Author Topic: DONT Payoff your Mortgage Club  (Read 363208 times)

EngagedToFIRE

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Re: DONT Payoff your Mortgage Club
« Reply #1650 on: July 11, 2019, 10:34:07 AM »
I guess what people on this thread are trying to say, AnxietyFly, is that if you want to be gazelle intense, you should not pay off the mortgage. You should drag the mortgage out as long as possible, and aggressively invest every spare penny.

Do the math for yourself and see how it works out. If you have any questions about how to do the math, I know people here will be happy to help you.

Solon, I have been gazelle intense on investing the last 22 years. For example, my net worth has increased about 120k per year the last few years. I'm still investing but also paying off the house now. I really don't need to spare every penny because I have compound interest doing the heavy lifting.  Would it be better mathematically invest instead of payoff the house, maybe but my goal is to pay off the house.

You are doing great!  This is just a thread specifically full of people who believe keeping mortgages is a good thing so you are getting the expected responses.  It is a good thing for some, not for others.  Keep doing what works for you.  I paid off mine (both of them) as well and don't regret it even a tiny bit.  I'm ok with the potential missed opportunity of earning more in the market.  Feels too damn good being debt free and that has a monetary value for me, and you too, apparently.  Worth it's price.

But yeah, I agree with the previous comment that you are probably on the wrong thread if you just want to discuss paying off your mortgage.
« Last Edit: July 11, 2019, 10:35:43 AM by EngagedToFIRE »

nereo

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Re: DONT Payoff your Mortgage Club
« Reply #1651 on: July 12, 2019, 09:46:27 AM »
@AnxietyFly , I have to admit, posting about a 2.99% rate is what we like around here.

We wish you success in pursuing your financial goals. If you are open to arguments about putting more money toward investments, and decelerating your mortgage pay-off, please give us a chance.

Talltexan - thank you for the feedback. Right now, I am going gazelle speed on paying down the house. I doubt right now I'll change my mind.
Maybe that's because you haven't read through this thread.

I've read through the first page and understand the concept. Sounds like a good strategy for people willing to accept debt.

you are accepting debt by owning a house. You will have to pay that debt - in the form of taxes and obligatory insurance - in perpetuity regardless of whether you pay off your mortgage or not.  What you are really considering with regard to paying off a mortgage is whether you would rather have less debt with less money, or more debt with more money.  That and what proportion of your net worth do you feel comfortable with being tied to your home.
Traditionally these are referred to as assets and liabilities.  It is a mistake to believe that your housing liabilities will disappear once you have paid off your mortgage.  Likewise not all assets are equal in their volatility and appreciation potential.

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Re: DONT Payoff your Mortgage Club
« Reply #1652 on: July 12, 2019, 03:28:14 PM »
@AnxietyFly , I have to admit, posting about a 2.99% rate is what we like around here.

We wish you success in pursuing your financial goals. If you are open to arguments about putting more money toward investments, and decelerating your mortgage pay-off, please give us a chance.
Talltexan - thank you for the feedback. Right now, I am going gazelle speed on paying down the house. I doubt right now I'll change my mind.
Maybe that's because you haven't read through this thread.

I've read through the first page and understand the concept. Sounds like a good strategy for people willing to accept debt.

you are accepting debt by owning a house. You will have to pay that debt - in the form of taxes and obligatory insurance - in perpetuity regardless of whether you pay off your mortgage or not.  What you are really considering with regard to paying off a mortgage is whether you would rather have less debt with less money, or more debt with more money.  That and what proportion of your net worth do you feel comfortable with being tied to your home.
Traditionally these are referred to as assets and liabilities.  It is a mistake to believe that your housing liabilities will disappear once you have paid off your mortgage.  Likewise not all assets are equal in their volatility and appreciation potential.
❤❤❤❤❤❤ @nereo, you're a badass rockstar. Awesome explanation!

Peach

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Re: DONT Payoff your Mortgage Club
« Reply #1653 on: July 13, 2019, 09:49:10 AM »
I was raised with the concept that you should never have debt.  Mortgage debt, while acceptable, was something one tried to pay down as quickly as possible.  Many years ago when I bought my first home, if you found an interest rate of 10% on a mortgage, you were lucky.  Of course you wanted to pay that off as quickly as possible because the interest was so high.  But that was a different time and things have changed.  It took me a very long time to adjust my thinking to realize that the credit market has changed dramatically since I was young. 

We are in the middle of a 15-year mortgage at 2.5%.  We even committed the cardinal sin of mortgages -- we have one in retirement. Although we don't bring in a lot of money monthly, we still manage to continue saving while having a great life.  And I haven't even tapped into Social Security yet.

We have no credit card debt, but I would not hesitate to use one of the balance transfer offers with very low rates should we need to make a major purchase. I prefer it to taking from savings and always pay it off in full before the 0% ends.  So far we've put on a new roof, replaced the heat pump, paid for doggie operations, and replaced the fence this way.  The savings/investment accounts remain untouched and continue to grow.

I can certainly understand why paying off a mortgage early is the goal of many.  I also understand why some might feel particularly uneasy having a mortgage while in retirement.  All I can say is that having a very low rate mortgage has worked well for us in retirement.  Once I got over the "can't have any debt" thing, I learned how to use the extremely low interest rates to our advantage. With such a low rate, the only way we'll pay off our mortgage early will be if we move.

nereo

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Re: DONT Payoff your Mortgage Club
« Reply #1654 on: July 13, 2019, 06:09:06 PM »
I was raised with the concept that you should never have debt.  Mortgage debt, while acceptable, was something one tried to pay down as quickly as possible.  Many years ago when I bought my first home, if you found an interest rate of 10% on a mortgage, you were lucky.  Of course you wanted to pay that off as quickly as possible because the interest was so high.  But that was a different time and things have changed.  It took me a very long time to adjust my thinking to realize that the credit market has changed dramatically since I was young. 

We are in the middle of a 15-year mortgage at 2.5%.  We even committed the cardinal sin of mortgages -- we have one in retirement. Although we don't bring in a lot of money monthly, we still manage to continue saving while having a great life.  And I haven't even tapped into Social Security yet.

We have no credit card debt, but I would not hesitate to use one of the balance transfer offers with very low rates should we need to make a major purchase. I prefer it to taking from savings and always pay it off in full before the 0% ends.  So far we've put on a new roof, replaced the heat pump, paid for doggie operations, and replaced the fence this way.  The savings/investment accounts remain untouched and continue to grow.

I can certainly understand why paying off a mortgage early is the goal of many.  I also understand why some might feel particularly uneasy having a mortgage while in retirement.  All I can say is that having a very low rate mortgage has worked well for us in retirement.  Once I got over the "can't have any debt" thing, I learned how to use the extremely low interest rates to our advantage. With such a low rate, the only way we'll pay off our mortgage early will be if we move.

Certain financial transactions carry social stigmas.  Carrying debt on a loan is one.  A prenuptial contract is another.  We are often encouraged to act emotionally towards financially decisions ("kill the debt!"  "prenups are tacky!") even though every economist will urge objectivity in place of emotional decision making when it comes to money.

One of the things I have learned from these forums is that debt is unavoidable in our society, and in fact necessary for its operation.  We trade debt a hundred different ways every month - from our employers to our banks to our various purchases.  What matters is whether that debt is sensible and manageable.

Pizzabrewer

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Re: DONT Payoff your Mortgage Club
« Reply #1655 on: July 13, 2019, 06:27:07 PM »


I've read through the first page and understand the concept. Sounds like a good strategy for people willing to accept debt.

It's very short-sighted not to accept debt.  Using certain kinds of debt can make you wealthier than if you become completely debt-free. 

In other words, what's a more important goal to you?  Minimizing debt or maximizing wealth?  Because that's what this discussion boils down to.  Me, I'd prefer to maximize my wealth.
« Last Edit: July 14, 2019, 08:11:35 AM by Pizzabrewer »

kenmoremmm

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Re: DONT Payoff your Mortgage Club
« Reply #1656 on: July 13, 2019, 09:20:29 PM »
not poking a bear here, but is there anything similar to SORR with the DPOYMC mentality? like, someone could kill their mortgage off, in say 5 years, and during that 5 year period stocks were flat or down? would you come out ahead long term?

SwordGuy

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Re: DONT Payoff your Mortgage Club
« Reply #1657 on: July 13, 2019, 10:30:44 PM »
not poking a bear here, but is there anything similar to SORR with the DPOYMC mentality? like, someone could kill their mortgage off, in say 5 years, and during that 5 year period stocks were flat or down? would you come out ahead long term?

But isn't the best time to buy stocks when they are down? 

Then, when they go back up, you own way more shares than you otherwise would.

In a perfect stock investing world for me, stocks would stay low all thru my accumulation phase and then catch up to the historical average rate of return right before I retire.   I would be way richer that way because I would own lots more shares.



kenmoremmm

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Re: DONT Payoff your Mortgage Club
« Reply #1658 on: July 13, 2019, 11:29:21 PM »
not poking a bear here, but is there anything similar to SORR with the DPOYMC mentality? like, someone could kill their mortgage off, in say 5 years, and during that 5 year period stocks were flat or down? would you come out ahead long term?

But isn't the best time to buy stocks when they are down? 

Then, when they go back up, you own way more shares than you otherwise would.

In a perfect stock investing world for me, stocks would stay low all thru my accumulation phase and then catch up to the historical average rate of return right before I retire.   I would be way richer that way because I would own lots more shares.

how about: now, in 2019, after historic bull run. let's say stocks go flat for 2 years, then plunge come reelection of a (D) (everyone's theory, i guess), and don't recover to 2019 levels until 2027. IOW - TOP IS IN?

TomTX

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Re: DONT Payoff your Mortgage Club
« Reply #1659 on: July 14, 2019, 04:20:49 AM »
how about: now, in 2019, after historic bull run. let's say stocks go flat for 2 years, then plunge come reelection of a (D) (everyone's theory, i guess), and don't recover to 2019 levels until 2027. IOW - TOP IS IN?

Who is "everyone"? If anything, the data shows better market performance under Democrats, at least since Reagan.

https://www.cnn.com/interactive/2019/business/stock-market-by-president/index.html

Back on topic: Getting quotes for a cashout refi back to 30 years. Best I'm seeing is 3.75% with ~$4k closing costs. Texas does make cashout refi more expensive ( a bit higher rate) due to our legislative weirdness about the "homestead"
« Last Edit: July 14, 2019, 04:22:37 AM by TomTX »

nereo

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Re: DONT Payoff your Mortgage Club
« Reply #1660 on: July 14, 2019, 05:22:10 AM »
not poking a bear here, but is there anything similar to SORR with the DPOYMC mentality? like, someone could kill their mortgage off, in say 5 years, and during that 5 year period stocks were flat or down? would you come out ahead long term?

This has been discussed in this thread earlier, but the short(er) answer to your question is that the faster you can pay down your mortgage and then transition to saving, the less of an advantage there is to not paying down your mortgage.  However, there's a few things to unpack in that statement. 
First (and most importantly) - if you are prioritizing paying off the mortgage ahead of any and all savings, you are at your most vulnerable during that period of payoff.  The worst possible situation you can be in is for a crisis to emerge while you are paying off the mortgage and you lack the additional savings to pay for it. 

Second, not paying off the mortgage still holds an edge even with very short pay-off periods (e.g. 5 years) - in other words under most historical scenarios it still wins out. Five years is still a really long time not to be adding to your inestment accounts and not paying off your mortgage wins out in an overwhelming majority of scenarios; it's really not until you get into sub 2 year timeperiods when the 'advantage' to not paying off your mortgage becomes somethng close to a coin flip. 

Third, it's basically impossible to know what the market and interest rates will do in the next five years.  Choosing to pay down your mortgage because you think stocks are overvalued is another form of market timing.

Finally, the equation tilts heavily towards not paying off your mortgage if doing otherwise casues you to ignore your tax-advantaged accounts.  If paying down your mortgage means you cannot fully max out your 401(k) and IRA and HSA accounts, it will almost certainly lose out over the long haul.

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Re: DONT Payoff your Mortgage Club
« Reply #1661 on: July 14, 2019, 09:55:33 AM »


I've read through the first page and understand the concept. Sounds like a good strategy for people willing to accept debt.

It's very short-sighted not to accept debt.  Using certain kinds of debt can make you wealthier than if you become completely debt-free. 

In other words, what's a more important goal to you?  Minimizing debt or maximizing wealth?  Because that's what this discussion boils down to.  Me, I'd prefer to maximize my wealth.

Yes Debt is a "risk" but so is doing something like becoming an entrepreneur and building a business.  Those who become truly wealthy and stay wealthy do so by taking risks.  They are all calculated risks but risks none the less. 

desert_phoenix

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Re: DONT Payoff your Mortgage Club
« Reply #1662 on: July 14, 2019, 02:32:22 PM »
Do the members of the no early pay-off club have an orthodox opinion on when refinancing makes sense?

I am at 3.75% right now and could go slightly sower, but we are talking to around 3.625%, so it doesn't seem worth the transaction cost.

Is there generally a "rule" or "guideline" on this like there is for everything else?  Only if you can lower .5% or 1% or something?  Or is it just a matter of looking at the break-even point for the transaction cost and going from there?

edit: typos
« Last Edit: July 14, 2019, 02:36:40 PM by desert_phoenix »

SwordGuy

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Re: DONT Payoff your Mortgage Club
« Reply #1663 on: July 14, 2019, 04:15:31 PM »
Do the members of the no early pay-off club have an orthodox opinion on when refinancing makes sense?

I am at 3.75% right now and could go slightly sower, but we are talking to around 3.625%, so it doesn't seem worth the transaction cost.

Is there generally a "rule" or "guideline" on this like there is for everything else?  Only if you can lower .5% or 1% or something?  Or is it just a matter of looking at the break-even point for the transaction cost and going from there?

edit: typos

Find an online mortgage calculator (like Karl's Mortgage Calculator) and test out both scenarios.   Then you'll know which is better, provided you also pay attention to when/if you may sell and move.

bacchi

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Re: DONT Payoff your Mortgage Club
« Reply #1664 on: July 14, 2019, 04:17:11 PM »
how about: now, in 2019, after historic bull run. let's say stocks go flat for 2 years, then plunge come reelection of a (D) (everyone's theory, i guess), and don't recover to 2019 levels until 2027. IOW - TOP IS IN?

You can test this with cfiresim.

With $1M and a $100k mortgage,

Take $40k spending minus the mortgage represented as an annual non-CPI expense.

Compare that to a $36k pull from $900k, representing a paid off mortgage.

cfiresim is sticky for me but it does seem to better to keep the mortgage (there are fewer failures). This is because a few of the late-60s high-inflation failures disappear due to the mortgage being an inflation hedge.


The results will differ in a low-inflation crash environment. That's when market timing comes into play, as nereo noted. Are you certain that a low-inflation market crash will happen soon? Or will QED come back to haunt us? Or are we halfway through a long-term boom that'll last 25 years like Australia's?
« Last Edit: July 14, 2019, 04:19:29 PM by bacchi »

Pizzabrewer

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Re: DONT Payoff your Mortgage Club
« Reply #1665 on: July 14, 2019, 04:46:48 PM »


I've read through the first page and understand the concept. Sounds like a good strategy for people willing to accept debt.

It's very short-sighted not to accept debt.  Using certain kinds of debt can make you wealthier than if you become completely debt-free. 

In other words, what's a more important goal to you?  Minimizing debt or maximizing wealth?  Because that's what this discussion boils down to.  Me, I'd prefer to maximize my wealth.

Yes Debt is a "risk" but so is doing something like becoming an entrepreneur and building a business.  Those who become truly wealthy and stay wealthy do so by taking risks.  They are all calculated risks but risks none the less.

Not sure if you're agreeing with me or disagreeing. 

Mortgage debt is about as low-risk as it gets.  Hurrying to pay off a 2.5 to 3.5% mortgage isn't lowering your risk, if anything it is increasing it. 

Fomerly known as something

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Re: DONT Payoff your Mortgage Club
« Reply #1666 on: July 14, 2019, 05:57:54 PM »


I've read through the first page and understand the concept. Sounds like a good strategy for people willing to accept debt.

It's very short-sighted not to accept debt.  Using certain kinds of debt can make you wealthier than if you become completely debt-free. 

In other words, what's a more important goal to you?  Minimizing debt or maximizing wealth?  Because that's what this discussion boils down to.  Me, I'd prefer to maximize my wealth.

Yes Debt is a "risk" but so is doing something like becoming an entrepreneur and building a business.  Those who become truly wealthy and stay wealthy do so by taking risks.  They are all calculated risks but risks none the less.

Not sure if you're agreeing with me or disagreeing. 

Mortgage debt is about as low-risk as it gets.  Hurrying to pay off a 2.5 to 3.5% mortgage isn't lowering your risk, if anything it is increasing it.

Agreeing, even at low rates it is a "risk" (not a very big one granted) but generally rewards come from taking risks either big or small.

aetheldrea

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Re: DONT Payoff your Mortgage Club
« Reply #1667 on: July 14, 2019, 06:15:32 PM »
I'll share my bad experience with paying off a mortgage. We bought a crappy condo at the very peak of the market, October 2006. Middle of 2008 we received an unexpected and very much unwanted windfall. Stuck in a fairly high rate mortgage that we couldn't refinance because of 2nd and 3rd mortgage complications. Housing prices are starting to drop, no idea how bad it is going to get. Used most of the windfall to pay down, but not pay off the mortgage. Doing so "saved" around 200k in mortgage interest, probably the worst financial decision of my life.

If I had invested that money in a total stock market index fund instead, I would be at least 160k richer today. I calculated this back in December and the stock market is way up since then, so the real number is probably closer to 200k.

However, in alternate reality land, a more likely outcome would have been that, without so much equity in that place, we would have walked away from that crappy condo that we didn't much like and didn't really fit in any more, and bought a 500k house that today would be worth 900k.

It sucked being stuck in that house. Prepaying the mortgage without paying it off was a huge increase in risk of total financial disaster. It wasn't just a personal decision that no one can criticize. It was a terrible decision that worked out badly. Probably most mortgage prepayment events, if examined, would also be seen to be terrible ideas.

Folks, don't pay off your mortgage.

TomTX

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Re: DONT Payoff your Mortgage Club
« Reply #1668 on: July 14, 2019, 06:41:25 PM »
Started seriously looking at a cashout refi to get back to that nice 30 year mortgage and dump more into the market. Winnowed a bunch of providers, best deal I can find is 3.75% and ~$4k closing costs.

Unfortunately, Texas has some weirdness with cashout refi, so rates tend to be a bit higher.

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Re: DONT Payoff your Mortgage Club
« Reply #1669 on: July 14, 2019, 06:58:23 PM »
Do the members of the no early pay-off club have an orthodox opinion on when refinancing makes sense?

I am at 3.75% right now and could go slightly sower, but we are talking to around 3.625%, so it doesn't seem worth the transaction cost.

Is there generally a "rule" or "guideline" on this like there is for everything else?  Only if you can lower .5% or 1% or something?  Or is it just a matter of looking at the break-even point for the transaction cost and going from there?

edit: typos

Looking at the breakeven point is probably the smartest way. 

My basic rule of thumb is if I can save $100/month in interest it is worth it to refinance. 

dandarc

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Re: DONT Payoff your Mortgage Club
« Reply #1670 on: July 15, 2019, 10:21:18 AM »
Do the members of the no early pay-off club have an orthodox opinion on when refinancing makes sense?

I am at 3.75% right now and could go slightly sower, but we are talking to around 3.625%, so it doesn't seem worth the transaction cost.

Is there generally a "rule" or "guideline" on this like there is for everything else?  Only if you can lower .5% or 1% or something?  Or is it just a matter of looking at the break-even point for the transaction cost and going from there?

edit: typos

Looking at the breakeven point is probably the smartest way. 

My basic rule of thumb is if I can save $100/month in interest it is worth it to refinance.
In addition to looking at the payment difference, important to look at any cash you could take out. Lower interest rate is a positive. Additional money to invest today is a positive as well.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #1671 on: July 16, 2019, 12:26:18 AM »
I'll share my bad experience with paying off a mortgage. We bought a crappy condo at the very peak of the market, October 2006. Middle of 2008 we received an unexpected and very much unwanted windfall. Stuck in a fairly high rate mortgage that we couldn't refinance because of 2nd and 3rd mortgage complications. Housing prices are starting to drop, no idea how bad it is going to get. Used most of the windfall to pay down, but not pay off the mortgage. Doing so "saved" around 200k in mortgage interest, probably the worst financial decision of my life.

If I had invested that money in a total stock market index fund instead, I would be at least 160k richer today. I calculated this back in December and the stock market is way up since then, so the real number is probably closer to 200k.

However, in alternate reality land, a more likely outcome would have been that, without so much equity in that place, we would have walked away from that crappy condo that we didn't much like and didn't really fit in any more, and bought a 500k house that today would be worth 900k.

It sucked being stuck in that house. Prepaying the mortgage without paying it off was a huge increase in risk of total financial disaster. It wasn't just a personal decision that no one can criticize. It was a terrible decision that worked out badly. Probably most mortgage prepayment events, if examined, would also be seen to be terrible ideas.

Folks, don't pay off your mortgage.
OMG, I'm so sorry this happened to you. Now I'm dying to know the rest of the story. What happened next?

aetheldrea

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Re: DONT Payoff your Mortgage Club
« Reply #1672 on: July 16, 2019, 06:44:18 PM »
I'll share my bad experience with paying off a mortgage. We bought a crappy condo at the very peak of the market, October 2006. Middle of 2008 we received an unexpected and very much unwanted windfall. Stuck in a fairly high rate mortgage that we couldn't refinance because of 2nd and 3rd mortgage complications. Housing prices are starting to drop, no idea how bad it is going to get. Used most of the windfall to pay down, but not pay off the mortgage. Doing so "saved" around 200k in mortgage interest, probably the worst financial decision of my life.

If I had invested that money in a total stock market index fund instead, I would be at least 160k richer today. I calculated this back in December and the stock market is way up since then, so the real number is probably closer to 200k.

However, in alternate reality land, a more likely outcome would have been that, without so much equity in that place, we would have walked away from that crappy condo that we didn't much like and didn't really fit in any more, and bought a 500k house that today would be worth 900k.

It sucked being stuck in that house. Prepaying the mortgage without paying it off was a huge increase in risk of total financial disaster. It wasn't just a personal decision that no one can criticize. It was a terrible decision that worked out badly. Probably most mortgage prepayment events, if examined, would also be seen to be terrible ideas.

Folks, don't pay off your mortgage.
OMG, I'm so sorry this happened to you. Now I'm dying to know the rest of the story. What happened next?
Eventually the condo was completely paid off, and we lived there for another year or so without a mortgage payment before moving into a rental that we actually fit in (lots of kids). Eventually we sold it. Having it paid off made it no hurry to clean it out and put it on the market, which also probably cost us a shit-ton of money, but was very low stress. Still in a rental now, hopefully someday my kids will feel like leaving home, and then we might be looking at buying again, but a reasonably sized place.

End result is that I will have to work a couple extra years to reach FI, just like most people that pay off their mortgage early :-)

EngagedToFIRE

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Re: DONT Payoff your Mortgage Club
« Reply #1673 on: July 17, 2019, 08:10:01 AM »
I'll share my bad experience with paying off a mortgage. We bought a crappy condo at the very peak of the market, October 2006. Middle of 2008 we received an unexpected and very much unwanted windfall. Stuck in a fairly high rate mortgage that we couldn't refinance because of 2nd and 3rd mortgage complications. Housing prices are starting to drop, no idea how bad it is going to get. Used most of the windfall to pay down, but not pay off the mortgage. Doing so "saved" around 200k in mortgage interest, probably the worst financial decision of my life.

If I had invested that money in a total stock market index fund instead, I would be at least 160k richer today. I calculated this back in December and the stock market is way up since then, so the real number is probably closer to 200k.

However, in alternate reality land, a more likely outcome would have been that, without so much equity in that place, we would have walked away from that crappy condo that we didn't much like and didn't really fit in any more, and bought a 500k house that today would be worth 900k.

It sucked being stuck in that house. Prepaying the mortgage without paying it off was a huge increase in risk of total financial disaster. It wasn't just a personal decision that no one can criticize. It was a terrible decision that worked out badly. Probably most mortgage prepayment events, if examined, would also be seen to be terrible ideas.

Folks, don't pay off your mortgage.

This is always house hindsight works.  The good bet, historically, is don't pay off your mortgage.  But you couldn't possibly know the future at the time.  All sorts of scenarios are possible where it was better for you to pay off your mortgage, though obviously less likely.

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Re: DONT Payoff your Mortgage Club
« Reply #1674 on: July 17, 2019, 08:27:23 AM »
I'll share my bad experience with paying off a mortgage. We bought a crappy condo at the very peak of the market, October 2006. Middle of 2008 we received an unexpected and very much unwanted windfall. Stuck in a fairly high rate mortgage that we couldn't refinance because of 2nd and 3rd mortgage complications. Housing prices are starting to drop, no idea how bad it is going to get. Used most of the windfall to pay down, but not pay off the mortgage. Doing so "saved" around 200k in mortgage interest, probably the worst financial decision of my life.

If I had invested that money in a total stock market index fund instead, I would be at least 160k richer today. I calculated this back in December and the stock market is way up since then, so the real number is probably closer to 200k.

However, in alternate reality land, a more likely outcome would have been that, without so much equity in that place, we would have walked away from that crappy condo that we didn't much like and didn't really fit in any more, and bought a 500k house that today would be worth 900k.

It sucked being stuck in that house. Prepaying the mortgage without paying it off was a huge increase in risk of total financial disaster. It wasn't just a personal decision that no one can criticize. It was a terrible decision that worked out badly. Probably most mortgage prepayment events, if examined, would also be seen to be terrible ideas.

Folks, don't pay off your mortgage.

This is always house hindsight works.  The good bet, historically, is don't pay off your mortgage.  But you couldn't possibly know the future at the time.  All sorts of scenarios are possible where it was better for you to pay off your mortgage, though obviously less likely.

There are serious advantages to "having a paid off mortgage".   That is a very different situation than "having a mortgage and working to pay it off early."


Having a paid off mortgage provides financial safety by lowering your fixed monthly expenses.

Putting extra money into your mortgage early (but not paying it off) decreases financial safety because one still has the same fixed monthly living expenses and has fewer financial reserves to deal with serious financial problems.   It does, however, make the company who holds your mortgage safer as the less you owe on it, the easier it will be for them to get their money back in a foreclosure sale.

Now, an interest rate of 9.375% like my first mortgage is so high that it's worth the risk to pump lots of money into it.
An interest rate of 2.75% like my current mortgage is so low that it's not.

It really just depends on the rate of the mortgage, the rate of other long term investments, how much of a financial cushion one has and the stability of one's income.  (Never overestimate the latter.  Stuff happens.)

EngagedToFIRE

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Re: DONT Payoff your Mortgage Club
« Reply #1675 on: July 17, 2019, 09:02:01 AM »
I'll share my bad experience with paying off a mortgage. We bought a crappy condo at the very peak of the market, October 2006. Middle of 2008 we received an unexpected and very much unwanted windfall. Stuck in a fairly high rate mortgage that we couldn't refinance because of 2nd and 3rd mortgage complications. Housing prices are starting to drop, no idea how bad it is going to get. Used most of the windfall to pay down, but not pay off the mortgage. Doing so "saved" around 200k in mortgage interest, probably the worst financial decision of my life.

If I had invested that money in a total stock market index fund instead, I would be at least 160k richer today. I calculated this back in December and the stock market is way up since then, so the real number is probably closer to 200k.

However, in alternate reality land, a more likely outcome would have been that, without so much equity in that place, we would have walked away from that crappy condo that we didn't much like and didn't really fit in any more, and bought a 500k house that today would be worth 900k.

It sucked being stuck in that house. Prepaying the mortgage without paying it off was a huge increase in risk of total financial disaster. It wasn't just a personal decision that no one can criticize. It was a terrible decision that worked out badly. Probably most mortgage prepayment events, if examined, would also be seen to be terrible ideas.

Folks, don't pay off your mortgage.

This is always house hindsight works.  The good bet, historically, is don't pay off your mortgage.  But you couldn't possibly know the future at the time.  All sorts of scenarios are possible where it was better for you to pay off your mortgage, though obviously less likely.

There are serious advantages to "having a paid off mortgage".   That is a very different situation than "having a mortgage and working to pay it off early."


Having a paid off mortgage provides financial safety by lowering your fixed monthly expenses.

Putting extra money into your mortgage early (but not paying it off) decreases financial safety because one still has the same fixed monthly living expenses and has fewer financial reserves to deal with serious financial problems.   It does, however, make the company who holds your mortgage safer as the less you owe on it, the easier it will be for them to get their money back in a foreclosure sale.

Now, an interest rate of 9.375% like my first mortgage is so high that it's worth the risk to pump lots of money into it.
An interest rate of 2.75% like my current mortgage is so low that it's not.

It really just depends on the rate of the mortgage, the rate of other long term investments, how much of a financial cushion one has and the stability of one's income.  (Never overestimate the latter.  Stuff happens.)

Fully agreed. Not much more to add :)

robartsd

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Re: DONT Payoff your Mortgage Club
« Reply #1676 on: July 17, 2019, 10:45:46 AM »
There is a chance that a paid down (but not paid off) mortgage can be recast to reduce the monthly payments. I'm not sure how common it is to have a borrower option to recast in a mortgage contract; but if your mortgage has such a clause the risk of lower liquidity without lower fixed monthly expenses is greatly reduced.

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Re: DONT Payoff your Mortgage Club
« Reply #1677 on: July 18, 2019, 10:15:36 AM »
This is always house hindsight works.  The good bet, historically, is don't pay off your mortgage.  But you couldn't possibly know the future at the time.  All sorts of scenarios are possible where it was better for you to pay off your mortgage, though obviously less likely.
I would call it hindsight if the less likely outcome occurred.

In my case, the more likely outcome happened and I have less money than I would have if I hadnít put that money towards the mortgage.

Like if I went to the roulette table and put my money on black and red came up, I wouldnít say, oh well, hindsight is 20/20. That is just a bad idea, because the odds are that you lose.

Luz

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Re: DONT Payoff your Mortgage Club
« Reply #1678 on: July 19, 2019, 02:56:16 PM »
HOW TO CALCULATE THE SAVINGS BY NOT PAYING DOWN YOUR MORTGAGE (using the previous post as an example)
Let
B = Mortgage balance [$160,000]
P = Mortgage payment (should be principle and interest only, exclude property taxes, property insurance, PMI, or anything else in escrow) [1,645]
N = number of payments remaining [120 = 10 x 12]
IM = EFFECTIVE Interest rate on your mortgage [.0433]
II = Interest rate on investments [Assuming .07 per year]

Calculate M= Monthly Investment Interest rate = (1+II)^(1/12) = 1.07^.0833333 = 1.0056541

If you don't know P, you can either go to a calculator on the internet or in Excel Type in =-PMT(0.0433/12,120,160000) to get the answer.

Deciding between a payoff assumes you have $160,000 lying around to extinguish the mortgage.  The question is what is the difference at the end of 10 years between:
1) Leaving the $160,000 invested and regular making mortgage payments.
2) Paying off the $160,000 and immediately investing the newfound $1,645 each month at the investment rate.

Option 1 is easy to calculate.  At the end of 10 years you have 160,000 x 1.07^10 = $314,744.
Option 2 is more convoluted.  The first $1,645 payment grows by 1.07^10.  The second $1,645 payment grows by 1.07^9.917, etc.  The total is $282,973.

Here's how you calculate it:  P x M x (M^N - 1) / (M - 1)
= 1,645 x 1.0056541 x (1.0056541^120 - 1) / (1.0056541 - 1)
= 1,654.30 x (1.96714 - 1) / 0.0056541
= 1,654.30 x 0.96714 / 0.0056541 (bit of rounding error) 

The difference here is $31,771.  Lower than other people's situations because (1) it's only a ten year mortgage, and (2) the interest rate is closer to 7% than many other people's mortgages.  But for some people that could be easily be a year's worth of expenses, so prepaying your mortgage could delay your FIRE date by a year in this instance.

One other thing you should take into account is the effective interest rate of your mortgage.  For those of us in the US that can deduct the interest rate on our mortgages (not everyone necessarily gets a benefit from this, you should check), that interest probably lowers your state and federal taxes.  This calculation isn't so simple because we automatically qualify for a standard deduction, so if you aren't already filing a Schedule A you might not see a full benefit.

Hope that helps.  If you can't be bothered to do the calculation, post your information here and I will try to help.  People with (1) longer mortgages and (2) lower interest rates and going to find more benefit in not paying down early.  I did this calculation for someone else on the forum and the difference was nearly TWO HUNDRED THOUSAND DOLLARS!

7% is the investment figure MMM has thrown around on the site, but you are welcome to tweak it depending on your age and risk tolerance.  Any mustachian this involved in making their finances go longer sooner owes it to themselves to do this calculation before paying down their mortgage.

Can you run my hypothetical numbers? I don't have a mortgage, but am someone who had a family member drowning in debt their whole life and I therefore have made it my goal to pay off any kind of debt lightning fast. I'm seeing this logic though and am willing to change my mindset.

I also stay home with the baby right now and we live on 1 low income. We wouldn't get a house until my early to mid forties, after a few other goals are met. I'm also finding that apartment living works well for us right now in that we're still not settled down and appreciate not having to come up with the costs related to home ownership (maintenance, for example). Having a 30 year mortgage that's not paid off early would mean we'd pay it off 10 years after traditional retirement age, though (we will likely not RE, which I'm fine with). Does this logic still stand for our situation?

Our rough numbers may be: between $200,000-$250,000 house; 20% down, monthly principle/interest payment $765-$955, 4% interest rate, depending on what 30% my husband's income ends up being at that time (to cover principle, interest, taxes, and insurance- and preferably closing costs and maintenance, but that's unlikely).
« Last Edit: July 19, 2019, 03:23:21 PM by Luz »

aetheldrea

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Re: DONT Payoff your Mortgage Club
« Reply #1679 on: July 19, 2019, 05:45:17 PM »
Can you run my hypothetical numbers? I don't have a mortgage, but am someone who had a family member drowning in debt their whole life and I therefore have made it my goal to pay off any kind of debt lightning fast. I'm seeing this logic though and am willing to change my mindset.

I also stay home with the baby right now and we live on 1 low income. We wouldn't get a house until my early to mid forties, after a few other goals are met. I'm also finding that apartment living works well for us right now in that we're still not settled down and appreciate not having to come up with the costs related to home ownership (maintenance, for example). Having a 30 year mortgage that's not paid off early would mean we'd pay it off 10 years after traditional retirement age, though (we will likely not RE, which I'm fine with). Does this logic still stand for our situation?

Our rough numbers may be: between $200,000-$250,000 house; 20% down, monthly principle/interest payment $765-$955, 4% interest rate, depending on what 30% my husband's income ends up being at that time (to cover principle, interest, taxes, and insurance- and preferably closing costs and maintenance, but that's unlikely).
Since you don't have a mortgage or (it sounds like) extra money to either invest or put towards your mortgage, this kind of calculation really doesn't apply to you.

If you get to the place where you do have a mortgage and have some extra money, you would be much better off following the Investment Order thread, and maximize contributions to tax-advantaged accounts before putting money toward a low interest rate mortgage.

Luz

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Re: DONT Payoff your Mortgage Club
« Reply #1680 on: July 19, 2019, 10:12:36 PM »
Can you run my hypothetical numbers? I don't have a mortgage, but am someone who had a family member drowning in debt their whole life and I therefore have made it my goal to pay off any kind of debt lightning fast. I'm seeing this logic though and am willing to change my mindset.

I also stay home with the baby right now and we live on 1 low income. We wouldn't get a house until my early to mid forties, after a few other goals are met. I'm also finding that apartment living works well for us right now in that we're still not settled down and appreciate not having to come up with the costs related to home ownership (maintenance, for example). Having a 30 year mortgage that's not paid off early would mean we'd pay it off 10 years after traditional retirement age, though (we will likely not RE, which I'm fine with). Does this logic still stand for our situation?

Our rough numbers may be: between $200,000-$250,000 house; 20% down, monthly principle/interest payment $765-$955, 4% interest rate, depending on what 30% my husband's income ends up being at that time (to cover principle, interest, taxes, and insurance- and preferably closing costs and maintenance, but that's unlikely).
Since you don't have a mortgage or (it sounds like) extra money to either invest or put towards your mortgage, this kind of calculation really doesn't apply to you.

If you get to the place where you do have a mortgage and have some extra money, you would be much better off following the Investment Order thread, and maximize contributions to tax-advantaged accounts before putting money toward a low interest rate mortgage.

We have $6,000 extra a year (for now while husband is in school and before I go back to work) and are working on the Investment Order.
Are you saying that everyone who bought their homes in this thread did so after they filled all the Investment Order buckets every year? Or just that's what they should have done (house purchase comes after ER, 401K Match, HSA/ROTH/401K Max and 529 contribution)?
So once we exceed $55,000 savings per year, we should put further savings toward a house down-payment? And rather than paying off the house early, we should use the excess of $55,000 to then invest in regular, non-tax advantaged accounts?
If I'm understanding this correctly, I'd still love to see the calculation of not paying off that hypothetical house early. To see if there'd be a big difference in our case.
I don't see why the calculation wouldn't apply, unless you've already made up your mind that it's out of our reach. And by the way... I think you meant to say "WHEN you get to the place...".  I'm getting some snooty vibes from this club! Just let me in, already!
« Last Edit: July 19, 2019, 10:29:27 PM by Luz »

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #1681 on: July 20, 2019, 12:23:26 AM »
I'm getting some snooty vibes from this club! Just let me in, already!
Nah, we're passionate, but not snooty-tooty. I'm actually the one who suggested starting this thread to the late, great boarder42, and...wait for it...we (my husband and I, not b42) paid cash for our house, so I don't even have a mortgage.* But we wouldn't have been able to do this if we hadn't started out with houses and mortgages that we didn't pay off early, at the expense of other savings and investing. I just want people to understand the math before they decide how to manage their mortgage. It seems a simple thing, but it's surprisingly contentious. There is no perfect answer, however the better answer (IMO) is not the sound bite that "debt is bad" or "kill the mortgage" are. It's more nuanced, and requires a little higher level of financial understanding. Nothing a good mustachian can't handle. Plus, that's what this thread is for. Helping people make the most optimal decision, one mortgage at a time. So, welcome, Luz!

*I am not against mortgages. In fact, my name is on four of them, just not on our primary home.

Raenia

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Re: DONT Payoff your Mortgage Club
« Reply #1682 on: July 20, 2019, 04:47:18 AM »
Can you run my hypothetical numbers? I don't have a mortgage, but am someone who had a family member drowning in debt their whole life and I therefore have made it my goal to pay off any kind of debt lightning fast. I'm seeing this logic though and am willing to change my mindset.

I also stay home with the baby right now and we live on 1 low income. We wouldn't get a house until my early to mid forties, after a few other goals are met. I'm also finding that apartment living works well for us right now in that we're still not settled down and appreciate not having to come up with the costs related to home ownership (maintenance, for example). Having a 30 year mortgage that's not paid off early would mean we'd pay it off 10 years after traditional retirement age, though (we will likely not RE, which I'm fine with). Does this logic still stand for our situation?

Our rough numbers may be: between $200,000-$250,000 house; 20% down, monthly principle/interest payment $765-$955, 4% interest rate, depending on what 30% my husband's income ends up being at that time (to cover principle, interest, taxes, and insurance- and preferably closing costs and maintenance, but that's unlikely).
Since you don't have a mortgage or (it sounds like) extra money to either invest or put towards your mortgage, this kind of calculation really doesn't apply to you.

If you get to the place where you do have a mortgage and have some extra money, you would be much better off following the Investment Order thread, and maximize contributions to tax-advantaged accounts before putting money toward a low interest rate mortgage.

We have $6,000 extra a year (for now while husband is in school and before I go back to work) and are working on the Investment Order.
Are you saying that everyone who bought their homes in this thread did so after they filled all the Investment Order buckets every year? Or just that's what they should have done (house purchase comes after ER, 401K Match, HSA/ROTH/401K Max and 529 contribution)?
So once we exceed $55,000 savings per year, we should put further savings toward a house down-payment? And rather than paying off the house early, we should use the excess of $55,000 to then invest in regular, non-tax advantaged accounts?
If I'm understanding this correctly, I'd still love to see the calculation of not paying off that hypothetical house early. To see if there'd be a big difference in our case.
I don't see why the calculation wouldn't apply, unless you've already made up your mind that it's out of our reach. And by the way... I think you meant to say "WHEN you get to the place...".  I'm getting some snooty vibes from this club! Just let me in, already!

Of course not everyone waited to buy a house until after filling all other buckets.  What priority you place on saving for a downpayment will depend on your situation - what is the rent vs buy calculation in your area?  How much do you value ownership?  Are you willing/able to DIY house projects or do you need to save extra for hiring things done?  Or do you have enough spare cashflow to do those things without impacting savings?  Etc.

We saved for a downpayment after maxing both DH and my IRAs, my 401k, an HSA, and more than enouch to DH's 403b to get full matching.  We couldn't afford to max all retirement accounts and still have extra left over every month.

The reason it's difficult to do a calculation before you actually have a mortgage, is you don't know what the inputs will be - what interest rate will you have?  How much will you need to borrow?  What's the required monthly payment, and how much is Principle vs interest (not counting taxes/insurance)?  Will you be paying PMI?  How much extra will you have to either pay off or invest each month?  Once you are actually facing the choice of pay the mortgage on schedule vs pay the mortgage early (rather than get a mortgage or not get a mortgage, very different question), it is much easier to show the math on the two alternatives.

If you want to run hypothetical numbers, I suggest careful reading to understand the math, so you can do it yourself.  However, note that the calculation you quoted is for the difference between paying off all at once vs investing, i.e. it is assuming you have a chunk of money lying around that is equal to the remaining balance on your mortgage.  In your hypothetical example, that's not the case, so the math would be different.

Luz

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Re: DONT Payoff your Mortgage Club
« Reply #1683 on: July 20, 2019, 07:49:54 AM »
Quote
Of course not everyone waited to buy a house until after filling all other buckets.  What priority you place on saving for a downpayment will depend on your situation - what is the rent vs buy calculation in your area?  How much do you value ownership?  Are you willing/able to DIY house projects or do you need to save extra for hiring things done?  Or do you have enough spare cashflow to do those things without impacting savings?  Etc.

So part of this conversation is really rent v buy and if someone is better off completely filling the investment buckets before purchasing a house (math-wise, and not taking the emotional value considerations into account)? I've often heard that a house is an expense, not an investment so I'm curious about where in the Investment Order lineup FI'er's calculate when this purchase would be a wise move.

Quote
The reason it's difficult to do a calculation before you actually have a mortgage, is you don't know what the inputs will be - what interest rate will you have?  How much will you need to borrow?  What's the required monthly payment, and how much is Principle vs interest (not counting taxes/insurance)?  Will you be paying PMI?  How much extra will you have to either pay off or invest each month?  Once you are actually facing the choice of pay the mortgage on schedule vs pay the mortgage early (rather than get a mortgage or not get a mortgage, very different question), it is much easier to show the math on the two alternatives.

I would assume that most of us on this thread run the numbers prior to taking action. Sure, it's a guess, but playing with hypothetical situations lets me see the parameters I'm working with. And I may decide, once the numbers are in, that purchasing a house is not a wise move, or that paying it off early is actually the better way (especially given that I thought having a paid for house before the traditional retirement age was something to shoot for- if I get a 30 year mortgage past the age of 35, I'll have mortgage payments in retirement). But I need to project a bit in order to figure that out. So...my projections are roughly: Interest Rate: 4%. Down payment: $50,000. No PMI. Monthly Principle and Interest Payment (not including taxes, insurance, maintenance etc): $955 (not sure on principle v interest at this point, but that wasn't required for the calculation offer on this thread). Extra to invest each month: possibly $1000-3000, depending on all the other numbers I run about our situation.

Quote
However, note that the calculation you quoted is for the difference between paying off all at once vs investing, i.e. it is assuming you have a chunk of money lying around that is equal to the remaining balance on your mortgage.  In your hypothetical example, that's not the case, so the math would be different.

Is there a calculation for the latter? I'm guessing that the numbers for investment v mortgage payoff would then be less exciting if it's done by chipping away v lump sum.

@runewell, would you be so kind as to weigh in? 


Luz

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Re: DONT Payoff your Mortgage Club
« Reply #1684 on: July 20, 2019, 07:55:38 AM »
Quote
I just want people to understand the math before they decide how to manage their mortgage.

Awesome! That's what I'm here for!

So I'm curious, why did you pay cash for the mortgage on your primary home?

Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #1685 on: July 20, 2019, 11:32:56 AM »
So part of this conversation is really rent v buy and if someone is better off completely filling the investment buckets before purchasing a house (math-wise, and not taking the emotional value considerations into account)? I've often heard that a house is an expense, not an investment so I'm curious about where in the Investment Order lineup FI'er's calculate when this purchase would be a wise move.

I think the proper way to look at it is that housing is an expense and whether you rent or buy, you still have a housing expense, so it doesn't fall into the investment order bucket.   It falls in the spending bucket.  Part of decision includes the notion that owning a home is a lifestyle choice, which is one of those intangible things you have to figure in.   Some people may or may not wish to own a home even if it isn't the most cost effective thing to do.  Having a own and a garden is important to me, so I'd pay extra to have that.   Other people might not want to deal with the maintence or being tied to a property. 

Many people like this rent vs. buy calculator:

https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

Luz

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Re: DONT Payoff your Mortgage Club
« Reply #1686 on: July 20, 2019, 02:02:51 PM »
I'm getting some snooty vibes from this club! Just let me in, already!
Nah, we're passionate, but not snooty-tooty. I'm actually the one who suggested starting this thread to the late, great boarder42, and...wait for it...we (my husband and I, not b42) paid cash for our house, so I don't even have a mortgage.* But we wouldn't have been able to do this if we hadn't started out with houses and mortgages that we didn't pay off early, at the expense of other savings and investing. I just want people to understand the math before they decide how to manage their mortgage. It seems a simple thing, but it's surprisingly contentious. There is no perfect answer, however the better answer (IMO) is not the sound bite that "debt is bad" or "kill the mortgage" are. It's more nuanced, and requires a little higher level of financial understanding. Nothing a good mustachian can't handle. Plus, that's what this thread is for. Helping people make the most optimal decision, one mortgage at a time. So, welcome, Luz!

*I am not against mortgages. In fact, my name is on four of them, just not on our primary home.

Ok, never mind my question of why you paid off your primary home mortgage. I just read your answer earlier in the thread.
« Last Edit: July 20, 2019, 08:36:38 PM by Luz »

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #1687 on: July 22, 2019, 08:54:33 AM »
I should mention that we're not debt fiends here. I've seen people from this thread in other places on the MMM forum advocating that people not finance cars and quickly pay off credit card debt.

The US Mortgage environment is simply in this one place (where it's really only been for about nine years), where the contrarian path seems like it ought to be appealing for long term wealth-building.

I, myself, actually enjoy listening to Dave Ramsey even.

Brother Esau

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Re: DONT Payoff your Mortgage Club
« Reply #1688 on: July 22, 2019, 11:49:54 AM »
If rates revert back to the historical average, we could board up this thread.

nereo

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Re: DONT Payoff your Mortgage Club
« Reply #1689 on: July 22, 2019, 11:59:24 AM »
If rates revert back to the historical average, we could board up this thread.
Maybe, maybe not. Mortgage rates donít operate in a vacuum. My parents love to tell me about their 9.9% mortgage back in the late 70s. Sounds horrible. Right?  Well shortly after getting their mortgage you could buy CDs that had yields of 12% - which is bonkers to think about now. So even with a mortgage near the double digit mark they could get a fixed return even better than that. Oh, and when rates were that high the interest deduction suddenly mattered a great deal, as >80% of your early payments was interest

« Last Edit: July 22, 2019, 07:36:22 PM by nereo »

Brother Esau

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Re: DONT Payoff your Mortgage Club
« Reply #1690 on: July 22, 2019, 12:10:21 PM »
If rates revert back to the historical average, we could board up this thread.
Maybe, maybe not. Mortgage rates donít operate in a vacuum. My parents love to tell me about their 9.9% mortgage back in the late 70s. Sounds horrible. Right?  Well shortly after getting their mortgage you could by CDs that had yields of 12% - which is bonkers to think about now. So even with a mortgage near the double digit mark they could get a fixed return even better than that. Oh, and when rates were that high the interest deduction suddenly mattered a great deal, as >80% of your early payments was interest

True. My first real job in the early 90's offered a savings account with a guaranteed minimum 10% return. Bonkers indeed.

Mr Mark

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Re: DONT Payoff your Mortgage Club
« Reply #1691 on: July 22, 2019, 07:11:23 PM »
If rates revert back to the historical average, we could board up this thread.

A big part of this play is dependent in access to these magical 15 or 30 year fixed noncallable yet refinancable if rates drop, nominal  loans in US$.

In most other countries these don't exist. And not at like sub4% rates.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #1692 on: July 23, 2019, 12:25:04 AM »
If rates revert back to the historical average, we could board up this thread.
Maybe, maybe not. Mortgage rates donít operate in a vacuum. My parents love to tell me about their 9.9% mortgage back in the late 70s. Sounds horrible. Right?  Well shortly after getting their mortgage you could buy CDs that had yields of 12% - which is bonkers to think about now. So even with a mortgage near the double digit mark they could get a fixed return even better than that. Oh, and when rates were that high the interest deduction suddenly mattered a great deal, as >80% of your early payments was interest
When I was saving the down payment for my first house, I put it in CD's. I think the best rate I got was 15.8%. I also remember being elated to get a mortgage on another property for (only) 7%! That was in about 1996.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #1693 on: July 23, 2019, 08:12:00 AM »
If rates revert back to the historical average, we could board up this thread.
Maybe, maybe not. Mortgage rates donít operate in a vacuum. My parents love to tell me about their 9.9% mortgage back in the late 70s. Sounds horrible. Right?  Well shortly after getting their mortgage you could buy CDs that had yields of 12% - which is bonkers to think about now. So even with a mortgage near the double digit mark they could get a fixed return even better than that. Oh, and when rates were that high the interest deduction suddenly mattered a great deal, as >80% of your early payments was interest

My parents love to tell me that they were such industrious workers that they could count on receiving 3-4% raises every year.

If you stretch to buy a house, but lock in fixed payments, having 10% more income to make those payments (two years later) is a really good thing.

Incredibly, my parents bought a 3/2 house nowhere special in 1987, and their monthly payment was $773. It wouldn't surprise me if there at people on this thread who are paying $773/month today for a 3/2 house somewhere???

robartsd

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Re: DONT Payoff your Mortgage Club
« Reply #1694 on: July 23, 2019, 08:23:24 AM »
A big part of this play is dependent in access to these magical 15 or 30 year fixed noncallable yet refinancable if rates drop, nominal  loans in US$.

In most other countries these don't exist. And not at like sub4% rates.
Even if the rate is only fixed for 10 years, that's plenty of time to be worth investing. I've recently heard of a 1.9% 10 year fixed in the UK (and a 1.5% rate fixed for 2 years on a 30 year amortization schedule - as long as rates stay low shopping the loan every few years isn't bad, but you do take on the risk that rates increase).

When I was saving the down payment for my first house, I put it in CD's. I think the best rate I got was 15.8%. I also remember being elated to get a mortgage on another property for (only) 7%! That was in about 1996.
High interest rates in the 80's and 90's were part of what motivated me to be a saver.

Incredibly, my parents bought a 3/2 house nowhere special in 1987, and their monthly payment was $773. It wouldn't surprise me if there at people on this thread who are paying $773/month today for a 3/2 house somewhere???
That's in the ballpark of my PI payment on a 2/1 in a less affluent area of Sacramento. Borrowed about $167k on a 30 year fixed at 3.75%. Could easily see that on a 3/2 in a LCOL area.

Kronsey

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Re: DONT Payoff your Mortgage Club
« Reply #1695 on: July 23, 2019, 09:58:04 PM »

Incredibly, my parents bought a 3/2 house nowhere special in 1987, and their monthly payment was $773. It wouldn't surprise me if there at people on this thread who are paying $773/month today for a 3/2 house somewhere???
That's in the ballpark of my PI payment on a 2/1 in a less affluent area of Sacramento. Borrowed about $167k on a 30 year fixed at 3.75%. Could easily see that on a 3/2 in a LCOL area.
[/quote]

The PI on my current house is around there. With taxes, insurance, and PMI, I'm only at $1,041/month.

A few houses ago (long story), my PITI was sub $700 month. Purchased in 2013. Purchase price was $88,000. Yearly taxes were sub $1k. Insurance was $600/yr or so. It was a foreclosure but was in good shape. We put around $5,000 into remodeling it, but most of that was our preferences, not necessity. It was 1,600 sq ft, 3 beds, 2.5 baths and even had a small office space. Two car attached garage.

We sold it a few years later for $125,000 or so. Probably worth $135,000 today. Man I miss that house. Probably the dumbest financial mistake I've made in the last decade or so.

Long story short - RE is still cheap in my area. In exchange, you have a bunch of $15/hr jobs. If you can find lucrative employment or profitable self-employmenr, you can really speed up the FI race.


EngagedToFIRE

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Re: DONT Payoff your Mortgage Club
« Reply #1696 on: July 24, 2019, 07:20:22 AM »

Incredibly, my parents bought a 3/2 house nowhere special in 1987, and their monthly payment was $773. It wouldn't surprise me if there at people on this thread who are paying $773/month today for a 3/2 house somewhere???
That's in the ballpark of my PI payment on a 2/1 in a less affluent area of Sacramento. Borrowed about $167k on a 30 year fixed at 3.75%. Could easily see that on a 3/2 in a LCOL area.

The PI on my current house is around there. With taxes, insurance, and PMI, I'm only at $1,041/month.

A few houses ago (long story), my PITI was sub $700 month. Purchased in 2013. Purchase price was $88,000. Yearly taxes were sub $1k. Insurance was $600/yr or so. It was a foreclosure but was in good shape. We put around $5,000 into remodeling it, but most of that was our preferences, not necessity. It was 1,600 sq ft, 3 beds, 2.5 baths and even had a small office space. Two car attached garage.

We sold it a few years later for $125,000 or so. Probably worth $135,000 today. Man I miss that house. Probably the dumbest financial mistake I've made in the last decade or so.

Long story short - RE is still cheap in my area. In exchange, you have a bunch of $15/hr jobs. If you can find lucrative employment or profitable self-employmenr, you can really speed up the FI race.
[/quote]

This sounds a lot like our second home location.  You can definitely find 3/2's in that price range still.  But you aren't going to be finding a 6 figure job, locally.  Only if you can work remotely would it be a great option.  Even $15/hr is probably a bit rich for that area.  We struggle with the idea of moving our business there sometimes just to take advantage of the super LCOL and even cheaper workforce, which would massively accelerate our savings.

DadJokes

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Re: DONT Payoff your Mortgage Club
« Reply #1697 on: July 24, 2019, 07:41:43 AM »
Our last house, which had an original loan of $200k and a 3.75% interest rate, had a P&I payment of $926. I hate that we went up so much in home price when we moved. That extra $500 or so per month invested would be so nice.

I think at that interest rate, it would only take a loan amount of ~$170k to get the payment that low, which is more than reasonable in low to mid COL areas.

Raenia

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Re: DONT Payoff your Mortgage Club
« Reply #1698 on: July 24, 2019, 08:06:58 AM »
@Luz

I'm not the best at math, so someone else might be able to give a more nuanced explanation, but here's a go with the numbers you gave.

The decision of IF to purchase a house is totally separate from the decision to pay early or not.  I recommend throwing some numbers into a good rent vs buy calculator like this one: https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

Using your projected numbers of:
4% interest rate
$200,000 mortgage balance (assuming 50k DP = 20%)
$955 monthly payment
$1000 extra available monthly

After 30 years of paying on schedule:
Mortgage balance = $0
Investment balance = $2,289,274.30 (based on a basic compounding calculator, 10% interest pre-inflation)

After paying 1k/month extra on mortgage, payoff occurs after 10.5 years, then invest 1955/month for 19.5 years:
Mortgage balance = 0$
Investment balance = $1,333,5002.72

If you want to play with more numbers, I used this mortgage payoff calculator to find when payoff would occur (https://www.daveramsey.com/mortgage-payoff-calculator) and this compound interest calculator (https://www.investor.gov/additional-resources/free-financial-planning-tools/compound-interest-calculator).  Not necessarily the best ones, but the first ones I found :P

Note that you should use pre-inflation returns for the investment returns, because the mortgage payment does not rise with inflation.

Hope that helps.

ETA: Fixed typos.
« Last Edit: July 24, 2019, 10:32:35 AM by Raenia »

Kronsey

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Re: DONT Payoff your Mortgage Club
« Reply #1699 on: July 24, 2019, 06:09:18 PM »
This sounds a lot like our second home location.  You can definitely find 3/2's in that price range still.  But you aren't going to be finding a 6 figure job, locally.  Only if you can work remotely would it be a great option.  Even $15/hr is probably a bit rich for that area.  We struggle with the idea of moving our business there sometimes just to take advantage of the super LCOL and even cheaper workforce, which would massively accelerate our savings.

I agree - the six figure jobs are tough to come by if you don't work in very specific fields/occupations. But you highlighted the best option available (IMHO) - self-employment/business ownership. I believe it is just as easy to build a profitable business in a LCOL metro area as a high cost (some business models wouldn't fit this bill - but there are always exceptions).

That is basically my plan to achieve FIRE really quickly. I am self-employed in a good niche that isn't hampered by lower pay for the work performed. The LCOL is just gravy on top at this point.