Author Topic: STOP SAYING IT IS NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!  (Read 63468 times)

PizzaSteve

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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.
« Last Edit: October 17, 2018, 10:52:00 AM by PizzaSteve »

nereo

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...  That is why we diversify.

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

:-P

appleshampooid

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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.

Retire-Canada

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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.

Bird In Hand

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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 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.

Bird In Hand

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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 where you can go do that.

Dicey

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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.

Dicey

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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 where you can go do that.
It's perfectly fine to mourn B42 wherever you like. Anywhere and everywhere, as often as needed.

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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.

Bird In Hand

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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 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.  ;)

Dicey

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Touche. Much as I loved B42, he wasn't without his [mostly grammatical] faults. But then, who the hell is?

Retire-Canada

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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.

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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!

Dicey

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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.

GuitarStv

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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.

Dicey

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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.

Retire-Canada

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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.

Blueberries

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My first thread:  STOP TELLING PEOPLE YOU KNOW WHAT IS BEST FOR THEM!

That goes for both sides of the argument.

Dicey

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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.

Retire-Canada

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My first thread:  STOP TELLING PEOPLE YOU KNOW WHAT IS BEST FOR THEM!

That goes for both sides of the argument.

AWESOME FIRST THREAD!

PizzaSteve

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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).
« Last Edit: October 16, 2018, 01:22:32 PM by PizzaSteve »

Blueberries

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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.

Dicey

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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?

Kyle Schuant

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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.

mrmoonymartian

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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

Blueberries

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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. 

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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?

Dabnasty

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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

nereo

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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.

Blueberries

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/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.

Dicey

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/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!

TexasRunner

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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)

nereo

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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.

Kyle Schuant

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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.

nereo

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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.

Kyle Schuant

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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...

ChpBstrd

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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.

Retire-Canada

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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.

FIRE47

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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.

« Last Edit: October 23, 2018, 08:22:18 AM by FIRE47 »

Dicey

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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?

Retire-Canada

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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.

FIRE47

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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.

Scortius

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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.

PizzaSteve

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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'.

« Last Edit: October 23, 2018, 11:35:41 AM by PizzaSteve »

FIRE47

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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.




« Last Edit: October 23, 2018, 11:48:23 AM by FIRE47 »

bacchi

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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!)


PiobStache

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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?

bacchi

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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.

PiobStache

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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.

TexasRunner

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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.