Author Topic: Paying off 30-year mortgage in 10 years or less  (Read 24071 times)

tomsang

  • Handlebar Stache
  • *****
  • Posts: 1085
Re: Paying off 30-year mortgage in 10 years or less
« Reply #50 on: May 14, 2015, 10:05:39 PM »
I think he is just toying with you now.

Cathy

  • Handlebar Stache
  • *****
  • Posts: 1044
Re: Paying off 30-year mortgage in 10 years or less
« Reply #51 on: May 14, 2015, 10:36:29 PM »
Here's another way of seeing the error in oneiota's arguments.

Suppose you are a mortgage investor with $250,000 in cash to invest. You always use an annual interest rate of 4%. You operate in a completely efficient mortgage market where any cash you have can be instantly deployed into mortgage notes with no time delay and no transaction costs and there is an unlimited supply of such notes available, with nominal interest rates of 4%. Furthermore, borrowers always make a timely payment each month, and they always make at least the minimum payment but possibly more -- in fact, they can prepay any amount they want, up to the full balance owning, and they sometimes do so. Further suppose that mortgage notes are completely liquid and can be liquidated at any time for a value rationally calculated based on the preceding assumptions.

Given the above mortgage lending premises, consider the following questions:
  • Is there any reason to prefer a longer or shorter term for the notes you originate or purchase? In other words, is there any reason to prefer a 30 year mortgage compared to a 10 year one?
  • Do you care whether your borrowers prepay the notes? Do you feel you are losing money when a borrower pays more than the minimum due?
  • Does it make a difference to you whether a borrower takes 30 years or 10 years to pay off a 30 year note?

The answer to all the questions above is "no". The term of the notes is utterly irrelevant to you, and you do not care in the least whether the borrower makes prepayments. Indeed, you do not care whether a borrower takes 10, 20, or 30 years to pay off a 30 year note.

The reason you don't care about any of those facts is that they are all irrelevant to your annual returns. Regardless of any of those investment details, your returns will be 4% per year. Given that none of those facts can affect the lender's returns, how could they possibly affect the borrowers' interest rates -- effective, real, actual, or otherwise? The answer is that they can't.

MDM

  • Senior Mustachian
  • ********
  • Posts: 10484
Re: Paying off 30-year mortgage in 10 years or less
« Reply #52 on: May 14, 2015, 10:47:13 PM »
And yet one more way....

Take a simple case: borrowing $100 at 10% interest, repaid annually over two years.  That would require two payments of $57.62.

Over the first year, $10 (10% of $100) interest adds to the principal.
 
The payment at the end of the first year includes $47.62 toward principal, and $10 interest.  That leaves $52.38 in principal. 

Over the second year, $5.24 (10% of $52.38) interest adds to the principal. 

The $57.62 payment at the end of the second year pays off the $52.38 principal and $5.24 interest.

A total of $15.24 interest has been paid.

If one chooses, one could pay off the entire loan at the end of the first year by paying $110.  In that case, $10 interest would have been paid.

The interest rate on the remaining principal is always 10%.  Paying in one year instead of two years does not change that.

oneiota

  • 5 O'Clock Shadow
  • *
  • Posts: 30
Re: Paying off 30-year mortgage in 10 years or less
« Reply #53 on: May 14, 2015, 11:01:39 PM »
The interest rate on the remaining principal is always 10%.  Paying in one year instead of two years does not change that.

Yet tragically, in a showing of what seems to be one of the worst endorsements for the quality of reading comprehension skills in our schools I think I've ever witnessed, opponent after opponent failed to realize that I was never talking about the interest on the principal.  I was talking about the amount of interest paid on the loan divided by the number of years the loan is active, and I just happened to assign it the nomenclature of "effective APR".  I explained my labeling and the rationale behind it.

They say that for the longest time, there were these senior citizens running around in the woods in Japan still fighting WWII decades after it was over, simply because they never got the memo the war was over.
I had no idea when I started this thread, that I had found the lost soldiers of Japan.  All in one place on an Internet forum no less.

Cathy

  • Handlebar Stache
  • *****
  • Posts: 1044
Re: Paying off 30-year mortgage in 10 years or less
« Reply #54 on: May 14, 2015, 11:14:33 PM »
I was talking about the amount of interest paid on the loan divided by the number of years the loan is active, and I just happened to assign it the nomenclature of "effective APR".  I explained my labeling and the rationale behind it.

Here's what you seem to be overlooking. Your construction is absolutely useless for any practical purpose whatsoever. It has no connection to the cost of borrowing, no connection to the rationality of a given financial decision, and no other utility either. It cannot be used as a decision-making tool, nor can it be used for comparing outcomes. I have not seen any convincing rationale presented for introducing this wholly useless concept.

The way I see it, there are only two possible reasons for making reference to a concept so completely divorced from any practical use and also devoid of any theoretical interest of any kind:
  • That you believe the concept has utility or is meaningful, even though it does not and is not; or
  • That you are deliberately trolling the forum.

Now, personally, I always assume good faith, so I would not suggest that the second possible reason is accurate. I reject the second explanation.

That leaves only one explanation: that you believe your concept is illustrating some lucid point, even though it is not. Everybody who has posted in this thread has come to this latter conclusion, and has incredibly nicely given you many different ways of seeing why your concept is irrelevant to anything. This has been an act of charity intended to help not only you, but future readers, on their quest for riches. For your part, you have intransigently responded with insult after insult, even though -- assuming, as I do, that the second explanation above is wrong -- you are the one operating under some form of misconception.

Faraday

  • Handlebar Stache
  • *****
  • Posts: 1191
  • Age: 59
  • Location: NC
  • Solar Powered Slice
Re: Paying off 30-year mortgage in 10 years or less
« Reply #55 on: May 15, 2015, 12:55:48 AM »
A lower rate of interest per year is being paid.  The bottom line is that you have made up your mind that annual percentage rate can only mean the interest rate assigned to the note, failing to understand that because this is how you view things does not turn it into fact.

No, a lower rate of interest is not being paid.  The same interest rate of 4% per annum is being paid in both cases.  Your calculation of what you are describing as the interest rate being paid ignores the fact that principal is being repaid prior to maturity in both scenarios (and at a faster rate in the second scenario).  Earlier you got annoyed by the use of the word "absurd" to describe your argument, but there's no better word to describe what you are now arguing - that the "interest rate" (or "cost of credit" or whatever else you choose to call it) of a loan with a 4% per annum rate is actually 2.4%, or, if you repay really quickly, 2.19%.  So if you repay the loan in full the instant you receive it, I guess you've now turned it into a 0% loan!

This isn't about semantics or hairsplitting.  You are simply misunderstanding how the accrual of interest on a loan works.

Hello oneiota - fellow questioner here. Let me give you some backstory that's getting withheld from you. (it comes out when you start doing searches on people's posts and start to recognize their M.O.)

First: The notion of NOT prepaying a mortgage and INSTEAD investing is a kind of sacred cow here on the forums. That sacred cow has a number of Valiant Defenders (VD). You have asked questions causing the Valiant Defenders to rise up and attempt to strike you down with their Insulting Dynamic Insinuation Offensive Taunts (IDIOT).

You are now jousting with a number of these Valiant Defenders. They are throwing their Powerful Insult Exclamations (PIE) at you. They will keep throwing PIE  until you finally stop and back up or quiet down. They will then believe they have won their VD acting out IDIOT by throwing PIE. Once again, the World will be Safe now that we all know we must Invest Invest Invest rather than paying down our mortgage. :-) :-) :-)

They'll hammer and hammer and hammer at you, "proving" you don't "really understand the math" of mortgages as a way to try to discredit your fundamental questions about the wisdom of investing vs. paying off a mortgage. They'll contrive things you never said, raise tangential, irrelevant arguments and insult you (then back up as if you were the offender) when you call them on it.

Now, the truth of their arguments lie in the fact that we are living through a period of time when mortgage interest rates are at historical, ungodly lows (and could someday STOP being at these historical, ungodly lows). That makes mortgage money cheaper than investing, over reasonably long time periods.

There's a zillion companies out there who are climbing all over each other to throw mortgage money at us for these bargain rates. Surely, according to the VD arguments, these companies must be staffed by chumps who are giving away money at stupid low mortgage rates when THEY THEMSELVES should be investing in the market for higher returns. Right? And yet, they are not investing in the market. They are stupidly begging us to take on a mortgage at some insanely low interest rate.

And you know why it's happening? You quit paying your mortgage, the sheriff comes, kicks your ass out, throws your shit out on the street and padlocks your doors.  That's a powerful incentive to make sure you pay that mortgage, no matter what.

It's such a serious difference that some frugalists can make an effective argument against buying a house at all and just renting. And a lot of mustachians do just that. They stay away from a mortgage even though it's some seriously cheap money right now.

Now, when Enron blew up, when GM declared bankruptcy, when Alcatel stock stayed in the crapper forever, when people lost their shirts investing in ATT or Thermo-whatever or any of a zillion other companies that simply disappeared overnight, did any investors get their money back? No. Did anyone at the company go to jail? No. Did the sheriff come padlock anything and throw any executives out on the street? No.

Anyone who raises a question about the insecurity of investing vs. the security of paying down a mortgage attracts the same set of players on the same topic using the same strategy to call you....stupid. When really, you're just some dude trying to figure out how to do this MMM thing.

Look at everyone who's FIRE and you will see nearly every one of them have no mortgage. What matters the most is what people in FIRE are actually doing. And what they are doing is paying off their mortgages.

brooklynguy

  • Handlebar Stache
  • *****
  • Posts: 2204
  • Age: 40
Re: Paying off 30-year mortgage in 10 years or less
« Reply #56 on: May 15, 2015, 05:29:13 AM »
Yet tragically, in a showing of what seems to be one of the worst endorsements for the quality of reading comprehension skills in our schools I think I've ever witnessed, opponent after opponent failed to realize that I was never talking about the interest on the principal.  I was talking about the amount of interest paid on the loan divided by the number of years the loan is active, and I just happened to assign it the nomenclature of "effective APR".  I explained my labeling and the rationale behind it.

Even if this were accurate, as Cathy eloquently explained, your "effective APR" concept is utterly useless, and any reader reading your posts with the reasonable belief that you are trying to make a lucid point would therefore have to interpret your posts to mean something more than the literal words in the quoted text.

I can create my own nomenclature that says the "effective sum" of two plus two is five, or the "effective color" of grass is purple, but why would I do that unless I was either intentionally trying to mislead (i.e., trolling) or confused about something?

In any event, the literal words of your posts were talking about "the interest on the principal."  What else could this have meant:

A lower rate of interest per year is being paid.  The bottom line is that you have made up your mind that annual percentage rate can only mean the interest rate assigned to the note, failing to understand that because this is how you view things does not turn it into fact.

On any truth-in-lending disclosure statement, the APR is defined as "the cost of your credit as a yearly rate".   

I have already proven conclusively here that the APR, by the very definition in this document, can be reduced by early pay down.  In one of my scenarios, the "cost of credit" (whether you want to use the qualifier "effective", or perhaps more accurately "ACTUAL" cost of credit as a yearly rate), was ~2.40% annually according to the original note terms, but in the second scenario the effective or actual cost of credit was ~2.19% per year.

The APR as defined in any truth-in-lending disclosure statement, as you said, does not have the same meaning as "oneiota's 'the sky is green' 'effective APR'", yet you said the APR, as so defined, can be reduced by early pay down.  The real answer is "no, it can't", and there is no way to chalk this up to reading miscomprehension.

tomsang

  • Handlebar Stache
  • *****
  • Posts: 1085
Re: Paying off 30-year mortgage in 10 years or less
« Reply #57 on: May 15, 2015, 06:16:11 AM »
MEFLA I think much of what you said in your post was unfair and not factually correct.  There are a number of us that want people to think about the pros and cons of paying off a 30 year fixed rate mortgage.  Too many people think that debt is bad and therefore it is always better to pay it off.  With a 30 year fixed rate mortgage that is 4% or lower the evidence from history using Cfiresim and other models shows that it is not the best use of your extra dollars.  Having all your extra dollars tied up in an illiquid asset is another negative, having a significant portion of your net worth tied up in one asset class is also a negative, locking in a 4% or lower return, when the retirement models that MMM and others use require a 7% portfolio return, etc.  With that all being said, if someone wants to pay off their mortgage that is fine if they understand what they are giving up.
 
Look at everyone who's FIRE and you will see nearly every one of them have no mortgage. What matters the most is what people in FIRE are actually doing. And what they are doing is paying off their mortgages.

MMM retired with a mortgage, Nords has a mortgage, Arebelspy has many mortgages and many others have kept a mortgage through their path to FIRE.  So I disagree with your assertion that you should pay off your mortgage, because those that have reached FIRE have no mortgage.  MMM had a mortgage for like 5 years into his retirement. 

brooklynguy

  • Handlebar Stache
  • *****
  • Posts: 2204
  • Age: 40
Re: Paying off 30-year mortgage in 10 years or less
« Reply #58 on: May 15, 2015, 07:12:23 AM »
MEFLA I think much of what you said in your post was unfair and not factually correct.

Exactly.  Mefla, your post would be a nice story if it accurately reflected the reality of what happened in this thread or the portion of the main thread on this issue that ruffled your feathers (which shall go down in forum history as "the poop-flinging monkey episode"), but it simply doesn't.

I believe I speak for most of the "Valiant Defenders" (also known as the Mortgage Payoff Police) when I say that our goal is simply to provide information to enable others to make informed decisions, and we believe perfectly valid reasons do exist for someone to decide (with their eyes open) to pay off their low-rate, long-term mortgage debt, including, but not limited to, the following:

- you believe there is a reasonable likelihood that you will not carry the mortgage for a sufficiently long period (because, for example, you may sell the property) (but in this case, recognize that purchasing the property in the first place may very well be a suboptimal decision)

- it will help you sleep at night (and you are willing to pay for good sleep with the currency of opportunity cost)

- you believe your investments will perform so abysmally low that they will not outperform the mortgage over its life to maturity (but in this case, recognize that you also necessarily believe that MMM-style, investment-based early retirement using a reasonable withdrawal rate is impossible).

However, the list of valid reasons does not include "mathematical laws apply differently to you than they do to me," which is the type of argument oneiota has been making in this thread, and which is why we've been "hammering and hammering" against those arguments.

There's a zillion companies out there who are climbing all over each other to throw mortgage money at us for these bargain rates. Surely, according to the VD arguments, these companies must be staffed by chumps who are giving away money at stupid low mortgage rates when THEY THEMSELVES should be investing in the market for higher returns. Right? And yet, they are not investing in the market. They are stupidly begging us to take on a mortgage at some insanely low interest rate.

If today's ultra-cheap mortgage rates are such a good thing that it's almost guaranteed to be optimal to obtain them and invest the proceeds, it is reasonable for people to question whether this argument is too good to be true (which is what you are doing here).  But there is an answer to the question of why banks are willing to make these loans instead of simply investing in the types of investments into which mortgage-borrowers can deploy the proceeds:  your statement above overlooks at least two relevant facts:  (i) mortgage loans are a form of secured debt (as you said, if you don't pay, the sheriff can come knocking at your door to repossess the collateral), which partly explains why higher returns can be had through other investment vehicles (like unsecured debt (including bonds) and equity) and (ii) the United States mortgage industry is quasi-government-subsidized, which artificially depresses mortgage rates lower still.

Faraday

  • Handlebar Stache
  • *****
  • Posts: 1191
  • Age: 59
  • Location: NC
  • Solar Powered Slice
Re: Paying off 30-year mortgage in 10 years or less
« Reply #59 on: May 15, 2015, 08:13:01 AM »

Exactly.  Mefla, your post would be a nice story if it accurately reflected the reality of what happened in this thread or the portion of the main thread on this issue that ruffled your feathers (which shall go down in forum history as "the poop-flinging monkey episode"), but it simply doesn't.

Wah wah wah. Cry me a river. In the meantime, you maintain your "Senior Mustachian" status by attacking people with honest questions. My bet is you're 18 years old, you deliver pizza for a living and you have your high school buds as roommates and whine about how the girls only go out with "bad boys".

Quote
I believe I speak for most of the "Valiant Defenders" (also known as the Mortgage Payoff Police) when I say that our goal is simply to provide information to enable others to make informed decisions, and we believe perfectly valid reasons do exist for someone to decide (with their eyes open) to pay off their low-rate, long-term mortgage debt, including, but not limited to, the following:

...various silly postulates were here....

However, the list of valid reasons does not include "mathematical laws apply differently to you than they do to me," which is the type of argument oneiota has been making in this thread, and which is why we've been "hammering and hammering" against those arguments.

If oneiota is like me, he found MMM gospel, put into practice the "debt should be like a million stinging bees" idea. He's now paid off his unsecured debt and he's got this....mortgage he's looking at and trying to figure what to do with this "good debt". Instead, the "good debt" feels like some fat-cat banker is holding a gun to his head, and he's trying to figure out if there's a way to disarm the fat-cat banker.

He's trying to take his MMM journey to the next level, and you gourd-heads are pouncing on him about mortgage details like the knowledge you have is some super-seekret rocket science, not 9th grade math.

To your credit, you did cause me to back the hell up and take a look at my own assumptions, and you know what? You aren't "teaching" anyone a damn thing, because you aren't dispensing useful information. You're arguing about mortgage details and trying to assign stupid meaning to anything anyone else says. You aren't actually teaching. It's facepunching just for the fun of facepunching.

You see the same thing in some of the threads where the poor, poor saps start threads that end up with "Should I divorce my DW/DH"? What you see there is a bunch of monkeys making up crap about someone they don't even know and giving insane marriage advice.

I have yet to see you treat oneiota with even a slight measure of welcoming respect. All you do is tell people "you goofed up" and try your best to make them look bad in front of eveyone else.

I, for one, am calling you out on that. You can whine all you want about unfairness. You can go back and edit your posts to take out the insults and the snark. I don't give a crap. I just want you to change your approach to one of educator, not Internet Dick. Earn that Senior Mustachian badge you so proudly wear.

Quote
There's a zillion companies out there who are climbing all over each other to throw mortgage money at us for these bargain rates. Surely, according to the VD arguments, these companies must be staffed by chumps who are giving away money at stupid low mortgage rates when THEY THEMSELVES should be investing in the market for higher returns. Right? And yet, they are not investing in the market. They are stupidly begging us to take on a mortgage at some insanely low interest rate.

If today's ultra-cheap mortgage rates are such a good thing that it's almost guaranteed to be optimal to obtain them and invest the proceeds, it is reasonable for people to question whether this argument is too good to be true (which is what you are doing here).  But there is an answer to the question of why banks are willing to make these loans instead of simply investing in the types of investments into which mortgage-borrowers can deploy the proceeds:  your statement above overlooks at least two relevant facts:  (i) mortgage loans are a form of secured debt (as you said, if you don't pay, the sheriff can come knocking at your door to repossess the collateral), which partly explains why higher returns can be had through other investment vehicles (like unsecured debt (including bonds) and equity) and (ii) the United States mortgage industry is quasi-government-subsidized, which artificially depresses mortgage rates lower still.

Blah blah, sputter sputter. Restate the obvious like I didn't understand the thing you thought I said. Quit putting stupidity in people's mouths and I will, in turn, back off. Hell, I'll blow you kisses all day long. Just change dude. You're already a "Senior Mustachian".

Are you gonna spend the rest of your life telling people in the forums they are stupid and bitching about it to your girlfriend/boyfriend/platonic friend until they figure it out and hit the road?


brooklynguy

  • Handlebar Stache
  • *****
  • Posts: 2204
  • Age: 40
Re: Paying off 30-year mortgage in 10 years or less
« Reply #60 on: May 15, 2015, 08:24:13 AM »
This thread now appears ripe for moderator intervention, but my vote would be to leave all the posts made thus far unedited.  The forum-reading populace can decide for themselves who is the one being an Internet Dick.  If I came across as one, then I apologize.

oneiota

  • 5 O'Clock Shadow
  • *
  • Posts: 30
Re: Paying off 30-year mortgage in 10 years or less
« Reply #61 on: May 15, 2015, 08:26:13 AM »
MMM retired with a mortgage, Nords has a mortgage, Arebelspy has many mortgages and many others have kept a mortgage through their path to FIRE.  So I disagree with your assertion that you should pay off your mortgage, because those that have reached FIRE have no mortgage.  MMM had a mortgage for like 5 years into his retirement.

But he later said that he and wife were in a house that was about $160k more expensive than the home they really needed, and he downsized into a fixer upper.

That alone is different than what I've suggested is right for me in this thread, which is first of all making sure your home is "just enough".  Large enough for what you really need but not so large that you end up just filling it up with furniture you don't use and acquiring a lot of useless junk.  Not to mention paying extra heating/cooling expenses that are unneeded.

 

oneiota

  • 5 O'Clock Shadow
  • *
  • Posts: 30
Re: Paying off 30-year mortgage in 10 years or less
« Reply #62 on: May 15, 2015, 08:31:34 AM »

Hello oneiota - fellow questioner here. Let me give you some backstory that's getting withheld from you. (it comes out when you start doing searches on people's posts and start to recognize their M.O.)

Thanks for the backstory mefla.  However my perspective is a little different in the sense that I do not feel like I've been ganged up on here at all.  What you've perceived as jousting feels like feeble attempts by folks who have failed to even grasp most of the ideas I've put forth, much less achieved success in opposing them.

It is nice to know that someone else is reading all this though.  Thanks again.

oneiota

  • 5 O'Clock Shadow
  • *
  • Posts: 30
Re: Paying off 30-year mortgage in 10 years or less
« Reply #63 on: May 15, 2015, 08:34:30 AM »
In any event, the literal words of your posts were talking about "the interest on the principal."  What else could this have meant:

I told you over and over and you just refuse to get it.

As truth in lending defines APR as "cost of credit", I defined effective APR as cost of credit as a percentage of the original balance.  Not the percentage of principal at any given point in the loan paydown.

That's where you guys got totally, hopelessly lost in the woods.  Then when you almost began to latch on to what I was saying, all you had was "well there's no value in that metric because..." yada yada.   

Lame.

nereo

  • Senior Mustachian
  • ********
  • Posts: 14207
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Paying off 30-year mortgage in 10 years or less
« Reply #64 on: May 15, 2015, 08:49:40 AM »
Ultimately, let's not loose sight of the forest for all of the trees.

If you have an APR of 4% on a 30 year note and you pay it off in 10 years, then you will pay exactly the same amount of interest as you would had you taken out a 10yr note. I think that's been well proven by both sides.

These alternative ways of viewing interest paid are of little use to the primary question of whether to pay down a 30 year note at an accelerated rate.  If you believe your returns will be better elsewhere, then the logical course of action is to pay the minimum and invest the difference.  If you feel most comfortable taking the 4% "return" on paying down the mortgage faster, then you should do that. Inflation should be taken into consideration on both possibilities, as well as things like cash-flow, asset allocation (i.e. the % of your NW tied to your home) and personal values.

Decide what makes the most sense for you.  I don't recommend that everyone pay down their mortgage early, nor do I recommend that everyone hold their mortgage as long as possible.

tomsang

  • Handlebar Stache
  • *****
  • Posts: 1085
Re: Paying off 30-year mortgage in 10 years or less
« Reply #65 on: May 15, 2015, 08:52:31 AM »
In any event, the literal words of your posts were talking about "the interest on the principal."  What else could this have meant:

I told you over and over and you just refuse to get it.

As truth in lending defines APR as "cost of credit", I defined effective APR as cost of credit as a percentage of the original balance.  Not the percentage of principal at any given point in the loan paydown.

That's where you guys got totally, hopelessly lost in the woods.  Then when you almost began to latch on to what I was saying, all you had was "well there's no value in that metric because..." yada yada.   

Lame.

The question that keeps going back to you is what does your made up effective APR tell you that can be used to make better decisions?  I can't see where or why this would be useful. If you can explain how this can be used then that may clear up the confusion.
« Last Edit: May 15, 2015, 08:57:55 AM by tomsang »

dandarc

  • Magnum Stache
  • ******
  • Posts: 4283
  • Age: 38
Re: Paying off 30-year mortgage in 10 years or less
« Reply #66 on: May 15, 2015, 09:00:34 AM »
If you have an APR of 4% on a 30 year note and you pay it off in 10 years, then you will pay exactly the same amount of interest as you would had you taken out a 10yr note. I think that's been well proven by both sides.
Assuming the 10 year is also at 4%.  So we're in Cathy's well-illustrated "perfect" mortgage market up-thread, where there is 0 additional risk to lending at a longer term.

nereo

  • Senior Mustachian
  • ********
  • Posts: 14207
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Paying off 30-year mortgage in 10 years or less
« Reply #67 on: May 15, 2015, 09:06:19 AM »
If you have an APR of 4% on a 30 year note and you pay it off in 10 years, then you will pay exactly the same amount of interest as you would had you taken out a 10yr note. I think that's been well proven by both sides.
Assuming the 10 year is also at 4%.  So we're in Cathy's well-illustrated "perfect" mortgage market up-thread, where there is 0 additional risk to lending at a longer term.
exactly, and as mentioned shown in my mathematical example earlier in the thread. 

oneiota

  • 5 O'Clock Shadow
  • *
  • Posts: 30
Re: Paying off 30-year mortgage in 10 years or less
« Reply #68 on: May 15, 2015, 09:09:43 AM »
If you have an APR of 4% on a 30 year note and you pay it off in 10 years, then you will pay exactly the same amount of interest as you would had you taken out a 10yr note. I think that's been well proven by both sides.
Assuming the 10 year is also at 4%.  So we're in Cathy's well-illustrated "perfect" mortgage market up-thread, where there is 0 additional risk to lending at a longer term.

Yes, and this also was part of my original strategy.  For purposes of risk mitigation and planning for the unknown / unexpected, it's better to take a 30 year note and pay it off in 10 so that you have the flexibility to lower your payments if you need to tighten the belt for some period of time, effectively giving yourself very inexpensive "mortgage disaster insurance" at a very low rate (the only cost being the extra interest of the slightly higher interest rate of the 30 and the cost of the extended loan duration).

So my question was, how is a 15-year mortgage "a good idea" but early paydown of a 30 a bad idea?  This is what I hear from so many "finance gurus" (crooks).

Tragic that this thread got caught up on something so trivial as the semantics of nomenclature and one of the greatest failures of reading comprehension in Internet history.

We haven't even gotten around to the other parts of my strategy, like the myth that folks are really going to be able to "manage" the capital gains tax on stock earnings away when they retire, as opposed to the far more realistic 20-25% they will probably pay even if tax laws stay the way they are (which they won't, they will morph in yet unknown ways, making stocks even riskier in the long run due to the unknown policy changes that are inevitable).


oneiota

  • 5 O'Clock Shadow
  • *
  • Posts: 30
Re: Paying off 30-year mortgage in 10 years or less
« Reply #69 on: May 15, 2015, 09:15:30 AM »
The question that keeps going back to you is what does your made up effective APR tell you that can be used to make better decisions?  I can't see where or why this would be useful. If you can explain how this can be used then that may clear up the confusion.

Again?  You mean half a dozen times wasn't enough and I need to do it again?  Where do I send the invoice for my time?  Given the track record here I think we need to set up a retainer account for anyone who really wants me to continually go into broken record mode.  Doing the same thing over and over without some gain is growing tiresome.

nereo

  • Senior Mustachian
  • ********
  • Posts: 14207
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Paying off 30-year mortgage in 10 years or less
« Reply #70 on: May 15, 2015, 09:25:28 AM »

So my question was, how is a 15-year mortgage "a good idea" but early paydown of a 30 a bad idea?  This is what I hear from so many "finance gurus" (crooks).
A 15-year note carries a lower APR than a 30 year note.  If you pay both off in 10 years you will pay less interest on the 15 year note.  However, as you correctly pointed out, you loose the freedom to pay less each month should an emergency strike.
There is a lot of strange assumptions made in the financial media.  That's why doing your own research and crunching the numbers for your own situation is so important.

Quote
We haven't even gotten around to the other parts of my strategy, like the myth that folks are really going to be able to "manage" the capital gains tax on stock earnings away when they retire, as opposed to the far more realistic 20-25% they will probably pay even if tax laws stay the way they are (which they won't, they will morph in yet unknown ways, making stocks even riskier in the long run due to the unknown policy changes that are inevitable).
You are correct that it is impossible to know the future of the tax code.  However, I don't agree with you that it is a foregone conclusion that the tax code will morph into something that makes stocks more risky and increases the taxes on capitol gains.  There's an immense amount of political will to prevent this from happening. 

However, regarding people's ability to manage the capital gains tax on stock earnings when they retire, there are many people who are doing this quite effectively, and without any real difficulties.  I cannot see myself paying 20% (or even 10%) in retirement, largely due to utilizing tax-advantaged accounts and then serially rolling them over into a ROTH during periods of low income.  I expect to be able to withdraw 40-50% from ER expenses from my ROTH.  Given that we already have fairly low expenses, we will need to withdrawal comparatively little from other sources, of which a good deal will be covered by our standard deduction.

One important aspect to remember is that in some cases paying down a mortgage too fast will prevent that person from being able to fully contribute to tax-advantaged accounts like 401(k)s and IRAs and HSAs.   In the case of a 401(k), you can make an annual contribution of $53k, of which the first $18k is tax-deferred. This can be entirely rolled over into a ROTH where you will have no future tax burden whatsoever.  Utilizing this strategy (terms a "mega-backdoor ROTH") just a few times could allow you to have a massive tax-free retirement war chest.
 
Just another thing to think about when determining whether to pay off a mortgage as fast as possible or not.

zephyr911

  • Magnum Stache
  • ******
  • Posts: 3620
  • Age: 42
  • Location: Northern Alabama
  • I'm just happy to be here. \m/ ^_^ \m/
    • Pinhook Development LLC
Re: Paying off 30-year mortgage in 10 years or less
« Reply #71 on: May 15, 2015, 10:52:43 AM »
Oneiota,

I think the bottom line is pretty clear here after reading all your comments. I'll avoid math because it seems a contentious subject (and I think it's unnecessary).

First, WRT paydown vs stocks:
You are risk-averse and you value the more predictable return of the early paydown more highly than the less predictable, if generally higher, return of the stock market. This is a personal decision and your values are a real thing. It's that simple, and no math is required.

Second, WRT paying a higher APR for the sake of flexibility:
While I (like the rest here) take issue with your math and terminology, I still see this as a values-based decision. The 30-year loan will take longer to pay off than the 15 if you pay the max you can, but if you get fired or get sick, it will be less of a drain. You're buying insurance, and if you can evaluate and accurately price that insurance compared to your other options, so be it. I would never buy that insurance - I have a 30-year fixed that I plan to hold indefinitely, and everything I plan to pay off early is on 5-year ARMs and other short-term loans, to get the lowest APR possible while I beat down the balances. But we all differ and that's okay.

Just a final note: be nice, and try not to insult the intelligence of the people commenting here. They're generally very knowledgeable and are rightly questioning some wacky math/logic you used. I think if you maintain the focus on your personal priorities and motivation for favoring one option over another, this will be a more productive (and civil) discussion.

Faraday

  • Handlebar Stache
  • *****
  • Posts: 1191
  • Age: 59
  • Location: NC
  • Solar Powered Slice
Re: Paying off 30-year mortgage in 10 years or less
« Reply #72 on: May 15, 2015, 12:00:59 PM »
I have a 30-year fixed that I plan to hold indefinitely, and everything I plan to pay off early is on 5-year ARMs and other short-term loans, to get the lowest APR possible while I beat down the balances. But we all differ and that's okay.

Oneiota, how old are you? Notice zephyr911's age: he's young enough to take advantage of market yields because he's got more time to do that.  I expect you are trying to figure out what next steps to take and when you formulate that strategy, you will pursue it and share the results with the community, right?

Just a final note: be nice, and try not to insult the intelligence of the people commenting here. They're generally very knowledgeable and are rightly questioning some wacky math/logic you used. I think if you maintain the focus on your personal priorities and motivation for favoring one option over another, this will be a more productive (and civil) discussion.

Wise words from the young man. I owe the thread my agreement before I shut up.

Beaker

  • Bristles
  • ***
  • Posts: 334
Re: Paying off 30-year mortgage in 10 years or less
« Reply #73 on: May 15, 2015, 12:47:45 PM »
This thread is just amazing. It's like it someone reprogrammed ELIZA as a financial adviser rather than a psychologist, and turned it loose on a forum. Or maybe if Lewis Carroll had given the Mad Hatter an accounting degree.

(grabs popcorn)

brooklynguy

  • Handlebar Stache
  • *****
  • Posts: 2204
  • Age: 40
Re: Paying off 30-year mortgage in 10 years or less
« Reply #74 on: May 15, 2015, 12:58:16 PM »
The question that keeps going back to you is what does your made up effective APR tell you that can be used to make better decisions?  I can't see where or why this would be useful. If you can explain how this can be used then that may clear up the confusion.

Again?  You mean half a dozen times wasn't enough and I need to do it again?  Where do I send the invoice for my time?  Given the track record here I think we need to set up a retainer account for anyone who really wants me to continually go into broken record mode.  Doing the same thing over and over without some gain is growing tiresome.

Oneiota, where have you answered this question?  I'm asking honestly (and not rhetorically), because I just re-read the entire thread and don't see an answer.  As far as I can tell, you are using the "effective APR" metric to tell you that the longer you carry the loan, the more interest you pay--but how does dividing the total amount of interest paid by the number of years it took to fully pay off the loan add any value?

Wah wah wah. Cry me a river. In the meantime, you maintain your "Senior Mustachian" status by attacking people with honest questions. My bet is you're 18 years old, you deliver pizza for a living and you have your high school buds as roommates and whine about how the girls only go out with "bad boys".

Mefla, for the sake of maintaining a productive discussion, I'm checking all snark at the door and declining to respond to any of your personal attacks, but I think, very early on, you may have confused me with (or, in your mind, conflated me together with) another poster who has a vaguely similar screen name and who was aggressively responding to your posts in the parallel mortgage thread that was running concurrently with the one tomsang linked to above.  You may want to go back and check.

Faraday

  • Handlebar Stache
  • *****
  • Posts: 1191
  • Age: 59
  • Location: NC
  • Solar Powered Slice
Re: Paying off 30-year mortgage in 10 years or less
« Reply #75 on: May 15, 2015, 01:30:39 PM »
Wah wah wah. Cry me a river. In the meantime, you maintain your "Senior Mustachian" status by attacking people with honest questions. My bet is you're 18 years old, you deliver pizza for a living and you have your high school buds as roommates and whine about how the girls only go out with "bad boys".

Mefla, for the sake of maintaining a productive discussion, I'm checking all snark at the door and declining to respond to any of your personal attacks, but I think, very early on, you may have confused me with (or, in your mind, conflated me together with) another poster who has a vaguely similar screen name and who was aggressively responding to your posts in the parallel mortgage thread that was running concurrently with the one tomsang linked to above.  You may want to go back and check.

Roger that. I agree to go back and review this weekend when I have time. If I screwed up I'll own it.

But you gotta admit, it's a pretty good rant. :-)

Faraday

  • Handlebar Stache
  • *****
  • Posts: 1191
  • Age: 59
  • Location: NC
  • Solar Powered Slice
Re: Paying off 30-year mortgage in 10 years or less
« Reply #76 on: May 15, 2015, 01:33:12 PM »
OH MAN. There's Yet Another Thread on this topic, popped up today:
http://forum.mrmoneymustache.com/investor-alley/pay-of-mortgage-or-invest/


brooklynguy

  • Handlebar Stache
  • *****
  • Posts: 2204
  • Age: 40
Re: Paying off 30-year mortgage in 10 years or less
« Reply #77 on: May 15, 2015, 01:58:33 PM »
But you gotta admit, it's a pretty good rant. :-)

Yes, I thoroughly enjoyed it.

I think everyone should keep in mind that it's not always easy to convey tone through this medium of communication, so in my view it's best to give other posters the benefit of the doubt.  A post intended simply as a correction of a perceived error, or a counterargument proffered in the spirit of debate, then gets construed as driven by an intention to make others look stupid--and, since this is an open forum, all discussion necessarily takes place "in front of everyone else"--so threads then devolve into shouting matches ending in ragequits.  You'd think this was the Internet or something.

That said, I enjoy a good show as much as the next guy, so feel free to ignore my advice too.

Now, I've got some pizzas to deliver...

waltworks

  • Magnum Stache
  • ******
  • Posts: 4720
Re: Paying off 30-year mortgage in 10 years or less
« Reply #78 on: May 15, 2015, 03:31:52 PM »
This is still going? Jeebus.

You can buy the ability to make lower monthly payments for the price of a higher overall rate. I think there are still a few places that even offer a 40 year, right? It might be worthwhile, it might not. Depends on the person and situation and subjective preference. OP, is that really all you meant? If so, for crying out loud, why did you bother posting? Everyone here knows that very well.

-W

nereo

  • Senior Mustachian
  • ********
  • Posts: 14207
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Paying off 30-year mortgage in 10 years or less
« Reply #79 on: May 16, 2015, 03:34:14 AM »
.... curious that the OP registered two days ago, has made 30 posts, and every one has been in this thread.  Just hope someone, somewhere learned something from this.  I know I sure didn't....

Nords

  • Magnum Stache
  • ******
  • Posts: 3300
  • Age: 60
  • Location: Oahu
    • Military Retirement & Financial Independence blog
Re: Paying off 30-year mortgage in 10 years or less
« Reply #80 on: May 16, 2015, 01:44:34 PM »
MMM retired with a mortgage, Nords has a mortgage, Arebelspy has many mortgages and many others have kept a mortgage through their path to FIRE.  So I disagree with your assertion that you should pay off your mortgage, because those that have reached FIRE have no mortgage.  MMM had a mortgage for like 5 years into his retirement.

But he later said that he and wife were in a house that was about $160k more expensive than the home they really needed, and he downsized into a fixer upper.

That alone is different than what I've suggested is right for me in this thread, which is first of all making sure your home is "just enough".  Large enough for what you really need but not so large that you end up just filling it up with furniture you don't use and acquiring a lot of useless junk.  Not to mention paying extra heating/cooling expenses that are unneeded.

 
Our 4BR 2.5BA 2400 sq ft home was barely big enough for the three of us (and a pet bunny) when our daughter was rampaging through here (along with friends and houseguests and college breaks).  Now that she's launched from the nest (and the bunny passed away of old age), my spouse and I could easily downsize to half of this.  However we're in an extremely nice neighborhood with awesome views and good neighbors.  So yeah, the house served its purpose for about 14 years and now we have excess capacity.  We have lifetime functional fitness through housecleaning and yardwork.  But we're not planning to downsize because it doesn't make lifestyle sense.

Real estate finances may be fungible (especially with low interest rates) but great homes are not.

As for the mortgage, we have a 30-year fixed at 3.625% whose payment is less than half of my inflation-adjusted military pension.  At those numbers (and with a highly-reliable pension) I should be taking out two or three more mortgages.  But my spouse and I have "enough" and the additional wealth leverage would not improve our lifestyle.  My pension is the main reason that we engage in mortgage arbitrage.

Financially, it makes sense to take out the longest fixed-rate mortgage (or student loan, or car loan) that you can so that you have the option to pay it off early (with your human capital) or pay it off as slowly as possible (if you're laid off or have better-- riskier-- investment opportunities elsewhere).  But behavioral financial psychology has also firmly established that we're still emotional loss-averse creatures who have to sleep comfortably at night.  In that case it might be better to accelerate paying off debts, or even have no debt at all. 

SnackDog

  • Handlebar Stache
  • *****
  • Posts: 1276
  • Location: Latin America
Re: Paying off 30-year mortgage in 10 years or less
« Reply #81 on: May 16, 2015, 05:22:51 PM »
By some of the (spurious) reasoning presented here, one might be better off paying cash for real estate (and watching the money sit there) rather than investing it.

At 2.5% inflation, a $1MM home will be worth $2.1MM in 30 years.  If, instead of paying it off early (or paying cash for the house), you invested $1MM in the stock market at the indicated 7% before-tax return, you would have $7.6MM after 30 years.  After 15% cap gains, $6.5MM.  (Plus the $1.1MM appreciation in the property).

Keep in mind that monetizing the property down the road will incur real estate and other fees plus potentially taxes.  6% realtor fees + 15% capital gains tax after the $250K exclusion for singles. 

Bottom line: invest and have $8.7MM after 30 years, or store your money in a house and have about $1.9MM in cash after 30 years.