Author Topic: The great "pay off mortage" vs "invest in stocks" debate - possible solution  (Read 75438 times)

Vinivedivichi

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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.

That's not really the point I was trying to make.  Use whatever numbers you want to use, my point is that you have a real monetized benefit. 

Vinivedivichi

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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.

Fair enough.  But then have you made a chart that shows you the point in time in which it's beneficial to refinance and max out your leverage again?  If not, then you should according to your methodology.  It will undoubtedly be beneficial at some point to refinance and get those max returns per your model.  Your welcome. 

BarkyardBQ

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

Refi'd in May from 4.625 to 2.875, the average principal to interest ratio on payments throughout the term is 3:1. What's the point in prepaying?

If I assume principal is cash I can get back in the future (adjusted for inflation with appreciation), my house expense is limited to interest, taxes, and insurance, which is still less than the principal, this is really cheap rent.
« Last Edit: October 02, 2015, 12:19:23 PM by BackyarBQ »

boarder42

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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.

Fair enough.  But then have you made a chart that shows you the point in time in which it's beneficial to refinance and max out your leverage again?  If not, then you should according to your methodology.  It will undoubtedly be beneficial at some point to refinance and get those max returns per your model.  Your welcome.

Large cashout REFI's over 100k lose the tax break on interest benefit so its probably somewhere in that neighborhood. 

Vinivedivichi

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

Your dividend is the fact that you can survive on no income.  In any other investment scenario your net gain is after you service your mortgage debt.  So it makes no sense to marginalize the benefit that you get from no mortgage payment since it clearly is monetized after you pay off your mortgage.  You can say that you can go out into the market and get a higher dividend.  Fine, I agree over the long term that is generally true.  But paying off your home is as real a dividend as you can get without putting cash in your hand. 

Vinivedivichi

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

Refi'd in May from 4.625 to 2.875, the average principal to interest ratio on payments throughout the term is 3:1. What's the point in prepaying?

No point in your situation.  I would say you made the right move. 

Vinivedivichi

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Large cashout REFI's over 100k lose the tax break on interest benefit so its probably somewhere in that neighborhood.

How much mortgage interest are you paying every year?  In many cases people overstate their perceived benefit of the mortgage deduction. 

boarder42

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its not a perceived benefit. if you itemize it is a tangible benefit.

Vinivedivichi

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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.

I just bolded you false assumption.  It's far too simplistic and general.  Hope that helps. 

Vinivedivichi

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its not a perceived benefit. if you itemize it is a tangible benefit.

You tell me the interest you're paying and your benefit and I'll explain why you're overstating your benefit. 

Telecaster

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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?

Two things:

1) I didn't say dividends always increase.  I said they typically increase.    I thought I made myself clear on that point, apologies if I didn't.

2)  By way of clarification, by the time we get to the end of the 30 year period, the question of paying off the mortgage early is moot.   In both cases, the mortgage is paid off.    So both sides have the same "dividend."

However, this reinforces my point that using the correct words is beneficial.   A paid off mortgage is a savings.   It is not a dividend, and there is no utility in thinking of it as a dividend.   

Vinivedivichi

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The first point doesn't really hold, still, because if you take the 5% of savings from your "house dividend" and invest, then you'll see compounding returns.  You can't assume in one scenario it's reinvested and in the other it's not. 

I agree with your second point, but I think the part you're missing is that whether you prepay or wait the whole term of the mortgage, at the end of the day you have sunk capital in that investment.  So, yes, you get the dividend in either scenario, but you also have all that capital trapped into your house whether you prepaid or waited.  But by being true to this max leverage mindset, you should refinance and turn that "house dividend" into an investment dividend (in fact, you should have refinanced long before it was paid off).  What I am hearing is that you really should never have a paid off mortgage because your settling for a lesser return than if you leveraged your house to invest (which is essentially the whole premise of this thread). 

I completely understand the argument for investing as opposed to prepaying, but I just think the arguments being made don't hold water in every fact pattern. In fact, I doubt in reality any of you practice what you preach to the letter of the law.  If you did, you would only have a 30 year mortgage, you would refinance regularly so that you could invest the proceeds, and you would scour credit card introductory low APR rates to invest that as well. 

Faraday

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I completely understand the argument for investing as opposed to prepaying, but I just think the arguments being made don't hold water in every fact pattern. In fact, I doubt in reality any of you practice what you preach to the letter of the law.  If you did, you would only have a 30 year mortgage, you would refinance regularly so that you could invest the proceeds, and you would scour credit card introductory low APR rates to invest that as well.

Of course they don't practice what they preach. They are here flailing at you as hard as they can because their wife left 'em, their dog bit 'em, or they just lost their job and it was someone else's fault.  This crap about it being "just math" is fool's talk about statistics and market history. Ironically, right now the equities market is in the shitter. Negative yields on an index fund year-to-date? How delicious!

They don't have that awesome ARM or all-interest loan because their FICO score sucks so bad even Guido the Loanshark won't take a chance on 'em.  Besides, if they prepay the mortgage, they won't be able to put gas in that luxury 4x4 F-150 they drive to work every day.

I used Betterment as an investment tool for a year and closed the account with exactly the same money I deposited into the account, not one penny more. That's 0% yield from an investment firm everyone practically gushes about. Betterment will say all day long it yielded 4.5%, but I'm not able to make one damned mortgage payment with that kind of elfin magic.

If I had a dollar for every time some investment-type told me I "earned 7%!" when I got low-to-negative returns....

THAT's my main argument against the "invest don't prepay you idiot" crowd. I just simply don't believe I can earn more with investing than prepaying the mortgage.

EDIT: Dear God, the name of this thread must have brought them out like flies to cowshit. Maybe we need to start a new thread and name it "Kittens and Puppies" or "How Bad Does Fantasy Football Suck?". Oh, wait, scratch that last one. There's one fly I know it will attract....
« Last Edit: October 02, 2015, 01:37:17 PM by mefla »

Telecaster

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^ You sound like a delightful person to share a beer with.   

Vinivedivichi

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Haha I love it. In all seriousness though this is how you know the market is headed for a correction. When taking a guaranteed 5% return is generating rebuttals from all these gurus. I love to see how these steel jaws hold up during a correction.

BarkyardBQ

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Taking a guaranteed return (whatever the rate is, mine is 2.875%) over YTD negative returns is completely irrelevant. There is no way the math suggests that THIS month the market is down, I should put 72% of my income toward my mortgage because 2.875 is better than -10 for this month... I hope that's not your argument, short term fluctuations are already accounted for in the math of investing vs paying down.

Vinivedivichi

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Who said that besides you?

Faraday

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Taking a guaranteed return (whatever the rate is, mine is 2.875%) over YTD negative returns is completely irrelevant. There is no way the math suggests that THIS month the market is down, I should put 72% of my income toward my mortgage because 2.875 is better than -10 for this month... I hope that's not your argument, short term fluctuations are already accounted for in the math of investing vs paying down.

Quit making up straw men you goober. My argument is "Because 2008".
It took me 5 years to recover from that and it still wasn't an actual recovery. The time-value of that money is gone forever. Five years when I could have been doing mortgage paydown. God, I hate myself sometimes.

BarkyardBQ

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Wasn't even replying to you, but that's how disorganized this is getting. Once again, since you guys don't post any facts, math, data, or dates, no one can properly reply to your statements. I'll just sign off from this thread.
« Last Edit: October 02, 2015, 02:31:53 PM by BackyarBQ »

Vinivedivichi

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It's logic. The math follows the logic.

Telecaster

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^ Since Sept. 2008, the S&P 500, including dividends, has returned 9.1% annualized.  My mortgage is 3.5%.   I am delighted.

However, in your situation you are absolutely correct that you should not be in the stock market.  If the volatility keeps you up at night or otherwise makes you feel regret, then do not invest there and pay down the house instead.   

I'm on the flip side of the coin from you.  I just sort of assumed paying off the mortgage early was a good idea.    I diligently made extra payments, and some months I even made double payments.   Then I did the math and realized I was making a financial mistake.   My net worth would be much higher today if I hadn't done that.   I've been through a few market corrections, for the record.   

Vinivedivichi

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Since sept 2008?  That's pretty much the bull market. Look longer term and make sure you factor fund expenses.

Telecaster

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Since sept 2008?  That's pretty much the bull market. Look longer term and make sure you factor fund expenses.

 mefla said that "2008" was his argument, so I went back exactly seven years to 2008.   For the record, 2008 was not a bull market.  The S&P was down something like -35% that year.   If that's pretty much a bull, I'd hate to see a bear.   

But since you don't like 2008, lets go back to Sept. 2007 which was the worst possible time to be in the market, pretty much the peak right before it crashed, and we get....5.6% annualized, including dividends.   Remove another 0.02% for expenses, if you like.   

However, I agree the time frames are not nearly long enough (looking at returns YTD is a red herring).    Since the length of a typical mortgage is 30 years, it only makes sense to look at likely returns over 30-year periods.   Going back to Sept. 1985, we get 10.6% annualized, including dividends.   

In fact, if we look closer, we find there are no 30 year periods where the S&P500, including dividends, returned less than 8% annualized.  The median is 10%, the high 14%.   

I've done this calculation from every  angle, using a blue million different assumptions, different rates of return, different tax assumptions, etc.  And there are no reasonable set of assumptions where paying off the mortgage makes sense.   In every scenario, you wind up with moderately to vastly more money at the end of 30 years if you simply invest.   Yes, the future could be worse than past, etc.  but that's the math.   

Again, I want to emphasize, in your situation you are absolutely correct that you should not be in the stock market.  If the volatility keeps you up at night or otherwise makes you feel regret, then do not invest there and pay down the house instead.    That goes triply so if you view the market being down YTD as some sort of validation of your views.   





NoNonsenseLandlord

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Having paid off my own home mortgage, and 4 rental property mortgages, I sleep WAY better knowing I have a 6-figure rental cash flow AFTER all expenses, than I would knowing that money was in the market.  I still have a decent stash, just not as much as I would otherwise have.

I am also well on the way to paying off another mortgage (5.375%), with the payoff just before FIRE.

Maybe it makes financial sense to pay it off, maybe not.  My cash flow has plenty of cushion now to LBYM even in FIRE.  By quite a bit.

Taran Wanderer

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Having paid off my own home mortgage, and 4 rental property mortgages, I sleep WAY better knowing I have a 6-figure rental cash flow AFTER all expenses, than I would knowing that money was in the market.  I still have a decent stash, just not as much as I would otherwise have.

I am also well on the way to paying off another mortgage (5.375%), with the payoff just before FIRE.

Maybe it makes financial sense to pay it off, maybe not.  My cash flow has plenty of cushion now to LBYM even in FIRE.  By quite a bit.

This makes sense to me.  Most of the rest of the comments on this topic are like blah blah blah blah, and the same blah blah repeated over and over again.  You can analyze it all you want, but I'm convinced that paying off the mortgage vs. investing is a rational decision based on fundamental emotional values about money, risk, and life.  Personal finance is not all about economic optimization.  That's why it's called personal finance.

brooklynguy

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Might there be other ways to leverage that are more efficient? 

What makes today's mortgage debt so well-suited for use in leveraged investing is its combination of being (i) low rate, (ii) fixed rate, and (iii) long term.  I don't think the debt used by leveraged closed end funds equally fits the bill (plus, if you use those, you are limited to the investments selected by the fund (so you couldn't use, say, VTSAX as your investment)), and I'm not aware of any other form of debt available to retail investors that is comparable or better than mortgage debt for the purpose of leveraged investing (but I too would be interested in hearing if anybody else is).

That said, even if such debt were available, it still doesn't change the answer to the question of whether the better approach for someone with a mortgage loan is to prepay it or invest instead (unless having the mortgage debt outstanding would affect your ability to obtain that other debt).

Telecaster

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That brings up another basic question here, which is "what level of leverage is optimal?"  Many posters seem to be debating whether to have "no mortgage leverage" or "mortgage leverage" but all leverage will increase portfolio risk.  So in addition to "what type of leverage?" one needs to ask "how much leverage?" and understand how much leverage they have across their portfolio.  Theoretically, leverage could come from recourse debt, nonrecourse debt, embedded leverage (borrowings by your investments), and construction leverage (based on how the portfolio is constructed).  It seems one would need to know the answers to these questions to determine whether mortgage debt is appropriate.  At the end of the day all debt will add risk and the question is how robust the overall portfolio is to surprise conditions.

In addition to brooklynguy's list why mortgages work well for leverage in this case, namely (i) low rate, (ii) fixed rate, and (iii) long term, I would also add (iv) non-callable.  Margin interest tends to be lower than mortgage interest, but I wouldn't consider getting a margin loan to buy stocks.   Margin calls tend to come when your portfolio drops, which is exactly when you don't want them.   No thanks, not interested in going there.

One the flip side, if I could buy a cash-flowing rental property for 0% down, that is, 100% leverage, I'd jump all over it (within reason of course).   Point is, not all leverage is created equal.   Real estate is one scenario where lots of leverage is considered reasonably safe.   

And I disagree that all leverage increases portfolio risk.  Let's look at the mortgage example again.  Investor A puts his extra money in the market, Investor B uses his extra money to pay down the mortgage.   After about say, 10 years some major life crisis happens.  Big layoff, divorce, serious illness and can't work, etc. etc.  Investor A has money to continue to pay the mortgage for years, if necessary.   Investor B's money is tied up in the house where might not be accessible at all with no job, and runs a real risk of losing his house.     Which scenario is riskier?   




Cheddar Stacker

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In addition to brooklynguy's list why mortgages work well for leverage in this case, namely (i) low rate, (ii) fixed rate, and (iii) long term, I would also add (iv) non-callable.

And I'll add:
(v) tax deductible. We all know that already, but since this discussion has turned to margin loans leveraged against your  investments it's an important thing to point out.

On a margin loan, your 1099 from the brokerage lists your margin interest. You put that on your schedule A in roughly the same spot as mortgage interest. However, margin interest is only deductible against investment income taxed at ordinary rates (interest income, ordinary dividends, s/t capital gains). Sometimes the interest you pay isn't deducted in the year you pay it, and it carries forward. Eventually you should be able to use it, but not always, and not always right away.

If anyone out there has a lot of margin loan interest they can't typically deduct I have a little trick for you. There's an election you can make on your return to have your Qualified investment gains taxed at ordinary rates, which allows you to then deduct your margin interest. Sometimes it helps a lot, sometimes it goes the other way. Worth a look though if you're never able to deduct this.

tonysemail

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Having paid off my own home mortgage, and 4 rental property mortgages, I sleep WAY better knowing I have a 6-figure rental cash flow AFTER all expenses, than I would knowing that money was in the market.  I still have a decent stash, just not as much as I would otherwise have.

I am also well on the way to paying off another mortgage (5.375%), with the payoff just before FIRE.

Maybe it makes financial sense to pay it off, maybe not.  My cash flow has plenty of cushion now to LBYM even in FIRE.  By quite a bit.

does having such a high rental income preclude one from starting a roth conversion ladder?

if so, that seems like a big tax burden and I think it'd make me sleep worse!

undercover

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Re: The great "pay off mortage" vs "invest in stocks" debate - possible solution
« Reply #279 on: November 06, 2015, 08:37:42 AM »
Don't mean to revive this thread, but...I'm about to be in this situation. 4% for 30 years. Unless the market yields an inflation-adjusted return of greater than 4%, isn't paying the mortgage off better? I'm also considering the fact that itemizing will do nothing for my taxes. I think realistically I would go half/half -half on the mortgage principle and invest half of any excess income.

dandarc

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Re: The great "pay off mortage" vs "invest in stocks" debate - possible solution
« Reply #280 on: November 06, 2015, 08:48:29 AM »
Don't mean to revive this thread, but...I'm about to be in this situation. 4% for 30 years. Unless the market yields an inflation-adjusted return of greater than 4%, isn't paying the mortgage off better? I'm also considering the fact that itemizing will do nothing for my taxes. I think realistically I would go half/half -half on the mortgage principle and invest half of any excess income.
Doesn't need to be an inflation adjusted return .  Even if it did, the long-term real return of the S&P 500 has been in the 6-7% range.

The math is strongly in favor of paying the minimum and investing the difference.  That being said, I'm paying ours off early at 3.375%, but only after maxing our tax-advantaged accounts each year.  Better decision than spending it on hookers & blow.  Not 100% optimal, but will be nice to live in a paid for house starting some time next year.  Our mortgage has always been a pretty small part of our financial world, so it isn't as huge a deal for us as it is for a lot of folks.

boarder42

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Re: The great "pay off mortage" vs "invest in stocks" debate - possible solution
« Reply #281 on: November 06, 2015, 08:54:19 AM »
Don't mean to revive this thread, but...I'm about to be in this situation. 4% for 30 years. Unless the market yields an inflation-adjusted return of greater than 4%, isn't paying the mortgage off better? I'm also considering the fact that itemizing will do nothing for my taxes. I think realistically I would go half/half -half on the mortgage principle and invest half of any excess income.

Investing wins in your case hands down. Only reason to pay it off would be to delay your fire to give yourself a false sense of security. No actual Mathematical security in paying it off early at those rates. 

Faraday

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Re: The great "pay off mortage" vs "invest in stocks" debate - possible solution
« Reply #282 on: November 06, 2015, 08:56:25 AM »
Don't mean to revive this thread, but...I'm about to be in this situation. 4% for 30 years. Unless the market yields an inflation-adjusted return of greater than 4%, isn't paying the mortgage off better? I'm also considering the fact that itemizing will do nothing for my taxes. I think realistically I would go half/half. Pay half and invest half of any excess income. That way, you get the benefit of both worlds.

There's been a LOT of threads about this on the forums. Of course, this thread, but also:
http://forum.mrmoneymustache.com/throw-down-the-gauntlet/mortgage-payoff-club!!/?topicseen
and...
http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/


What you'll find here is a predisposition for most savings investors to prioritize saving/investing over mortgage principal abatement. For example: I prioritize all my pre-tax 401k savings far above paying down the mortgage because of the annual tax benefits for me, since I itemize. But I treat my post-tax money differently - I've become frugal enough that now I've got big lumps of post-tax money I can use to pay down the principal on my mortgage loan.

While I acknowledge that the market will likely outperform my mortgage interest rate over the long term, I'm working within a five year plan, so I've gone from long-term concerns to very short-term concerns. So rather than invest heavily post-tax, right now I'm using post-tax money to pay down the mortgage.

And what I mean by "pay down the mortgage" is not that I am pre-paying mortgage payments. I make a specific payment earmarked to decreasing principal only, which is mortgage principal abatement.
« Last Edit: November 06, 2015, 08:58:39 AM by Faraday »

boarder42

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Re: The great "pay off mortage" vs "invest in stocks" debate - possible solution
« Reply #283 on: November 06, 2015, 09:11:33 AM »
Just because you can pay it down in 5years doesn't make that the right decision Mathematically. It's actually beneficial to most here to hold a mortgage in retirement as it creates a huge inflation hedge. So paying it off early will likely cost you security in retirement as well

It's not like the world stops spinning when your mortgage is paid off. You're still going to be living for many years after that so that money couldve been invested and growing vs tied up in an asset that just keeps up with inflation that is very illiquid.

If you gotba 300k windfall today and had a 300k mortgage and are less than 50. It doesn't matter that you can pay it off today bc who knows what the market will do over one day. You're still costing yourself long term.

undercover

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Re: The great "pay off mortage" vs "invest in stocks" debate - possible solution
« Reply #284 on: November 06, 2015, 09:20:15 AM »
Don't mean to revive this thread, but...I'm about to be in this situation. 4% for 30 years. Unless the market yields an inflation-adjusted return of greater than 4%, isn't paying the mortgage off better? I'm also considering the fact that itemizing will do nothing for my taxes. I think realistically I would go half/half -half on the mortgage principle and invest half of any excess income.
Doesn't need to be an inflation adjusted return

Why not? I know it's impossible to predict inflation, and I'm sure the market regularly returns >4% after inflation, but I still think inflation is a key variable here. Inflation doesn't affect interest on the mortgage payment because it's fixed - it's a guaranteed 4% return

[edit] Maybe I'm wrong - maybe you do need to adjust for inflation in that "guaranteed 4%" return? So the real return on making extra payments is ~1% assuming 3% of inflation?
« Last Edit: November 06, 2015, 09:45:05 AM by undercover »

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Re: The great "pay off mortage" vs "invest in stocks" debate - possible solution
« Reply #285 on: November 06, 2015, 09:32:19 AM »
Don't pay off your mortgage its simple. No need to think anymore. Invest what you would use to pay it down. You'll be happy you made this choice.

Let's just for 1 second assume you knew Mathematically it was 100% equal as far as you would have the same balance in your stock account at the end of 30 years paying it off vs not paying it off.

You now have a large sum of money tied up in something that's not even close to easy to liquidate. It's one of the most illiquid assets you can have.  Say you or a family member comes down with some ridiculously crazy disease or accident that costs you more than you have saved in your efund in 15 years.

Paid off house version will now have to go take a loan out against your home at whatever that rate is at the time to pay it off. And very worst case you're forced to quickly sell your house under undesirable conditions quickly.

Vs large cash fund can instantly tap money.  And work on figuring out how to rebuild it later.

I mean even a "risk averse person" should see having your money tied up like that is more risky. 

And if you want to play but what if the stock market sucks over 30 years. Well then we're all never retiring here. So who cares which path you pick.

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Re: The great "pay off mortage" vs "invest in stocks" debate - possible solution
« Reply #286 on: November 06, 2015, 09:41:53 AM »
If you were going to invest $1K a month in a 90/10 protfolio. Could you consider paying off your mortage as your bond allocation? Depending on your interest rate that might ba a good middle ground. Unless im missing something.

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Re: The great "pay off mortage" vs "invest in stocks" debate - possible solution
« Reply #287 on: November 06, 2015, 09:46:31 AM »
I still say...

If your balance/interest is low, save for FIRE, payoff to retire.

IE... get your Nut, then reduce your housing expenses and have a larger nut.

In 10 years after we reach our FIRE goal, it will take 5 months to pay off the last 5 years of the mortgage. 5 months to wind down our careers and lock in extra sustainability for our portfolio.

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Re: The great "pay off mortage" vs "invest in stocks" debate - possible solution
« Reply #288 on: November 06, 2015, 09:50:06 AM »
Don't mean to revive this thread, but...I'm about to be in this situation. 4% for 30 years. Unless the market yields an inflation-adjusted return of greater than 4%, isn't paying the mortgage off better? I'm also considering the fact that itemizing will do nothing for my taxes. I think realistically I would go half/half -half on the mortgage principle and invest half of any excess income.
Doesn't need to be an inflation adjusted return
Why not? I know it's impossible to predict inflation, and I'm sure the market regularly returns >4% after inflation, but I still think inflation is a key variable here. Inflation doesn't affect interest on the mortgage payment because it's fixed - it's a guaranteed 4% return
[edit] Maybe I'm wrong - maybe you do need to adjust for inflation in that "guaranteed 4%" return? So the real return on making extra payments is ~1% assuming 3% of inflation?

Think about what happens if inflation gets very bad - say, 10%.  If the market return merely fails to keep up with inflation by 2%, you still get an 8% return from the market while you are paying 4% on the mortgage.  That is an example of what people mean when they say "holding a low interest mortgage is a hedge against inflation."

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Re: The great "pay off mortage" vs "invest in stocks" debate - possible solution
« Reply #289 on: November 06, 2015, 10:11:39 AM »
Don't mean to revive this thread, but...I'm about to be in this situation. 4% for 30 years. Unless the market yields an inflation-adjusted return of greater than 4%, isn't paying the mortgage off better? I'm also considering the fact that itemizing will do nothing for my taxes. I think realistically I would go half/half -half on the mortgage principle and invest half of any excess income.
Doesn't need to be an inflation adjusted return
Why not? I know it's impossible to predict inflation, and I'm sure the market regularly returns >4% after inflation, but I still think inflation is a key variable here. Inflation doesn't affect interest on the mortgage payment because it's fixed - it's a guaranteed 4% return
[edit] Maybe I'm wrong - maybe you do need to adjust for inflation in that "guaranteed 4%" return? So the real return on making extra payments is ~1% assuming 3% of inflation?

Think about what happens if inflation gets very bad - say, 10%.  If the market return merely fails to keep up with inflation by 2%, you still get an 8% return from the market while you are paying 4% on the mortgage.  That is an example of what people mean when they say "holding a low interest mortgage is a hedge against inflation."

For some reason in my head I thought I had to compare the 4% mortgage interest rate to the inflation adjusted return of the market. I guess this isn't fair to say because even if you paid an extra $1000 on your mortgage in a year and saved $40 in interest, that $40 is still only worth as much as the inflation adjusted amount. So I guess the correct comparison is leaving inflation out of it and just looking at returns. In that case, I agree - investing the difference in the market or other assets makes much more sense.

I guess the only reason to pay off the house early would be to hedge against the worst - a bad recession where your stocks are worth nothing much less but you have a paid off house. But something to consider is that the 4% return is risk free - and much higher than the 30 yr treasury rate. The 8% is not without its risks. I agree that investing in the market makes much more sense mathematically if these figures hold true.

I think the MMM crowd is an adaptable bunch though, so I suppose it does make sense to take the risks considering if the market doesn't continue to return >7% then we'll all be working anyway. The most realistic worse case scenario I could think of is a 4% market return, where you break even, but still have a very liquid portfolio.
« Last Edit: November 06, 2015, 10:34:35 AM by undercover »

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Re: The great "pay off mortage" vs "invest in stocks" debate - possible solution
« Reply #290 on: November 06, 2015, 10:25:32 AM »
We have 4 rental homes.  They all started leveraged at 80%.  Once a certain level of equity is reached in each one, we plan to sell and invest the proceeds in stocks.  The rentals are just a means to an end.  Once we have enough for full FI, there is no longer any reason to have them as we prefer the passive investment approach of ETFs.  Without the leverage and tax write-offs, we wouldn't invest directly in real estate. 

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Re: The great "pay off mortage" vs "invest in stocks" debate - possible solution
« Reply #291 on: November 06, 2015, 12:29:15 PM »
Don't mean to revive this thread, but...I'm about to be in this situation. 4% for 30 years. Unless the market yields an inflation-adjusted return of greater than 4%, isn't paying the mortgage off better? I'm also considering the fact that itemizing will do nothing for my taxes. I think realistically I would go half/half -half on the mortgage principle and invest half of any excess income.
Doesn't need to be an inflation adjusted return
Why not? I know it's impossible to predict inflation, and I'm sure the market regularly returns >4% after inflation, but I still think inflation is a key variable here. Inflation doesn't affect interest on the mortgage payment because it's fixed - it's a guaranteed 4% return
[edit] Maybe I'm wrong - maybe you do need to adjust for inflation in that "guaranteed 4%" return? So the real return on making extra payments is ~1% assuming 3% of inflation?

Think about what happens if inflation gets very bad - say, 10%.  If the market return merely fails to keep up with inflation by 2%, you still get an 8% return from the market while you are paying 4% on the mortgage.  That is an example of what people mean when they say "holding a low interest mortgage is a hedge against inflation."

For some reason in my head I thought I had to compare the 4% mortgage interest rate to the inflation adjusted return of the market. I guess this isn't fair to say because even if you paid an extra $1000 on your mortgage in a year and saved $40 in interest, that $40 is still only worth as much as the inflation adjusted amount. So I guess the correct comparison is leaving inflation out of it and just looking at returns. In that case, I agree - investing the difference in the market or other assets makes much more sense.

I guess the only reason to pay off the house early would be to hedge against the worst - a bad recession where your stocks are worth nothing much less but you have a paid off house. But something to consider is that the 4% return is risk free - and much higher than the 30 yr treasury rate. The 8% is not without its risks. I agree that investing in the market makes much more sense mathematically if these figures hold true.

I think the MMM crowd is an adaptable bunch though, so I suppose it does make sense to take the risks considering if the market doesn't continue to return >7% then we'll all be working anyway. The most realistic worse case scenario I could think of is a 4% market return, where you break even, but still have a very liquid portfolio.

how does having a paid off house during as you say the worst recession ever hits?

if what you speak of happens everything this site is built on emplodes..  if youre retired... you're not getting a job. 

in actuality a mortgage is a hedge AGAINST high inflation.  which in a worst depression ever would be marked by crazy inflation most likely.

the stock market armageddon sends the entire world into chaos.   

undercover

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Re: The great "pay off mortage" vs "invest in stocks" debate - possible solution
« Reply #292 on: November 06, 2015, 01:17:11 PM »
Don't mean to revive this thread, but...I'm about to be in this situation. 4% for 30 years. Unless the market yields an inflation-adjusted return of greater than 4%, isn't paying the mortgage off better? I'm also considering the fact that itemizing will do nothing for my taxes. I think realistically I would go half/half -half on the mortgage principle and invest half of any excess income.
Doesn't need to be an inflation adjusted return
Why not? I know it's impossible to predict inflation, and I'm sure the market regularly returns >4% after inflation, but I still think inflation is a key variable here. Inflation doesn't affect interest on the mortgage payment because it's fixed - it's a guaranteed 4% return
[edit] Maybe I'm wrong - maybe you do need to adjust for inflation in that "guaranteed 4%" return? So the real return on making extra payments is ~1% assuming 3% of inflation?

Think about what happens if inflation gets very bad - say, 10%.  If the market return merely fails to keep up with inflation by 2%, you still get an 8% return from the market while you are paying 4% on the mortgage.  That is an example of what people mean when they say "holding a low interest mortgage is a hedge against inflation."

For some reason in my head I thought I had to compare the 4% mortgage interest rate to the inflation adjusted return of the market. I guess this isn't fair to say because even if you paid an extra $1000 on your mortgage in a year and saved $40 in interest, that $40 is still only worth as much as the inflation adjusted amount. So I guess the correct comparison is leaving inflation out of it and just looking at returns. In that case, I agree - investing the difference in the market or other assets makes much more sense.

I guess the only reason to pay off the house early would be to hedge against the worst - a bad recession where your stocks are worth nothing much less but you have a paid off house. But something to consider is that the 4% return is risk free - and much higher than the 30 yr treasury rate. The 8% is not without its risks. I agree that investing in the market makes much more sense mathematically if these figures hold true.

I think the MMM crowd is an adaptable bunch though, so I suppose it does make sense to take the risks considering if the market doesn't continue to return >7% then we'll all be working anyway. The most realistic worse case scenario I could think of is a 4% market return, where you break even, but still have a very liquid portfolio.

how does having a paid off house during as you say the worst recession ever hits? Because you have a paid off place to live and your market money is worth much less? Doesn't sound too complicated.

if what you speak of happens everything this site is built on emplodes..  if youre retired... you're not getting a job.  I'm not saying it will. And I definitely don't believe that if you quit a job you can never get another, retired or not.

in actuality a mortgage is a hedge AGAINST high inflation.  which in a worst depression ever would be marked by crazy inflation most likely. Even in this scenario, you're going to have trouble paying your mortgage.

the stock market armageddon sends the entire world into chaos. Which means that real assets would be worth more than paper, no?

I was not suggesting that having a paid off house is still better most of the time, just that there ARE scenarios in which it could be. A 4% guaranteed return is still much higher than the risk free rate, so there is a place for it in one's portfolio, I would argue, especially since it's tied to a real asset.
« Last Edit: November 06, 2015, 01:32:12 PM by undercover »

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Re: The great "pay off mortage" vs "invest in stocks" debate - possible solution
« Reply #293 on: November 06, 2015, 03:34:58 PM »
Don't mean to revive this thread, but...I'm about to be in this situation. 4% for 30 years. Unless the market yields an inflation-adjusted return of greater than 4%, isn't paying the mortgage off better? I'm also considering the fact that itemizing will do nothing for my taxes. I think realistically I would go half/half -half on the mortgage principle and invest half of any excess income.
Doesn't need to be an inflation adjusted return
Why not? I know it's impossible to predict inflation, and I'm sure the market regularly returns >4% after inflation, but I still think inflation is a key variable here. Inflation doesn't affect interest on the mortgage payment because it's fixed - it's a guaranteed 4% return
[edit] Maybe I'm wrong - maybe you do need to adjust for inflation in that "guaranteed 4%" return? So the real return on making extra payments is ~1% assuming 3% of inflation?

Think about what happens if inflation gets very bad - say, 10%.  If the market return merely fails to keep up with inflation by 2%, you still get an 8% return from the market while you are paying 4% on the mortgage.  That is an example of what people mean when they say "holding a low interest mortgage is a hedge against inflation."

For some reason in my head I thought I had to compare the 4% mortgage interest rate to the inflation adjusted return of the market. I guess this isn't fair to say because even if you paid an extra $1000 on your mortgage in a year and saved $40 in interest, that $40 is still only worth as much as the inflation adjusted amount. So I guess the correct comparison is leaving inflation out of it and just looking at returns. In that case, I agree - investing the difference in the market or other assets makes much more sense.

I guess the only reason to pay off the house early would be to hedge against the worst - a bad recession where your stocks are worth nothing much less but you have a paid off house. But something to consider is that the 4% return is risk free - and much higher than the 30 yr treasury rate. The 8% is not without its risks. I agree that investing in the market makes much more sense mathematically if these figures hold true.

I think the MMM crowd is an adaptable bunch though, so I suppose it does make sense to take the risks considering if the market doesn't continue to return >7% then we'll all be working anyway. The most realistic worse case scenario I could think of is a 4% market return, where you break even, but still have a very liquid portfolio.

how does having a paid off house during as you say the worst recession ever hits? Because you have a paid off place to live and your market money is worth much less? Doesn't sound too complicated.

if what you speak of happens everything this site is built on emplodes..  if youre retired... you're not getting a job.  I'm not saying it will. And I definitely don't believe that if you quit a job you can never get another, retired or not.

in actuality a mortgage is a hedge AGAINST high inflation.  which in a worst depression ever would be marked by crazy inflation most likely. Even in this scenario, you're going to have trouble paying your mortgage.

the stock market armageddon sends the entire world into chaos. Which means that real assets would be worth more than paper, no?

I was not suggesting that having a paid off house is still better most of the time, just that there ARE scenarios in which it could be. A 4% guaranteed return is still much higher than the risk free rate, so there is a place for it in one's portfolio, I would argue, especially since it's tied to a real asset.

if the market crashes to the point you're expecting it wont matter if you have a house or not you may as well invest in guns and ammo.  b/c that will be what gets you want you want. 

"having a place to live" if the dollar is worth nothing b/c of a the armageddon crash you're talking about gets you next to nothing unless you're so remote and self sustainable no one wants to live where you are or cares to seek you out.

whether you "own your home" or a bunch of stocks worth nothing you're talking about mass anarchy at that point

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Re: The great "pay off mortage" vs "invest in stocks" debate - possible solution
« Reply #294 on: November 06, 2015, 03:36:34 PM »
a home isnt "a part of a portfolio" 

a mortgage is - its an inflation hedge.

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Re: The great "pay off mortage" vs "invest in stocks" debate - possible solution
« Reply #295 on: November 06, 2015, 05:04:54 PM »
a home isnt "a part of a portfolio" 

a mortgage is - its an inflation hedge.

In a doomsday scenario, I agree with you - it doesn't matter what you own if it isn't guns & ammo. I'm certainly not worried about a doomsday scenario.

But there are plenty of scenarios where the market may return close to nothing (think Japan, depending on when you started) and your house still be worth a lot in a functioning society.

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Re: The great "pay off mortage" vs "invest in stocks" debate - possible solution
« Reply #296 on: November 06, 2015, 05:59:13 PM »
a home isnt "a part of a portfolio" 

a mortgage is - its an inflation hedge.

In a doomsday scenario, I agree with you - it doesn't matter what you own if it isn't guns & ammo. I'm certainly not worried about a doomsday scenario.

But there are plenty of scenarios where the market may return close to nothing (think Japan, depending on when you started) and your house still be worth a lot in a functioning society.

so if japan happens we burn this site to the ground and who the F cares what you own, you're still working.  this site is about early retirement.  owning your home in a shitty market like japan while relying on stocks for your retirement gives you no advantage per say over the guy who doesn't ... long term youre F'd and you have to go back to work at some point .

i mean so go ahead pay off your mortgage retire after the rest of us get hit by some hyper inflation year (more likely than japan) and go back to work then.  this horse has been beat forwards backwards upside down and sideways.  maths are maths.  either believe them and live in the comfort of logic or choose to live in a false sense of fear ...

you can have a FIRE based on VTSAX AND a paid off house but you wont be as safe as the guy who doesn't ... you know based on historical data. 

but by all means predict the future to be terrible ... at that point why even bother following along with this blog's philosophy.

even if you decided VTSAX and stock arent for you and you went rentals... the ROI on that still predicates you carry a mortgage to be safer.  its simple fundamental math based on historical data.  there isnt anything else to it but the assumption that ALL DEBT IS BAD DEBT ... NO ITS NOT...

its bad for people who spend vs invest the difference.


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Re: The great "pay off mortage" vs "invest in stocks" debate - possible solution
« Reply #297 on: November 06, 2015, 06:01:43 PM »
i mean the only arguement the payoff crowd really has is

"BUT WHAT IF.... " (fill in the blank with any crazy non historical math number you can fill into this block from people who live in AMERICA"

the other side is based on the fundamental principal behind this site which is longterm stock market returns. 

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Re: The great "pay off mortage" vs "invest in stocks" debate - possible solution
« Reply #298 on: November 06, 2015, 09:50:49 PM »
Wow....what an awesome thread!

It surprises me that in all of this discourse nobody has mentioned the benefit in some states of bankruptcy planning.  In Texas you can keep your house in a bankruptcy.  Without a mortgage this is a pretty big benefit to consider that enhances the "payoff for peace of mind" stance a bit. 

I had never really considered the tax benefits of paying it off because conversions would lead to higher marginal tax rates during draw down.  I guess this is mainly because I am still fairly young and don't really plan to make very low income after FIRE.  I still plan to work on my business after I quit my W2. 

Another thing to consider is that getting access to financing is more difficult without an income.  HELOCs are probably still obtainable, but I am not sure you'd get the same rates as you would if the real estate was financed when you had sizable income.   

The approach I have taken recently is to prepay a bit of our mortgage very slowly.  I realize that this is sub-optimal, but I don't really miss the small amount of money monthly and it is forcing us to be more diligent about saving and budgeting.  The inflation hedging is nice, but there has been little real inflation for many years now so it hasn't been as big of a deal as I'd hoped for when I originally bought our house. 

Overall the tax benefits combined with the inflation hedge make fixed-rate FNMA 30-year debt a no-brainer.  We pay 4.625% on our mortgage right now and can use the tax shields for roughly 25-39.6% (depending on the year) in federal taxes.  If you assume inflation will be 2-3% annually the money is ALMOST FREE in real terms even with low inflation.  I'm not sure how anyone can rationally argue that they'll have a hard time topping free money in real terms for even a short period of time. 

The sequence of returns risk thing should be able to be hedged with proper asset allocations and planning or with access to lines of credit or other short-term credit facilities during market dips. 

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Re: The great "pay off mortage" vs "invest in stocks" debate - possible solution
« Reply #299 on: November 07, 2015, 02:31:39 AM »
It surprises me that in all of this discourse nobody has mentioned the benefit in some states of bankruptcy planning.  In Texas you can keep your house in a bankruptcy.  Without a mortgage this is a pretty big benefit to consider that enhances the "payoff for peace of mind" stance a bit. 

And in many states you can keep your retirement funds--so that argument cuts both ways.  :)

Either way though, most of us here aren't planning on, or close to, BKing.  It's a factor, but a very tiny one for all of us, not likely to tip the scales from whichever way one was leaning.
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