accounts?

Let's say I have a $1000 a month mortgage payment on a $100,000 mortgage balance.

Using the 4% "rule", I will need $25,000 invested to make one month's payment.   To make 12 payments I'll need $250,000 invested.

Or, I can just save up $100,000 and pay the damn thing off, and retire $150,000 quicker.

That's how. :)

Noooo. The $1000/mth payment includes principal payment. You can't use the 4% rule on mortgage-invested money because some of it is trading one investment (stocks) for another (real estate).

Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Mattzlaff on January 11, 2017, 04:07:47 AM
Regardless of the math I prefer to pay off the mortgage quicker too. I do invest all I can into tax advantaged accounts, and I'm not paying off my mortgage in 5 years, but I do maybe put 6-8k a year towards the principal. I'm happy with that.

30 years of debt doesn't sit well here with me. The way I see it, is that this place preaches debt free living, so why not pay off the mortgage, faster than normal but not dump everything into it? If I can cut my mortgage to 20 years I'm happy(I'll be 43 by then). I've still invested into the market and I've gotten 10 years of debt free living.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Retire-Canada on January 11, 2017, 07:01:58 AM
The way I see it, is that this place preaches debt free living, so why not pay off the mortgage, faster than normal but not dump everything into it?

The reasons have all been listed in this thread already.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Livewell on January 11, 2017, 07:31:07 AM
In my decision analysis classes we first learned the concept of an expected value, which is simply the expected payout multiplied by the probability of getting it. I think most people understand that concept, especially when we talk about the lottery. As an example, I'll offer you a $1 wager that when I flip a coin if it is heads I'll give you $2 and if it is tails I'll give you nothing. The expected value of this is exactly the cost of the wager. HOWEVER, this does not take into account risk tolerance.

Once you take into effect risk tolerance, you start multiplying these expectations by another factor (how to determine your own risk tolerance is another topic entirely). Pretend I am risk intolerant so I will multiply my expected values by 0.9. Suddenly the wager above is unattractive to me because I would pay $1 for a $0.90 expected value. Conversely, my friend might love risk and get a little thrill out of this wager, and have a risk tolerance factor of 1.1. That means for my friend, the expected value of the above wager is above $1, so it is worth it to him/her to flip the coin.

I say all of this as a preface to the debate on paying off the mortgage or not. We can run the strict numbers for probabilities and expected value, but that ignores each person's individual risk tolerance. This is real and important and influences decision making. It doesn't matter if the numbers say that holding the mortgage for 30 years is the best option if my second friend can't sleep at night and would rather take the lower, less volatile return. It isn't WRONG or RIGHT, it is one's individual risk tolerance. The important thing is to understand that and factor it in accordingly.

I think this is absolutely the answer here - it is your own risk tolerance that determines the right choice for your decision.  For us, we had a healthy portfolio and no other debt before we started tackling the mortgage.  At first we used a bonus to pay down and refinance - which reduced our monthly payment by 40%. A few years later we used another bonus to pay it off.  Could we have made more in the market with that money?  Absolutely, however we still had a portfolio of index stocks too.  End of the day it just felt right to be 40 and not have to worry about a mortgage.  My advice would be to trust your gut.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on January 11, 2017, 07:49:14 AM
I'd like to compliment Virtus on a fine piece of trolling.  He/she titled the thread as a shouted command, and has since proceeded to deny points made in discussion criticizing the central premise or simply redefined concepts like risk to better fit the premise.

The all-caps subject was a nice touch, using every single character allowed (perhaps that's why there was only one exclamation mark?)
A few suggestions for future threads:

STOP RELYING ON THE 4% RULE, IT WON'T WORK!!!
MMM LIES, HE'S NOT REALLY RETIRED AT ALL
TAXATION IS THEFT, TO SAY OTHERWISE IS DISHONEST!

what others topics can we yell at each other about?
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on January 11, 2017, 07:56:05 AM

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)
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Retire-Canada on January 11, 2017, 08:03:54 AM
what others topics can we yell at each other about?

Before we move on to something else can I just say -  IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY! ;)
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: soupcxan on January 11, 2017, 08:50:28 AM
the actual risk of losing money in the market over that length of time [30 years] is effectively zero. 

This is such a gross misunderstanding of risk, I don't even know where to start. SMH
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: thepokercab on January 11, 2017, 09:01:22 AM
I for one am excited about ALL CAPS proclamations taking their rightful place as a sign of truth.  For too long Caps Lock has been mocked and ignored in this country, by the ELITE with their semi colons, and commas and punctuation in general, trying to tell the rest of us how to live. 
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on January 11, 2017, 09:10:09 AM
I for one am excited about ALL CAPS proclamations taking their rightful place as a sign of truth.  For too long Caps Lock has been mocked and ignored in this country, by the ELITE with their semi colons, and commas and punctuation in general, trying to tell the rest of us how to live.

For someone who disparages punctuation, you certainly have used quite a lot of it in your post.
:-P
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: bacchi on January 11, 2017, 09:36:21 AM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Midwest on January 11, 2017, 10:45:40 AM

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
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: FIPurpose on January 11, 2017, 10:45:53 AM
Same Troll? You decide

http://forum.mrmoneymustache.com/share-your-badassity/how-i-paid-off-my-$115-000-mortgage-in-23-months-!!!!!/ (http://forum.mrmoneymustache.com/share-your-badassity/how-i-paid-off-my-$115-000-mortgage-in-23-months-!!!!!/)
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: libertarian4321 on January 11, 2017, 10:52:52 AM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on January 11, 2017, 10:59:06 AM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Midwest on January 11, 2017, 11:19:37 AM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on January 11, 2017, 11:25:58 AM

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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Midwest on January 11, 2017, 11:45:31 AM

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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on January 11, 2017, 01:29:10 PM

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".
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: CorpRaider on January 11, 2017, 01:37:22 PM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on January 11, 2017, 02:09:53 PM

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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Scandium on January 11, 2017, 02:28:30 PM
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!
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Midwest on January 11, 2017, 02:36:01 PM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: CrazyIT on January 11, 2017, 02:38:15 PM
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!
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Scandium on January 11, 2017, 02:57:53 PM
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..
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Midwest on January 11, 2017, 03:08:35 PM
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).
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Scandium on January 11, 2017, 03:14:38 PM

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..?
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Midwest on January 11, 2017, 03:26:59 PM

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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on January 11, 2017, 03:46:54 PM
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~
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: pegleglolita on January 11, 2017, 07:23:09 PM
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?     
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Indexer on January 11, 2017, 08:57:12 PM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Telecaster on January 11, 2017, 09:42:38 PM
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. 

Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: aspiringnomad on January 11, 2017, 10:07:09 PM
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).
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: steveo on January 12, 2017, 03:09:51 AM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: MoonLiteNite on January 12, 2017, 04:57:42 AM
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!
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Midwest on January 12, 2017, 06:45:40 AM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: pegleglolita on January 12, 2017, 12:00:30 PM
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... 
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on January 12, 2017, 12:06:42 PM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Frugancial Advisor on January 12, 2017, 04:11:48 PM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Telecaster on January 12, 2017, 04:53:17 PM
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.   

Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: FIPurpose on January 12, 2017, 05:14:59 PM
If you own a Russian mortgage of 15%, you should probably pay that off first.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: SwordGuy on January 12, 2017, 10:32:32 PM
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.  :)


Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: SuperMex on January 13, 2017, 05:10:57 AM
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.   
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: boarder42 on January 13, 2017, 05:34:05 AM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Tjat on January 13, 2017, 07:05:33 AM
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.

Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: boarder42 on January 13, 2017, 07:54:42 AM
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. 
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Scandium on January 13, 2017, 09:40:01 AM
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..
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: actionjackson on January 13, 2017, 01:00:56 PM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: actionjackson on January 13, 2017, 04:31:29 PM
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
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: boarder42 on January 13, 2017, 05:12:37 PM
If you assume investments are worse than a fixed rate below 5% you must work til a 2% swr or lower
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: actionjackson on January 13, 2017, 05:59:17 PM
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!
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: boarder42 on January 13, 2017, 06:51:12 PM
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
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: marty998 on January 14, 2017, 03:11:07 AM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: boarder42 on January 14, 2017, 03:16:34 AM
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
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: actionjackson on January 14, 2017, 07:28:22 AM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: superannuationfreak on January 14, 2017, 06:52:03 PM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: boarder42 on January 14, 2017, 08:21:33 PM
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 
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: superannuationfreak on January 14, 2017, 09:57:03 PM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Telecaster on January 14, 2017, 11:59:21 PM
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.



 
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: superannuationfreak on January 15, 2017, 01:05:53 AM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: boarder42 on January 15, 2017, 06:12:06 AM
Having a goal of paying down a mortgage doesn't make it mathematically superior.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: aspiringnomad on January 15, 2017, 09:13:00 AM

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

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

Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: aspiringnomad on January 15, 2017, 09:18:56 AM


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

I'm not sure that's really true.

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

.....

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

So how is that risky?

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

And lots of things can happen to any individual company, which is why I said a diversified portfolio of equities (say 2,500 companies) was less risky than owning one home, stuck on one piece of land, subject to all the things that can happen around that land.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: doneby35 on January 15, 2017, 09:39:41 AM
I ended up doing the following, I am not sure if it's the right decision or not but I feel comfortable with it.
1. max out all tax advantaged accounts
2. make extra payments towards mortgage AND invest in a taxable account (1000 extra for mortgage and 1000 for taxable account)
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: boarder42 on January 15, 2017, 09:58:30 AM
I ended up doing the following, I am not sure if it's the right decision or not but I feel comfortable with it.
1. max out all tax advantaged accounts
2. make extra payments towards mortgage AND invest in a taxable account (1000 extra for mortgage and 1000 for taxable account)

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

To be truly safe all your 2k should be going to taxable and then lump some pay off the mortgage when you have enough. The bank doesn't care how much extra you've been paying if you have to start missing payments.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Retire-Canada on January 15, 2017, 10:15:12 AM
I'm considering both extending the amortization of my mortgage and pulling equity back out once it builds up enough. Any extra funds I get will be invested. As long as rates stay this low it doesn't make a ton of sense to have a huge chunk of my NW tied up in a house. Living in Canada and using variable rate mortgages [currently sub-2%] I don't have the long-term stability your US 30yr mortgages provide, but I do have sufficient financial agility to deal with significant changes to interest rates and my mortgage is very flexible on accelerated repayment should I want to do that.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: bacchi on January 15, 2017, 11:33:04 AM
I'm considering both extending the amortization of my mortgage and pulling equity back out once it builds up enough. Any extra funds I get will be invested. As long as rates stay this low it doesn't make a ton of sense to have a huge chunk of my NW tied up in a house. Living Canada and using variable rate mortgages [currently sub-2%] I don't have the long-term stability your US 30yr mortgages provide, but I do have sufficient financial agility to deal with significant changes to interest rates and my mortgage is very flexible on accelerated repayment should I want to do that.

Pulling out equity is one of the better financial decisions I've made.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: boarder42 on January 15, 2017, 11:37:01 AM
Hoping rates stay low so I can keep doing refinancing and pulling out equity
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Retire-Canada on January 15, 2017, 11:52:42 AM
Hoping rates stay low so I can keep doing refinancing and pulling out equity

I assume rates will rise a bit, but when you look at the impact of a 1% rate hike on Canadian mortgages I can't see them going up 2% - 3% fast. It would be devastating on the market. That said no matter what happens I'll be in a better financial position to deal with it than 80%+ of the other folks with a mortgage in Canada.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on January 15, 2017, 12:45:02 PM
Hoping rates stay low so I can keep doing refinancing and pulling out equity

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

Historically rate-increases of 2-3% within a single 12 month period have been fairly common.  That's one of the things that deeply concerns me about the Canadian economy right now; after several years of super-low rates people have forgotten how much rates can change in a relatively short period of time, and many households simply aren't prepared to start paying 5%+ mortgage rates.  If it happens, it could really suck (http://www.cbc.ca/news/business/cmhc-stress-test-1.3855434).

(http://peterandsharda.com/wp-includes/Text/historical-mortgage-rates-canada-chart-i3.jpg)
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Telecaster on January 15, 2017, 01:27:29 PM
Are there reasonable assumptions and more realistic preferences (for most of the population) than maximising portfolio value after 10 or 20 years where an individual is expected to be better off (under those preferences) by paying off the mortgage?  Yes.

You're making a common mistake.  If you are doing an A vs. B scenario of paying off the mortgage early or investing, then the comparison makes sense if and only if the time period includes the entire length of the loan in both scenarios.  If you don't, then the whole exercise is is meaningless because you can't compare the two.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: PAstash on January 15, 2017, 05:20:06 PM
commenting for follow. also going to throw my 0.02 in.

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

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

 I lose my job then i can hope the market is on a upswing to sell enough equities to pay off my house. I could hang onto the mortgage and make payments while withdrawing from my shares slowly hoping the market makes a come back if it's down(which it likely will be). The problem is when it rains it pours. If i lose my job it's reasonable given most people in middle to late stage careers in their life that it reflects the market they are in. Which means stocks will be down i'll be out of a job and i'll be in a huge amount of real estate debt. Finding a job in that market that covers my life style will not be easy or fun. Low stress existence all the way. Asset protection is the key to wealth accumulation not chasing returns.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Cathy on January 15, 2017, 05:54:20 PM
This is flawed comparison because it leaves out risk.

I agree with you that many participants in the various mortgage loan threads have a poor (or at least incomplete) understanding of risk. Many respondents fail to take stock of risks such as, but by no means limited to,

After analysing all of the relevant risks, many (if not most) prospective or actual early retirees will reach the conclusion that it can be an overwhelmingly risky decision to prepay fixed-rate non-callable government-favoured low-interest tax-deductible long-term possibly-non-recourse debt secured by an instrument on which creators are generally slow to foreclose. Indeed, it's because I'm so risk-averse that I keep favourable debt outstanding (http://forum.mrmoneymustache.com/ask-a-mustachian/paying-off-mortgage/msg1337728/#msg1337728).
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Retire-Canada on January 15, 2017, 06:18:34 PM
If you owe money to anyone. You are not building your wealth you are paying someone else interest.

This ^^^ is not even remotely true. If you want to say you don't "feel" comfortable with debt that's fine. But strategic use of debt is the way most wealth around us has and is being built.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: boarder42 on January 15, 2017, 06:33:04 PM
commenting for follow. also going to throw my 0.02 in.

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

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

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

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

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

Low interest debt is good debt. ESP when it fixed
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: actionjackson on January 15, 2017, 09:27:32 PM
Hoping rates stay low so I can keep doing refinancing and pulling out equity

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

Historically rate-increases of 2-3% within a single 12 month period have been fairly common.  That's one of the things that deeply concerns me about the Canadian economy right now; after several years of super-low rates people have forgotten how much rates can change in a relatively short period of time, and many households simply aren't prepared to start paying 5%+ mortgage rates.  If it happens, it could really suck (http://www.cbc.ca/news/business/cmhc-stress-test-1.3855434).

Central banks are targeting inflation though, with an eye on the unemployment rate. If household spending is highly elastic to increases in the interest rate, then only a small interest rate increase is required to tame the inflation rate. I read that article and I don't understand why the Canadian central bank would increase interest rates in a scenario with high unemployment and low inflation - they just wouldn't need to do it, they would crank the interest rate right down to stimulate demand. The only reason, I would think, for an interest rate increase would be during a period with relatively low unemployment, with inflation pushing upwards of 3%.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: ChpBstrd on January 15, 2017, 10:05:25 PM
First of all, nobody is choosing between paying off the mortgage or buying 1-year treasuries. They're talking about borrowing at low risk and investing at a higher risk in the stock market - risk arbitrage.

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

If I could borrow $1M at 3.65%, I would. All day long I would! I would buy ETFs, earn maybe 7-8% long-term, and keep the difference. The reason nobody will loan me that (unless I put down collateral) is because they would be taking the same risk as the stock market and earning half the return!
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on January 16, 2017, 06:11:11 AM
Hoping rates stay low so I can keep doing refinancing and pulling out equity

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

Historically rate-increases of 2-3% within a single 12 month period have been fairly common.  That's one of the things that deeply concerns me about the Canadian economy right now; after several years of super-low rates people have forgotten how much rates can change in a relatively short period of time, and many households simply aren't prepared to start paying 5%+ mortgage rates.  If it happens, it could really suck (http://www.cbc.ca/news/business/cmhc-stress-test-1.3855434).

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

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

My point is basically that rates sometimes shoot up,  and tens of thousands of Canadian households are in a particularly poor position to handle rate increases right now. If it happens, it could be very ugly.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: boarder42 on January 16, 2017, 06:26:16 AM
Hoping rates stay low so I can keep doing refinancing and pulling out equity

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

Historically rate-increases of 2-3% within a single 12 month period have been fairly common.  That's one of the things that deeply concerns me about the Canadian economy right now; after several years of super-low rates people have forgotten how much rates can change in a relatively short period of time, and many households simply aren't prepared to start paying 5%+ mortgage rates.  If it happens, it could really suck (http://www.cbc.ca/news/business/cmhc-stress-test-1.3855434).

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

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

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

yeah thats a US 2008 style crash.  esp. with how fast your markets are appreciating currently.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: actionjackson on January 16, 2017, 07:23:21 AM
Hoping rates stay low so I can keep doing refinancing and pulling out equity

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

Historically rate-increases of 2-3% within a single 12 month period have been fairly common.  That's one of the things that deeply concerns me about the Canadian economy right now; after several years of super-low rates people have forgotten how much rates can change in a relatively short period of time, and many households simply aren't prepared to start paying 5%+ mortgage rates.  If it happens, it could really suck (http://www.cbc.ca/news/business/cmhc-stress-test-1.3855434).

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

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

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

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

Then again, something weird could happen and we could re-write the economics textbooks, again.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: boarder42 on January 16, 2017, 07:28:31 AM
not to mention electric cars coming of age and starting to decrease the dependence on oil
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: SuperMex on January 16, 2017, 07:43:20 AM
Inflation happens as a consequence of our fiat system printing more money. The U.S. has created almost 15 trillion dollar in debt in the last 8 years. Therefore inflation is a given at some point I am actually shocked it hasn't happened yet. When it does happen the federal reserve will have to raise interest rates and tighten the money supply to try and slow it down. When this happens all of those individuals living on the edge and in debt are in serious trouble. Of course those appreciating assets will ride this out comfortably. 
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on January 16, 2017, 08:02:38 AM

Inflation just doesn't go up without a cause. You're talking about stagflation - high inflation, coupled with high unemployment.
No, I'm not talking about stagflation.  Unemployment isn't currently very high in either Canada (6.9%) or the US (4.7%).
Inflation can be caused by things other than oil prices, like (over)printing money.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: ChpBstrd on January 16, 2017, 08:26:00 AM
Inflation happens as a consequence of our fiat system printing more money. The U.S. has created almost 15 trillion dollar in debt in the last 8 years. Therefore inflation is a given at some point I am actually shocked it hasn't happened yet. When it does happen the federal reserve will have to raise interest rates and tighten the money supply to try and slow it down. When this happens all of those individuals living on the edge and in debt are in serious trouble. Of course those appreciating assets will ride this out comfortably.

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

A false understanding of the causes of inflation drove many investors into the wrong investments over the past few years (e.g. TIPS, metals). Thus, it is important to ensure one's economic theory is as correct (fits data, makes correct predictions) as possible. It is also important to be willing to drop underperforming theories. Your retirement might depend on it.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: PAstash on January 23, 2017, 09:38:28 PM
If you owe money to anyone. You are not building your wealth you are paying someone else interest.

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

I never said FEEL.

It is plain and mathematical. If I have 100k earning me 1% I am earning money. If I have 50K earning 1% and 50k mortgage that I am paying 1% I am not making any money. to say nothing of the risk associated with debt. Being lean and liquid allows me to capitalize on good investment opportunities when they show up. If that money is tied up in a mortgage I don't have that option. Having the debt is costing you money not earning you money.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: PAstash on January 23, 2017, 09:48:31 PM
commenting for follow. also going to throw my 0.02 in.

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

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

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

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

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

Low interest debt is good debt. ESP when it fixed

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

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

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

doing that which needs not done efficiently is twice as bad.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: PizzaSteve on January 23, 2017, 10:56:55 PM
Cant we let this thread die?  These arguements are so assumption driven.  A good savings rate is what will drive most personal wealth creation, not whether one chooses to save as a stock investment or home equity.  Stop splitting hairs and spend less/invest more.  If someone chooses an asset class slightly less efficient because they are risk adverse, who cares.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Mr Mark on January 25, 2017, 05:39:15 AM
Cant we let this thread die?  These arguements are so assumption driven.  A good savings rate is what will drive most personal wealth creation, not whether one chooses to save as a stock investment or home equity.  Stop splitting hairs and spend less/invest more.  If someone chooses an asset class slightly less efficient because they are risk adverse, who cares.

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

;-)
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: boarder42 on January 25, 2017, 06:09:49 AM
Cant we let this thread die?  These arguements are so assumption driven.  A good savings rate is what will drive most personal wealth creation, not whether one chooses to save as a stock investment or home equity.  Stop splitting hairs and spend less/invest more.  If someone chooses an asset class slightly less efficient because they are risk adverse, who cares.

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

;-)

and riskier to pay it down.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: arebelspy on January 25, 2017, 06:24:39 AM
It is not mathematically correct to pay off your mortgage early.* ** *** **** *****

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

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

But it's very, very rarely mathematically correct to do so, in the current environment.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Captain and Mrs Slow on January 25, 2017, 07:15:16 AM
Really it's the same argument over rent vs buy, often renting makes more sense but buying has a an emotional element. For my and I our mortgage is gone in 8 years and we really don't need to pay it off but there is something about saying only (after next week) 3 more lump sum payments plus 4 months and this baby is gone. It's exciting especially after years of financial struggles!!!!!
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: boarder42 on January 25, 2017, 07:21:18 AM
Really it's the same argument over rent vs buy, often renting makes more sense but buying has a an emotional element. For my and I our mortgage is gone in 8 years and we really don't need to pay it off but there is something about saying only (after next week) 3 more lump sum payments plus 4 months and this baby is gone. It's exciting especially after years of financial struggles!!!!!

You're also in germany so the pay off the mortgage debate likely doesnt apply to you as you dont have the rate and long term fixed mortgages the USA has.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Retire-Canada on January 25, 2017, 07:55:51 AM
You're also in germany so the pay off the mortgage debate likely doesnt apply to you as you dont have the rate and long term fixed mortgages the USA has.

Some of factors are different, but the same question is important. In Canada we have 5yr mortgages that get renewed 5 times during a 30yr amortization. At each point you can choose to pay off the mortgage if you have saved enough, take equity out, renew the same amortization or speed up/slow down repayment. The choice isn't as cut and dried as in the US, but deciding whether your money is best tied up in your house or used to invest is still something to consider.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: jessicat on January 25, 2017, 08:18:47 AM
We paid off a mortgage of 244k in 6 years and 8 months.  During that time the value of our house has gone up 106k.  Of course I would have to sell it to get that return.  I am a huge fan of no debt.  No one can come take my house. 
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Cromacster on January 25, 2017, 08:27:06 AM
We paid off a mortgage of 244k in 6 years and 8 months.  During that time the value of our house has gone up 106k.  Of course I would have to sell it to get that return.  I am a huge fan of no debt. No one can come take my house.

Uhhh the government can and has.  Not likely, but it happens.  And it still doesn't change the fact that its not mathematically correct, it's just that your debt averse.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Retire-Canada on January 25, 2017, 08:27:22 AM
We paid off a mortgage of 244k in 6 years and 8 months.  During that time the value of our house has gone up 106k.  Of course I would have to sell it to get that return.  I am a huge fan of no debt.  No one can come take my house.

Your house would have gone up $106K if you had a mortgage as well and stop paying your property taxes and they will take your house.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on January 25, 2017, 08:34:33 AM
We paid off a mortgage of 244k in 6 years and 8 months.  During that time the value of our house has gone up 106k.  Of course I would have to sell it to get that return.  I am a huge fan of no debt.  No one can come take my house.

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

Of course as you said realizing this gain would require selling the home.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: jessicat on January 25, 2017, 09:09:09 AM
I am debt averse.  Without debt we can live on a lot less.  Especially if something bad happened.  When you are a family of 8 that makes a huge difference.  It was also part of an agreement I made with dh.  He can now take all of them money we were putting into paying off our house and invest all of it.  My need for security has been met.  My life long dream has been met.  we lived in arizona in 2008 and sold our house there in 2009.  Our house value there dropped 150k in less than a year.  We were one of the lucky ones that still sold for more than we paid for.  But we know a lot of people who ended up massively upside down.  I don't think you all have taken that into account.  Sometimes you can get screwed in real estate too.  And that  is why paying off my house was so important to me. 
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on January 25, 2017, 09:18:25 AM
I am debt averse.  Without debt we can live on a lot less.  Especially if something bad happened.  When you are a family of 8 that makes a huge difference.  It was also part of an agreement I made with dh.  He can now take all of them money we were putting into paying off our house and invest all of it.  My need for security has been met.  My life long dream has been met.  we lived in arizona in 2008 and sold our house there in 2009.  Our house value there dropped 150k in less than a year.  We were one of the lucky ones that still sold for more than we paid for.  But we know a lot of people who ended up massively upside down.  I don't think you all have taken that into account.  Sometimes you can get screwed in real estate too.  And that  is why paying off my house was so important to me.
I have no problem with you choosing to pay off your home because you are debt adverse.  As many have said throughout this thread, there are multiple factors to weigh and each person will give these factors different weight.

I was merely pointing out that your example about how the price of your home rising (and at that rate) actually favors not paying it off.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Retire-Canada on January 25, 2017, 09:21:14 AM
I am debt averse.  Without debt we can live on a lot less.  Especially if something bad happened.

Not trying to hammer on you, but having money invested and mortgage gives you more options to deal with a serious problem than a paid off house and small or no investments. I get that feels better to you being debt free, but that's not the same as it being better and it's a very expensive feeling to make happen.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: PAstash on January 25, 2017, 10:12:19 AM
Cant we let this thread die?  These arguements are so assumption driven.  A good savings rate is what will drive most personal wealth creation, not whether one chooses to save as a stock investment or home equity.  Stop splitting hairs and spend less/invest more.  If someone chooses an asset class slightly less efficient because they are risk adverse, who cares.

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

;-)

and riskier to pay it down.

Tap into your crystal ball and tell me what the powerball number will be tonight then. I mean since you know about how risky the market will be in the next few years.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Retire-Canada on January 25, 2017, 10:13:48 AM
Tap into your crystal ball and tell me what the powerball number will be tonight then. I mean since you know about how risky the market will be in the next few years.

Risk is an assessment of the probability and impact of future events. Once you know the actual outcomes it's no longer a risk.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: boarder42 on January 25, 2017, 10:15:55 AM
Cant we let this thread die?  These arguements are so assumption driven.  A good savings rate is what will drive most personal wealth creation, not whether one chooses to save as a stock investment or home equity.  Stop splitting hairs and spend less/invest more.  If someone chooses an asset class slightly less efficient because they are risk adverse, who cares.

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

;-)

and riskier to pay it down.

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

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

meanwhile tap your crystal ball and confirm for me you wont be laid off in the middle of paying down your mortgage and lose your house b/c the bank doesnt care that you've been paying extra. 
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: arebelspy on January 25, 2017, 02:01:52 PM
Tap into your crystal ball and tell me what the powerball number will be tonight then. I mean since you know about how risky the market will be in the next few years.

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

Well said.

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

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

Thinking of all those companies out there churning out products, selling services, information, etc... and we're going to have flat returns for three decades in a row?  I'm super skeptical of that.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Mr Mark on January 25, 2017, 10:23:26 PM
It is a common refrain on this forum from some posters that 'there could be a 50% crash in the stock market!', 'bonds have peaked!' or 'hyperinflation is coming!'. In general, volatility and uncertainty is commonly equated to 'risk'.

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

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

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

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

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




Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: arebelspy on January 26, 2017, 01:01:45 AM


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

What long time posters advocate for this as a strategy?

The people holding hundreds of thousands in cash seem to be new posters asking how they get over the hump of investing when the market is at an all time high, and we all shout at them to do it.  For years now.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Mr Mark on January 26, 2017, 01:54:07 AM


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

What long time posters advocate for this as a strategy?

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

Exactly. I believe i didn't say long term posters. :-)
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: PAstash on January 30, 2017, 10:04:27 PM
Tap into your crystal ball and tell me what the powerball number will be tonight then. I mean since you know about how risky the market will be in the next few years.

Risk is an assessment of the probability and impact of future events. Once you know the actual outcomes it's no longer a risk.
forgive my ignorance. It would appear to me you are claiming to know future events. Could you please explain how I am misinterpting this?
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: PAstash on January 30, 2017, 10:12:02 PM
Cant we let this thread die?  These arguements are so assumption driven.  A good savings rate is what will drive most personal wealth creation, not whether one chooses to save as a stock investment or home equity.  Stop splitting hairs and spend less/invest more.  If someone chooses an asset class slightly less efficient because they are risk adverse, who cares.

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

;-)

and riskier to pay it down.

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

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

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

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

If your a true believer in your position you should never buy real estate and only rent.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: PAstash on January 30, 2017, 10:18:20 PM
Tap into your crystal ball and tell me what the powerball number will be tonight then. I mean since you know about how risky the market will be in the next few years.

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

Well said.

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

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

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

I more or less agree with you. However in the game of wealth building over the course of your entire life not just this market cycle i disagree. Wealth preservation is key. Perhaps i don't fully understand your position would you care to go into greater detail risk vs volatility? Perhaps you could sway me. I feel like any persons greatest asset is their ability to earn more money via labor over anyone's life time especially those of us blue collar white collar workers. So having a solid home in a area where they could easily find another job(even if it's not as high paid) paid off seems like a wonderful position of strength to be in.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: arebelspy on January 31, 2017, 12:15:23 AM
I feel like any persons greatest asset is their ability to earn more money via labor over anyone's life time especially those of us blue collar white collar workers. So having a solid home in a area where they could easily find another job(even if it's not as high paid) paid off seems like a wonderful position of strength to be in.

Initially, when starting out with nothing, sure.

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

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

Once you get to that point, the "solid home in an area where they can easily find another job" is much less important.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: boarder42 on January 31, 2017, 03:53:11 AM
Cant we let this thread die?  These arguements are so assumption driven.  A good savings rate is what will drive most personal wealth creation, not whether one chooses to save as a stock investment or home equity.  Stop splitting hairs and spend less/invest more.  If someone chooses an asset class slightly less efficient because they are risk adverse, who cares.

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

;-)

and riskier to pay it down.

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

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

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

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

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

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

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

There is an entire 20something page thread devoted to why paying down your mortgage is suboptimal and in most cases riskier than investing. If you want to be swayed put aside your current false pretenses and go read all of that then come back here and explain what your conclusion is.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: tyort1 on January 31, 2017, 09:36:57 AM
For me, there's a tipping point - if I'm close to paying off the mortgage, I would accelerate it to remove a monthly cost.  If I was far away from paying off my mortgage, I would dump as much as possible into my 80/20 stock/bond split. 
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Retire-Canada on January 31, 2017, 09:51:02 AM
For me, there's a tipping point - if I'm close to paying off the mortgage, I would accelerate it to remove a monthly cost.  If I was far away from paying off my mortgage, I would dump as much as possible into my 80/20 stock/bond split.

If interests rates were this low when I was getting close to having a paid off house I'd get a new mortgage and pull out a big chunk of the equity to invest it. So that's a third option.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: boarder42 on January 31, 2017, 10:03:21 AM
For me, there's a tipping point - if I'm close to paying off the mortgage, I would accelerate it to remove a monthly cost.  If I was far away from paying off my mortgage, I would dump as much as possible into my 80/20 stock/bond split.

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

yep i'd do the same.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: PAstash on January 31, 2017, 10:38:21 AM
I feel like any persons greatest asset is their ability to earn more money via labor over anyone's life time especially those of us blue collar white collar workers. So having a solid home in a area where they could easily find another job(even if it's not as high paid) paid off seems like a wonderful position of strength to be in.

Initially, when starting out with nothing, sure.

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

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

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

So what networth level do you draw that line? in your opinion.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: boarder42 on January 31, 2017, 10:43:26 AM
I feel like any persons greatest asset is their ability to earn more money via labor over anyone's life time especially those of us blue collar white collar workers. So having a solid home in a area where they could easily find another job(even if it's not as high paid) paid off seems like a wonderful position of strength to be in.

Initially, when starting out with nothing, sure.

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

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

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

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

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

if you really want to know why its bad mathmatically go read the thread i mentioned with an open mind and come back and explain why your new way of thinking changed.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: PAstash on January 31, 2017, 10:44:39 AM
Cant we let this thread die?  These arguements are so assumption driven.  A good savings rate is what will drive most personal wealth creation, not whether one chooses to save as a stock investment or home equity.  Stop splitting hairs and spend less/invest more.  If someone chooses an asset class slightly less efficient because they are risk adverse, who cares.

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

;-)

and riskier to pay it down.

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

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

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

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

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

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

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

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

i have. many other articles many other books. Tons of blog posts. Countless audiobooks pod casts and subjective personal experience backs how i feel. Math is not always reflective of real life. it's a good measurement tool not great when you lose your house your job cause of correlative sectors. Getting rich slowly is the key. I'll stand on that.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: NESailor on January 31, 2017, 10:47:42 AM
Fascinating thread...again...lol. 

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

Cheers!
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: PAstash on January 31, 2017, 10:49:02 AM
I feel like any persons greatest asset is their ability to earn more money via labor over anyone's life time especially those of us blue collar white collar workers. So having a solid home in a area where they could easily find another job(even if it's not as high paid) paid off seems like a wonderful position of strength to be in.

Initially, when starting out with nothing, sure.

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

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

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

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

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

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

You can remove liquidity pretty easy. about 80-90% without much of a problem at all and still have the asset to live in or rent. Heloc easily. Take another mortage out on it. Hard money lend. there are countless options for using real estate as a way to leverage. Say you have a stock portfolio. Market crashes. that's okay right cause you will just hang on. That's all well and good but now your NW is eviscerated until market recovers. There have been far fewer housing market crashes then stock market crashes in history. It is a more stable asset for building wealth. So long as you buy properly. 
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Retire-Canada on January 31, 2017, 10:49:21 AM
Fascinating thread...again...lol. 

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

Cheers!

What is the size of your investment portfolio? How secure is your income?
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Telecaster on January 31, 2017, 10:58:39 AM

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

I wish people would just start off saying it is about feelings rather than trying to construct a financial argument. 
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: PAstash on January 31, 2017, 11:03:10 AM
Fascinating thread...again...lol. 

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

Cheers!

I'd say do it. Here is why.

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

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

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

I won't take anything away from the full equity investment people. It's a strategy every strategy comes with different levels of risk. I'd happily sacrifice some % of returns to avoid the bankruptcy button. Need some motivation go look at some images of people in poverty or take a spin though the ghetto. I love the endless positiveness of MMM and his cohorts on here. I've been a reader since the first year of the blog. If i need a pick me up this is where i come. Reality sometimes doesn't care.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: PAstash on January 31, 2017, 11:04:11 AM

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

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

You are misreading the useage of the word feel here. Feel meaning based on my judgement this is what i think is the correct way to build wealth. Nice cherry pick.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: PAstash on January 31, 2017, 11:07:12 AM
Fascinating thread...again...lol. 

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

Cheers!

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

You know you didn't even bother to ask me any of these questions when i expressed my opinion Canada. I just don't see how you could switch your position at this point in the thread regardless of what he/she says. You have taken the position so far that he should always be investing no matter what. He/she already said that they have been investing 70kish a year so that gives you a good idea of NW.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Telecaster on January 31, 2017, 11:17:12 AM
Fascinating thread...again...lol. 

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

Cheers!

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

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

Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Retire-Canada on January 31, 2017, 11:38:36 AM
You know you didn't even bother to ask me any of these questions when i expressed my opinion Canada. I just don't see how you could switch your position at this point in the thread regardless of what he/she says. You have taken the position so far that he should always be investing no matter what. He/she already said that they have been investing 70kish a year so that gives you a good idea of NW.

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

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

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

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

None of that changes my personal view that paying down your mortgage faster is a sub-optimal decision in the current low interest rate environment.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Mr Mark on January 31, 2017, 11:46:39 AM
The maths is pretty clear when in accumulation mode. We're all implicitly assuming long term total nominal pretax returns of about 9% in the markets. It's what underpins FIRE for most.

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

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

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

Later post FIRE the calculations can be very different. Paid house by definition is then untaxed income and an effective bond investment substitute. 
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Mr Mark on January 31, 2017, 11:55:27 AM
You know you didn't even bother to ask me any of these questions when i expressed my opinion Canada. I just don't see how you could switch your position at this point in the thread regardless of what he/she says. You have taken the position so far that he should always be investing no matter what. He/she already said that they have been investing 70kish a year so that gives you a good idea of NW.

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

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

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

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

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

Yep. It's when I see this as an extension of the "the market could always crash so I'm losing my risk with this strategy" that it annoys me. It's just incorrect.  And it scares the very people who should be investing in usually tax advantaged accounts with low NW into hurting their time to FIRE by either  sitting on cash or the next worse thing - over paying a mortgage.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: tyort1 on January 31, 2017, 11:57:47 AM
You can remove liquidity pretty easy. about 80-90% without much of a problem at all and still have the asset to live in or rent. Heloc easily. Take another mortage out on it. Hard money lend. there are countless options for using real estate as a way to leverage. Say you have a stock portfolio. Market crashes. that's okay right cause you will just hang on. That's all well and good but now your NW is eviscerated until market recovers. There have been far fewer housing market crashes then stock market crashes in history. It is a more stable asset for building wealth. So long as you buy properly.

Stock Market crash plus job loss - isn't that why we do 80% stocks and 20% bonds around here?  If stocks are down and you need cash, raid the bonds.  When stocks recover, replenish your bonds.  That's what I'd do....
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Retire-Canada on January 31, 2017, 12:03:42 PM
You can remove liquidity pretty easy. about 80-90% without much of a problem at all and still have the asset to live in or rent. Heloc easily. Take another mortage out on it. Hard money lend. there are countless options for using real estate as a way to leverage. Say you have a stock portfolio. Market crashes. that's okay right cause you will just hang on. That's all well and good but now your NW is eviscerated until market recovers. There have been far fewer housing market crashes then stock market crashes in history. It is a more stable asset for building wealth. So long as you buy properly.

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

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

If you are paying off your mortgage fast and lose your job with $60K left on a $300K home and no investments because you are "hammering" your mortgage then you are screwed. You lose your home and can't pay your bills for anything else either.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: tyort1 on January 31, 2017, 12:09:43 PM
Oh, I agree with you - I was just pointing out that stocks are even less risky if you do an 80/20 or 70/30 split.  You can use bonds as cash in the short term and not touch stocks at all, even with job loss.

Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: boarder42 on January 31, 2017, 12:11:23 PM
You can remove liquidity pretty easy. about 80-90% without much of a problem at all and still have the asset to live in or rent. Heloc easily. Take another mortage out on it. Hard money lend. there are countless options for using real estate as a way to leverage. Say you have a stock portfolio. Market crashes. that's okay right cause you will just hang on. That's all well and good but now your NW is eviscerated until market recovers. There have been far fewer housing market crashes then stock market crashes in history. It is a more stable asset for building wealth. So long as you buy properly.

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

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

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

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


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

yes i actually will run these numbers when we FIRE.  we will straddle the 15% line and if LTCGs and QDs are still 0% in the 15% we may need to pay down our mortgage to stay in that bracket.  depending on a few things.  but still its a math equation.  feeling safer and being safer are 2 very unrelated things and i dont quite understand why emotions run so high in what is in general a very simple math function.  and typically the risk lies in paying it down vs investing.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Mr Mark on January 31, 2017, 12:14:13 PM
You can remove liquidity pretty easy. about 80-90% without much of a problem at all and still have the asset to live in or rent. Heloc easily. Take another mortage out on it. Hard money lend. there are countless options for using real estate as a way to leverage. Say you have a stock portfolio. Market crashes. that's okay right cause you will just hang on. That's all well and good but now your NW is eviscerated until market recovers. There have been far fewer housing market crashes then stock market crashes in history. It is a more stable asset for building wealth. So long as you buy properly.

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

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

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

That's the problem with banks. When you don't need credit you'll get offers all day. When you really need it the liquidity dries up.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: brooklynguy on January 31, 2017, 12:34:36 PM
yes i actually will run these numbers when we FIRE.  we will straddle the 15% line and if LTCGs and QDs are still 0% in the 15% we may need to pay down our mortgage to stay in that bracket.   

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

(When determining the size of the cash reserve needed for this strategy, or whether any cash reserve is even needed to avoid being pushed into the next tax bracket in the first place, don't forget that having required mortgage payments does not translate into a need for additional income on a dollar-for-dollar basis (because a significant portion of the proceeds of the invested assets that will be used to service the mortgage payments will represent return of principal, rather than income), which is a very common mistake around here.)
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: NESailor on January 31, 2017, 12:58:29 PM
You know you didn't even bother to ask me any of these questions when i expressed my opinion Canada. I just don't see how you could switch your position at this point in the thread regardless of what he/she says. You have taken the position so far that he should always be investing no matter what. He/she already said that they have been investing 70kish a year so that gives you a good idea of NW.

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

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

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

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

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

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

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

Well...still playing around with the idea.  Maybe I'll wait until the tenure bit by which point we could be looking at around half a million stash anyway.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: boarder42 on January 31, 2017, 01:13:50 PM
yes i actually will run these numbers when we FIRE.  we will straddle the 15% line and if LTCGs and QDs are still 0% in the 15% we may need to pay down our mortgage to stay in that bracket.   

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

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

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

elaborate on your last statement please.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: AdrianC on January 31, 2017, 01:14:10 PM
The maths is pretty clear when in accumulation mode. We're all implicitly assuming long term total nominal pretax returns of about 9% in the markets. It's what underpins FIRE for most.

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

Just kidding.

9% is quite optimistic for stocks. I'd use 5% nominal for stocks and 2.5% for bonds. The math still works, it's just not the huge win you might be expecting.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: brooklynguy on January 31, 2017, 01:43:56 PM
elaborate on your last statement please.

When comparing the "mortgage" and "no mortgage" alternatives, many times people are under the mistaken impression that the "mortgage" alternative necessarily requires you to have additional income in an amount equal to the required mortgage payments.  But that's not true.  If your required mortgage payments (principal + interest) total, say, $20K per year, that does not necessarily mean that keeping the mortgage requires you to have an extra $20K of income beyond what you would need if you paid off the mortgage.  In the "mortgage" alternative, as long as your investments generate some portion of their returns through capital appreciation, then when you sell those assets to service the mortgage payments, part of the proceeds will represent return of principal (and not capital gains/income).  If your investments generate their returns primarily through capital appreciation (as stock index funds do), then, in the early years of your retirement, most of the proceeds of the investment asset sales are likely to represent return of principal (not income), so your income will probably be only slightly higher under the "mortgage" alternative.  Over time, your income will drift up as your overall cost basis in the investments decreases, but that could happen slowly enough to keep the scales titled in favor of retaining the mortgage loan, even though you straddle the 15% tax bracket.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: dandarc on January 31, 2017, 01:50:12 PM
The maths is pretty clear when in accumulation mode. We're all implicitly assuming long term total nominal pretax returns of about 9% in the markets. It's what underpins FIRE for most.

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

Just kidding.

9% is quite optimistic for stocks. I'd use 5% nominal for stocks and 2.5% for bonds. The math still works, it's just not the huge win you might be expecting.
Because you expect stock returns to be half of the historic CAGR on the S&P500?  That's overly pessimistic, in my opinion.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on January 31, 2017, 01:58:36 PM
The maths is pretty clear when in accumulation mode. We're all implicitly assuming long term total nominal pretax returns of about 9% in the markets. It's what underpins FIRE for most.

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

Just kidding.

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


Personally I'm not expecting outstanding (or even historically average) nominal returns for stocks.  I am expecting a return to ~3% inflation sometime over the next decade, perhaps with forays into the 4-5%.  THAT is my greatest reason for holding a mortgage (expected market returns of ~5-6% real are just icing on that cake)
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: 2Birds1Stone on January 31, 2017, 02:26:27 PM
IT's NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: AdrianC on January 31, 2017, 07:39:31 PM
The maths is pretty clear when in accumulation mode. We're all implicitly assuming long term total nominal pretax returns of about 9% in the markets. It's what underpins FIRE for most.

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

Just kidding.

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

What do you think long term stock returns will be from here, and why?
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: PAstash on January 31, 2017, 09:09:34 PM
You know you didn't even bother to ask me any of these questions when i expressed my opinion Canada. I just don't see how you could switch your position at this point in the thread regardless of what he/she says. You have taken the position so far that he should always be investing no matter what. He/she already said that they have been investing 70kish a year so that gives you a good idea of NW.

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

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

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

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

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

they said saving 70k for year(s) so atleast 140k That gives you a good idea of the type of NW they would have. other then that well played argument.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: PAstash on January 31, 2017, 09:14:22 PM
You can remove liquidity pretty easy. about 80-90% without much of a problem at all and still have the asset to live in or rent. Heloc easily. Take another mortage out on it. Hard money lend. there are countless options for using real estate as a way to leverage. Say you have a stock portfolio. Market crashes. that's okay right cause you will just hang on. That's all well and good but now your NW is eviscerated until market recovers. There have been far fewer housing market crashes then stock market crashes in history. It is a more stable asset for building wealth. So long as you buy properly.

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

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

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

Yea but you wouldn't have NO investments you might have 60k invested + E-fund
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: PAstash on January 31, 2017, 09:17:10 PM
yes i actually will run these numbers when we FIRE.  we will straddle the 15% line and if LTCGs and QDs are still 0% in the 15% we may need to pay down our mortgage to stay in that bracket.   

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

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

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

Maybe this is what I haven't been getting.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: tyort1 on January 31, 2017, 09:34:04 PM
IT's NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
I like your sense of humor :P
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: arebelspy on January 31, 2017, 10:52:20 PM
I feel like any persons greatest asset is their ability to earn more money via labor over anyone's life time especially those of us blue collar white collar workers. So having a solid home in a area where they could easily find another job(even if it's not as high paid) paid off seems like a wonderful position of strength to be in.

Initially, when starting out with nothing, sure.

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

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

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

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

Probably right around the time you're FI.   :)
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Mr Mark on January 31, 2017, 10:58:01 PM
The maths is pretty clear when in accumulation mode. We're all implicitly assuming long term total nominal pretax returns of about 9% in the markets. It's what underpins FIRE for most.

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

Just kidding.

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

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

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

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

It really is a no brainer when in accumulation mode.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: AdrianC on February 01, 2017, 07:26:41 AM
What do you think long term stock returns will be from here, and why?
Better than long term returns from bonds or cash and certainly more than 4% nominal (which is roughly what the long term fixed mortgage rate is).

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

It really is a no brainer when in accumulation mode.

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

Now, is it mathematically correct to have a mortgage and have bonds in your investment portfolio?
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: boarder42 on February 01, 2017, 09:05:29 AM
elaborate on your last statement please.

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

essentially what you're saying is that if you have a 1500 a month mortage payment you dont need 1500*12*25 ... and yes i understand that. if you're not saying that throw some math down ... i understand numbers better than words.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: boarder42 on February 01, 2017, 09:08:00 AM
What do you think long term stock returns will be from here, and why?
Better than long term returns from bonds or cash and certainly more than 4% nominal (which is roughly what the long term fixed mortgage rate is).

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

It really is a no brainer when in accumulation mode.

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

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

well then you need to throw in SSA that you'll have at whatever age it will be then as well.  ... if SSA still exists and my counts are correct we will have 0 bonds once we start acruing that down for 10% we plan to have with our mortgage n FIRE.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Retire-Canada on February 01, 2017, 09:10:19 AM
essentially what you're saying is that if you have a 1500 a month mortage payment you dont need 1500*12*25 ... and yes i understand that. if you're not saying that throw some math down ... i understand numbers better than words.

What he is saying is if your mortgage is $1K/month or $12K/yr and you pay for it by selling $12K of investments from your taxable account only a portion of the $12K [let's say $2K] is taxed as capital gains. The $10K principal is after-tax money you've already paid the taxman for so there is no additional tax.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: boarder42 on February 01, 2017, 09:13:40 AM
essentially what you're saying is that if you have a 1500 a month mortage payment you dont need 1500*12*25 ... and yes i understand that. if you're not saying that throw some math down ... i understand numbers better than words.

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

ahh yes i understand that as well.  i was confusing the word principal in his statement.  with mortgage principal. 
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: arebelspy on February 01, 2017, 09:43:42 AM
Now, is it mathematically correct to have a mortgage and have bonds in your investment portfolio?

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

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

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

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

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

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

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

If the "keep mortgage" vs "pay off mortgage" cost-benefit analysis otherwise favors keeping the mortgage over paying it off, it's hard to imagine a scenario where the fact that you straddle the 15% tax bracket line will tip the scales back in favor of paying it off (as long as you're using investments that generate their returns primarily through capital appreciation (like stocks)).  Just keep a cash reserve on hand that can be used as necessary to avoid being pushed into the next tax bracket -- unless you have a really big mortgage loan, I would think the leveraged-investing-via-mortgage strategy, even with the drag on performance caused by the relatively small cash allocation, would still outperform the mortgage payoff strategy under virtually all circumstances where the leveraged-investing-via-mortgage strategy would otherwise win out.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: AdrianC on February 01, 2017, 05:23:07 PM
Now, is it mathematically correct to have a mortgage and have bonds in your investment portfolio?

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

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

A "smoother ride" is an emotional need. Rather like wanting to be debt free. It's not math.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: arebelspy on February 01, 2017, 07:26:55 PM
Now, is it mathematically correct to have a mortgage and have bonds in your investment portfolio?

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

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

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

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

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

I don't think taking a mortgage to buy bonds is a good idea tho. Which was OP's original point.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on October 15, 2018, 12:08:29 PM
Resurrecting this excellent thread in honor of Boarder42...
R.I.P. Boarder42 -
I enjoyed your commentary, though at times you ran hot under the collar and crossed the line between 'attack and argument' and 'attack another poster'.

I will forever be reminded of you when some bloke suggests accelerated payoff of a fixed-rate mortgage...
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Retire-Canada on October 15, 2018, 12:09:16 PM
Resurrecting this excellent thread in honor of Boarder42...

What happened to Boarder 42?
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: appleshampooid on October 15, 2018, 12:09:54 PM
Resurrecting this excellent thread in honor of Boarder42...

What happened to Boarder 42?
He got the banhammer.

https://forum.mrmoneymustache.com/off-topic/r-i-p-boarder42/
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Retire-Canada on October 15, 2018, 12:28:59 PM
(https://qph.fs.quoracdn.net/main-qimg-38a1c5c160e4200b1bbcb6918737659d.webp)

No! No! No!

I just made an extra early mortgage payment. I hate myself!
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: PizzaSteve on October 15, 2018, 11:32:53 PM
Its pretty funny stuff in this thread.

My one point is that it is easy to confuse a data based strategy with the statistics of probability.  Morgage keeping strategies are built on a back testing of historical data models.  They are designed to help us plan, but are not a pure system of mathmatic probabilities. 

We are used to things like blackjack strategy win rates or poker strategies, where the odds are known, with possible outcomes,as finite and  measurable.  It is easy to think that stock market win rates can be similarly determined, but they are different.

The enthusiasm for a good idea, (leverage) is great, but dont confuse the useful model of a complex system with statistical probabilities.  The models of past data generate convincing statistics, but all are backwards looking.  These models are not necessarily predictive of future returns. They are useful, but I see many posts in this forum that seem to think that 30 year positive returns are guaranteed just because they have occured for all of the prior 30 year periods for which data is available. 

Calling the best predictor we have sure fire 'math' is exaggerating the predictive usefulness of these studies.  Sure, they are designed to help us make the best guess possible, and perhaps we structure our plan accordingly.

IMHO, this is not a good fact base from which to call people flat out wrong for not fully trusting these models and accordingly calling them stupid to not invest 100% is US stocks.   It is exactly the reason we have prospectuses with all the language many ignore.

Keeping a mortgage is a good bet, but it is not a bet that 'cant lose.' (as often implied and flat out said by b42).   No analysis of the past eliminates a poor result as a possible outcome.  I dont care how loud someone like b42 yells, he is wrong when he guarantees future outcomes or calls paying down debt risky to FIRE.  People who want less debt are fine (as are people who want to take on the risk of leverage and reap the rewards should stocks perform as expected).

The future is unknown and only a fool says that an investment strategy is fool proof because of the past, whether well researched or not.  That is why we diversify.  That said, the debates educate, so i guess i am fine with it all.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on October 16, 2018, 05:38:22 AM
...

...

...

...

...

...

...

...  That is why we diversify.

Another EXCELLENT reason NOT to pay off your mortgage early!!

:-P
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: appleshampooid on October 16, 2018, 06:47:15 AM
Its pretty funny stuff in this thread.

My one point is that it is easy to confuse a data based strategy with the statistics of probability.  Morgage keeping strategies are built on a back testing of historical data models.  They are designed to help us plan, but are not a pure system of mathmatic probabilities. 

We are used to thimgs like blackjack strategy win rates or poker strategies, where the odds are known, with possible outcomes,as finite and  measurable.  It is easy to think that stock market win rates can be similarly determined, but they are different.

The enthusiasm for a good idea, (leverage) is great, but dont confuse the useful model of a complex system with statistical probabilities.  The models of past data generate convincing statistics, but all are backwards looking.  These models are not necessarily predictive of future returns. They are useful, but I see many posts in this forum that seem to think that 30 year positive returns are guaranteed just because they have occured for all of the prior 30 year periods for which data is available. 

Calling the best predictor we have sure fire 'math' is exaggerating the predictive usefulness of these studies.  Sure, they are designed to help us make the best guess possible, and perhaps we structure our plan accordingly.

IMHO, this is not a good fact base from which to call people flat out wrong for not fully trusting these models and accordingly calling them stupid to not invest 100% is US stocks.   It is exactly the reason we have prospectuses with all the language many ignore.

Keeping a mortgage is a good bet, but it is not a bet that 'cant lose.' (as often implied and flat out said by b42).   No analysis of the past eliminates a poor result as a possible outcome.  I dont care how loud someone like b42 yells, he is wrong when he guarantees future outcomes or calls paying down debt risky to FIRE.  People who want less debt are fine (as are people who want to take on the risk of leverage and reap the rewards should stocks perform as expected).

All these debates are silly IMHO.  The future is unknown and only a fool thinks that any investment strategy is fool proof, whether well researched or not.  That is why we diversify.
Channeling the ghost of b42 here to say...if you believe 30 years stock returns are going to be as bad as the low mortgage rates right now, you better be planning on a 2 or 3% SWR for your retirement. This whole community is based on an assumption of 4% SWR which is based on historical stock returns.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Retire-Canada on October 16, 2018, 07:27:26 AM
All these debates are silly IMHO.  The future is unknown and only a fool thinks that any investment strategy is fool proof, whether well researched or not.  That is why we diversify.

Let us mourn Boarder42 for a while before you start up this "silly debate" again.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Bird In Hand on October 16, 2018, 07:46:14 AM
if you believe 30 years stock returns are going to be as bad as the low mortgage rates right now, you better be planning on a 2 or 3% SWR for your retirement. This whole community is based on an assumption of 4% SWR which is based on historical stock returns.

Technically the 4% SWR was 95% successful for 30 year retirement periods, with subsequent work (https://www.kitces.com/blog/adjusting-safe-withdrawal-rates-to-the-retirees-time-horizon/) indicating that 3.3%-3.5% was appropriate for 40+ year periods.  That's certainly relevant for most of us with FIRE aspirations.

Of course there have been endless discussions in the FIRE-world about ways to mitigate a bad SOR or even future returns that are just overall worse than what we've seen in the past.  Get a part time job if needed, dial down spending during bad years, downsize house, move to lower COL area, etc.  I think those are great strategies and I think they will probably be effective in mitigating ER risks due to unexpectedly poor market conditions.

You might include 3% SWR, lower fixed expenses in ER (especially via mortgage payoff), bond tents, and other strategies as more conservative ways to hedge against poor market returns in the future.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Bird In Hand on October 16, 2018, 07:55:49 AM
Let us mourn Boarder42 for a while before you start up this "silly debate" again.

Sorry to be redundant, but in case you missed it there's a dedicated thread (https://forum.mrmoneymustache.com/off-topic/r-i-p-boarder42/) where you can go do that.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Dicey on October 16, 2018, 07:58:04 AM
All these debates are silly IMHO.  The future is unknown and only a fool thinks that any investment strategy is fool proof, whether well researched or not.  That is why we diversify.

Let us mourn Boarder42 for a while before you start up this "silly debate" again.
Meh, PS never got B42, so the tone of this reply is completely in character.  Live and let live, sez I.

After all, B42 is not dead. I know he is out there living a wild, happy and free life. There are many paths to FIRE and each of them have found their own way.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Dicey on October 16, 2018, 08:01:13 AM
Let us mourn Boarder42 for a while before you start up this "silly debate" again.

Sorry to be redundant, but in case you missed it there's a dedicated thread (https://forum.mrmoneymustache.com/off-topic/r-i-p-boarder42/) where you can go do that.
It's perfectly fine to mourn B42 wherever you like. Anywhere and everywhere, as often as needed.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: GuitarStv on October 16, 2018, 08:04:07 AM
I feel the need to point out (yet again) that although Boarder42 never admitted it - his information was US centric.  If you don't live in the US it's very important that you double check and re-run his numbers.  For many of us, paying off your mortgage sooner is not the slam dunk he constantly sold everyone.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Bird In Hand on October 16, 2018, 08:06:04 AM
Let us mourn Boarder42 for a while before you start up this "silly debate" again.

Sorry to be redundant, but in case you missed it there's a dedicated thread (https://forum.mrmoneymustache.com/off-topic/r-i-p-boarder42/) where you can go do that.
It's perfectly fine to mourn B42 wherever you like. Anywhere and everywhere, as often as needed.

I wasn't saying that anyone couldn't do that.  For the sake of keeping other topics on topic I was sharing the link to the place where such comments would be both on topic and welcome by all.

But I will admit, one way to accurately honor b42's legacy is to endlessly hijack other threads.  ;)
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Dicey on October 16, 2018, 08:08:47 AM
Touche. Much as I loved B42, he wasn't without his [mostly grammatical] faults. But then, who the hell is?
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Retire-Canada on October 16, 2018, 08:22:11 AM
I feel the need to point out (yet again) that although Boarder42 never admitted it - his information was US centric.  If you don't live in the US it's very important that you double check and re-run his numbers.  For many of us, paying off your mortgage sooner is not the slam dunk he constantly sold everyone.

Good point, but as a Canadian without access to a 30yr fixed rate mortgage I found his argument compelling with some tweaks. I plan to keep my mortgage as long as possible and potentially extended it when I move at some point in FIRE. The only caveat being keeping the money diverted aside and available to pay off part or all of the mortgage should the interest rate situation change sufficiently to warrant it.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on October 16, 2018, 08:27:38 AM
I feel the need to point out (yet again) that although Boarder42 never admitted it - his information was US centric.  If you don't live in the US it's very important that you double check and re-run his numbers.  For many of us, paying off your mortgage sooner is not the slam dunk he constantly sold everyone.

Stop it with your mumbo-jumbo - there is nothing outside of the US.  Just an empty wilderness!  It's Beyond the Wall!
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Dicey on October 16, 2018, 08:45:42 AM
I feel the need to point out (yet again) that although Boarder42 never admitted it - his information was US centric.  If you don't live in the US it's very important that you double check and re-run his numbers.  For many of us, paying off your mortgage sooner is not the slam dunk he constantly sold everyone.
He totally "admitted it", as did others, including yours truly, repeatedly.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: GuitarStv on October 16, 2018, 09:02:42 AM
I feel the need to point out (yet again) that although Boarder42 never admitted it - his information was US centric.  If you don't live in the US it's very important that you double check and re-run his numbers.  For many of us, paying off your mortgage sooner is not the slam dunk he constantly sold everyone.
He totally "admitted it", as did others, including yours truly, repeatedly.

Others certainly did.  From my recollection, Boarder42 never admitted it outright.  Boarder went on to continuously post things like "It's always a better financial decision to pay off your mortgage!", "You obviously can't do the math if you don't pay off your mortgage!", "Paying off your mortgage is akin to aggressively masturbating in a school parking lot while pouring sugar down your own gas tank!", etc.

Not all members of this board are American, and the advice he gave was never appended with an asterisks indicating circumstances where it was wrong.  It was given any time anyone from any country mentioned paying off a mortgage.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Dicey on October 16, 2018, 09:15:49 AM
I feel the need to point out (yet again) that although Boarder42 never admitted it - his information was US centric.  If you don't live in the US it's very important that you double check and re-run his numbers.  For many of us, paying off your mortgage sooner is not the slam dunk he constantly sold everyone.
He totally "admitted it", as did others, including yours truly, repeatedly.

Others certainly did.  From my recollection, Boarder42 never admitted it outright.  Boarder went on to continuously post things like "It's always a better financial decision to pay off your mortgage!", "You obviously can't do the math if you don't pay off your mortgage!", "Paying off your mortgage is akin to aggressively masturbating in a school parking lot while pouring sugar down your own gas tank!", etc.

Not all members of this board are American, and the advice he gave was never appended with an asterisks indicating circumstances where it was wrong.  It was given any time anyone from any country mentioned paying off a mortgage.
Hyperbole much? Given your made-up "quotes", I would agree your recollection is erm, something... You are welcome to disagree, but making shit up is probably a Rule #1 violation. B42 may be banned, but the rules still apply.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Retire-Canada on October 16, 2018, 09:18:07 AM
He totally "admitted it", as did others, including yours truly, repeatedly.

FWIW I agree. I don't recall B42 trying to hide/gloss over/ignore the role the 30yr fixed mortgage played into his argument.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Blueberries on October 16, 2018, 09:24:30 AM
My first thread:  STOP TELLING PEOPLE YOU KNOW WHAT IS BEST FOR THEM!

That goes for both sides of the argument.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Dicey on October 16, 2018, 09:38:09 AM
My first thread:  STOP TELLING PEOPLE YOU KNOW WHAT IS BEST FOR THEM!

That goes for both sides of the argument.
This is a forum for people who want to get to FIRE efficiently. It's what we do here.

Besides, this revival is mostly a backhanded tribute to our dearly departed boarder42. It isn't really an argument, though it could seem so to one who wasn't along for the whole ride.

Perhaps it would help to think of this as a wake, where the mourners may be deep in their cups.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Retire-Canada on October 16, 2018, 09:46:35 AM
My first thread:  STOP TELLING PEOPLE YOU KNOW WHAT IS BEST FOR THEM!

That goes for both sides of the argument.

AWESOME FIRST THREAD!
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: PizzaSteve on October 16, 2018, 12:59:56 PM
Its pretty funny stuff in this thread..... is fool proof, whether well researched or not.  That is why we diversify.
Channeling the ghost of b42 here to say...if you believe 30 years stock returns are going to be as bad as the low mortgage rates right now, you better be planning on a 2 or 3% SWR for your retirement. This whole community is based on an assumption of 4% SWR which is based on historical stock returns.
I disagree with this statement.

Yes, a portion of the blog discusses this strategy as a guideline, but much more is discussed...come on now.

Second, again dont put words in my mouth.  I didnt say the 4% rule isnt useful, just not fool proof.  I dont object to planning using it, I object to posts which say they odds of failure are zero.  The model may say the odds are zero, but it is just a model and shit can happen outside of the model's data set. 

Again, I was very clear that I only object to the excessive hyperbole, which can misslead others into making an overly aggresive plan, inconsistent with their true risk tolerance, because they think it is fool proof.    So dont put words in my mouth about predicting poor returns, I only say they are unknown.

I like morgage leverage for people who understand the risks, including myself.  In fact I took the interest rate risk myself by using ARMs, which is an even more aggressive strategy (and superior, IMHO, for aggressive savers and investors). I find 30 year fixed rates to be historically expensive vs other options* (* in the US).
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Blueberries on October 16, 2018, 01:40:28 PM
My first thread:  STOP TELLING PEOPLE YOU KNOW WHAT IS BEST FOR THEM!
That goes for both sides of the argument.


Isn't there a whole portion of the forum dedicated to that? Ask a mustachian, Case studies... you can't know what you don't know yet, so someone has to bring it up if you want to add more information to your knowledge base...

1.)  It was typed in jest.
2.)  You can't learn if your mind is convinced what you already know is correct.  I see a lot of financial dogma on this website.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Dicey on October 17, 2018, 12:01:29 AM
My first thread:  STOP TELLING PEOPLE YOU KNOW WHAT IS BEST FOR THEM!
That goes for both sides of the argument.


Isn't there a whole portion of the forum dedicated to that? Ask a mustachian, Case studies... you can't know what you don't know yet, so someone has to bring it up if you want to add more information to your knowledge base...

1.)  It was typed in jest.
2.)  You can't learn if your mind is convinced what you already know is correct.  I see a lot of financial dogma on this website.
Congratulations! You've been here what? About a week?
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Kyle Schuant on October 17, 2018, 01:44:49 AM
In Australia our mortgage is at 4.21%, and that's one of the lowest rates since it's ING and they have no branches, etc.

As well, there's recently been a Royal Commission into banking which has exposed a lot of criminal and fraudulent conduct on the part of the big four banks, so it's likely they'll tighten lending restrictions etc in future, and unable to make money with criminal fraud, be forced to raise lending rates to compensate. As well, there's been a slight decline in house prices nationally, and it's likely to get bigger; if lending less overall, banks will want to make more from each customer. In other words, mortgage rates are likely to go up, and other banks like our own to follow.

So we go ahead and pay down the mortgage ASAP.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: mrmoonymartian on October 17, 2018, 03:03:20 AM
I feel the need to point out (yet again) that although Boarder42 never admitted it - his information was US centric.  If you don't live in the US it's very important that you double check and re-run his numbers.  For many of us, paying off your mortgage sooner is not the slam dunk he constantly sold everyone.
He totally "admitted it", as did others, including yours truly, repeatedly.

Others certainly did.  From my recollection, Boarder42 never admitted it outright.  Boarder went on to continuously post things like "It's always a better financial decision to pay off your mortgage!", "You obviously can't do the math if you don't pay off your mortgage!", "Paying off your mortgage is akin to aggressively masturbating in a school parking lot while pouring sugar down your own gas tank!", etc.

Not all members of this board are American, and the advice he gave was never appended with an asterisks indicating circumstances where it was wrong.  It was given any time anyone from any country mentioned paying off a mortgage.
I had a similar complaint, but to be fair I did see him start to use an asterisk just before the end.

"Use the gift the govt is giving you if you're in the US"

https://forum.mrmoneymustache.com/share-your-badassity/paid-off-mortgage-people-how-long-did-it-take-you-to-pay-off-the-house-96556/msg2131835/#msg2131835 (https://forum.mrmoneymustache.com/share-your-badassity/paid-off-mortgage-people-how-long-did-it-take-you-to-pay-off-the-house-96556/msg2131835/#msg2131835)
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Blueberries on October 17, 2018, 06:12:40 AM
My first thread:  STOP TELLING PEOPLE YOU KNOW WHAT IS BEST FOR THEM!
That goes for both sides of the argument.


Isn't there a whole portion of the forum dedicated to that? Ask a mustachian, Case studies... you can't know what you don't know yet, so someone has to bring it up if you want to add more information to your knowledge base...

1.)  It was typed in jest.
2.)  You can't learn if your mind is convinced what you already know is correct.  I see a lot of financial dogma on this website.
Congratulations! You've been here what? About a week?

Why the congrats?  I've been registered for roughly a week. 
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on October 17, 2018, 07:03:54 AM
In Australia our mortgage is at 4.21%, and that's one of the lowest rates since it's ING and they have no branches, etc.

As well, there's recently been a Royal Commission into banking which has exposed a lot of criminal and fraudulent conduct on the part of the big four banks, so it's likely they'll tighten lending restrictions etc in future, and unable to make money with criminal fraud, be forced to raise lending rates to compensate. As well, there's been a slight decline in house prices nationally, and it's likely to get bigger; if lending less overall, banks will want to make more from each customer. In other words, mortgage rates are likely to go up, and other banks like our own to follow.

So we go ahead and pay down the mortgage ASAP.

Is your rate fixed or variable?
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Dabnasty on October 17, 2018, 07:41:56 AM
My first thread:  STOP TELLING PEOPLE YOU KNOW WHAT IS BEST FOR THEM!
That goes for both sides of the argument.


Isn't there a whole portion of the forum dedicated to that? Ask a mustachian, Case studies... you can't know what you don't know yet, so someone has to bring it up if you want to add more information to your knowledge base...

1.)  It was typed in jest.
2.)  You can't learn if your mind is convinced what you already know is correct.  I see a lot of financial dogma on this website.
Congratulations! You've been here what? About a week?

Why the congrats?  I've been registered for roughly a week.
/s. very /s

You may see what appears to be dogma and coming from some, perhaps it is, but I can assure you that the majority of these statements are made with confidence because they're backed up with in depth analysis and not because of closed-mindedness.

I think what Dicey was getting at is that you should spend some more time in the forums before you get critical. And no, we will not STOP TELLING PEOPLE WE KNOW WHAT IS BEST FOR THEM! because we totally do. /s. but only a little /s
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on October 17, 2018, 08:03:18 AM
Quote
You may see what appears to be dogma and coming from some, perhaps it is, but I can assure you that the majority of these statements are made with confidence because they're backed up with in depth analysis and not because of closed-mindedness.

To paraphrase one of MMM's earlier blog posts, this is not a site for the beginner - this is advanced financial and life optimization.  We don't pat ourselves on the back for clipping a 2-for-1 coupon for crap we don't need and then tell each other its ok to have 'guilt-free' spending on 25% of our paycheck while carrying a hair-on-fire car loan.  We give face punches, but always with the goal of getting people to realize and curb their clown-consumer ways.  We use math and careful analysis to determine whether something is actually a good deal, not squishy marketing mumbo-jumbo like "you're worth it!" or "it's such a lifesaver!" There's also a not-so-secret "hidden" agenda here of trying to get people to stop destroying the planet quite so rapidly.  Most of all, we try to match out spending to our values, eliminating mindless consumption while ensuring the things we do spend money bring real and lasting happiness.  We're not above luxury, but its always done in moderation and in a self-mocking tone, realizing full well that the overwhelming majority of the planet does not have it as good as we do. We acknowledge that learning how to do something yourself is often preferable to contracting out tasks, particularly ones that most people used to do themselves, and we accept that mild discomfort is a human condition that can make us stronger and signals growth.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Blueberries on October 17, 2018, 09:24:51 AM

/s. very /s

You may see what appears to be dogma and coming from some, perhaps it is, but I can assure you that the majority of these statements are made with confidence because they're backed up with in depth analysis and not because of closed-mindedness.

I think what Dicey was getting at is that you should spend some more time in the forums before you get critical. And no, we will not STOP TELLING PEOPLE WE KNOW WHAT IS BEST FOR THEM! because we totally do. /s. but only a little /s

I had to look up /s; it's nice there is a shortcut as I'm not good at reading sarcasm online. 

That was the point?  It was completely missed on me.  I have never really understood this mindset on forums; someone can read a forum for years without ever registering. 

I understand people may have the "this is best for you mindset" because they have researched their situation and are excited by what they learned and want to share it.  However, what is best for you may not be best for me, not to mention the delivery of these comments; nastiness isn't typically helpful.  Maybe you viewed my jesting comment as nasty or the comment on "financial dogma" as such and that's fair, but what I stated is also true; it's what I see.


<edit>

There's also a not-so-secret "hidden" agenda here of trying to get people to stop destroying the planet quite so rapidly.  Most of all, we try to match out spending to our values, eliminating mindless consumption while ensuring the things we do spend money bring real and lasting happiness.  We're not above luxury, but its always done in moderation and in a self-mocking tone, realizing full well that the overwhelming majority of the planet does not have it as good as we do. We acknowledge that learning how to do something yourself is often preferable to contracting out tasks, particularly ones that most people used to do themselves, and we accept that mild discomfort is a human condition that can make us stronger and signals growth.

Sometimes we want to find like-minded people and that's precisely why I signed up.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Dicey on October 17, 2018, 10:38:52 AM

/s. very /s

You may see what appears to be dogma and coming from some, perhaps it is, but I can assure you that the majority of these statements are made with confidence because they're backed up with in depth analysis and not because of closed-mindedness.

I think what Dicey was getting at is that you should spend some more time in the forums before you get critical. And no, we will not STOP TELLING PEOPLE WE KNOW WHAT IS BEST FOR THEM! because we totally do. /s. but only a little /s

I had to look up /s; it's nice there is a shortcut as I'm not good at reading sarcasm online. 

That was the point?  It was completely missed on me.  I have never really understood this mindset on forums; someone can read a forum for years without ever registering. 

I understand people may have the "this is best for you mindset" because they have researched their situation and are excited by what they learned and want to share it.  However, what is best for you may not be best for me, not to mention the delivery of these comments; nastiness isn't typically helpful.  Maybe you viewed my jesting comment as nasty or the comment on "financial dogma" as such and that's fair, but what I stated is also true; it's what I see.


<edit>

There's also a not-so-secret "hidden" agenda here of trying to get people to stop destroying the planet quite so rapidly.  Most of all, we try to match out spending to our values, eliminating mindless consumption while ensuring the things we do spend money bring real and lasting happiness.  We're not above luxury, but its always done in moderation and in a self-mocking tone, realizing full well that the overwhelming majority of the planet does not have it as good as we do. We acknowledge that learning how to do something yourself is often preferable to contracting out tasks, particularly ones that most people used to do themselves, and we accept that mild discomfort is a human condition that can make us stronger and signals growth.

Sometimes we want to find like-minded people and that's precisely why I signed up.

Spend enough time here and you will see that one of the biggest complaints in the community is that it's gotten too soft.
Spend even more time here and you may start agreeing with them.
Or even loving them. ♡♡♡♡♡♡♡♡♡♡ Go, @Malkynn!
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: TexasRunner on October 17, 2018, 10:56:10 AM
Spend enough time here and you will see that one of the biggest complaints in the community is that it's gotten too soft.
Spend even more time here and you may start agreeing with them.

Yup.  Read the first 200 Blog Posts on MMM and then go to the forum.  Very different attitudes....

Now (apparently) you can get the ban hammer for face punches (which some might call trolling, but I consider "Trolling With Respect"... lol)
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on October 17, 2018, 11:11:01 AM
B42 didn't get banned for the facepunches.
Correct.  Sadly b42 crossed the line a few too many times.  Despite being a longstanding and prolific contributor, he racked up more than a few warnings (he described them himself in some thread I can't find now). Basically, the mods give you a warning, then a temporary ban or two (depending on the severity of the transgression(s)), then it's the perma-ban.  It's how the forum works.  B42 isn't the first (nor will is he likely the last) member who will get the ax despite posting lots of also useful stuff.

Put another way, you can be a net benefit to society, but in our world if you break the law, you [should] do the time regardless.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Kyle Schuant on October 18, 2018, 06:06:27 AM
Is your rate fixed or variable?
Variable. Fixed is always higher usually 0.5% or so, and you can't get it fixed for more than 3 years. So unless you think rates are likely to be up quite a lot in those 3 years, you go for variable.


Ours will be paid off within 3 years, anyway.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on October 18, 2018, 07:00:25 AM
Is your rate fixed or variable?
Variable. Fixed is always higher usually 0.5% or so, and you can't get it fixed for more than 3 years. So unless you think rates are likely to be up quite a lot in those 3 years, you go for variable.

Yeah, that was my experience in Canada.  Frankly coming from the US it was surprising - 'what do you mean I can't get a low fixed rate for 30 years??'  At least in Canada they have 5 year terms, and (at least lately) super low rates.
The calculus is a bit different when your mortgage rate resets every few years.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Kyle Schuant on October 18, 2018, 07:09:53 AM
Well, in my lifetime the interest rates have been up to 17% or so. Late 80s. And house prices have gone up a lot in that time. On the other hand, the US had a housing crash. So over a 30yr mortgage who the hell knows what'll happen, just get rid of the debt ASAP, I say. Plus I just hate debt.

Usury used to be considered a bad thing. In some countries there is none, and banks invest in productive enterprises instead. Of course, those countries have other issues, so...
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: ChpBstrd on October 18, 2018, 12:53:10 PM
Is your rate fixed or variable?
Variable. Fixed is always higher usually 0.5% or so, and you can't get it fixed for more than 3 years. So unless you think rates are likely to be up quite a lot in those 3 years, you go for variable.

Yeah, that was my experience in Canada.  Frankly coming from the US it was surprising - 'what do you mean I can't get a low fixed rate for 30 years??'  At least in Canada they have 5 year terms, and (at least lately) super low rates.
The calculus is a bit different when your mortgage rate resets every few years.

I wonder if Canadian house prices are more or less volatile than US house prices? I would think less volatile because buyers should be more wary of paying as much as they can afford at today's interest rates. If they stretch and interest rates shoot up in 3y, they may no longer be able to afford the reset payments.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Retire-Canada on October 18, 2018, 01:06:38 PM
I wonder if Canadian house prices are more or less volatile than US house prices? I would think less volatile because buyers should be more wary of paying as much as they can afford at today's interest rates. If they stretch and interest rates shoot up in 3y, they may no longer be able to afford the reset payments.

We recently changed our mortgage rules to require more challenging stress testing of folks wanting a mortgage. To ensure they could handle a significant rate increase.

My GF has a mortgage on a vacation rental that is a variable rate, but the payments are fixed so if rates go up she's just paying down the principal slower.

I've always signed up for 5yr variable rate mortgages. I'll take the lower rates now and self-insure for rate increases that may happen during the term. With a 5yr fixed mortgage I'd be paying more right off the bat and would only break even if the mortgage rates went up fast enough and high enough in the term. Either way at the end of 5yrs I'd be dealing with that higher rate.

My solution to the interest rate increase risk was to just buy a small house I could afford easily under any reasonable circumstance and maintain a high savings rate.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: FIRE47 on October 23, 2018, 08:19:23 AM
Everyone always talks about foreclosure and losing all of your equity - it doesn't work like that first of all. If I only owe the bank $1 but have a million in equity they are just going to pocket the rest?

If I have hundreds of thousands in home equity why would I let myself get foreclosed? I could just sell the house, in any case I doubt anyone on this forum is at much risk of being foreclosed on as they are usually dual income, with emergency funds, and substantial investments as well have a selected a house they can easily afford.

Also a few precautions in obtaining favorable terms can reduce that risk. For example for every "extra" dollar I pay on my house it can be counted towards future regular scheduled payments. Take a very long amortization, pay "extra" to hit your early repayment goals, if I can't make any payments at some point all of the extra payments will ensure I wouldn't have to pay any mortgage payments for years and still not get foreclosed.

Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Dicey on October 23, 2018, 08:24:55 AM
Everyone always talks about foreclosure and losing all of your equity - it doesn't work like that first of all. If I only owe the bank $1 but have a million in equity they are just going to pocket the rest?

If I have hundreds of thousands in home equity why would I let myself get foreclosed? I could just sell the house, in any case I doubt anyone on this forum is at much risk of being foreclosed on as they are usually dual income, with emergency funds, and substantial investments as well have a selected a house they can easily afford.

Also a few precautions in obtaining favorable terms can reduce that risk. For example for every "extra" dollar I pay on my house it can be counted towards future regular scheduled payments. Take a very long amortization, pay "extra" to hit your early repayment goals, if I can't make any payments at some point all of the extra payments will ensure I wouldn't have to pay any mortgage payments for years and still not get foreclosed.
You're talking about paying the "extra" to yourself, not the bank, riiiiight?
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Retire-Canada on October 23, 2018, 08:36:21 AM
Take a very long amortization, pay "extra" to hit your early repayment goals, if I can't make any payments at some point all of the extra payments will ensure I wouldn't have to pay any mortgage payments for years and still not get foreclosed.

If I make "extra" payments on my mortgage they reduce my principal balance. They would not count as future payments if I was unable to send the lender money for several months.

The problem with "just sell the house" to free up equity tied in it is that when you can no longer make mortgage payments it's quite possible other people are struggling as well because of some larger scale financial event. You might not be able to sell the house as fast as you need to or at all for a price that unlocks the needed equity.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: FIRE47 on October 23, 2018, 08:43:33 AM
Take a very long amortization, pay "extra" to hit your early repayment goals, if I can't make any payments at some point all of the extra payments will ensure I wouldn't have to pay any mortgage payments for years and still not get foreclosed.

If I make "extra" payments on my mortgage they reduce my principal balance. They would not count as future payments if I was unable to send the lender money for several months.

The problem with "just sell the house" to free up equity tied in it is that when you can no longer make mortgage payments it's quite possible other people are struggling as well because of some larger scale financial event. You might not be able to sell the house as fast as you need to or at all for a price that unlocks the needed equity.

Yes they would if you have a mortgage that specifies that is the case, not every mortgage has the same terms.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Scortius on October 23, 2018, 11:03:02 AM
Take a very long amortization, pay "extra" to hit your early repayment goals, if I can't make any payments at some point all of the extra payments will ensure I wouldn't have to pay any mortgage payments for years and still not get foreclosed.

If I make "extra" payments on my mortgage they reduce my principal balance. They would not count as future payments if I was unable to send the lender money for several months.

The problem with "just sell the house" to free up equity tied in it is that when you can no longer make mortgage payments it's quite possible other people are struggling as well because of some larger scale financial event. You might not be able to sell the house as fast as you need to or at all for a price that unlocks the needed equity.

Yes they would if you have a mortgage that specifies that is the case, not every mortgage has the same terms.

No mortgage I know has those terms, even in the US. Loans typically come with a fixed repayment schedule.

As for simply selling the house... that's exactly the problem. You don't need to sell the house unless you lose your job unexpectedly. Unanticipated job losses generally come with a recession. A recession craters the housing market. Suddenly everyone who just lost their job is desperate to sell their house to avoid foreclosure. The housing market tanks and everyone is underwater... simply selling your house will be insufficient to pay off your mortgage and you are forced into foreclosure anyway.

On the other hand, if you had been investing the money, you would take a loss, but you could liquidate only the portion of your investments required to meet your expenses until you were able to recover (as opposed to being forced to liquidate your entire house). You wouldn't come out great, but you'd be a lot better off than had you put the money into your house.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: PizzaSteve on October 23, 2018, 11:20:25 AM
We are really splitting hairs now.  Almost all of us have significant investment equity, emergency funds, and some home equity, even those paying the minimum.  These scenarios are fairly wild.

It is really quite simple and it all boils down to your assumptions about the future.  The debates boil down to the same arguments people have about holding 100% stocks vs some percentage of bonds or cash.

What is best depends on ones assumptions, which can be varied.  Usually they include: 

1) where you are in your plan (time horizon).  Generally those with sufficient wealth to be FI want to take sequence of returns risk off table, while those early in their plan want risk to start accumulating wealth.  FI folks may already have over a million in stocks and a bit of leverage wont impact their retirement (may actually create excess weath), while those without much wealth need the returns so they are willing to take risk. Both are rational decisions.

2) level of concerns about sequence of returns and/or overall stock market future returns (for your time horizon) Generally those concerned about stocks or pessamistic about the future want to limit stock exposure while optimistic folks are willing to hold debt and leverage greater returns on it.  Note, no amount of historic data can predict that markets will do precisely in the future.

3) mortgage rates/terms (cost of financing vs expected investment returns.  Generally, those with very favorable, cheap capital relative to future expected inflation will want debt, while those who fear deflation or have expensive loan terms will want to pay down debt.  Again this is assumption based.  One may believe their money is either cheap or expensive, but only time will actually reveal whether rates drop or a home prices decrease. So, whether the debt is a good or bad deal in the future depends on the status of an unknown future money supply situation.

People can use whatever data they like to make their own assumptions and then make their own choices, once informed.  The only thing this thread is trying to say is let people make their own informed choices and dont harrass them about it based on your own different assumptions and call this 'logic or inevitable math'.

Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: FIRE47 on October 23, 2018, 11:45:10 AM
Take a very long amortization, pay "extra" to hit your early repayment goals, if I can't make any payments at some point all of the extra payments will ensure I wouldn't have to pay any mortgage payments for years and still not get foreclosed.

If I make "extra" payments on my mortgage they reduce my principal balance. They would not count as future payments if I was unable to send the lender money for several months.

The problem with "just sell the house" to free up equity tied in it is that when you can no longer make mortgage payments it's quite possible other people are struggling as well because of some larger scale financial event. You might not be able to sell the house as fast as you need to or at all for a price that unlocks the needed equity.

Yes they would if you have a mortgage that specifies that is the case, not every mortgage has the same terms.

No mortgage I know has those terms, even in the US. Loans typically come with a fixed repayment schedule.

As for simply selling the house... that's exactly the problem. You don't need to sell the house unless you lose your job unexpectedly. Unanticipated job losses generally come with a recession. A recession craters the housing market. Suddenly everyone who just lost their job is desperate to sell their house to avoid foreclosure. The housing market tanks and everyone is underwater... simply selling your house will be insufficient to pay off your mortgage and you are forced into foreclosure anyway.

On the other hand, if you had been investing the money, you would take a loss, but you could liquidate only the portion of your investments required to meet your expenses until you were able to recover (as opposed to being forced to liquidate your entire house). You wouldn't come out great, but you'd be a lot better off than had you put the money into your house.

I have these terms with my mortgage in relation to some of the available prepayment options. The mortgage is with a major bank on a fairly standard fixed rate mortgage, not sure what there is to argue about as it is absolutely possible that is a fact.

Loans most certainly do not all come with a fixed repayment schedule - my mortgage allows a number of major payment modification options as long as I meet the minimum amortization, with some of the options all payment can be used towards future minimum payments and to stop paying altogether if I chose to voluntarily at any point.

I'm not arguing that you wont on average make more money - but there is no need to insert BS into the argument to make a point that anyone with home equity stands to lose it all.




Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: bacchi on October 23, 2018, 12:10:25 PM
People can use whatever data they like to make their own assumptions and then make their own choices, once informed.  The only thing this thread is trying to say is let people make their own informed choices and dont harrass them about it based on your own different assumptions and call this 'logic or inevitable math'.

How can anyone be "harassed" on an internet forum where someone could just easily...stop reading the thread or use 'ignore'? Is there doxxing happening and I'm missing it?

And of course people can make their own choices. It's their money. (Unless you're my underage son? In which case, pay attention to the teacher instead of being on your phone!)

Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: PiobStache on October 23, 2018, 12:20:12 PM
I always thought that with the concept of "personal finances," while math was highly important, it was not the only thing?  Risk tolerances, personal balance sheet, income state, entire asset portfolio mix, and future plans also played in?  Have I been incorrect in this thinking?  That given the mix of inputs into the decision making involved with personal finances math was in the mix but not the sole driver?
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: bacchi on October 23, 2018, 12:36:46 PM
I always thought that with the concept of "personal finances," while math was highly important, it was not the only thing?  Risk tolerances, personal balance sheet, income state, entire asset portfolio mix, and future plans also played in?  Have I been incorrect in this thinking?  That given the mix of inputs into the decision making involved with personal finances math was in the mix but not the sole driver?

It is "personal" finance. You can build a 6 car garage and use the rest for hookers and blow if you want.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: PiobStache on October 23, 2018, 12:37:49 PM
It is "personal" finance. You can build a 6 car garage and use the rest for hookers and blow if you want.

That would be relevant to my interests.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: TexasRunner on October 23, 2018, 12:52:14 PM
I always thought that with the concept of "personal finances," while math was highly important, it was not the only thing?  Risk tolerances, personal balance sheet, income state, entire asset portfolio mix, and future plans also played in?  Have I been incorrect in this thinking?  That given the mix of inputs into the decision making involved with personal finances math was in the mix but not the sole driver?

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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: PiobStache on October 23, 2018, 01:01:03 PM
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. 
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: verfrugal on October 23, 2018, 01:40:52 PM
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.

Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Boofinator on October 23, 2018, 02:21:15 PM
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.)
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: PizzaSteve on October 23, 2018, 02:26:55 PM
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).
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Radagast on October 23, 2018, 09:04:44 PM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on October 24, 2018, 06:31:48 AM
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!)
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: ChpBstrd on October 24, 2018, 08:52:11 AM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Adam Zapple on October 24, 2018, 08:54:53 AM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: bacchi on October 24, 2018, 09:39:25 AM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on October 24, 2018, 09:57:00 AM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: PizzaSteve on October 24, 2018, 12:51:54 PM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: FIRE47 on October 24, 2018, 01:16:21 PM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: bacchi on October 24, 2018, 05:09:19 PM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: PizzaSteve on October 24, 2018, 06:10:14 PM
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?)
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: bacchi on October 24, 2018, 07:04:41 PM
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.


Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Boofinator on October 25, 2018, 01:02:37 PM
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).
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Boofinator on October 25, 2018, 03:06:30 PM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: PizzaSteve on October 25, 2018, 06:38:12 PM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: bacchi on October 25, 2018, 07:41:44 PM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Kyle Schuant on October 25, 2018, 08:06:18 PM
Here is one who has obviously calculated all the numbers very carefully:

www.news.com.au/lifestyle/real-life/true-stories/cash-confessions-fatherofone-says-he-still-struggles-on-300k/news-story/2e2ef77daac0a47adb5f6d0a281bce60
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Radagast on October 25, 2018, 08:39:17 PM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: simplyjay on March 22, 2019, 06:58:34 AM
following to read posts.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: ericrugiero on March 22, 2019, 09:38:46 AM
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? 

Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: bacchi on March 22, 2019, 10:18:47 AM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: effigy98 on March 22, 2019, 10:34:57 AM
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!
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: DeniseNJ on March 22, 2019, 10:47:27 AM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: TexasRunner on March 22, 2019, 10:51:42 AM
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 (https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/) (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 (https://forum.mrmoneymustache.com/reader-recommendations/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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: bacchi on March 22, 2019, 11:10:30 AM
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!
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on March 22, 2019, 12:18:26 PM
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. 
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: OurTown on March 22, 2019, 01:39:00 PM
@TexasRunner Don't hold back, tell us how you really feel!
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Dicey on March 22, 2019, 02:27:58 PM
Y'all know this guy has never made another post on this website under this name? T-R-O-L-L
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on March 22, 2019, 02:46:34 PM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: DadJokes on March 22, 2019, 03:37:38 PM
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 can’t tell if this is satire or not.

1) Don’t live a lifestyle that requires two working spouses. If you can’t 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).
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Boofinator on March 22, 2019, 06:49:30 PM
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!
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Dicey on March 22, 2019, 10:28:42 PM
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!
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Malkynn on March 23, 2019, 06:02:20 AM
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 can’t tell if this is satire or not.

1) Don’t live a lifestyle that requires two working spouses. If you can’t 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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: ender on March 23, 2019, 06:14:54 AM
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.


Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Boofinator on March 23, 2019, 08:09:19 AM
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).
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: joenorm on March 23, 2019, 08:33:45 AM
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
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Blueberries on March 23, 2019, 08:47:00 AM

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. 
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Boofinator on March 23, 2019, 08:53:46 AM
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.)
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: the_fixer on March 23, 2019, 09:39:55 AM
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 (https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/) (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 (https://forum.mrmoneymustache.com/reader-recommendations/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.


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Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on March 23, 2019, 10:01:36 AM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on March 23, 2019, 10:09:20 AM
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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Telecaster on March 23, 2019, 12:44:24 PM
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. 
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: the_fixer on March 23, 2019, 01:32:56 PM
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....

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Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: TexasRunner on March 23, 2019, 07:33:12 PM
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....

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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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: the_fixer on March 23, 2019, 08:50:14 PM
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.

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Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Dicey on March 24, 2019, 11:48:21 AM
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.

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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.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Telecaster on March 24, 2019, 01:16:17 PM
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. 
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Telecaster on March 24, 2019, 01:53:00 PM
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.

I'm definitely in the never pay it off club, but not so much as "leverage as much you can" camp.  I view housing an expense, and like all expenses it should be minimized.  I think I misunderstood your post.  I took it as a are warning why it is a bad idea to have money in your house.  My apologies if I misunderstood.

That said, I don't know your friends' specific situations but it seems having money in the house was the worst possible place it could have been.  Let's say they put a hypothetical extra $100K on the mortgage.  Then housing market drops at the same time they become unemployed.   Now they are potentially risking that whole $100K if they can't make the house payments--which two of the three of them couldn't do.

Now let's say they put that hypothetical $100K in the stock market.  The market crashes, so now the $100K is only worth $50K.   But that amount of money still would have allowed them to continue to make the mortgage payment for years, if needs be.     

The reality is the money in your house is difficult and expensive to access if you need it, and might even be impossible to access.  The money in your brokerage account is only a mouse click away.   As we've had these discussion in the past, people typically will say something like "Of course, before you start to pay down the mortgage you should have a robust emergency fund, and well as sufficient liquid assets."   Fair enough, but that just highlights how risky it is.   Even the proponents don't think you should do it until you have substantial financial reserves. 

As an aside, a lot of people did escape with short sales back in 2008-09.    But they found out to their dismay the banks clawed back the money years later.   
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Kyle Schuant on March 24, 2019, 11:35:08 PM
The reality is the money in your house is difficult and expensive to access if you need it, and might even be impossible to access.
Thus the benefit of living in Australia: offset accounts.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on March 25, 2019, 05:17:44 AM
The reality is the money in your house is difficult and expensive to access if you need it, and might even be impossible to access.
Thus the benefit of living in Australia: offset accounts.
I am not familiar with this - how do they work?
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: vand on March 25, 2019, 11:07:10 AM
We have offset mortgages in the UK too.
Basically they link your bank account balance to your mortgage account. If you have a 100k mortgage and 40k in your bank account, you're effectively only being charged interest on 60k. The difference is that the cash from the bank account is still accessible if you need it.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: DadJokes on March 25, 2019, 11:21:55 AM
We have offset mortgages in the UK too.
Basically they link your bank account balance to your mortgage account. If you have a 100k mortgage and 40k in your bank account, you're effectively only being charged interest on 60k. The difference is that the cash from the bank account is still accessible if you need it.

That's pretty cool. When you pay your mortgage, does the principal portion stay in your bank account? When you have 100k in your account, do you have the option to keep the mortgage almost like a HELOC, as well as the option to just pay it off completely?
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on March 25, 2019, 11:50:09 AM
We have offset mortgages in the UK too.
Basically they link your bank account balance to your mortgage account. If you have a 100k mortgage and 40k in your bank account, you're effectively only being charged interest on 60k. The difference is that the cash from the bank account is still accessible if you need it.

Are they limited to what is in your bank account?  I am struggling to see how this would be useful to me, as  - broadly speaking - i would recommend against holding more than a few $k in a (low-interest) bank account. 

I do see how it would get you an effective greater 'yield' (effectively whatever your mortgage rate is) but beyond that... why keep ~$40k in a bank account rather than putting those green soldiers to work?
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: bacchi on March 25, 2019, 12:22:01 PM
I do see how it would get you an effective greater 'yield' (effectively whatever your mortgage rate is) but beyond that... why keep ~$40k in a bank account rather than putting those green soldiers to work?

Emergency account?
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: TexasRunner on March 25, 2019, 01:10:50 PM
I do see how it would get you an effective greater 'yield' (effectively whatever your mortgage rate is) but beyond that... why keep ~$40k in a bank account rather than putting those green soldiers to work?

Emergency account?

That actually sounds like a pretty cool plan.  It combines the nicities of a Cash-out heloc in a holding account with a bank account with reduced interest.  Basically changes the formula to be ((Principle - Holding Account) * (rate /12)) Through amort table...   Basically would mean that maxing out tax account and then stuffing dollars in there would make some sense, up to your EM fund- since most CDs and savings rates don't get near the 3.5% to 5% mortgage rates....  BUT they rarely have fixed mortgages so it seems like a trade off.

That would change the math some, up to the amount of your E-Fund, as it wouldn't be likely to find another E-Fund account that could return a mortgage rate.

Interesting option.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on March 25, 2019, 01:15:28 PM
I do see how it would get you an effective greater 'yield' (effectively whatever your mortgage rate is) but beyond that... why keep ~$40k in a bank account rather than putting those green soldiers to work?

Emergency account?

That actually sounds like a pretty cool plan.  It combines the nicities of a Cash-out heloc in a holding account with a bank account with reduced interest.  Basically changes the formula to be ((Principle - Holding Account) * (rate /12)) Through amort table...   Basically would mean that maxing out tax account and then stuffing dollars in there would make some sense, up to your EM fund- since most CDs and savings rates don't get near the 3.5% to 5% mortgage rates....  BUT they rarely have fixed mortgages so it seems like a trade off.

That would change the math some, up to the amount of your E-Fund, as it wouldn't be likely to find another E-Fund account that could return a mortgage rate.

Interesting option.
Oh for sure having the option would be better than not having it.  I'm just wondering about it's overall practicality beyond what I'd normally hold in cash.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: TexasRunner on March 25, 2019, 01:27:14 PM
I do see how it would get you an effective greater 'yield' (effectively whatever your mortgage rate is) but beyond that... why keep ~$40k in a bank account rather than putting those green soldiers to work?

Emergency account?

That actually sounds like a pretty cool plan.  It combines the nicities of a Cash-out heloc in a holding account with a bank account with reduced interest.  Basically changes the formula to be ((Principle - Holding Account) * (rate /12)) Through amort table...   Basically would mean that maxing out tax account and then stuffing dollars in there would make some sense, up to your EM fund- since most CDs and savings rates don't get near the 3.5% to 5% mortgage rates....  BUT they rarely have fixed mortgages so it seems like a trade off.

That would change the math some, up to the amount of your E-Fund, as it wouldn't be likely to find another E-Fund account that could return a mortgage rate.

Interesting option.
Oh for sure having the option would be better than not having it.  I'm just wondering about it's overall practicality beyond what I'd normally hold in cash.

Investment order with this option would probably look something like this:

0. Establish an emergency fund to your satisfaction     (See 7 below)       
1. Contribute to your 401k up to any company match           
2. Pay off any debts with interest rates ~5% or more above the current 10-year Treasury note yield.           
3. Max Health Savings Account (HSA) if eligible.
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level           
5. Max 401k (if
    - 401k fees are lower than available in an IRA, or
    - you need the 401k deduction to be eligible for (and desire) a tIRA deduction, or
    - your earn too much for an IRA deduction and prefer traditional to Roth, then
    swap #4 and #5)           
6. Fund a mega backdoor Roth if applicable.         
7. PLOP --- Invest up to full amount of E-Fund or 12 month E-Fund in "Mortgage Holding Account".
8. Pay off any debts with interest rates ~3% or more above the current 10-year Treasury note yield.           
9. Invest in a taxable account and/or fund a 529 with any extra.           
9b. Optional, invest full value of mortgage in "Mortgage Holding Account"
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: the_fixer on March 25, 2019, 05:28:55 PM
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.

I'm definitely in the never pay it off club, but not so much as "leverage as much you can" camp.  I view housing an expense, and like all expenses it should be minimized.  I think I misunderstood your post.  I took it as a are warning why it is a bad idea to have money in your house.  My apologies if I misunderstood.

That said, I don't know your friends' specific situations but it seems having money in the house was the worst possible place it could have been.  Let's say they put a hypothetical extra $100K on the mortgage.  Then housing market drops at the same time they become unemployed.   Now they are potentially risking that whole $100K if they can't make the house payments--which two of the three of them couldn't do.

Now let's say they put that hypothetical $100K in the stock market.  The market crashes, so now the $100K is only worth $50K.   But that amount of money still would have allowed them to continue to make the mortgage payment for years, if needs be.     

The reality is the money in your house is difficult and expensive to access if you need it, and might even be impossible to access.  The money in your brokerage account is only a mouse click away.   As we've had these discussion in the past, people typically will say something like "Of course, before you start to pay down the mortgage you should have a robust emergency fund, and well as sufficient liquid assets."   Fair enough, but that just highlights how risky it is.   Even the proponents don't think you should do it until you have substantial financial reserves. 

As an aside, a lot of people did escape with short sales back in 2008-09.    But they found out to their dismay the banks clawed back the money years later.
I agree that unless it is paid off you are at more risk.

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Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: effigy98 on March 25, 2019, 06:00:00 PM
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.


You must be a poor little man with a huge chip on your shoulder that cannot comprehend living in a modern tech city with high cost of living and you have to attack people on the internet to feel like you matter. I feel sorry for you.

MOD EDIT: No personal attacks, please.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Gremlin on March 25, 2019, 07:38:56 PM

I do see how it would get you an effective greater 'yield' (effectively whatever your mortgage rate is) but beyond that... why keep ~$40k in a bank account rather than putting those green soldiers to work?

In Australia mortgage rates are typically higher than the US and mortgage repayments on your primary home are NOT tax deductible.  A typical mortgage rate might be 5%.  For someone in the top tax bracket they will need to generate roughly $2 in gross income to pay $1 in their mortgage (be it either principal or interest).  So they'd need something close to 10% gross returns just to break even (not completely dogmatic as it depends on the tax vagaries of the different sources of income/capital gains, etc).  Whilst you might get that on the stock market, you certainly don't get it as risk free as an offset account.

There are some tax advantaged investment accounts that may take precedence for most, but they lock your money away for a long, long time and there are limits as to how much you can squirrel there each year.  Maxing out your offset account is a pretty sensible plan for most Australians. 
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: vand on March 26, 2019, 04:21:46 AM
We have offset mortgages in the UK too.
Basically they link your bank account balance to your mortgage account. If you have a 100k mortgage and 40k in your bank account, you're effectively only being charged interest on 60k. The difference is that the cash from the bank account is still accessible if you need it.

That's pretty cool. When you pay your mortgage, does the principal portion stay in your bank account? When you have 100k in your account, do you have the option to keep the mortgage almost like a HELOC, as well as the option to just pay it off completely?

The mortgage itself works like a standard repayment mortgage regardless of what is going on in your bank account, so the capital is amortised a little each month; it doesn't ever hit your bank account (they are still treated as 2 separate accounts provided by the same lender).

TBH mortgage rates are so low in the UK that these type of mortgages are not very popular. We can easily get 2yr fixed rate mortgages for 1.8%apr and 10yr fixed for 3.3 apr%.. I know, just crazy. But before anyone gets jelous, consider that this has had the effect of driving up our home prices to insane levels to the point where its dysfunctional and has a damaging effect on society, eg with plenty of grown adults living with their parents. In addition, our homes are insultingly small, so the amount of house you get for your money is tiny. A "1000 sqft 3 bed semi" would represents a dream purchase for 95% of people today. When I read about "4000 sqft McMansions".. those sort of homes are reserved for millionaires over here.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: MaaS on March 26, 2019, 08:10:24 AM
What a hit and run by the OP.

Creates account. Takes a very arrogant stance on one of the top hot button issues. 300+ posts later, never heard from again.

This is why a lot of boards have post minimums before new accounts can create threads. MMM may be at that scale where it makes sense. Just saying!
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: joleran on March 27, 2019, 06:02:17 PM
Not sure how this went 7 pages without a shoutout to https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/ and one small mention of sequence of returns risk.  It's a pretty big deal!
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Telecaster on March 27, 2019, 06:42:55 PM
Not sure how this went 7 pages without a shoutout to https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/ and one small mention of sequence of returns risk.  It's a pretty big deal!

It is indeed a pretty big deal.   It also contains a pretty big assumption:

Quote
We assume a 2% annualized inflation rate, so the mortgage payments, in real inflation-adjusted terms will decline over time.

There has never been a 60 year period, or even a 30 year period with a 2% inflation rate.   We've had low inflation for a long time, so we've gotten used to that being normal.  But the long term average is about 3.5%, and we had inflation higher than that just a few years ago.   

Since the Great Recession we haven't had 10-year Treasury rates above 4% (or at least not for very long).   But that is an outlier.  Most of the time, it has been above 4% and usually much above.  Perhaps if you are retiring today, then he's correct.  But much beyond that I wouldn't make plans based on an outlier low rate of inflation/bond rate. 
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Boofinator on March 27, 2019, 08:26:05 PM
Not sure how this went 7 pages without a shoutout to https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/ and one small mention of sequence of returns risk.  It's a pretty big deal!

It is indeed a pretty big deal.   It also contains a pretty big assumption:

Quote
We assume a 2% annualized inflation rate, so the mortgage payments, in real inflation-adjusted terms will decline over time.

There has never been a 60 year period, or even a 30 year period with a 2% inflation rate.   We've had low inflation for a long time, so we've gotten used to that being normal.  But the long term average is about 3.5%, and we had inflation higher than that just a few years ago.   

Since the Great Recession we haven't had 10-year Treasury rates above 4% (or at least not for very long).   But that is an outlier.  Most of the time, it has been above 4% and usually much above.  Perhaps if you are retiring today, then he's correct.  But much beyond that I wouldn't make plans based on an outlier low rate of inflation/bond rate.

Except inflation is a red herring: 1) Inflation rates really don't make a difference unless you invest your money somewhere that is positively correlated to inflation (stocks are, generally speaking, not). 2) The analysis I ran earlier in this thread was based on cFIREsim, which used historical nominal returns (so inflation is taken into account); it clearly shows many scenarios where paying off the mortgage would have been the best bet, historically in the U.S. (depending on a number of input factors).
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: joleran on March 27, 2019, 10:23:23 PM
There has never been a 60 year period, or even a 30 year period with a 2% inflation rate.   We've had low inflation for a long time, so we've gotten used to that being normal.  But the long term average is about 3.5%, and we had inflation higher than that just a few years ago.   

Since the Great Recession we haven't had 10-year Treasury rates above 4% (or at least not for very long).   But that is an outlier.  Most of the time, it has been above 4% and usually much above.  Perhaps if you are retiring today, then he's correct.  But much beyond that I wouldn't make plans based on an outlier low rate of inflation/bond rate.

OK, but given a situation where bond yields are below your mortgage rate, it still doesn't make any sense to buy those bonds over paying off a mortgage and going all-in on equities is still a gamble.  Also, long term returns may be great and paying off your mortgage with future dollars worth relatively less is really awesome, but that doesn't help with sequence of returns risk.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: powskier on March 28, 2019, 11:19:51 AM
What a hit and run by the OP.

Creates account. Takes a very arrogant stance on one of the top hot button issues. 300+ posts later, never heard from again.

This is why a lot of boards have post minimums before new accounts can create threads. MMM may be at that scale where it makes sense. Just saying!

All caps title is a red flag too.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: tyort1 on March 28, 2019, 11:44:39 AM
There has never been a 60 year period, or even a 30 year period with a 2% inflation rate.   We've had low inflation for a long time, so we've gotten used to that being normal.  But the long term average is about 3.5%, and we had inflation higher than that just a few years ago.   

Since the Great Recession we haven't had 10-year Treasury rates above 4% (or at least not for very long).   But that is an outlier.  Most of the time, it has been above 4% and usually much above.  Perhaps if you are retiring today, then he's correct.  But much beyond that I wouldn't make plans based on an outlier low rate of inflation/bond rate.

Re: sequence of returns risk, why not save up enough to FIRE, and then save up a bit more to pay off the mortgage?  Wouldn't that give you a good buffer for sequence of returns risk?  Sure you have to work a little longer, but I feel it's a rational approach as it addresses one of the biggest causes of FIRE failure.  That's my plan, anyway.
OK, but given a situation where bond yields are below your mortgage rate, it still doesn't make any sense to buy those bonds over paying off a mortgage and going all-in on equities is still a gamble.  Also, long term returns may be great and paying off your mortgage with future dollars worth relatively less is really awesome, but that doesn't help with sequence of returns risk.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: joleran on March 28, 2019, 03:05:03 PM
Re: sequence of returns risk, why not save up enough to FIRE, and then save up a bit more to pay off the mortgage?  Wouldn't that give you a good buffer for sequence of returns risk?  Sure you have to work a little longer, but I feel it's a rational approach as it addresses one of the biggest causes of FIRE failure.  That's my plan, anyway.

I think this is your actual post?  This is pretty much exactly how to do it to mitigate sequence of returns risk.  You save with 95%+ equities early on, start to pay off the mortgage as you get near FIRE (unless you have one at a rate lower than after-tax bond yields), then once it's paid off get your bonds in and pull the trigger.

Equity part of FIRE -> Mortgage payoff -> Bonds

Of course, if equities start crashing, stop paying off the mortgage and buy more of them.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: redbirdfan on March 30, 2019, 07:28:16 PM
Mathematically speaking I believe your net worth will likely be higher by having a 30 year mortgage and investing any surplus.  To me it gets a bit fuzzy for a few reasons: 1) projected salary duration; 2) simplicity; and 3) stress.  If you have a mortgage that you keep for 30 years, that means you have to make payments for 30 years.  That is fine during the accumulation stage, but I'm assuming that many in the forums plan to retire early.  What do those payments look like when you are in the withdrawal phase and/or when the stock market does not have a good year? 

If you can pay off the mortgage within 5 years, I believe it makes sense to knock it out and ramp up investments after it is paid off.  If it will take longer than 5 years, it makes sense to invest the money and revisit the decision based on personal preferences after the invested amount > mortgage balance.  This is assuming that in either scenario you are investing in retirement accounts and have a sufficient emergency fund.

Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on March 31, 2019, 08:06:45 AM
  That is fine during the accumulation stage, but I'm assuming that many in the forums plan to retire early.  What do those payments look like when you are in the withdrawal phase and/or when the stock market does not have a good year? 

This idea of getting rid of mortgage before retirement (early or otherwise) comes up frequently, so I thought I'd address it directly.

One noteworthy aspect of fixed rate mortgages is that the they decrease in real terms over time because of inflation, while most people's WR (e.g. the '4% rule') is inflation adjusted.  The effect is that a fixed-rate mortgage payment decreases proportionally to overall spending. 

There seems to be a pervasive belief that one cannot (or at least should not) retire while still holding onto a mortgage, but there's no reason why one can't, and many FIREs in our community have done just that. Of course you will have higher expenses than you otherwise would at the start, but this is offset by the additional savings on hand.  For example, instead of making the equivalent of 50 extra mortgage payments, a person could have 50 mortgage payments + (or minus) market gains to draw from. All the while each year our FIREe increases withdrawals annually to match inflation.

Simulators such as CfireSim allow one to see how holding additional investments and a mortgage (requiring a higher WR in absolute ($)) compares to lower investment holdings but a lower WR.  Under all 'normal' simulations I have run (i.e. assuming positive annual inflation and a WR of 3.5 to 6%)) holding the mortgage results in fewer failures.  It is markedly safer if the inflation rate is near or over its historical average of ~3%. The only times it seems to be less safe is when you assume a multi-year period of deflation.  For historical context the US hasn't seen deflation since the 50s, and then only sporadically. 
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: joleran on March 31, 2019, 12:29:24 PM
Simulators such as CfireSim allow one to see how holding additional investments and a mortgage (requiring a higher WR in absolute ($)) compares to lower investment holdings but a lower WR.  Under all 'normal' simulations I have run (i.e. assuming positive annual inflation and a WR of 3.5 to 6%)) holding the mortgage results in fewer failures.  It is markedly safer if the inflation rate is near or over its historical average of ~3%. The only times it seems to be less safe is when you assume a multi-year period of deflation.  For historical context the US hasn't seen deflation since the 50s, and then only sporadically.

It's all about that sequence of returns risk.  On average, having a mortgage is good.  In the worst cases, having a mortgage is really bad.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Boofinator on March 31, 2019, 01:08:55 PM
There seems to be a pervasive belief that one cannot (or at least should not) retire while still holding onto a mortgage, but there's no reason why one can't, and many FIREs in our community have done just that.

One should consider what their objectives are at retirement to determine whether or not it makes sense to pay off their mortgage. If the objective is to make as much money as possible by taking some risk, they should keep their mortgage under just about any conceivable mortgage interest rate (up to about 10% based off historical returns), as this maximizes expected returns; but if the objective is to make as much money as possible, why are they even retiring? If the objective is instead to retire as soon as possible and minimize the chance of having to work again, it often makes more sense to pay off the mortgage (see my post here: https://forum.mrmoneymustache.com/investor-alley/stop-saying-it-is-not-mathematically-correct-to-pay-off-your-mortgage-early!/msg2181733/#msg2181733 (https://forum.mrmoneymustache.com/investor-alley/stop-saying-it-is-not-mathematically-correct-to-pay-off-your-mortgage-early!/msg2181733/#msg2181733)).
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: ChpBstrd on April 01, 2019, 03:36:40 PM
I'm not sure we are considering inflation in a way that is applicable to retirement. Inflation usually implies an increase in both wages and expenses.

For working people, over long periods of time, living standards hold about steady because their increase in wages equals their increase in spending. For example, maybe both increase 20% over 5 years and nothing changes in terms of purchasing power.

Now consider a retiree living off of savings/investments. If expenses increase 20%, they do not have a job so they do not get the higher wages that come with inflation. Also, their investments do not yield more just because everything now costs more. Bond yields do not rise (except for TIPS) and stocks do not neccessarily go up or pay higher dividends.

Retired homeowners with paid-off mortgages experience the same increase in living expenses as retirees with mortgages. That's because the mortgage payment never changes. The increase in expenses comes from food, medical, insurance transportation, utilities, etc. not the mortgage payment. So if the retiree with a paid-off house has $0 in mortgage expenses and $40k in all other expenses, his or her increase in living expenses due to inflation are the same as the retiree who pays $10k in mortgage P&I and $40k in all other expenses. Our hypothetical 20% inflation would increase the total cost of living for both by $8k.

Of course, the mortgage-free retiree pays less in interest, and the mortgaged retiree has more cash earning a return. Will the mortgaged retiree's assets generate a return higher than the mortgage interest rate? This is unknown. The US stock market has done great historically, but that does not guarantee its future performance. So the decision boils down to a market prediction about future long term total returns exceeding the mortgage rate.
That doesn't always happen.

The average annual return with dividends reinvested since 1990 was only 0.604% for the Nikkei 225. The winner in that scenario was pay off the mortgage.

https://dqydj.com/nikkei-return-calculator-dividend-reinvestment/ (https://dqydj.com/nikkei-return-calculator-dividend-reinvestment/)

Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: bostonjim on April 02, 2019, 02:06:13 PM
We have offset mortgages in the UK too.
Basically they link your bank account balance to your mortgage account. If you have a 100k mortgage and 40k in your bank account, you're effectively only being charged interest on 60k. The difference is that the cash from the bank account is still accessible if you need it.

You can manually do the same sort of thing in the U.S. by setting up a regular mortgage combined with a HELOC.  You pay your bills and deposit your paycheck into the HELOC, so you are reducing the interest you carry during the month.  I've never seen the point, but it is one of those strategies that some financial gurus recommend. 

EDIT: Sorry, the video I linked wasn't really helpful.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Telecaster on April 04, 2019, 11:31:31 PM
Except inflation is a red herring: 1) Inflation rates really don't make a difference unless you invest your money somewhere that is positively correlated to inflation (stocks are, generally speaking, not). 2) The analysis I ran earlier in this thread was based on cFIREsim, which used historical nominal returns (so inflation is taken into account); it clearly shows many scenarios where paying off the mortgage would have been the best bet, historically in the U.S. (depending on a number of input factors).

Red herring or not, the 4% rule includes inflation adjusted withdrawals and therefore inflation must be included.  Big Ern assumes 2% inflation. That is much lower than the historical average,  and indeed was in double digits in living memory of many people on this board. 

It could be that you are correct that current conditions will continue on with inflation at no more 2% for the next 60 years.  I do not share you optimism on this point.


Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Boofinator on April 05, 2019, 08:59:50 AM
Except inflation is a red herring: 1) Inflation rates really don't make a difference unless you invest your money somewhere that is positively correlated to inflation (stocks are, generally speaking, not). 2) The analysis I ran earlier in this thread was based on cFIREsim, which used historical nominal returns (so inflation is taken into account); it clearly shows many scenarios where paying off the mortgage would have been the best bet, historically in the U.S. (depending on a number of input factors).

Red herring or not, the 4% rule includes inflation adjusted withdrawals and therefore inflation must be included.  Big Ern assumes 2% inflation. That is much lower than the historical average,  and indeed was in double digits in living memory of many people on this board. 

It could be that you are correct that current conditions will continue on with inflation at no more 2% for the next 60 years.  I do not share you optimism on this point.

I agree, inflation with respect to spending should be considered in any retirement analysis, and 2% was probably not the best assumption for ERN to make. However, when we are considering how to allocate our stash during retirement, most options we have are uncorrelated with inflation (with the exception of something like TIPS). So if we are comparing whether to invest in our mortgage or in equities, inflation doesn't play much of a role in this decision. What plays a huge role is sequence of returns risk. (This also plays a role when building the stash, but as mentioned in a previous post the objective during that time should be to increase risk in order to maximize expected returns and thus minimize expected time to FIRE.)
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Gary123 on April 06, 2019, 08:03:06 AM
the actual risk of losing money in the market over that length of time [30 years] is effectively zero. 

This is such a gross misunderstanding of risk, I don't even know where to start. SMH

Agreed. 

To update this conversation, the standard deduction now being raised to $24,000 means many people will get little or no tax benefit from holding a personal mortgage especially given the new upper limit placed on property taxes you can deduct.

I knew of an Edward Jones financial advisor who followed his own advice (per many comments above) and mortgaged the house he inherited debt free from his parents in 2007 to invest in the market for “no risk” and better returns.  Needless to say, he lost the house when the housing market collapsed and his mortgage exceeded the value of the property while the money he invested was a fraction of what he invested. 

Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: DadJokes on April 06, 2019, 08:26:27 AM
That's a period of a few years. The market has already more than recovered since then and will almost certainly end up better off over a full 30 year period than the small interest rate that the mortgage has.

S&P 500 on January 1, 2007: 1,424.16
S&P 500 right now: 2,892.29

It has more than doubled since the high before the 2008 recession, which is a far better rate of return than not having a 4% mortgage can provide (it would take 18 years for that money to double).
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Dicey on April 06, 2019, 08:43:20 AM
the actual risk of losing money in the market over that length of time [30 years] is effectively zero. 

This is such a gross misunderstanding of risk, I don't even know where to start. SMH

Agreed. 

To update this conversation, the standard deduction now being raised to $24,000 means many people will get little or no tax benefit from holding a personal mortgage especially given the new upper limit placed on property taxes you can deduct.

I knew of an Edward Jones financial advisor who followed his own advice (per many comments above) and mortgaged the house he inherited debt free from his parents in 2007 to invest in the market for “no risk” and better returns.  Needless to say, he lost the house when the housing market collapsed and his mortgage exceeded the value of the property while the money he invested was a fraction of what he invested.
Sorry, but this example is woefully incomplete. What did he invest in? Most likely individual stocks or expensive funds, which are typical of EJ. Did he invest all the money or use some of it to support or even inflate his lifestyle? Did he keep a stong EF?  This example merely shows he wasn't smart about how he invested the money, not that doing so was a terrible idea.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on April 06, 2019, 08:58:48 AM

I knew of an Edward Jones financial advisor who followed his own advice (per many comments above) and mortgaged the house he inherited debt free from his parents in 2007 to invest in the market for “no risk” and better returns.  Needless to say, he lost the house when the housing market collapsed and his mortgage exceeded the value of the property while the money he invested was a fraction of what he invested.

How did an EJ advisor go from having (presumably) hundreds of thousands in the market from mortgaging a paid off house to being unable to make a monthly mortgage payment?
This anecdote strains credulity.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: tyort1 on April 06, 2019, 08:59:40 AM
the actual risk of losing money in the market over that length of time [30 years] is effectively zero. 

This is such a gross misunderstanding of risk, I don't even know where to start. SMH

Agreed. 

To update this conversation, the standard deduction now being raised to $24,000 means many people will get little or no tax benefit from holding a personal mortgage especially given the new upper limit placed on property taxes you can deduct.

I knew of an Edward Jones financial advisor who followed his own advice (per many comments above) and mortgaged the house he inherited debt free from his parents in 2007 to invest in the market for “no risk” and better returns.  Needless to say, he lost the house when the housing market collapsed and his mortgage exceeded the value of the property while the money he invested was a fraction of what he invested.

And I know people that took out a mortgage, paid extra and then didn't have enough $$ as a cushion during the crash, lost their job and lost their house.  That's the problem with anecdotes, they don't actually prove anything.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Gary123 on April 06, 2019, 10:00:17 AM
Not trying to “prove” anything.  Just an observation of an actual case where someone followed this advise to his own peril. 

Anyone remotely familiar with the 2008 financial crises doesn’t need statistics to back-up an anecdote about someone losing a home since the statistics are well known.  Essentially, the federal government tried to push homeownership past 67% as if that was a good thing.  Policy makers confused cause and effect.  Homeowners are more financially stable and prosperous not because they are homeowners but the opposite.

The point is leveraging your primary residence to invest in the market isn’t really that smart.  Regardless of the projected or perceived future benefits, another financial crises can put you out of both money and home very quickly.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on April 06, 2019, 11:40:08 AM
Not trying to “prove” anything.  Just an observation of an actual case where someone followed this advise to his own peril. 

Anyone remotely familiar with the 2008 financial crises doesn’t need statistics to back-up an anecdote about someone losing a home since the statistics are well known.  Essentially, the federal government tried to push homeownership past 67% as if that was a good thing.  Policy makers confused cause and effect.  Homeowners are more financially stable and prosperous not because they are homeowners but the opposite.

The point is leveraging your primary residence to invest in the market isn’t really that smart.  Regardless of the projected or perceived future benefits, another financial crises can put you out of both money and home very quickly.

I'm not disagreeing that people lost their homes in the '08 financial crisis.  I'm questioning how your anecdote could even be possible given what we know and what you've told us. A man who has a job as a financial advisor takes the full value of his home and places it in the market.  If he did this the day before everything crashed (unlikely) he would have seen a 54% loss at the bottom.  Which sounds bad, except he still retained half of his original investment.  How again did he lose his house? He could have continued to make payments for well over a decade (i.e. "now").
Either he was betting everything on speculative stocks which went entirely bust (unlikely - and something literally no one here is advocating) or your story is complete BS.

The point is leveraging your primary residence to invest in the market isn’t really that smart.  Regardless of the projected or perceived future benefits, another financial crises can put you out of both money and home very quickly.
I find the opposite - putting a huge amount of your NW into your home is really not very smart, and financial crises don't care how much equity you have in your home - particularly if you are still a few payments short of eliminating your mortgage entirely. Unless you have a lot of liquid investments the next financial crisis (be in a recession or something more personal in nature) can toss you out of your home very quickly.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: tyort1 on April 06, 2019, 11:55:08 AM
Put another way. 

If you invest all your $$ in your home and you lose your job/income before it's fully paid off, you'll lose your home.

If you invest your $$ into index funds and you lose your job during a crash, you might lose up to 50% of your money (temporarily) but you still have a bunch of cash on hand that you can dip into to make your house payments till you find another job. 

From a "risk" standpoint, these 2 options aren't even in the same ballpark.  The first one is WAY RISKIER in the case of job loss.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: the_fixer on April 06, 2019, 04:29:43 PM
Put another way. 

If you invest all your $$ in your home and you lose your job/income before it's fully paid off, you'll lose your home.

If you invest your $$ into index funds and you lose your job during a crash, you might lose up to 50% of your money (temporarily) but you still have a bunch of cash on hand that you can dip into to make your house payments till you find another job. 

From a "risk" standpoint, these 2 options aren't even in the same ballpark.  The first one is WAY RISKIER in the case of job loss.
Not sure about the rest of the world but here in the US if you house is foreclosed on you get the difference back that is above and beyond what the bank is owed.

For example say you have a house that is worth $400k, you owe $20k to the bank and it gets foreclosed on the house goes to auction and brings $300k you would be entitled to $280k from the sale of the house.



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Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on April 06, 2019, 05:12:03 PM
Put another way. 

If you invest all your $$ in your home and you lose your job/income before it's fully paid off, you'll lose your home.

If you invest your $$ into index funds and you lose your job during a crash, you might lose up to 50% of your money (temporarily) but you still have a bunch of cash on hand that you can dip into to make your house payments till you find another job. 

From a "risk" standpoint, these 2 options aren't even in the same ballpark.  The first one is WAY RISKIER in the case of job loss.
Not sure about the rest of the world but here in the US if you house is foreclosed on you get the difference back that is above and beyond what the bank is owed.

For example say you have a house that is worth $400k, you owe $20k to the bank and it gets foreclosed on the house goes to auction and brings $300k you would be entitled to $280k from the sale of the house.

Technically true, but the reality is it often isn't straightforward or immediate.  What you are talking about is surplus funds from a foreclosure sale. Often the bank will not automatically issue you a cheque, which is why the entire field of foreclosure law exists.  The lender will also us any funds to pay property taxes and homeowners insurance and applicable penalties. This is in addition to the remaining amount on your mortgage plus applicable fees (often steep) for not paying your mortgage on time for several months Laws vary by state but many will not settle surplus funds until months after the auctioned property has gone through escrow.

Ultimately your home will be sold at auction, and the bank cares little about the sale price beyond getting back what is owed on the mortgage.  The lender won't fix issues or do yard work or do any of the various techniques used to fetch the maximum sale price because they don't give a f*&k. The price your foreclosed home goes for depends greatly on how many buyers with cash-on-hand are interested in buying on that particular month.  I'd say getting 75% of your assessed value is wildly optimistic - when I lived in California during the last mortgage bubble there was suddenly a glut of homes in foreclosure and a dearth of buyers capable of bringing several hundred $k to an auction.

tl;dr - in order to get any equity back from the foreclosure of your home you have to wait until it goes to auction at a steep discount, clears escrow, the lender deducts fees and penalties and (often) you hire an attorney to file the appropriate legal paperwork and testify in court.

Compare that to holding equities or (better) an appropriate mix of equities and bonds.  The market drops 30% but you the next day you can sell some, all or none of you holdings as necessary.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: the_fixer on April 06, 2019, 05:18:06 PM
Put another way. 

If you invest all your $$ in your home and you lose your job/income before it's fully paid off, you'll lose your home.

If you invest your $$ into index funds and you lose your job during a crash, you might lose up to 50% of your money (temporarily) but you still have a bunch of cash on hand that you can dip into to make your house payments till you find another job. 

From a "risk" standpoint, these 2 options aren't even in the same ballpark.  The first one is WAY RISKIER in the case of job loss.
Not sure about the rest of the world but here in the US if you house is foreclosed on you get the difference back that is above and beyond what the bank is owed.

For example say you have a house that is worth $400k, you owe $20k to the bank and it gets foreclosed on the house goes to auction and brings $300k you would be entitled to $280k from the sale of the house.

Technically true, but the reality is it often isn't straightforward or immediate.  What you are talking about is surplus funds from a foreclosure sale. Often the bank will not automatically issue you a cheque, which is why the entire field of foreclosure law exists.  The lender will also us any funds to pay property taxes and homeowners insurance and applicable penalties. This is in addition to the remaining amount on your mortgage plus applicable fees (often steep) for not paying your mortgage on time for several months Laws vary by state but many will not settle surplus funds until months after the auctioned property has gone through escrow.

Ultimately your home will be sold at auction, and the bank cares little about the sale price beyond getting back what is owed on the mortgage.  The lender won't fix issues or do yard work or do any of the various techniques used to fetch the maximum sale price because they don't give a f*&amp;k. The price your foreclosed home goes for depends greatly on how many buyers with cash-on-hand are interested in buying on that particular month.  I'd say getting 75% of your assessed value is wildly optimistic - when I lived in California during the last mortgage bubble there was suddenly a glut of homes in foreclosure and a dearth of buyers capable of bringing several hundred $k to an auction.

tl;dr - in order to get any equity back from the foreclosure of your home you have to wait until it goes to auction at a steep discount, clears escrow, the lender deducts fees and penalties and (often) you hire an attorney to file the appropriate legal paperwork and testify in court.

Compare that to holding equities or (better) an appropriate mix of equities and bonds.  The market drops 30% but you the next day you can sell some, all or none of you holdings as necessary.
I simply pointed this out to make the point as many people were saying the bank just takes your house and everything you have paid into it is gone.

Sure you might have to wait a bit or jump through a few hoops but not nearly as dire as it was made out to be.

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Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on April 06, 2019, 05:31:04 PM
I simply pointed this out to make the point as many people were saying the bank just takes your house and everything you have paid into it is gone.

Sure you might have to wait a bit or jump through a few hoops but not nearly as dire as it was made out to be.

Agreed.  After 6-12 months and with some considerable investment in time and resources an individual can get back most of the surplus funds from the lender.
A person will not lose all the equity from a paid-off or nearly paid-off home.  It just won't be immediately available, nor will it be anywhere near the full equity.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Dicey on April 07, 2019, 09:11:32 AM
I simply pointed this out to make the point as many people were saying the bank just takes your house and everything you have paid into it is gone.

Sure you might have to wait a bit or jump through a few hoops but not nearly as dire as it was made out to be.

Agreed.  After 6-12 months and with some considerable investment in time and resources an individual can get back most of the surplus funds from the lender.
A person will not lose all the equity from a paid-off or nearly paid-off home.  It just won't be immediately available, nor will it be anywhere near the full equity.
But in the meantime, you have nowhere to live and no place to put your stuff. It was heartbreaking to see what people left behind during the great recession.

Also, one can still lose their paid-for home for non-payment of taxes.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: tyort1 on April 07, 2019, 10:05:28 AM
You might get some equity back after the bank sells it, but you've still lost your house.  If your goal is to NOT lose your house, then paying extra towards the mortgage is waaaaaaayyyyyyy more risky than saving/investing it into index funds. 

Now, having said that, my own strategy is to save $1.6 million, use $300k of that to pay off the mortgage that I have left.  That reduces my available spend by $12k per year (ie, 300,000 x .04), but it also reduces my expenses by $26,400 (by getting rid of my $2200/month mortgage payment).  That gives me a $1.3m stash left over and $65k per year spending and no mortgage payments so they can't take my house even if the market crashes or whatever. 
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: ender on April 07, 2019, 03:35:36 PM
You might get some equity back after the bank sells it, but you've still lost your house.  If your goal is to NOT lose your house, then paying extra towards the mortgage is waaaaaaayyyyyyy more risky than saving/investing it into index funds. 

Now, having said that, my own strategy is to save $1.6 million, use $300k of that to pay off the mortgage that I have left.  That reduces my available spend by $12k per year (ie, 300,000 x .04), but it also reduces my expenses by $26,400 (by getting rid of my $2200/month mortgage payment).  That gives me a $1.3m stash left over and $65k per year spending and no mortgage payments so they can't take my house even if the market crashes or whatever.

fwiw a risk most here seem to consistently ignore is inflation - the last decades have had such low inflation in the USA that it's hard to imagine inflation mattering.

Holding a mortgage is risk mitigation against inflation, to some extent.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Boofinator on April 07, 2019, 06:12:46 PM
You might get some equity back after the bank sells it, but you've still lost your house.  If your goal is to NOT lose your house, then paying extra towards the mortgage is waaaaaaayyyyyyy more risky than saving/investing it into index funds. 

Now, having said that, my own strategy is to save $1.6 million, use $300k of that to pay off the mortgage that I have left.  That reduces my available spend by $12k per year (ie, 300,000 x .04), but it also reduces my expenses by $26,400 (by getting rid of my $2200/month mortgage payment).  That gives me a $1.3m stash left over and $65k per year spending and no mortgage payments so they can't take my house even if the market crashes or whatever.

fwiw a risk most here seem to consistently ignore is inflation - the last decades have had such low inflation in the USA that it's hard to imagine inflation mattering.

Holding a mortgage is risk mitigation against inflation, to some extent.

If you're comparing buying a house to renting, you are right, you're mitigating inflation. If you're comparing paying off the mortgage to investing in equities, it's hard to argue that inflation pays a role at all (since neither of these investments correlate with inflation, for the most part).
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Telecaster on April 08, 2019, 12:00:09 AM
I knew of an Edward Jones financial advisor who followed his own advice (per many comments above) and mortgaged the house he inherited debt free from his parents in 2007 to invest in the market for “no risk” and better returns.  Needless to say, he lost the house when the housing market collapsed and his mortgage exceeded the value of the property while the money he invested was a fraction of what he invested.

Needless to say? 

The guy sounds like a typical Edwards Jones adviser who doesn't understand what mortgage is, the definition of "risk" or how the stock market works.  And he definitely didn't read any of the comments above because he clearly didn't understand the concepts we're talking about.

First, mortgage payments need to be made on schedule regardless of value of the house of what the stock market does.  If you don't have a plan to make the payments independent of what the stock market does, you are very, very special kind of stupid.   By not paying off the mortgage and investing instead leaves you a cushion of liquid assets  which you could use to pay the monthly payments, if the situation should arise.   Taking on a debt obligation based on what stock market does is cra-cra.

Second, the basic principal of NOT paying down your mortgage is that mortgages are long term.   No one knows what the market will do over the short or medium term, but the long term will be up.  If he went all in in 2007 and lost everything in 2009-ish then that violates the long term rule right off the bat.

Third, since 2007, the market is up about 150% (including dividends) or a CAGR of about 8%.    I don't know what mortgages were back then (5%?) but if he had been wise enough to realize he had to make his mortgage payment (which is not a major stretch of intellectual capacity), he would be money ahead today.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: tyort1 on April 08, 2019, 08:13:11 AM
You might get some equity back after the bank sells it, but you've still lost your house.  If your goal is to NOT lose your house, then paying extra towards the mortgage is waaaaaaayyyyyyy more risky than saving/investing it into index funds. 

Now, having said that, my own strategy is to save $1.6 million, use $300k of that to pay off the mortgage that I have left.  That reduces my available spend by $12k per year (ie, 300,000 x .04), but it also reduces my expenses by $26,400 (by getting rid of my $2200/month mortgage payment).  That gives me a $1.3m stash left over and $65k per year spending and no mortgage payments so they can't take my house even if the market crashes or whatever.

fwiw a risk most here seem to consistently ignore is inflation - the last decades have had such low inflation in the USA that it's hard to imagine inflation mattering.

Holding a mortgage is risk mitigation against inflation, to some extent.

If you're comparing buying a house to renting, you are right, you're mitigating inflation. If you're comparing paying off the mortgage to investing in equities, it's hard to argue that inflation pays a role at all (since neither of these investments correlate with inflation, for the most part).

Agreed, inflation is accounted for whether you keep the mortgage OR invest in index funds.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: FireAnt on April 08, 2019, 09:20:17 AM
Mathematically speaking I believe your net worth will likely be higher by having a 30 year mortgage and investing any surplus.  To me it gets a bit fuzzy for a few reasons: 1) projected salary duration; 2) simplicity; and 3) stress.  If you have a mortgage that you keep for 30 years, that means you have to make payments for 30 years.  That is fine during the accumulation stage, but I'm assuming that many in the forums plan to retire early.  What do those payments look like when you are in the withdrawal phase and/or when the stock market does not have a good year? 

If you can pay off the mortgage within 5 years, I believe it makes sense to knock it out and ramp up investments after it is paid off.  If it will take longer than 5 years, it makes sense to invest the money and revisit the decision based on personal preferences after the invested amount > mortgage balance.  This is assuming that in either scenario you are investing in retirement accounts and have a sufficient emergency fund.

And what if you have a sufficient emergency fund and maxed out all retirement accounts? Would it be the same if you are investing in a taxable account? That's where I get stuck in paying down my mortgage vs. using it to invest in taxable accounts.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on April 08, 2019, 09:35:03 AM

And what if you have a sufficient emergency fund and maxed out all retirement accounts? Would it be the same if you are investing in a taxable account? That's where I get stuck in paying down my mortgage vs. using it to invest in taxable accounts.

The further down you go on the Investment Order, the less of a difference there will be between deciding to invest or overpay a mortgage. Historically investing in taxable accounts has beaten out paying off a mortgage in the majority of time periods, but you can find periods (particularly shorter ones) where this was not the case.
My personal opinion - once you have an e-fund, are maxing out retirement accounts and have at least five-figures in easily-accessed taxable accounts do whichever makes the most sense to you.  I'd still rather hold the mortgage and invest in my daughter's 529, but at that point in the game neither choice is particularly 'bad' - unlike when people forego all savings entirely just to kill a fixed-rate mortgage.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Boofinator on April 08, 2019, 09:42:57 AM
Mathematically speaking I believe your net worth will likely be higher by having a 30 year mortgage and investing any surplus.  To me it gets a bit fuzzy for a few reasons: 1) projected salary duration; 2) simplicity; and 3) stress.  If you have a mortgage that you keep for 30 years, that means you have to make payments for 30 years.  That is fine during the accumulation stage, but I'm assuming that many in the forums plan to retire early.  What do those payments look like when you are in the withdrawal phase and/or when the stock market does not have a good year? 

If you can pay off the mortgage within 5 years, I believe it makes sense to knock it out and ramp up investments after it is paid off.  If it will take longer than 5 years, it makes sense to invest the money and revisit the decision based on personal preferences after the invested amount > mortgage balance.  This is assuming that in either scenario you are investing in retirement accounts and have a sufficient emergency fund.

And what if you have a sufficient emergency fund and maxed out all retirement accounts? Would it be the same if you are investing in a taxable account? That's where I get stuck in paying down my mortgage vs. using it to invest in taxable accounts.

It depends on what your objectives are and how much risk you are willing to take.

Let's take somebody who is early in their savings journey and wants to minimize the expected (average) time to FIRE. First off, this person should try to have some liquid funds (tax-advantaged funds could be liquidated, but this isn't ideal). I am a big proponent of having this "emergency fund" in equities, unless you have unsecure employment. Additionally, since this person is near the beginning of their savings journey, this money will likely compound for decades, reducing the risk even more (reversion to the mean). Finally, this strategy minimizes the expected time to FIRE (at current mortgage interest rates and considering historical equity returns). So for this person, he or she minimizes expected time to retirement and minimizes risk by investing in a taxable account over paying off their mortgage.

As one gets older, their objectives should change, due to both a declining desire to take risk (assuming you're mustachian and have a stash that can cover your needs) and a declining ability to take risk (the pleasures of aging). At this point, one can often reduce risk by paying off the mortgage even if the expected return is less than that for equities.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: the_fixer on April 08, 2019, 09:43:16 AM
I believe interest rates were around 6.5% for a 30 year in 2007.

Crazy thing is how many people had 0% down payment or low down payment style loans using 80/20 loans and ARM's just so they could buy a house.

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Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on April 08, 2019, 11:33:00 AM
I believe interest rates were around 6.5% for a 30 year in 2007.
This is broadly true.  For context the 10y US treasury rate also went above 5%.  Lenders (banks) want a return that is proportional with risk, and a 30 year mortgage is considered more risky than government bonds. Also for context when my parents originally financed their home in the early 1980s they had a prime rate of over 12%, yet within a few years the 10y went as high as 15%.

Crazy thing is how many people had 0% down payment or low down payment style loans using 80/20 loans and ARM's just so they could buy a house.
NINJA loans (no income, no assets, no job) were commonplace back them, as mortgage-backed securities made all mortgages seem less risky than they really were, and people were relying on an uninterrupted rise in home values to make their leverage seem sane. 

I would say this was the most ludicrous thing the lending industry has ever undertaken, but sadly such loans are making a comeback as the deregulation push takes hold.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: techwiz on April 10, 2019, 08:54:37 AM
 
Quote
but sadly such loans are making a comeback as the deregulation push takes hold.

If true this could mean a repeat of 2008 housing crisis. I wouldn't think people in finance industry have that short of a memory?
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on April 10, 2019, 09:04:34 AM
Quote
but sadly such loans are making a comeback as the deregulation push takes hold.

If true this could mean a repeat of 2008 housing crisis. I wouldn't think people in finance industry have that short of a memory?
Sadly you would be mistaken.
The current drumbeat is that the regulatory oversight put into place after the mortgage-backed securities fiasco of 2008 is burdensome and an unnecessary headwind on profits.  This, despite record profitability in the banking sector. https://www.washingtonpost.com/business/economy/federal-reserve-proposes-changes-to-bank-regulations/2019/04/08/48da8fa2-5a01-11e9-a00e-050dc7b82693_story.html?utm_term=.efe02bad4360 (https://www.washingtonpost.com/business/economy/federal-reserve-proposes-changes-to-bank-regulations/2019/04/08/48da8fa2-5a01-11e9-a00e-050dc7b82693_story.html?utm_term=.efe02bad4360)

Memories are short, and a large group of people still believe that 'market forces' will ensure that banks do what is in their best long term interest.  They argue that self-regulation will be the most effective. Meanwhile, our financial system continues to evaluate publicly traded companies based on quarterly (short term) profits above all else, and rewarding risky behavior.

IMO we won't have a repeat of 2008 - the bubble will burst someplace else, with some new vulnerability clever people have exploited to avoid 'onerous' regulation.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: ChpBstrd on April 11, 2019, 04:30:45 PM
Quote
but sadly such loans are making a comeback as the deregulation push takes hold.

If true this could mean a repeat of 2008 housing crisis. I wouldn't think people in finance industry have that short of a memory?
Sadly you would be mistaken.
The current drumbeat is that the regulatory oversight put into place after the mortgage-backed securities fiasco of 2008 is burdensome and an unnecessary headwind on profits.  This, despite record profitability in the banking sector. https://www.washingtonpost.com/business/economy/federal-reserve-proposes-changes-to-bank-regulations/2019/04/08/48da8fa2-5a01-11e9-a00e-050dc7b82693_story.html?utm_term=.efe02bad4360 (https://www.washingtonpost.com/business/economy/federal-reserve-proposes-changes-to-bank-regulations/2019/04/08/48da8fa2-5a01-11e9-a00e-050dc7b82693_story.html?utm_term=.efe02bad4360)

Memories are short, and a large group of people still believe that 'market forces' will ensure that banks do what is in their best long term interest.  They argue that self-regulation will be the most effective. Meanwhile, our financial system continues to evaluate publicly traded companies based on quarterly (short term) profits above all else, and rewarding risky behavior.

IMO we won't have a repeat of 2008 - the bubble will burst someplace else, with some new vulnerability clever people have exploited to avoid 'onerous' regulation.

1) Financial crisis / recession
2) Democrats elected to regulate away the causes of the recession
3) Rapid economic growth
4) Growth cycle slows
5) Republicans elected to deregulate industry and increase growth
6) Repeat
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on April 11, 2019, 05:19:49 PM
Sadly, i don't think that's far off...
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Neo on April 11, 2019, 10:36:33 PM
I didn't read all the replies so someone probably already said it but if you want to pay off the mortgage early my answer is to invest in index funds instead of paying down the mortgage early each month. Then pay the mortgage off in one shot from the investment account when it reaches the appropriate amount. Seems like the least risky way to do it.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Boofinator on April 12, 2019, 08:40:10 PM
I didn't read all the replies so someone probably already said it but if you want to pay off the mortgage early my answer is to invest in index funds instead of paying down the mortgage early each month. Then pay the mortgage off in one shot from the investment account when it reaches the appropriate amount. Seems like the least risky way to do it.

That's the generally recommended approach for those who want to pay off their mortgage. Given current interest rates, just about nobody should be paying off their mortgage early in their accumulation years if they are interested in FIREing as soon as possible (granted this is not everybody's objective).
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: nereo on April 13, 2019, 05:08:39 AM
I didn't read all the replies so someone probably already said it but if you want to pay off the mortgage early my answer is to invest in index funds instead of paying down the mortgage early each month. Then pay the mortgage off in one shot from the investment account when it reaches the appropriate amount. Seems like the least risky way to do it.

That's the generally recommended approach for those who want to pay off their mortgage. Given current interest rates, just about nobody should be paying off their mortgage early in their accumulation years if they are interested in FIREing as soon as possible (granted this is not everybody's objective).

To me it seems like good advice for anyone with a low-rate fixed mortgage still in the accumulation phase, whether they intend to FIRE or not...
Question:  When would you not recommend this strategy under these parameters?
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Boofinator on April 13, 2019, 11:32:51 AM
I didn't read all the replies so someone probably already said it but if you want to pay off the mortgage early my answer is to invest in index funds instead of paying down the mortgage early each month. Then pay the mortgage off in one shot from the investment account when it reaches the appropriate amount. Seems like the least risky way to do it.

That's the generally recommended approach for those who want to pay off their mortgage. Given current interest rates, just about nobody should be paying off their mortgage early in their accumulation years if they are interested in FIREing as soon as possible (granted this is not everybody's objective).

To me it seems like good advice for anyone with a low-rate fixed mortgage still in the accumulation phase, whether they intend to FIRE or not...
Question:  When would you not recommend this strategy under these parameters?

I would recommend it 100% of the time. But I understand different people have different things that make them tick. Some people have a strong aversion to debt, and don't care that they're reducing expected return and increasing their risk of default by paying off the mortgage. I'm ok with that, it's certainly better than being a spendypants. So given that objective, to eliminate all debt independent of other objectives, I wouldn't object to somebody paying off their mortgage so long as they understand the risks associated with that approach relative to investing.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: ender on April 13, 2019, 11:42:29 AM
And what if you have a sufficient emergency fund and maxed out all retirement accounts? Would it be the same if you are investing in a taxable account? That's where I get stuck in paying down my mortgage vs. using it to invest in taxable accounts.

IMO it depends on your risk factors for:


If inflation will not affect you as much this is less of a problem than if it can. If someone's home is 50% of their net worth, their inflation risk is higher.

Likewise, you need to have a plan for paying the mortgage/taxes/etc in the event of job loss.
Title: Re: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
Post by: Boofinator on April 13, 2019, 12:21:10 PM

IMO it depends on your risk factors for:

  • Inflation
  • Income loss & mortgage payments

If inflation will not affect you as much this is less of a problem than if it can. If someone's home is 50% of their net worth, their inflation risk is higher.

Likewise, you need to have a plan for paying the mortgage/taxes/etc in the event of job loss.

Could you walk us through how inflation poses a risk here?