Author Topic: Am I saving by paying my mortgage? (Pardon if dumb question)  (Read 1526 times)

rdp123

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Hi everyone,
I am trying to understand what I think would seem like a basic question, but I honestly don't know the answer.

I am trying to calculate my savings rate. When doing so, should I include the portion of my mortgage that goes into the principle of my mortgage? It makes a pretty large difference in my savings rate, particularly if I pay extra on the principle, which I plan to do.

Separate but related question -- I've read on MMM site that one should typically think of housing not as an investment, but as an expense, including if you own. (See here: http://www.mrmoneymustache.com/2011/05/11/the-elephant-in-the-room-housing/)

The argument as presented on the blog sounds reasonable. But then again, it sounds like it's premised on the notion that you'd buy the property outright in cash, no? If you're going in with say 15 percent down on a 370K mortgage (pretty much my situation, but all things considered it was cheaper than renting an equivalent property in the same area of town when factoring in tax savings, so made sense for me)... isn't that an investment? In that case, you're leveraged. If the total value of the house goes up at 2 percent per year, you've in theory made roughly $55K on an investment of $55K over 7 years. That's the equivalent of more than a 10 percent annual rate of compounding interest.

I realize there would be expenses in the event one sells, but I'm just trying to understand the concept, so let's set that aside for a second. And at any rate, I would expect where I live -- a bustling urban center that's been growing strong in recent years, to probably over perform the historical average.

Am I missing something about real estate? It's not a huge deal either way -- I did it because I like the place we found and it's in an area we love and I'm feeling pretty certain we're getting a better deal than renting. I just want to understand whether I should be thinking of the house as an investment to put more money into or whether to simply pay the minimum and set aside my savings in index funds. And to reiterate, I'm not really sure whether to count the money I put toward the house as savings or not.

And just in case folks are wondering, I plan to get to 20 percent equity within about eight months, so that issue is factored into my thinking.

Any thoughts greatly appreciated!

marty998

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Re: Am I saving by paying my mortgage? (Pardon if dumb question)
« Reply #1 on: June 23, 2017, 09:37:37 PM »
There have been way too many discussions over this to mention.


It's not a huge deal either way 

This is the correct answer. Savings rate is quite a nebulous concept when you factor in retirement accounts and taxes.

I just go with the idea of saving as much as you can without making your life too uncomfortable.

rdp123

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Re: Am I saving by paying my mortgage? (Pardon if dumb question)
« Reply #2 on: June 23, 2017, 09:48:12 PM »
Haha, OK! That helps put my mind at ease. Still, though -- would like to know the correct answer, if there is one. Is there not?

waltworks

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Re: Am I saving by paying my mortgage? (Pardon if dumb question)
« Reply #3 on: June 24, 2017, 11:51:21 AM »
The simple answer is: you are saving money when you pay down your principal.

The more complex answer is: you are not putting your money to work very hard in doing that, unless you have a very high interest rate, so mathematically you are generally better off putting excess money into other investments.

As others have mentioned, this has been discussed a million times. Do a quick search and you can geek out all day (literally).

-W

maizeman

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Re: Am I saving by paying my mortgage? (Pardon if dumb question)
« Reply #4 on: June 24, 2017, 12:50:52 PM »
Well I'd argue most of the discussions to date have focused on whether paying down the mortgage is the right or wrong thing to do.

rpd123, in your case there is a simple answer, but it does depend on your plans for FIRE and the baseline expenses you're using for your 4% (or 3.5% 5% whatever) rule math.

1. If you're planning to retire with the 4% (or 3.5 or 5 or whatever) of non-mortgage expenses + additional savings equal to remaining mortgage debt rule, then do count principal payments/prepayments towards your savings rate.*

2. If you're using the regular 4% (or 3.5% 5% whatever) rule, and plan to live in either this property or one on comparable size/cost in FIRE, then don't count principal payments or prepayments towards your savings rate.

3. If you're using the regular 4% (or 3.5% 5% whatever) rule and plan to downsize, either to a smaller house, or a lower cost of living area (or both) in FIRE and your remaining mortgage debt is significantly higher than the what you expect to pay for that new cheaper house, then do count do count principal payments/prepayments towards your savings rate.

If you want to relive weeks arguing about whether the rule in #1 or the rule in #2 is safer or more realistic,** then as others have suggest, there are a good number of recent (and long) forum threads you can dig up.

*I think BrooklynGuy was the one who proposed this?

**Among other things, this debate apparently hinges on how much of a moral obligation you would feel to keep paying your mortgage if your house was destroyed by a nuclear bomb (not covered by home owners insurance).

rdp123

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Re: Am I saving by paying my mortgage? (Pardon if dumb question)
« Reply #5 on: June 24, 2017, 01:13:27 PM »
Thank you to both!!