The great "pay off mortage" vs "invest in stocks" debate - possible solution

[mr_orange]

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.

True....but this assumes that you aren't already maximizing your tax-deferred plans.  Some with high incomes are already doing this and thus keeping the mortgage means they'd have to divert those dollars to after-tax (and thus not BK-protected) accounts.

So this fits with the overall theme of the thread that things are somewhat situation dependent.  From my passage above I think it is very hard to justify prepaying the mortgage from a purely mathematical point of view. 

And yeah...nobody is planning on going BK.  We live in a crazy society though where anyone can sue anyone for anything at any time or where insurance companies can deny claims for a strange illness for one of your loved ones.  This should at least be a small part of your overall analysis.  For posters with small businesses you have to worry about this stuff more than others do most likely.  Again, things are situation dependent.  I could see a nice argument being made by wealthy people that they'd prefer the certainty of protection in bankruptcy to a small (or possibly bigger than small) yield spread between real portfolio returns and real mortgage prepayment returns because they're unable to shelter more with retirement accounts. 

[SnackDog]

Even if one was foolish enough to store cash in a paid-off property drifting along at inflation rates of appreciation, I think a nice HELOC would allow one to redeploy those at stock market rates of return. If you maim someone with your car and look likely to lose it all in a liability suit, just sell the stocks and pay off the HELOC until things clear up.  Of course, in some states (e.g. CA) the exemption is quite limited.

[BBub]

Storing cash in a paid-off property is hardly foolish.  Sub-optimal, perhaps.  But foolish?  Absolutely not.

[dmbsux]

Well, there's an angle I haven't heard mentioned on this site before (been lurking for a few years): if you're making extra principal payments on your mortgage, you're likely doing it with income that's been taxed - so in order to do that, you're paying FICA tax and marginal tax rate for the privilege of making extra principal payments.  In contrast, if you're instead investing in stocks with that same money, you *could* be doing it solely in tax deferred accounts: HSA that avoids FICA and marginal tax rate; 401K/403B/457 that defers taxes... but remember, you're not just deferring those taxes to a later date: if you do it right, you could end up paying 0% on that income if you stay in the 15% bracket in retirement. 

So folks can talk all they want about how paying down the mortgage gives them guaranteed returns and peace of mind, but they are also guaranteeing that they will pay more in taxes for that guaranteed return. 

[boarder42]

Well, there's an angle I haven't heard mentioned on this site before (been lurking for a few years): if you're making extra principal payments on your mortgage, you're likely doing it with income that's been taxed - so in order to do that, you're paying FICA tax and marginal tax rate for the privilege of making extra principal payments.  In contrast, if you're instead investing in stocks with that same money, you *could* be doing it solely in tax deferred accounts: HSA that avoids FICA and marginal tax rate; 401K/403B/457 that defers taxes... but remember, you're not just deferring those taxes to a later date: if you do it right, you could end up paying 0% on that income if you stay in the 15% bracket in retirement. 

So folks can talk all they want about how paying down the mortgage gives them guaranteed returns and peace of mind, but they are also guaranteeing that they will pay more in taxes for that guaranteed return.

401k is not 0% tax in retirement JUST by staying in a 15% bracket. If this were true it would be the greatest loop hole in tax code ever but unfortunately it's not. You pay 0% on ltcgs and qcds that's it. If those gains are in a 401k you're being taxed.