Author Topic: The great "pay off mortage" vs "invest in stocks" debate - possible solution  (Read 75439 times)

BlueHouse

  • Magnum Stache
  • ******
  • Posts: 3508
  • Location: WDC
why do people keep starting these threads over and over and over again.. .maths are maths.  30 year at today's rate wins and is safer in FIRE than paying it off.  use Cfiresim.  unless you want to assume unreasonably low returns ... in which case your 4% SWR isnt good anyways. 

Because everyone's situation is different and by sharing, they are helping others determine what is right for them. 
boarder42, an acceptable risk profile is different for most 50-year-olds than it is for a 30-year-old. 

I max out all of my pre-tax savings, and then I invest some extra for post-tax, but rather than putting all of the extra into post-tax investment accounts, I use part of that to pay down my mortgage.  Here are a few reasons why.
#1. emotional.  I get it.  enough said.
#2.  Tax-cutting strategy to reduce taxable income at retirement .  My house payments are large and burdensome.  I am trying to minimize expenses in retirement, and therefore minimize income (and taxes) needed to cover those expenses. 
#3.  Asset re-allocation for reduced risk-tolerance..  Consider that paying a mortgage down is simply reducing my risk tolerance as I grow older.  This summer, it happened to really work out well for me.  It's the first time that market timing & luck worked in my favor.  But the bottom line is that I asked myself if I could stomach losing 30% of my portfolio, and my answer was no...I wanted more safety and I went for it and got lucky with timing, but I also understood my personal cash flow situation enough to know that if favorable conditions for buying back in exist, then I have the cash flow now to do so.  And I've been buying back in. 

So I have to ask, Boarder, when you know that there is emotion included in these decisions, why do you keep arguing it?  How much money do you borrow with other collateral in order to invest more?  How often do you invest on margin?  why not more?  Why not go all in?  Presumably, it's because you've found your acceptable risk tolerance. 


MDM

  • Senior Mustachian
  • ********
  • Posts: 10468
MDM, in my case, I'm searching for "fastest possible path to FIRE".
An excellent choice!

Quote
In the case of investing vs. a 30 year mortgage, you can pull from your investments in about years 14-16 of a 30 year mortgage (at my rate of savings and income)
I don't understand this well enough to agree or disagree.  Could you explain "pull from"?  And, if not already explained by that answer, why this occurs in the time frame given?

Quote
In my case, I'm trying to get to FIRE within a 5 year plan. So I can't take advantage of the growth over a long timeframe that the market offers. cfiresim shows investment failure in almost any 5 year timeframe you care to devise with anything less than Warren Buffet-like wages and investments. 
Also don't understand this well enough to agree or disagree.  Could you explain "investment failure" more?  E.g., is this "always fails" or "doesn't always succeed" or...?

Quote
So you do agree, it takes longer to reach FIRE if you invest vs. pay down mortgage, right?
Absolutely not, but perhaps you didn't make this comment seriously. 

As explained in a previous post, "But back to the FI discussion: the 4% SWR assumes that expenses are ongoing - and increase with inflation - for a full 30 years.  The mortgage payment meets neither of those assumptions.  If investment returns are at least as high as the mortgage interest, you would need $2k/month + $200 taxes/month, that's  roughly $2.2k/month. $2.2k * 12 months = $26,400 yearly / .04 SWR = $660,000.  $660K + $100K mortgage principal due = $760K total investment."

Under the above assumptions, you will reach $760K with a $100K principal still due, before you will reach $660K with no mortgage.

MDM

  • Senior Mustachian
  • ********
  • Posts: 10468
I think you're incorrectly spinning people that pay off their mortgage as making a "wrong" financial decision.  I do not think that is always true...in fact, I don't think it's often true.
Almost agreed with you here, until the part after the ellipsis.  Way back on the first page of this thread, http://forum.mrmoneymustache.com/real-estate-and-landlording/the-great-'pay-off-mortage'-vs-'invest-in-stocks'-debate-possible-solution/msg633112/#msg633112 to be exact, brooklynguy provided some good evidence to show that even for 5 year periods investing has been statistically better than mortgage paying.

Quote
In certain cases, there just isn't enough of a spread between market returns and mortgage rates to justify calling paying off a mortgage the wrong financial decision.
Yes, absolutely true.  E.g., when it seemed there was a 6.2% mortgage under discussion it made a lot of sense to pay that.

Quote
The ability to lock in guaranteed gains seems to be overlooked by a lot of people due to the markets long term sustained returns.  I expect the market to continue to perform over the long term, but I still would prefer to cash in on guaranteed 5% return.  Once I pay off my mortgage, that gives me a de facto 5% guaranteed dividend and about 3.8% of extra liquidity (e.g. the cash I would be forced to put towards principal which is really paying yourself so can't treat as extra dividend).
Seems likely that most of the investment proponents are very aware of the difference in risk between mortgage payment and index investing.  5% is also on the high side of mortgages available today.

Quote
This is not to say that prepaying a mortgage is the right decision.  I just don't think it's fair to say that it's financially the wrong decision.  It's not that black and white.   
Agreed that it isn't a 100% vs. 0% probability - never said (or, at least, never meant to say) it is.  But, given historical market returns (including fluctuations), it is more likely that investing will be preferable to paying off loans with interest rates lower than those returns.  One can of course bet against the odds and sometimes win.

Vinivedivichi

  • 5 O'Clock Shadow
  • *
  • Posts: 56
I hear what you are saying but you view this purely from a net gain perspective, which in fairness is generally the way that it should be viewed.  However, if you broaden it out it becomes a way to diversify and a way to get a guaranteed fixed return on my investments.  For instance, I'm 32 but if I were 62 I would be wise to take a 5% guaranteed fixed return every year for the rest of my life over the historic 8/9% market gains, which also can be quite volatile year to year.  Obviously, as you get older you have to be more risk focused since the you become more of a short term investor as opposed to long term. 

Even as a 32 year-old, I'll take 5% fixed return w/a defacto dividend as part of my overall investment portfolio.  For now, my house is about 50% of my portfolio, but in 3 years it will be 20% or so.  I don't mind settling for a -2% return over the next 30 years or so (until the point I start moving to less risky investments) on the 135k as it is only a part of my overall portfolio and will essentially provide a fixed income stream through the ups and the downs.  It's no different than moving to blue chip stocks for historically lower returns, but more income, as opposed to low cap growth stocks which can be more volatile and provide less income but higher LT gains.  The one key difference is the guaranteed return, which nothing in the market can match.  Like I said, I understand your line of thinking and I certainly wouldn't argue against someone going that route, but I also don't think it's "wrong" financially to pay off your mortgage in most cases nor do I think the reason it's not "wrong" is emotional.  There are fact patterns that make it more or less attractive, but all in all I would say it's rarely "wrong" financially to pay off your mortgage. 

MDM

  • Senior Mustachian
  • ********
  • Posts: 10468
I hear what you are saying but you view this purely from a net gain perspective, which in fairness is generally the way that it should be viewed.  However, if you broaden it out it becomes a way to diversify and a way to get a guaranteed fixed return on my investments.  For instance, I'm 32 but if I were 62 I would be wise to take a 5% guaranteed fixed return every year for the rest of my life over the historic 8/9% market gains, which also can be quite volatile year to year.  Obviously, as you get older you have to be more risk focused since the you become more of a short term investor as opposed to long term.
Those are certainly defensible points.  One can also argue against them.  E.g, a couple both age 62 now have a joint life expectancy of ~30 years.  To avoid running out of money, it might be wise for them to continue investing somewhat aggressively.

Quote
Even as a 32 year-old, I'll take 5% fixed return w/a defacto dividend as part of my overall investment portfolio.  For now, my house is about 50% of my portfolio, but in 3 years it will be 20% or so.  I don't mind settling for a -2% return over the next 30 years or so (until the point I start moving to less risky investments) on the 135k as it is only a part of my overall portfolio and will essentially provide a fixed income stream through the ups and the downs.  It's no different than moving to blue chip stocks for historically lower returns, but more income, as opposed to low cap growth stocks which can be more volatile and provide less income but higher LT gains.  The one key difference is the guaranteed return, which nothing in the market can match.  Like I said, I understand your line of thinking and I certainly wouldn't argue against someone going that route, but I also don't think it's "wrong" financially to pay off your mortgage in most cases nor do I think the reason it's not "wrong" is emotional.  There are fact patterns that make it more or less attractive, but all in all I would say it's rarely "wrong" financially to pay off your mortgage.
Mortgage payment can indeed be better than some options, e.g., not investing at all.

We have been talking about the risk of low (or negative) market returns that, if actual, would make mortgage payment look better.  There is a similar risk we haven't discussed: high inflation.  If that occurs, today's low interest rate mortgages will be wonderful to have retained.

Of course, if either of us knew the future....

Telecaster

  • Handlebar Stache
  • *****
  • Posts: 2371
  • Location: Seattle, WA

We have been talking about the risk of low (or negative) market returns that, if actual, would make mortgage payment look better.  There is a similar risk we haven't discussed: high inflation.  If that occurs, today's low interest rate mortgages will be wonderful to have retained.

Of course, if either of us knew the future....

Or even sort of moderate inflation.  There have been several decades when the inflation rate was 5-ish%, a return to inflation on that scale is not a crazy absurd scenario. It is something that realistically could, and IMO will happen. 

I haven't read every post in this thread so forgive me if this has already been brought up, but there is another inflation risk associated with paying off the mortgage early, namely the "investment" is really a future savings.   Nothing wrong with a future savings, btw.   However, the future savings is NOT inflation adjusted.  So you use full value dollars to today to pay down the mortgage in order to save inflation eroded dollars in the future.

To put it another way, let's say that 15 years ago you had a $2000 mortgage payment.  $2000 then is the equivalent to about $1400 of today's dollars. Even with low rates of inflation, over time the results are pretty dramatic.   That makes the idea of a future savings not nearly as attractive. 

If you ask your parents or grandparents what their first mortgage was, in most cases they will chortle and say something like $500 or whatever.   That was a lot of money at the time, but now it sounds trivially small for a house payment.  Right now, your house payment sounds like a lot of money and so you want to get rid of it, but 15-20 years down the road it won't be a lot of money, or at least, not a painfully large amount of money. 



 

boarder42

  • Walrus Stache
  • *******
  • Posts: 7845
the diversification of portfolio by adding a non liquid asset is not a good play you're making good points but you're more diversified by having a mortgage.. its an inflatino hedge like nothing else can provide.  there is no dividend return on owning a non liquid asset of that magnitude.  unless you're renting and consider that a dividend but now its an investment property.

no one is claiming black and white the 6.2% guy is just about as borderline as you can get. 

but just out of curiosity vinivedi what do you plan to live on in retirement?  are you waiting til you get to a 2% SWR b/c thats essentially what you're saying is youre safety zone by pre paying a 5% mortgage.  MDM may correct my math on that
« Last Edit: October 01, 2015, 06:42:25 PM by boarder42 »

Vinivedivichi

  • 5 O'Clock Shadow
  • *
  • Posts: 56
The inflation point is a good one.  It's something that I considered, but probably not as much as I should have.  It's making me think...

In my personal situation, I'm not as retirement focused at this point.  I don't plan to retire extraordinarily early, and I'm making too much money right now  and in the near future to retire.  In all honesty, if my home were much more valuable and more aligned with my income I would likely not be paying it off because of the reasons you guys have stated.  But because for me it's a fairly small piece of my portfolio (or at least will be soon), I don't mind trading the long term incremental returns for the flexibility.  I don't view that as an emotional decision, but perhaps it is.  I am very debt averse and I'm very much a bird in the hand over two in the bush type of thinker, so maybe emotion is a part of the reasoning though financially it's not enough of a detriment to get me to declare it's "wrong" financially.  It admittedly will likely result in less gains over my life expectancy, but I'm fine with that.

My point about the dividend, though I think is still true.  It's not a cash inflow if I stay in the house, rather the lack of a cash outflow.  I'll have $1k more per month because I don't have to put that money towards my mortgage.  It's not totally illiquid in that sense and even selling the house isn't that big of a deal.  I don't see it as totally illiquid though obviously more illiquid than stocks. 

I'll go one more angle as well just to have some more fun.  Prepaying your mortgage before retirement may allow you the benefit of lowering your tax burden - perhaps enough to offset the incremental investment gains.  Tax rates in this country are progressive and due to standard deduction, etc. you can make a certain amount of money tax free (I forget how much that amount is but let's say it's $12k).  If you need $30k to live in retirement with a mortgage and 12k to live in retirement without a mortgage, the fact that you still have your mortgage during retirement is forcing you to pull out 18k more (which is taxable at xx % (probably around 5%)) whereas at a 12k you are tax free.  During retirement, you have a lot of control over your income and can really manage your tax burden efficiently.  Not having a mortgage gives you more flexibility in that respect. 

boarder42

  • Walrus Stache
  • *******
  • Posts: 7845
Taxes shouldnt be an issue for most on this blog as the money i personally would be prepaying my mortgage with is going into taxable accounts.  As long as you're in the 15% tax bracket all the LTCGs and QDs is not taxed on these funds. 

i know there are many on this blog not maxing tax advantaged accounts AND are prepaying their mortgages... and IMO this is about as bad a situation as one can put themselves in when we're getting down to the nitty gritty.

brooklynguy

  • Handlebar Stache
  • *****
  • Posts: 2204
  • Age: 40
My point about the dividend, though I think is still true.  It's not a cash inflow if I stay in the house, rather the lack of a cash outflow.  I'll have $1k more per month because I don't have to put that money towards my mortgage.

Again, though, someone who opts to use investments to service their mortgage for them lacks, for all intents and purposes, the monthly cash outflow (or, said more accurately, lacks the monthly cash outflow's impact on their non-mortgage-related cash flow) to the same extent as someone who opts to extinguish their mortgage.

Quote
If you need $30k to live in retirement with a mortgage and 12k to live in retirement without a mortgage, the fact that you still have your mortgage during retirement is forcing you to pull out 18k more (which is taxable at xx % (probably around 5%)) whereas at a 12k you are tax free. 

The cash outflows required to satisfy the mortgage payments will not necessarily result in a dollar-for-dollar increase in taxable income.  See post # 74 above and the discussion starting at post # 105.  In your example, even if all 18k is being pulled from a taxable investment account, a portion of that 18k (in the early years of retirement, likely a substantial portion) will represent nontaxable return of principal.

Quote
During retirement, you have a lot of control over your income and can really manage your tax burden efficiently.  Not having a mortgage gives you more flexibility in that respect.

Not necessarily.  Having the mortgage and the corresponding extra investments could in some respects give you more flexibility to efficiently manage your tax burden.  In my case, based purely on my natural spending levels, I would probably lack sufficient income in retirement to qualify for ACA tax credits.  Retaining my mortgage and having the associated extra investments will allow me to more easily "manufacture" income for that purpose.

Vinivedivichi

  • 5 O'Clock Shadow
  • *
  • Posts: 56

Again, though, someone who opts to use investments to service their mortgage for them lacks, for all intents and purposes, the monthly cash outflow (or, said more accurately, lacks the monthly cash outflow's impact on their non-mortgage-related cash flow) to the same extent as someone who opts to extinguish their mortgage.

I'm not arguing that point, I'm just saying that you have to acknowledge the liquidity of a paid mortgage.  It's a de-facto dividend just like your investments.  Someone said there's no dividend unless you rent your home out but that's not true the lack of a mortgage payment is essentially a dividend. 

Quote

The cash outflows required to satisfy the mortgage payments will not necessarily result in a dollar-for-dollar increase in taxable income.  See post # 74 above and the discussion starting at post # 105.  In your example, even if all 18k is being pulled from a taxable investment account, a portion of that 18k (in the early years of retirement, likely a substantial portion) will represent nontaxable return of principal.

That's not entirely true.  If it's a taxable deferred tax account (e.g. 401k/IRA) then it will be dollar for dollar since they are taxed as ordinary income.  If you're purely using a taxable account outside of any retirement vehicle that's a good point, but if it's been around for a long time I would think most of the withdrawals would still be taxable (as capital gains) as opposed to a return of capital. 

Quote
During retirement, you have a lot of control over your income and can really manage your tax burden efficiently.  Not having a mortgage gives you more flexibility in that respect.
Not necessarily.  Having the mortgage and the corresponding extra investments could in some respects give you more flexibility to efficiently manage your tax burden.  In my case, based purely on my natural spending levels, I would probably lack sufficient income in retirement to qualify for ACA tax credits.  Retaining my mortgage and having the associated extra investments will allow me to more easily "manufacture" income for that purpose.
[/quote]

I admittedly don't know much about the ACA, but was under the impression the less income you made for ACA purposes allowed you more subsidies.  I could be wrong about that, but regardless that seems to be a pretty isolated situation.  I get that this is an early retirement forum but I doubt very many of the people on this forum actually will retire that early.  It's more of an ideal than a norm.

boarder42

  • Walrus Stache
  • *******
  • Posts: 7845
More ideal than norm ... i'd say that depends on your own personal definition of early and when you found this blog.  i found it at 27 ... i'm on track to be done in 10 years and i will be at the top end of the 15% tax bracket in spending levels

meaning if i were truly mustacian i would have far less time left to retire.   I would think on an early retirement site it would be more the norm than not to retire early but thats just my thought.  its not this crazy carrot that you have to keep chasing.  it is largley definable and controllable for the most part.

brooklynguy

  • Handlebar Stache
  • *****
  • Posts: 2204
  • Age: 40
I'm not arguing that point, I'm just saying that you have to acknowledge the liquidity of a paid mortgage.  It's a de-facto dividend just like your investments.  Someone said there's no dividend unless you rent your home out but that's not true the lack of a mortgage payment is essentially a dividend. 

I don't follow.  How is the lack of a mortgage payment essentially a dividend, unless you mean the cash flow impact of not having to make the monthly mortgage payment (in which case, as I said, someone who opts not to prepay effectively gets the same cash flow impact)?

Quote
That's not entirely true.  If it's a taxable deferred tax account (e.g. 401k/IRA) then it will be dollar for dollar since they are taxed as ordinary income. 

If the dollars have to come from a tax-deferred account, that means, under the prepayment scenario, you had to have opted to prepay in lieu of maximizing your available tax-deferred space, which (to boarder's point) raises the hurdle significantly higher for that approach to come out ahead.

Quote
I admittedly don't know much about the ACA, but was under the impression the less income you made for ACA purposes allowed you more subsidies.  I could be wrong about that, but regardless that seems to be a pretty isolated situation.  I get that this is an early retirement forum but I doubt very many of the people on this forum actually will retire that early.  It's more of an ideal than a norm.

Don't want to sidetrack the discussion too much, but eligibility for ACA tax credits requires hitting a minimum income level (and then the credits taper off as income gets higher).  And ACA tax credits are probability the single biggest-ticket tax-planning item on the plate of a sizable percentage of the retirement planners on this forum.

boarder42

  • Walrus Stache
  • *******
  • Posts: 7845
can people here not understand that you had to make extra payments to get rid of the mortgage payment so the defacto "not having a mortgage payment" isnt any different than the guy that invested the money in a taxable account and now has more than enough to pay of his mortgage and have money left over by the time you pay yours off.

its not extra money it doesnt just magically come from somewhere... you essentially/historically/statisistcally used your money the incorrect way and are there for farther behind financially than those investing.

Vinivedivichi

  • 5 O'Clock Shadow
  • *
  • Posts: 56
can people here not understand that you had to make extra payments to get rid of the mortgage payment so the defacto "not having a mortgage payment" isnt any different than the guy that invested the money in a taxable account and now has more than enough to pay of his mortgage and have money left over by the time you pay yours off.

its not extra money it doesnt just magically come from somewhere... you essentially/historically/statisistcally used your money the incorrect way and are there for farther behind financially than those investing.

Is "people here" me?  You are making the same point I am trying to make.  It's a dividend the same as your investments.  Somebody said it's not a dividend and I said yes it is.  I didn't say that it's a dividend and investments can't be sapped to accomplish the same end goal, I just said that it is a dividend.  I don't think there is any disagreement unless I am missing something. 

Vinivedivichi

  • 5 O'Clock Shadow
  • *
  • Posts: 56

Quote

If the dollars have to come from a tax-deferred account, that means, under the prepayment scenario, you had to have opted to prepay in lieu of maximizing your available tax-deferred space, which (to boarder's point) raises the hurdle significantly higher for that approach to come out ahead.

I don't follow this.  I am talking about post-retirement, not pre-retirement.  The point is that once you're retired, you are drawing down tax deferred accounts to fund your retirement (no matter what your fact pattern this is the case at some point).  If that's the case, you can better manage your tax burden without a mortgage.  If you have a shitload of non tax-deferred accounts, along with tax deferred, you can toggle the two to get to the same outcome even if you do have mortgage, but not having a mortgage brings your threshold down quite a bit.  You can live off a low amount of income which means most or even all of that tax deferred money could end up being tax free. 

BarkyardBQ

  • Pencil Stache
  • ****
  • Posts: 666
I don't see how you can claim earned income as a dividend simply because you aren't spending it on a mortgage.

Is it also a dividend if I cancel my internet connection and keep $53 a month because now I don't have that expense?

Does paying off a credit card immediately produce a dividend in the amount of the previous payment or does it simply increase available cash flow from earned income?

A dividend is a distribution of earnings on an investment, your income is not a dividend.

BarkyardBQ

  • Pencil Stache
  • ****
  • Posts: 666

Quote

If the dollars have to come from a tax-deferred account, that means, under the prepayment scenario, you had to have opted to prepay in lieu of maximizing your available tax-deferred space, which (to boarder's point) raises the hurdle significantly higher for that approach to come out ahead.

I don't follow this.  I am talking about post-retirement, not pre-retirement.  The point is that once you're retired, you are drawing down tax deferred accounts to fund your retirement (no matter what your fact pattern this is the case at some point).  If that's the case, you can better manage your tax burden without a mortgage.  If you have a shitload of non tax-deferred accounts, along with tax deferred, you can toggle the two to get to the same outcome even if you do have mortgage, but not having a mortgage brings your threshold down quite a bit.  You can live off a low amount of income which means most or even all of that tax deferred money could end up being tax free.

Lowering your retirement cash requirements by not having a mortgage does not justify prepaying your mortgage during the accumulation phase.

As boarder42 said in post #190, you cannot make both assumptions that current returns are lower than your mortgage interest rate, and expect to magically be able to use 4% in retirement. Whatever your reasons for prepaying are, you must make an informed decision. It is still better to defer income and taxes and invest while you accumulate your portfolio to your non-mortgage retirement expense requirements, and then pay off the mortgage before pulling the trigger with cash earned before it needs to grow.

If you believe that future returns will be less than your mortgage rate, then it will still serve you better to stash, accumulate, and grow early dollar until you get to the stash and SWR you need before paying the mortgage off to retire.
« Last Edit: October 02, 2015, 10:20:37 AM by BackyarBQ »

Vinivedivichi

  • 5 O'Clock Shadow
  • *
  • Posts: 56
I don't see how you can claim earned income as a dividend simply because you aren't spending it on a mortgage.

Is it also a dividend if I cancel my internet connection and keep $53 a month because now I don't have that expense?

Does paying off a credit card immediately produce a dividend in the amount of the previous payment or does it simply increase available cash flow from earned income?

A dividend is a distribution of earnings on an investment, your income is not a dividend.

There is a big difference between internet and a mortgage payment.  Your house is an investment and your internet is not.  The same for your credit card payments.  Those are reduced expenses while your mortgage is the liability on your asset (home).  You can't simply go without paying your mortgage or "cut back" your way to no mortgage. 

The alternative that is the subject of this thread is either paying off your mortgage or investing those funds that would be used to pay off your mortgage into the market.  And as someone rightly pointed out, a house is more illiquid than stocks.  The capital invested into prepaying a mortgage is definitely illiquid.  However, once you pay it off, there is essentially a dividend in the form of mortgage payments you are not making.  The person that pays off the mortgage has xx amount of less living expenses than the person that invested the money.  As has also been pointed out, the person that invested the money can theoretically cash out enough investment gains to cover the mortgage payments each month (with an extra windfall) and be in a better place financially.  That person that cashes out each month is going to have to pay taxes, which erodes the gains, and transaction fees.  The person that pays off the mortgage has a permanent fixed, no-hassle, tax free return on their investment equal to the going interest rate on a mortgage, plus principal (even though this portion isn't really a return on investment but more non-fixed cash outflow), plus a premium % (e.g. you would not go out and refinance each day the mortgage rate drops and incur transaction costs, so it's not reasonable to assume you will always have the lowest mortgage rate).  I'm not sure why this is such a bone of contention?
« Last Edit: October 02, 2015, 10:35:11 AM by Vinivedivichi »

Vinivedivichi

  • 5 O'Clock Shadow
  • *
  • Posts: 56

Lowering your retirement cash requirements by not having a mortgage does not justify prepaying your mortgage during the accumulation phase.

As boarder42 said in post #190, you cannot make both assumptions that current returns are lower than your mortgage interest rate, and expect to magically be able to use 4% in retirement. Whatever your reasons for prepaying are, you must make an informed decision. It is still better to defer income and taxes and invest while you accumulate your portfolio to your non-mortgage retirement expense requirements, and then pay off the mortgage before pulling the trigger with cash earned before it needs to grow.

If you believe that future returns will be less than your mortgage rate, then it will still serve you better to stash, accumulate, and grow early dollar until you get to the stash and SWR you need before paying the mortgage off to retire.

We're missing each other here.  I didn't say anything about market rates of return.  I am referring to managing your post-retirement tax burden.  All of the models that are used assume that pre-tax retirement accounts will ultimately be taxed and my point is simply that if you manage your withdrawals wisely, the pretax accounts can end up being tax free.  There is more flexibility to reach this end goal if you don't have a mortgage. 

When you take the incremental gains you get by investing and not prepaying a mortgage, you have to factor in the detriment as well.  One detriment is the fact that gains on investment are taxable, the savings or "dividend" or whatever you want to call the non-payment of mortgage interest is not taxable.  So that erodes the incremental gains.  My point is that in addition to the fact that your investment gains are taxable, once you retire you will be withdrawing from your 401k/IRA (since we are all maxing this out, these withdrawals will be significant theoretically).  Those withdrawals are taxed at regular income tax rates.  The income you need to live, the more income you need to withdraw.  Fact.  We have graduated tax system for ordinary income that essentially creates a threshold of x amount of income before you get taxed on ordinary income.  Fact.  If I have less living expenses (e.g. no mortgage) then I can take out less tax deferred money and get it either tax free or at a low rate.  If you are taking out a significant amount more of tax deferred gains, you are going to be paying tax on that money while I won't.  That is something to consider.
« Last Edit: October 02, 2015, 10:45:30 AM by Vinivedivichi »

boarder42

  • Walrus Stache
  • *******
  • Posts: 7845
B/c its 100% incorrect - your house isnt paying you a dividend. you're just not putting money into it.  if you quit working you have no "dividend" as you're calling it. 

noun
noun: dividend; plural noun: dividends
1.
a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves).

You're not getting any money from your house.  not having a mortgage payment is not congruent with owning stock that is gaining you money and paying litterally dividends. 

You're still accruing money and can divert it to save but it did not pay you a dividend

and for the other use of dividends

"it pays dividends to invest vs pay off your mortgage at todays current US rates" 

would be a proper use of that term. 

There is only 1 scenario i have ever seen that i agree with as a financially responsible reason to pay down your mortgage.

Person 1 is making x + y + z where x is their living expenses excluding mortgage and y is their mortgage payment and z is their extra capital to do with as they please

They are saving nothing but have a company pension set to pay out x when they retire and it will increase at inflation til they die. 

This person, while they won't come out in the best spot Net worth wise historically, can virtually eliminate all risk by putting z into their mortgage to retire as fast as possible and live on said pension "x" until they retire. 

If you can come up with another scenario that leaves you risk free and doesnt involve using investments of some type or nature but a guarnteed pension fund let me know b/c this was the only good reason i've ever seen posted

brooklynguy

  • Handlebar Stache
  • *****
  • Posts: 2204
  • Age: 40
If the dollars have to come from a tax-deferred account, that means, under the prepayment scenario, you had to have opted to prepay in lieu of maximizing your available tax-deferred space, which (to boarder's point) raises the hurdle significantly higher for that approach to come out ahead.

I don't follow this.  I am talking about post-retirement, not pre-retirement.  The point is that once you're retired, you are drawing down tax deferred accounts to fund your retirement (no matter what your fact pattern this is the case at some point).  If that's the case, you can better manage your tax burden without a mortgage.  If you have a shitload of non tax-deferred accounts, along with tax deferred, you can toggle the two to get to the same outcome even if you do have mortgage, but not having a mortgage brings your threshold down quite a bit.  You can live off a low amount of income which means most or even all of that tax deferred money could end up being tax free.

My point was that you will necessarily also have taxable accounts to draw upon to satisfy your mortgage payments in retirement, unless during the accumulation phase you never had excess savings after maxing out (to the fullest extent possible) your tax-deferred accounts (in which case prepaying your mortgage would have been even more likely to be suboptimal, because the dollars that would have been used to make the prepayments could have instead benefited from tax sheltering).

BarkyardBQ

  • Pencil Stache
  • ****
  • Posts: 666
We're missing each other here.  I didn't say anything about market rates of return.  I am referring to managing your post-retirement tax burden.  All of the models that are used assume that pre-tax retirement accounts will ultimately be taxed and my point is simply that if you manage your withdrawals wisely, the pretax accounts can end up being tax free.  There is more flexibility to reach this end goal if you don't have a mortgage. 

The house you live in is a consumable item, slowly falling apart and earning you no income, it is not an investment. You cannot simply not pay a credit card balance either, same as a mortgage, having either paid off does not increase your return on investment, it reduces your burden and frees up cash. Your house does not pay you until you sell it, having no mortgage does not mean an immediate return on investment even with appreciation as you are using the house and it is depreciating. It does not matter what the expense is, earned income is not a dividend. I can chose to invest $1000/month, by choosing not to invest that I have not gained a $1000/month dividend. For the same reason that someone who is FI and chooses to work is not earning a dividend equal to their earned income.

It seems to me that the only way you could call your primary residence an investment is to hedge your mortgage against an ever increasing spread of inflation where the price of your mortgage payment decreases against earned or invested income used to pay it off. Pairing appreciation and the mortgage rate against inflation minus the depreciation of the physical property seems the only way you can call it an investment, in which case you are hurting yourself by locking money into an asset that historically appreciates just above inflation.


Quote
When you take the incremental gains you get by investing and not prepaying a mortgage, you have to factor in the detriment as well.  One detriment is the fact that gains on investment are taxable, the savings or "dividend" or whatever you want to call the non-payment of mortgage interest is not taxable.  So that erodes the incremental gains.  My point is that in addition to the fact that your investment gains are taxable, once you retire you will be withdrawing from your 401k/IRA (since we are all maxing this out, these withdrawals will be significant theoretically).  Those withdrawals are taxed at regular income tax rates.  The income you need to live, the more income you need to withdraw.  Fact.  We have graduated tax system for ordinary income that essentially creates a threshold of x amount of income before you get taxed on ordinary income.  Fact.  If I have less living expenses (e.g. no mortgage) then I can take out less tax deferred money and get it either tax free or at a low rate.  If you are taking out a significant amount more of tax deferred gains, you are going to be paying tax on that money while I won't.  That is something to consider.

And I'm saying that if you defer income until FI and then pay off the mortgage before RE, lowering your retirement cash flow requirements and retirement tax burden, you will utilize both strategies to the best advantage.
« Last Edit: October 02, 2015, 11:01:06 AM by BackyarBQ »

Vinivedivichi

  • 5 O'Clock Shadow
  • *
  • Posts: 56
If the dollars have to come from a tax-deferred account, that means, under the prepayment scenario, you had to have opted to prepay in lieu of maximizing your available tax-deferred space, which (to boarder's point) raises the hurdle significantly higher for that approach to come out ahead.

I don't follow this.  I am talking about post-retirement, not pre-retirement.  The point is that once you're retired, you are drawing down tax deferred accounts to fund your retirement (no matter what your fact pattern this is the case at some point).  If that's the case, you can better manage your tax burden without a mortgage.  If you have a shitload of non tax-deferred accounts, along with tax deferred, you can toggle the two to get to the same outcome even if you do have mortgage, but not having a mortgage brings your threshold down quite a bit.  You can live off a low amount of income which means most or even all of that tax deferred money could end up being tax free.

My point was that you will necessarily also have taxable accounts to draw upon to satisfy your mortgage payments in retirement, unless during the accumulation phase you never had excess savings after maxing out (to the fullest extent possible) your tax-deferred accounts (in which case prepaying your mortgage would have been even more likely to be suboptimal, because the dollars that would have been used to make the prepayments could have instead benefited from tax sheltering).

Agree but in this example your taxable accounts are double taxed (e.g. you are taxed upon earning the income, and then taxed again on investment gains) while the mortgage payoff alternative results in one level of taxation (e.g. income earned) and avails you of tax free income during retirement.  No matter how much more taxable gains you have they will always be double taxed, so this is a benefit of paying off your mortgage.

Vinivedivichi

  • 5 O'Clock Shadow
  • *
  • Posts: 56
B/c its 100% incorrect - your house isnt paying you a dividend. you're just not putting money into it.  if you quit working you have no "dividend" as you're calling it. 

noun
noun: dividend; plural noun: dividends
1.
a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves).

You're not getting any money from your house.  not having a mortgage payment is not congruent with owning stock that is gaining you money and paying litterally dividends. 

You're still accruing money and can divert it to save but it did not pay you a dividend

and for the other use of dividends

"it pays dividends to invest vs pay off your mortgage at todays current US rates" 

would be a proper use of that term. 

There is only 1 scenario i have ever seen that i agree with as a financially responsible reason to pay down your mortgage.

Person 1 is making x + y + z where x is their living expenses excluding mortgage and y is their mortgage payment and z is their extra capital to do with as they please

They are saving nothing but have a company pension set to pay out x when they retire and it will increase at inflation til they die. 

This person, while they won't come out in the best spot Net worth wise historically, can virtually eliminate all risk by putting z into their mortgage to retire as fast as possible and live on said pension "x" until they retire. 

If you can come up with another scenario that leaves you risk free and doesnt involve using investments of some type or nature but a guarnteed pension fund let me know b/c this was the only good reason i've ever seen posted

I don't need the wikipedia definition for a dividend.  I understand that there is no cash inflow so it's not a real dividend.  I've been calling it a de facto dividend because the entire premise of this thread is paying off your mortgage or investing.  If those are the two scenarios, then you either have a mortgage payment or you don't.  If you pay it off, you don't, and if you don't pay it off you do.  That simple.   

Vinivedivichi

  • 5 O'Clock Shadow
  • *
  • Posts: 56
We're missing each other here.  I didn't say anything about market rates of return.  I am referring to managing your post-retirement tax burden.  All of the models that are used assume that pre-tax retirement accounts will ultimately be taxed and my point is simply that if you manage your withdrawals wisely, the pretax accounts can end up being tax free.  There is more flexibility to reach this end goal if you don't have a mortgage. 

The house you live in is a consumable item, slowly falling apart and earning you no income, it is not an investment. You cannot simply not pay a credit card balance either, same as a mortgage, having either paid off does not increase your return on investment, it reduces your burden and frees up cash. Your house does not pay you until you sell it, having no mortgage does not mean an immediate return on investment even with appreciation as you are using the house and it is depreciating. It does not matter what the expense is, earned income is not a dividend. I can chose to invest $1000/month, by choosing not to invest that I have not gained a $1000/month dividend. For the same reason that someone who is FI and chooses to work is not earning a dividend equal to their earned income.

It seems to me that the only way you could call your primary residence an investment is to hedge your mortgage against an ever increasing spread of inflation where the price of your mortgage payment decreases against earned or invested income used to pay it off. Pairing appreciation and the mortgage rate against inflation minus the depreciation of the physical property seems the only way you can call it an investment, in which case you are hurting yourself by locking money into an asset that historically appreciates just above inflation.


Quote
When you take the incremental gains you get by investing and not prepaying a mortgage, you have to factor in the detriment as well.  One detriment is the fact that gains on investment are taxable, the savings or "dividend" or whatever you want to call the non-payment of mortgage interest is not taxable.  So that erodes the incremental gains.  My point is that in addition to the fact that your investment gains are taxable, once you retire you will be withdrawing from your 401k/IRA (since we are all maxing this out, these withdrawals will be significant theoretically).  Those withdrawals are taxed at regular income tax rates.  The income you need to live, the more income you need to withdraw.  Fact.  We have graduated tax system for ordinary income that essentially creates a threshold of x amount of income before you get taxed on ordinary income.  Fact.  If I have less living expenses (e.g. no mortgage) then I can take out less tax deferred money and get it either tax free or at a low rate.  If you are taking out a significant amount more of tax deferred gains, you are going to be paying tax on that money while I won't.  That is something to consider.

And I'm saying that if you defer income until FI and then pay off the mortgage before RE, lowering your retirement cash flow requirements and retirement tax burden, you will utilize both strategies to the best advantage.

You're wrong.  Shelter is a fixed expense in the world that I live in.  Internet, whatever else example you want to use is not.  If you can avoid shelter cash outflow, that is essentially a dividend.  You're freeing up whatever interest/rent fixed payments you would be making.  I don't really feel like arguing this point any further because what you're saying makes no sense. 

brooklynguy

  • Handlebar Stache
  • *****
  • Posts: 2204
  • Age: 40
Agree but in this example your taxable accounts are double taxed (e.g. you are taxed upon earning the income, and then taxed again on investment gains) while the mortgage payoff alternative results in one level of taxation (e.g. income earned) and avails you of tax free income during retirement.  No matter how much more taxable gains you have they will always be double taxed, so this is a benefit of paying off your mortgage.

The dollars which could have been used to prepay the mortgage but were invested instead will not be taxed again (which was my point earlier about "return of principal").  The earnings on those dollars may or may not be taxed, depending on your overall tax profile.  If they are taxed, that raises the hurdle for the invest approach to come out ahead (because the investment approach needs to outperform the prepayment approach net of those taxes).

I think everyone here agrees that when you compare the two alternatives, you need to stack up all the costs and benefits of each approach against one another to see which one comes out ahead.

Vinivedivichi

  • 5 O'Clock Shadow
  • *
  • Posts: 56

And I'm saying that if you defer income until FI and then pay off the mortgage before RE, lowering your retirement cash flow requirements and retirement tax burden, you will utilize both strategies to the best advantage.

Oh okay that is different than what I was hearing because it sounded to me like everyone was telling me to maximize leverage...Now you are saying do payoff the mortgage, but do it just before retirement.  Got it. 

BarkyardBQ

  • Pencil Stache
  • ****
  • Posts: 666
We're missing each other here.  I didn't say anything about market rates of return.  I am referring to managing your post-retirement tax burden.  All of the models that are used assume that pre-tax retirement accounts will ultimately be taxed and my point is simply that if you manage your withdrawals wisely, the pretax accounts can end up being tax free.  There is more flexibility to reach this end goal if you don't have a mortgage. 

The house you live in is a consumable item, slowly falling apart and earning you no income, it is not an investment. You cannot simply not pay a credit card balance either, same as a mortgage, having either paid off does not increase your return on investment, it reduces your burden and frees up cash. Your house does not pay you until you sell it, having no mortgage does not mean an immediate return on investment even with appreciation as you are using the house and it is depreciating. It does not matter what the expense is, earned income is not a dividend. I can chose to invest $1000/month, by choosing not to invest that I have not gained a $1000/month dividend. For the same reason that someone who is FI and chooses to work is not earning a dividend equal to their earned income.

It seems to me that the only way you could call your primary residence an investment is to hedge your mortgage against an ever increasing spread of inflation where the price of your mortgage payment decreases against earned or invested income used to pay it off. Pairing appreciation and the mortgage rate against inflation minus the depreciation of the physical property seems the only way you can call it an investment, in which case you are hurting yourself by locking money into an asset that historically appreciates just above inflation.


Quote
When you take the incremental gains you get by investing and not prepaying a mortgage, you have to factor in the detriment as well.  One detriment is the fact that gains on investment are taxable, the savings or "dividend" or whatever you want to call the non-payment of mortgage interest is not taxable.  So that erodes the incremental gains.  My point is that in addition to the fact that your investment gains are taxable, once you retire you will be withdrawing from your 401k/IRA (since we are all maxing this out, these withdrawals will be significant theoretically).  Those withdrawals are taxed at regular income tax rates.  The income you need to live, the more income you need to withdraw.  Fact.  We have graduated tax system for ordinary income that essentially creates a threshold of x amount of income before you get taxed on ordinary income.  Fact.  If I have less living expenses (e.g. no mortgage) then I can take out less tax deferred money and get it either tax free or at a low rate.  If you are taking out a significant amount more of tax deferred gains, you are going to be paying tax on that money while I won't.  That is something to consider.

And I'm saying that if you defer income until FI and then pay off the mortgage before RE, lowering your retirement cash flow requirements and retirement tax burden, you will utilize both strategies to the best advantage.

You're wrong.  Shelter is a fixed expense in the world that I live in.  Internet, whatever else example you want to use is not.  If you can avoid shelter cash outflow, that is essentially a dividend.  You're freeing up whatever interest/rent fixed payments you would be making.  I don't really feel like arguing this point any further because what you're saying makes no sense.

Touché, I wasn't aware I entered a world defined by you.

BarkyardBQ

  • Pencil Stache
  • ****
  • Posts: 666

And I'm saying that if you defer income until FI and then pay off the mortgage before RE, lowering your retirement cash flow requirements and retirement tax burden, you will utilize both strategies to the best advantage.

Oh okay that is different than what I was hearing because it sounded to me like everyone was telling me to maximize leverage...Now you are saying do payoff the mortgage, but do it just before retirement.  Got it.

Exactly.

I know that I am approximately 5-7 years from FI (never mind the fact that my FI number includes our current expenses+mortgage, because we may want a new house down the road so I want inflation adjusted housing costs). When we reach FI, after accumulating I can work for 3-6 months, defer no income, pay off the mortgage and eliminate that expense entirely. Draw less from the portfolio because we have no mortgage or use that extra for hobbies etc, or until later down the road we decide to rent House A, buy House B with a mortgage. The same could be done and reach FI with no mortgage savings, pay off the mortgage and have what you need (drawing less for less taxes).
« Last Edit: October 02, 2015, 11:15:56 AM by BackyarBQ »

Cathy

  • Handlebar Stache
  • *****
  • Posts: 1044
You can count ownership of a house as an investment that pays you a dividend, but then you need to count that dividend in all scenarios where you own a house, regardless of whether you have a mortgage loan secured by the property. The house pays the "dividend" even if you have a mortgage loan. If you count such a dividend only when there is no mortgage loan, that is in effect "double counting" the value of each principal repayment, which makes no sense. Double counting errors seem to come up pretty frequently in these mortgage loan threads.

Vinivedivichi

  • 5 O'Clock Shadow
  • *
  • Posts: 56
Agree but in this example your taxable accounts are double taxed (e.g. you are taxed upon earning the income, and then taxed again on investment gains) while the mortgage payoff alternative results in one level of taxation (e.g. income earned) and avails you of tax free income during retirement.  No matter how much more taxable gains you have they will always be double taxed, so this is a benefit of paying off your mortgage.

The dollars which could have been used to prepay the mortgage but were invested instead will not be taxed again (which was my point earlier about "return of principal").  The earnings on those dollars may or may not be taxed, depending on your overall tax profile.  If they are taxed, that raises the hurdle for the invest approach to come out ahead (because the investment approach needs to outperform the prepayment approach net of those taxes).

I think everyone here agrees that when you compare the two alternatives, you need to stack up all the costs and benefits of each approach against one another to see which one comes out ahead.

I think everyone passively agrees with that notion, but a lot of the folks on this board seemed to programmed towards higher overall modeled returns without really factoring in all the costs.  My point is simply that when you factor in all the costs, especially where the spread between mortgage rate and LT historical returns is not that significant, paying off the mortgage can be the "right" option in terms of maximizing LT gains.  It can also be "a" right option for other reasons even if it does not maximize LT gains.  This is not nearly as black and white as many on this board are making it.  There are a lot of factors to think about so it's not true to frame it as either going with sound financial reasoning (investing) or making an emotional decision (mortgage).  That's just plain out not true.  There are factors that should influence people one way or the other but it's rarely that black and white. 

Vinivedivichi

  • 5 O'Clock Shadow
  • *
  • Posts: 56
We're missing each other here.  I didn't say anything about market rates of return.  I am referring to managing your post-retirement tax burden.  All of the models that are used assume that pre-tax retirement accounts will ultimately be taxed and my point is simply that if you manage your withdrawals wisely, the pretax accounts can end up being tax free.  There is more flexibility to reach this end goal if you don't have a mortgage. 

The house you live in is a consumable item, slowly falling apart and earning you no income, it is not an investment. You cannot simply not pay a credit card balance either, same as a mortgage, having either paid off does not increase your return on investment, it reduces your burden and frees up cash. Your house does not pay you until you sell it, having no mortgage does not mean an immediate return on investment even with appreciation as you are using the house and it is depreciating. It does not matter what the expense is, earned income is not a dividend. I can chose to invest $1000/month, by choosing not to invest that I have not gained a $1000/month dividend. For the same reason that someone who is FI and chooses to work is not earning a dividend equal to their earned income.

It seems to me that the only way you could call your primary residence an investment is to hedge your mortgage against an ever increasing spread of inflation where the price of your mortgage payment decreases against earned or invested income used to pay it off. Pairing appreciation and the mortgage rate against inflation minus the depreciation of the physical property seems the only way you can call it an investment, in which case you are hurting yourself by locking money into an asset that historically appreciates just above inflation.


Quote
When you take the incremental gains you get by investing and not prepaying a mortgage, you have to factor in the detriment as well.  One detriment is the fact that gains on investment are taxable, the savings or "dividend" or whatever you want to call the non-payment of mortgage interest is not taxable.  So that erodes the incremental gains.  My point is that in addition to the fact that your investment gains are taxable, once you retire you will be withdrawing from your 401k/IRA (since we are all maxing this out, these withdrawals will be significant theoretically).  Those withdrawals are taxed at regular income tax rates.  The income you need to live, the more income you need to withdraw.  Fact.  We have graduated tax system for ordinary income that essentially creates a threshold of x amount of income before you get taxed on ordinary income.  Fact.  If I have less living expenses (e.g. no mortgage) then I can take out less tax deferred money and get it either tax free or at a low rate.  If you are taking out a significant amount more of tax deferred gains, you are going to be paying tax on that money while I won't.  That is something to consider.

And I'm saying that if you defer income until FI and then pay off the mortgage before RE, lowering your retirement cash flow requirements and retirement tax burden, you will utilize both strategies to the best advantage.

You're wrong.  Shelter is a fixed expense in the world that I live in.  Internet, whatever else example you want to use is not.  If you can avoid shelter cash outflow, that is essentially a dividend.  You're freeing up whatever interest/rent fixed payments you would be making.  I don't really feel like arguing this point any further because what you're saying makes no sense.

Touché, I wasn't aware I entered a world defined by you.

Maybe I should not have said it that way, but come on.  Are you suggesting living in a tent or something?  I know this board is geared towards extreme frugality but I think it's disingenuous to argue from a position where there is not fixed cost for shelter.  If I can't count that as an assumption then I really don't know where to start. 

Vinivedivichi

  • 5 O'Clock Shadow
  • *
  • Posts: 56
You can count ownership of a house as an investment that pays you a dividend, but then you need to count that dividend in all scenarios where you own a house, regardless of whether you have a mortgage loan secured by the property. The house pays the "dividend" even if you have a mortgage loan. If you count such a dividend only when there is no mortgage loan, that is in effect "double counting" the value of each principal repayment, which makes no sense. Double counting errors seem to come up pretty frequently in these mortgage loan threads.

I don't follow.  If I am not paying a fixed mortgage payment, to me that is a de-facto dividend (especially the interest portion..that is as "real" of a dividend as you can get without cash in your hand).  If I am paying a mortgage payment, where is my dividend? 

I don't understand how you count a dividend if you have a mortgage?  Unless you are saying appreciation, but that's really not a dividend that's baking in some gain (that you get whether it's mortgaged or not).  The investments that you make side-by-side along with paying your mortgage payments can be a dividend (I agree with that) but your mortgage itself is not one.   

BarkyardBQ

  • Pencil Stache
  • ****
  • Posts: 666
We're missing each other here.  I didn't say anything about market rates of return.  I am referring to managing your post-retirement tax burden.  All of the models that are used assume that pre-tax retirement accounts will ultimately be taxed and my point is simply that if you manage your withdrawals wisely, the pretax accounts can end up being tax free.  There is more flexibility to reach this end goal if you don't have a mortgage. 

The house you live in is a consumable item, slowly falling apart and earning you no income, it is not an investment. You cannot simply not pay a credit card balance either, same as a mortgage, having either paid off does not increase your return on investment, it reduces your burden and frees up cash. Your house does not pay you until you sell it, having no mortgage does not mean an immediate return on investment even with appreciation as you are using the house and it is depreciating. It does not matter what the expense is, earned income is not a dividend. I can chose to invest $1000/month, by choosing not to invest that I have not gained a $1000/month dividend. For the same reason that someone who is FI and chooses to work is not earning a dividend equal to their earned income.

It seems to me that the only way you could call your primary residence an investment is to hedge your mortgage against an ever increasing spread of inflation where the price of your mortgage payment decreases against earned or invested income used to pay it off. Pairing appreciation and the mortgage rate against inflation minus the depreciation of the physical property seems the only way you can call it an investment, in which case you are hurting yourself by locking money into an asset that historically appreciates just above inflation.


Quote
When you take the incremental gains you get by investing and not prepaying a mortgage, you have to factor in the detriment as well.  One detriment is the fact that gains on investment are taxable, the savings or "dividend" or whatever you want to call the non-payment of mortgage interest is not taxable.  So that erodes the incremental gains.  My point is that in addition to the fact that your investment gains are taxable, once you retire you will be withdrawing from your 401k/IRA (since we are all maxing this out, these withdrawals will be significant theoretically).  Those withdrawals are taxed at regular income tax rates.  The income you need to live, the more income you need to withdraw.  Fact.  We have graduated tax system for ordinary income that essentially creates a threshold of x amount of income before you get taxed on ordinary income.  Fact.  If I have less living expenses (e.g. no mortgage) then I can take out less tax deferred money and get it either tax free or at a low rate.  If you are taking out a significant amount more of tax deferred gains, you are going to be paying tax on that money while I won't.  That is something to consider.

And I'm saying that if you defer income until FI and then pay off the mortgage before RE, lowering your retirement cash flow requirements and retirement tax burden, you will utilize both strategies to the best advantage.

You're wrong.  Shelter is a fixed expense in the world that I live in.  Internet, whatever else example you want to use is not.  If you can avoid shelter cash outflow, that is essentially a dividend.  You're freeing up whatever interest/rent fixed payments you would be making.  I don't really feel like arguing this point any further because what you're saying makes no sense.

Touché, I wasn't aware I entered a world defined by you.

Maybe I should not have said it that way, but come on.  Are you suggesting living in a tent or something?  I know this board is geared towards extreme frugality but I think it's disingenuous to argue from a position where there is not fixed cost for shelter.  If I can't count that as an assumption then I really don't know where to start.

Hmm, I'm not sure where I gave the impression you should have no housing expenses. I'm claiming all expenses being equal; whether they be internet, groceries, rent or a mortgage, eliminating the expense does not create a dividend equal to the reduced expense it simply frees cash flow. But as Cathy points out, you can declare a dividend on the house as an asset.

I'm just trying to wrap my head about how reduced cash requirements equal to a former expense is a dividend.
« Last Edit: October 02, 2015, 11:27:11 AM by BackyarBQ »

Vinivedivichi

  • 5 O'Clock Shadow
  • *
  • Posts: 56

And I'm saying that if you defer income until FI and then pay off the mortgage before RE, lowering your retirement cash flow requirements and retirement tax burden, you will utilize both strategies to the best advantage.

Oh okay that is different than what I was hearing because it sounded to me like everyone was telling me to maximize leverage...Now you are saying do payoff the mortgage, but do it just before retirement.  Got it.

Exactly.

I know that I am approximately 5-7 years from FI (never mind the fact that my FI number includes our current expenses+mortgage, because we may want a new house down the road so I want inflation adjusted housing costs). When we reach FI, after accumulating I can work for 3-6 months, defer no income, pay off the mortgage and eliminate that expense entirely. Draw less from the portfolio because we have no mortgage or use that extra for hobbies etc, or until later down the road we decide to rent House A, buy House B with a mortgage. The same could be done and reach FI with no mortgage savings, pay off the mortgage and have what you need (drawing less for less taxes).

I agree that your scenario gives you the tax flexibility I mentioned was an advantage of paying off your mortgage.  I think though that sorta makes my point that it actually does make sense to pay it off (though you are doing a better job of timing it to maximize your gains) in certain fact patterns.  You are accepting a lower gain, but I would wager that at the end of the day, all things considered, you come out ahead or at least very close to break even (though again it also depends on mortgage rate).  I don't meant to sound like I am 100% on the side of paying off your mortgage (I'm not...), I'm just trying to act as a bit of a counterbalance because I think the sentiment in this thread is too far in one direction and has painted one side as right and one side as wrong when that's not really a fair characterization. 

boarder42

  • Walrus Stache
  • *******
  • Posts: 7845
its pretty black and white financially speaking

emotionally ... people dont make the best financialy decision.

If the market earns more than your interest over the 30 years you come out ahead. 

Now how do we know what the market will do

We dont, but we can guess pretty well at it. 

How do we know your rate you tell us... and anything sub 6% in my mind is a no brainer invest

The WHOLE ENTIRE NOTION BEHIND FIRE is based primarily are a 4% SWR as stated above ... Most people on here live by this rule.  and it seems many people on here are paying off low cost mortgages

which is an oxymoron


Oh and backyarbq - you really need to reconsider the 'best of both worlds' as you're calling paying it off right before RE.  This is unlikely a good move and will actually cost you over the long run as your mortgage is a great inflation hedge.  Unless you're retirement budget is over the 15% threshold on taxes (which it shouldnt be here)  you should really look into a REFI at retirement.  assuming rates stay historically low.

boarder42

  • Walrus Stache
  • *******
  • Posts: 7845

And I'm saying that if you defer income until FI and then pay off the mortgage before RE, lowering your retirement cash flow requirements and retirement tax burden, you will utilize both strategies to the best advantage.

Oh okay that is different than what I was hearing because it sounded to me like everyone was telling me to maximize leverage...Now you are saying do payoff the mortgage, but do it just before retirement.  Got it.

Exactly.

I know that I am approximately 5-7 years from FI (never mind the fact that my FI number includes our current expenses+mortgage, because we may want a new house down the road so I want inflation adjusted housing costs). When we reach FI, after accumulating I can work for 3-6 months, defer no income, pay off the mortgage and eliminate that expense entirely. Draw less from the portfolio because we have no mortgage or use that extra for hobbies etc, or until later down the road we decide to rent House A, buy House B with a mortgage. The same could be done and reach FI with no mortgage savings, pay off the mortgage and have what you need (drawing less for less taxes).

I agree that your scenario gives you the tax flexibility I mentioned was an advantage of paying off your mortgage.  I think though that sorta makes my point that it actually does make sense to pay it off (though you are doing a better job of timing it to maximize your gains) in certain fact patterns.  You are accepting a lower gain, but I would wager that at the end of the day, all things considered, you come out ahead or at least very close to break even (though again it also depends on mortgage rate).  I don't meant to sound like I am 100% on the side of paying off your mortgage (I'm not...), I'm just trying to act as a bit of a counterbalance because I think the sentiment in this thread is too far in one direction and has painted one side as right and one side as wrong when that's not really a fair characterization.

show me a fair time when it is right throughout history from a math standpoint to pay it down.. you cant put emotion in it b/c its not a measurable variable.  so from a math standpoint its wrong at todays rates in the US with a fixed mortgage.  there is a cross over point on rates but its much greater than 5%

Cathy

  • Handlebar Stache
  • *****
  • Posts: 1044
You can count ownership of a house as an investment that pays you a dividend, but then you need to count that dividend in all scenarios where you own a house, regardless of whether you have a mortgage loan secured by the property. The house pays the "dividend" even if you have a mortgage loan. If you count such a dividend only when there is no mortgage loan, that is in effect "double counting" the value of each principal repayment, which makes no sense. Double counting errors seem to come up pretty frequently in these mortgage loan threads.

I don't follow.  If I am not paying a fixed mortgage payment, to me that is a de-facto dividend (especially the interest portion..that is as "real" of a dividend as you can get without cash in your hand).  If I am paying a mortgage payment, where is my dividend?

Consider the following two scenarios.

Scenario 1: You pay $500 in cash for a stock Q that pays a monthly dividend of $1,000.

Scenario 2: You take out a $500 loan and use the loan proceeds to purchase the identical stock Q as in Scenario 1.

By your reasoning, in Scenario 2 you would not receive any dividend because you used loan proceeds to purchase stock Q. That makes no sense. Whether an asset pays a dividend is independent of where the money came from that was used to purchase the asset. Money is fungible. You can treat a house as paying a dividend, but then you need to do that in all scenarios, regardless of the presence of a mortgage loan; otherwise the accounting makes no sense.

Vinivedivichi

  • 5 O'Clock Shadow
  • *
  • Posts: 56

Hmm, I'm not sure where I gave the impression you should have no housing expenses. I'm claiming all expenses being equal; whether they be internet, groceries, rent or a mortgage, eliminating the expense does not create a dividend equal to the reduced expense it simply frees cash flow. But as Cathy points out, you can declare a dividend on the house as an asset.

I'm just trying to wrap my head about how reduced cash requirements equal to a former expense is a dividend.

Got it, sorry.  I guess the part that I disagree with is that all expenses are equal, though I'm not sure that disagreement makes my point.  Internet, groceries, etc. are expenditures.  You use cash outflow for them, but they are gone once they are gone.  Your mortgage is the liability that attaches to an asset (your home).  You service the debt to have benefit of the asset.   

I guess my point is that you can't avoid shelter payments.  You can avoid expenditures.  You can limit shelter payments, etc. but in any modeling exercise they need to be accounted for.  So if we assume, for purposes of our argument, that you HAVE to pay 1k per month (or whatever it is) on some form of shelter, then any scenario that allows you not to pay that 1k per month is as good as a dividend.

Vinivedivichi

  • 5 O'Clock Shadow
  • *
  • Posts: 56

And I'm saying that if you defer income until FI and then pay off the mortgage before RE, lowering your retirement cash flow requirements and retirement tax burden, you will utilize both strategies to the best advantage.

Oh okay that is different than what I was hearing because it sounded to me like everyone was telling me to maximize leverage...Now you are saying do payoff the mortgage, but do it just before retirement.  Got it.

Exactly.

I know that I am approximately 5-7 years from FI (never mind the fact that my FI number includes our current expenses+mortgage, because we may want a new house down the road so I want inflation adjusted housing costs). When we reach FI, after accumulating I can work for 3-6 months, defer no income, pay off the mortgage and eliminate that expense entirely. Draw less from the portfolio because we have no mortgage or use that extra for hobbies etc, or until later down the road we decide to rent House A, buy House B with a mortgage. The same could be done and reach FI with no mortgage savings, pay off the mortgage and have what you need (drawing less for less taxes).

I agree that your scenario gives you the tax flexibility I mentioned was an advantage of paying off your mortgage.  I think though that sorta makes my point that it actually does make sense to pay it off (though you are doing a better job of timing it to maximize your gains) in certain fact patterns.  You are accepting a lower gain, but I would wager that at the end of the day, all things considered, you come out ahead or at least very close to break even (though again it also depends on mortgage rate).  I don't meant to sound like I am 100% on the side of paying off your mortgage (I'm not...), I'm just trying to act as a bit of a counterbalance because I think the sentiment in this thread is too far in one direction and has painted one side as right and one side as wrong when that's not really a fair characterization.

show me a fair time when it is right throughout history from a math standpoint to pay it down.. you cant put emotion in it b/c its not a measurable variable.  so from a math standpoint its wrong at todays rates in the US with a fixed mortgage.  there is a cross over point on rates but its much greater than 5%

I've given you plenty of factors but you are married to a mindset that I cannot penetrate.  The good news is that your methodology is not a bad one, and in many cases is a better one, so you have nothing to worry about.   

BarkyardBQ

  • Pencil Stache
  • ****
  • Posts: 666

And I'm saying that if you defer income until FI and then pay off the mortgage before RE, lowering your retirement cash flow requirements and retirement tax burden, you will utilize both strategies to the best advantage.

Oh okay that is different than what I was hearing because it sounded to me like everyone was telling me to maximize leverage...Now you are saying do payoff the mortgage, but do it just before retirement.  Got it.

Exactly.

I know that I am approximately 5-7 years from FI (never mind the fact that my FI number includes our current expenses+mortgage, because we may want a new house down the road so I want inflation adjusted housing costs). When we reach FI, after accumulating I can work for 3-6 months, defer no income, pay off the mortgage and eliminate that expense entirely. Draw less from the portfolio because we have no mortgage or use that extra for hobbies etc, or until later down the road we decide to rent House A, buy House B with a mortgage. The same could be done and reach FI with no mortgage savings, pay off the mortgage and have what you need (drawing less for less taxes).

I agree that your scenario gives you the tax flexibility I mentioned was an advantage of paying off your mortgage.  I think though that sorta makes my point that it actually does make sense to pay it off (though you are doing a better job of timing it to maximize your gains) in certain fact patterns.  You are accepting a lower gain, but I would wager that at the end of the day, all things considered, you come out ahead or at least very close to break even (though again it also depends on mortgage rate).  I don't meant to sound like I am 100% on the side of paying off your mortgage (I'm not...), I'm just trying to act as a bit of a counterbalance because I think the sentiment in this thread is too far in one direction and has painted one side as right and one side as wrong when that's not really a fair characterization.

What about a flow chart to outline optimized steps?

Oh and backyarbq - you really need to reconsider the 'best of both worlds' as you're calling paying it off right before RE.  This is unlikely a good move and will actually cost you over the long run as your mortgage is a great inflation hedge.  Unless you're retirement budget is over the 15% threshold on taxes (which it shouldnt be here)  you should really look into a REFI at retirement.  assuming rates stay historically low.

I know...

What if my plan includes reaching FI, working til RE, paying off the mortgage on the primary residence before RE (which in 7-10 years will be either 36 or 26k). Either balance should take us less than 6 months to pay off, our FI number includes mortgage expense. The reason being down the road we will buy and mortgage land/building costs for our future home. The reduced expense and lower withdrawal will increase the portfolio value until we buy future property and utilize the mortgage to hedge future inflation. Since I cannot assume to know how much property will cost or the future mortgage rate, I need sufficient portfolio/capital to handle the unknown accounting for a mortgage but not having the expense until later. On the other hand, since we're moving in 5 years and I don't know if we'll have 4 tax deferred accounts, and if we do have after tax savings, we may buy said property on mortgage and hedge it later, probably refinancing for another 30 years before we start building.

Telecaster

  • Handlebar Stache
  • *****
  • Posts: 2371
  • Location: Seattle, WA
I'm not arguing that point, I'm just saying that you have to acknowledge the liquidity of a paid mortgage.  It's a de-facto dividend just like your investments.  Someone said there's no dividend unless you rent your home out but that's not true the lack of a mortgage payment is essentially a dividend. 

Hmm.  You can look at it like a dividend, but it isn't like your investments.    Dividends typically increase over time, at least one hopes so.  but in this case, the "dividend" is fixed and ultimately comes to an end when the mortgage would have been paid off anyway.   I don't know of any other investments like that, and it doesn't sound  particularly desirable if you view it in that manner. 

That's why I like to view a paid mortgage as what it actually is:  A future savings.   You down pay the mortgage now so you don't have to pay it later.   There are lots of nice things about having a future savings.   But there is a significant opportunity cost in order to get those future savings. 





Vinivedivichi

  • 5 O'Clock Shadow
  • *
  • Posts: 56
You can count ownership of a house as an investment that pays you a dividend, but then you need to count that dividend in all scenarios where you own a house, regardless of whether you have a mortgage loan secured by the property. The house pays the "dividend" even if you have a mortgage loan. If you count such a dividend only when there is no mortgage loan, that is in effect "double counting" the value of each principal repayment, which makes no sense. Double counting errors seem to come up pretty frequently in these mortgage loan threads.

I don't follow.  If I am not paying a fixed mortgage payment, to me that is a de-facto dividend (especially the interest portion..that is as "real" of a dividend as you can get without cash in your hand).  If I am paying a mortgage payment, where is my dividend?

Consider the following two scenarios.

Scenario 1: You pay $500 in cash for a stock Q that pays a monthly dividend of $1,000.

Scenario 2: You take out a $500 loan and use the loan proceeds to purchase the identical stock Q as in Scenario 1.

By your reasoning, in Scenario 2 you would not receive any dividend because you used loan proceeds to purchase stock Q. That makes no sense. Whether an asset pays a dividend is independent of where the money came from that was used to purchase the asset. Money is fungible. You can treat a house as paying a dividend, but then you need to do that in all scenarios, regardless of the presence of a mortgage loan; otherwise the accounting makes no sense.

I don't think that's right.  I would say in scenario 2, the stock is paying the dividend (which is true), which you could use to cover your mortgage payment (fair enough).  Your example is only showing part of the picture.  Here is the way I would frame it:

Scenario 1:  $500 mortgage payment (100k initial mortgage, for simplicity say $400 goes to interest and $100 to principal).  Instead of paying mortgage you invest a 100k windfall in the market and get fixed dividends from the investment in this fictitious world of $500 per month.  You pay tax on your $500 (say 20%) and you get $400 free and clear that you use to pay your mortgage.  In this example, your house is not a dividend.  Your stock is a dividend.

Scenario 2: Same facts as 1 except you use your windfall to payoff the mortgage.  The lack of a mortgage payment is essentially a defacto dividend ($400 of which is real dividend and $100 of which is lack of forced saving or whatever you want to call it). 

Your house is a dividend in scenario 2.  Your stock is a dividend in Scenario 1.  Not sure how I am double counting?  I mentioned previously that you can obviously use dividends from investments to service your mortgage but we are all calling those real dividends so my point is let's give scenario 2 credit for being essentially a dividend.  Your capital in the house is an illiquid investment but it's giving you what amounts to a dividend once you have paid off the mortgage. 

boarder42

  • Walrus Stache
  • *******
  • Posts: 7845

And I'm saying that if you defer income until FI and then pay off the mortgage before RE, lowering your retirement cash flow requirements and retirement tax burden, you will utilize both strategies to the best advantage.

Oh okay that is different than what I was hearing because it sounded to me like everyone was telling me to maximize leverage...Now you are saying do payoff the mortgage, but do it just before retirement.  Got it.

Exactly.

I know that I am approximately 5-7 years from FI (never mind the fact that my FI number includes our current expenses+mortgage, because we may want a new house down the road so I want inflation adjusted housing costs). When we reach FI, after accumulating I can work for 3-6 months, defer no income, pay off the mortgage and eliminate that expense entirely. Draw less from the portfolio because we have no mortgage or use that extra for hobbies etc, or until later down the road we decide to rent House A, buy House B with a mortgage. The same could be done and reach FI with no mortgage savings, pay off the mortgage and have what you need (drawing less for less taxes).

I agree that your scenario gives you the tax flexibility I mentioned was an advantage of paying off your mortgage.  I think though that sorta makes my point that it actually does make sense to pay it off (though you are doing a better job of timing it to maximize your gains) in certain fact patterns.  You are accepting a lower gain, but I would wager that at the end of the day, all things considered, you come out ahead or at least very close to break even (though again it also depends on mortgage rate).  I don't meant to sound like I am 100% on the side of paying off your mortgage (I'm not...), I'm just trying to act as a bit of a counterbalance because I think the sentiment in this thread is too far in one direction and has painted one side as right and one side as wrong when that's not really a fair characterization.

show me a fair time when it is right throughout history from a math standpoint to pay it down.. you cant put emotion in it b/c its not a measurable variable.  so from a math standpoint its wrong at todays rates in the US with a fixed mortgage.  there is a cross over point on rates but its much greater than 5%

I've given you plenty of factors but you are married to a mindset that I cannot penetrate.  The good news is that your methodology is not a bad one, and in many cases is a better one, so you have nothing to worry about.

you havent once put actual math to paper to prove you're point you just want to argue which can be seen by you submitting that in many cases investing is better,  though you have yet to mathmatically show one case where your methodology is better financially.  using numbers not words. ie math not emotion

BarkyardBQ

  • Pencil Stache
  • ****
  • Posts: 666

Hmm, I'm not sure where I gave the impression you should have no housing expenses. I'm claiming all expenses being equal; whether they be internet, groceries, rent or a mortgage, eliminating the expense does not create a dividend equal to the reduced expense it simply frees cash flow. But as Cathy points out, you can declare a dividend on the house as an asset.

I'm just trying to wrap my head about how reduced cash requirements equal to a former expense is a dividend.

Got it, sorry.  I guess the part that I disagree with is that all expenses are equal, though I'm not sure that disagreement makes my point.  Internet, groceries, etc. are expenditures.  You use cash outflow for them, but they are gone once they are gone.  Your mortgage is the liability that attaches to an asset (your home).  You service the debt to have benefit of the asset.   

I guess my point is that you can't avoid shelter payments.  You can avoid expenditures.  You can limit shelter payments, etc. but in any modeling exercise they need to be accounted for.  So if we assume, for purposes of our argument, that you HAVE to pay 1k per month (or whatever it is) on some form of shelter, then any scenario that allows you not to pay that 1k per month is as good as a dividend.

If you are FIRE (not working) and 1 year after you FIRE, you make your final mortgage payment (reducing your withdrawal requirements) do you suddenly have a dividend equal to the mortgage payment or do you simply have the value of the mortgage payment still in the account, which can now be spent on something else or not spent at all?
« Last Edit: October 02, 2015, 12:02:45 PM by BackyarBQ »

boarder42

  • Walrus Stache
  • *******
  • Posts: 7845
You can count ownership of a house as an investment that pays you a dividend, but then you need to count that dividend in all scenarios where you own a house, regardless of whether you have a mortgage loan secured by the property. The house pays the "dividend" even if you have a mortgage loan. If you count such a dividend only when there is no mortgage loan, that is in effect "double counting" the value of each principal repayment, which makes no sense. Double counting errors seem to come up pretty frequently in these mortgage loan threads.

I don't follow.  If I am not paying a fixed mortgage payment, to me that is a de-facto dividend (especially the interest portion..that is as "real" of a dividend as you can get without cash in your hand).  If I am paying a mortgage payment, where is my dividend?

Consider the following two scenarios.

Scenario 1: You pay $500 in cash for a stock Q that pays a monthly dividend of $1,000.

Scenario 2: You take out a $500 loan and use the loan proceeds to purchase the identical stock Q as in Scenario 1.

By your reasoning, in Scenario 2 you would not receive any dividend because you used loan proceeds to purchase stock Q. That makes no sense. Whether an asset pays a dividend is independent of where the money came from that was used to purchase the asset. Money is fungible. You can treat a house as paying a dividend, but then you need to do that in all scenarios, regardless of the presence of a mortgage loan; otherwise the accounting makes no sense.

I don't think that's right.  I would say in scenario 2, the stock is paying the dividend (which is true), which you could use to cover your mortgage payment (fair enough).  Your example is only showing part of the picture.  Here is the way I would frame it:

Scenario 1:  $500 mortgage payment (100k initial mortgage, for simplicity say $400 goes to interest and $100 to principal).  Instead of paying mortgage you invest a 100k windfall in the market and get fixed dividends from the investment in this fictitious world of $500 per month.  You pay tax on your $500 (say 20%) and you get $400 free and clear that you use to pay your mortgage.  In this example, your house is not a dividend.  Your stock is a dividend.

Scenario 2: Same facts as 1 except you use your windfall to payoff the mortgage.  The lack of a mortgage payment is essentially a defacto dividend ($400 of which is real dividend and $100 of which is lack of forced saving or whatever you want to call it). 

Your house is a dividend in scenario 2.  Your stock is a dividend in Scenario 1.  Not sure how I am double counting?  I mentioned previously that you can obviously use dividends from investments to service your mortgage but we are all calling those real dividends so my point is let's give scenario 2 credit for being essentially a dividend.  Your capital in the house is an illiquid investment but it's giving you what amounts to a dividend once you have paid off the mortgage.

you cherry picked incorrect numbers randomly.  6k annual return on a stock is lower than historical avgs.

BarkyardBQ

  • Pencil Stache
  • ****
  • Posts: 666
You can count ownership of a house as an investment that pays you a dividend, but then you need to count that dividend in all scenarios where you own a house, regardless of whether you have a mortgage loan secured by the property. The house pays the "dividend" even if you have a mortgage loan. If you count such a dividend only when there is no mortgage loan, that is in effect "double counting" the value of each principal repayment, which makes no sense. Double counting errors seem to come up pretty frequently in these mortgage loan threads.

I don't follow.  If I am not paying a fixed mortgage payment, to me that is a de-facto dividend (especially the interest portion..that is as "real" of a dividend as you can get without cash in your hand).  If I am paying a mortgage payment, where is my dividend?

Consider the following two scenarios.

Scenario 1: You pay $500 in cash for a stock Q that pays a monthly dividend of $1,000.

Scenario 2: You take out a $500 loan and use the loan proceeds to purchase the identical stock Q as in Scenario 1.

By your reasoning, in Scenario 2 you would not receive any dividend because you used loan proceeds to purchase stock Q. That makes no sense. Whether an asset pays a dividend is independent of where the money came from that was used to purchase the asset. Money is fungible. You can treat a house as paying a dividend, but then you need to do that in all scenarios, regardless of the presence of a mortgage loan; otherwise the accounting makes no sense.

I don't think that's right.  I would say in scenario 2, the stock is paying the dividend (which is true), which you could use to cover your mortgage payment (fair enough).  Your example is only showing part of the picture.  Here is the way I would frame it:

Scenario 1:  $500 mortgage payment (100k initial mortgage, for simplicity say $400 goes to interest and $100 to principal).  Instead of paying mortgage you invest a 100k windfall in the market and get fixed dividends from the investment in this fictitious world of $500 per month.  You pay tax on your $500 (say 20%) and you get $400 free and clear that you use to pay your mortgage.  In this example, your house is not a dividend.  Your stock is a dividend.

Scenario 2: Same facts as 1 except you use your windfall to payoff the mortgage.  The lack of a mortgage payment is essentially a defacto dividend ($400 of which is real dividend and $100 of which is lack of forced saving or whatever you want to call it). 

Your house is a dividend in scenario 2.  Your stock is a dividend in Scenario 1.  Not sure how I am double counting?  I mentioned previously that you can obviously use dividends from investments to service your mortgage but we are all calling those real dividends so my point is let's give scenario 2 credit for being essentially a dividend.  Your capital in the house is an illiquid investment but it's giving you what amounts to a dividend once you have paid off the mortgage.

If you have no income, and you have a house that is paid for, where is the dividend?

Vinivedivichi

  • 5 O'Clock Shadow
  • *
  • Posts: 56
I'm not arguing that point, I'm just saying that you have to acknowledge the liquidity of a paid mortgage.  It's a de-facto dividend just like your investments.  Someone said there's no dividend unless you rent your home out but that's not true the lack of a mortgage payment is essentially a dividend. 

Hmm.  You can look at it like a dividend, but it isn't like your investments.    Dividends typically increase over time, at least one hopes so.  but in this case, the "dividend" is fixed and ultimately comes to an end when the mortgage would have been paid off anyway.   I don't know of any other investments like that, and it doesn't sound  particularly desirable if you view it in that manner. 

That's why I like to view a paid mortgage as what it actually is:  A future savings.   You down pay the mortgage now so you don't have to pay it later.   There are lots of nice things about having a future savings.   But there is a significant opportunity cost in order to get those future savings.

Dividends do not necessarily increase over time.  Returns do (due to compounding), but dividends do not (they are at the mercy of the corporation paying them).  I also disagree that the dividend comes to an end.  It is paid in perpetuity.  Your capital is still tied into your home after the original end of the 30 year (or whatever) mortgage term (that is not a good thing) but you still have the benefit of no debt service payments and/or rent payments.  The dividend is in perpetuity.  Just like if you wait til the 30 year mortgage term is complete, starting year one you are getting the same dividend (this is simplistic since in reality you're paying less interest as you go since principal is smaller, but at the end of the mortgage is when the you get to monetize the unpaid interest).  The alternative is to refinance at the end of the 30 years (after paid) and invest the proceeds.  You then have not monetized your "house dividend" but in theory you should have investment gains to offset. 

I'm assuming all of you are paying interest only mortgages since paying principal makes no sense according to your fire plans or whatever?

boarder42

  • Walrus Stache
  • *******
  • Posts: 7845
I'm not arguing that point, I'm just saying that you have to acknowledge the liquidity of a paid mortgage.  It's a de-facto dividend just like your investments.  Someone said there's no dividend unless you rent your home out but that's not true the lack of a mortgage payment is essentially a dividend. 

Hmm.  You can look at it like a dividend, but it isn't like your investments.    Dividends typically increase over time, at least one hopes so.  but in this case, the "dividend" is fixed and ultimately comes to an end when the mortgage would have been paid off anyway.   I don't know of any other investments like that, and it doesn't sound  particularly desirable if you view it in that manner. 

That's why I like to view a paid mortgage as what it actually is:  A future savings.   You down pay the mortgage now so you don't have to pay it later.   There are lots of nice things about having a future savings.   But there is a significant opportunity cost in order to get those future savings.

Dividends do not necessarily increase over time.  Returns do (due to compounding), but dividends do not (they are at the mercy of the corporation paying them).  I also disagree that the dividend comes to an end.  It is paid in perpetuity.  Your capital is still tied into your home after the original end of the 30 year (or whatever) mortgage term (that is not a good thing) but you still have the benefit of no debt service payments and/or rent payments.  The dividend is in perpetuity.  Just like if you wait til the 30 year mortgage term is complete, starting year one you are getting the same dividend (this is simplistic since in reality you're paying less interest as you go since principal is smaller, but at the end of the mortgage is when the you get to monetize the unpaid interest).  The alternative is to refinance at the end of the 30 years (after paid) and invest the proceeds.  You then have not monetized your "house dividend" but in theory you should have investment gains to offset. 

I'm assuming all of you are paying interest only mortgages since paying principal makes no sense according to your fire plans or whatever?

interest only mortgages cant be had at a 4% FOREVER rate if they could i'm willing to bet most on this board myself included would jump on that.