Author Topic: DONT Payoff your Mortgage Club  (Read 920043 times)

fuzzy math

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Re: DONT Payoff your Mortgage Club
« Reply #3350 on: September 24, 2022, 09:02:34 PM »
I tithe regularly to my religion



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bacchi

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Re: DONT Payoff your Mortgage Club
« Reply #3351 on: September 24, 2022, 09:39:25 PM »
Hey all, just checking in. Was walking around with my sig other when I remembered the homo economicuses on this thread. How are you all doing? Are you still economicuses, making economically optimal decisions?
Has some of your identity become, “I am someone who does not pay off their mortgage,” as opposed to, “I am someone who makes optimal decisions based on the math.”?
Is there a crossover point when one becomes mere Homo sapiens?
It may come across as snarky, but that’s just my resting bitch face. Hope you are well.

Mortgages in the US are generally fixed-rate and non-callable. A mortgage taken out last year (2021) at 3% would still be at 3%.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #3352 on: September 24, 2022, 11:39:24 PM »
Hey all, just checking in. Was walking around with my sig other when I remembered the homo economicuses on this thread. How are you all doing? Are you still economicuses, making economically optimal decisions?
Has some of your identity become, “I am someone who does not pay off their mortgage,” as opposed to, “I am someone who makes optimal decisions based on the math.”?
Is there a crossover point when one becomes mere Homo sapiens?
It may come across as snarky, but that’s just my resting bitch face. Hope you are well.
Hmmm, I have a 30 year mortgage on each of three houses at the moment. Two of them are very recent and I'm over 60. I own one house that never had a mortgage. I sold two mortgaged properties to buy it. I have never paid off a mortgage prior to sale in my life. I am also FIRE,fwiw for the win.

I guess it depends on what you consider a crossover point.

If snark makes you happy, there are plenty of places to practice it. What's unclear is why it's important to you to practice it on this particular thread. Is there something related to mortgages that you're uncomfortable with? We can help.

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Re: DONT Payoff your Mortgage Club
« Reply #3353 on: September 25, 2022, 08:36:51 AM »
Hey all, just checking in. Was walking around with my sig other when I remembered the homo economicuses on this thread. How are you all doing? Are you still economicuses, making economically optimal decisions?
Has some of your identity become, “I am someone who does not pay off their mortgage,” as opposed to, “I am someone who makes optimal decisions based on the math.”?
Is there a crossover point when one becomes mere Homo sapiens?
It may come across as snarky, but that’s just my resting bitch face. Hope you are well.

What exactly are you asking.  Your profile says you are from New Jersey but you seem to not be speaking in English.

I have personally never been 100% about optimization so nope there isn’t a cross over point for me.  I’m more in the camp of, is there something else I could be doing with my money that is more desirable.  I have paid extra toward my mortgage in the past, but it comes from my discretionary income, so money I would have otherwise spent on something else.  Now I have other things I’d rather spend money on so I don’t prepay.  Same with paying in full.  I could pay off my mortgage, or I could have 12 years of fun money once I can retire until I have access to tax advantaged account at 59.5.  I’ll take the fun money.

mbjerry

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Re: DONT Payoff your Mortgage Club
« Reply #3354 on: October 06, 2022, 04:56:34 PM »
Would you mind helping with my calculation? Balance is $312k. 30 years. Rate is 3.75. Have 354 payments left. Thank you for any help!

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.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #3355 on: October 07, 2022, 09:02:03 AM »
Would you mind helping with my calculation? Balance is $312k. 30 years. Rate is 3.75. Have 354 payments left. Thank you for any help!

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.
A batsignal might help, though I'm not sure if @runewell is still in the building...

Interesting that this 2017 calculation doesn't include inflation. On that basis alone, no way would I prepay a 3.75% 30 year mortgage.

Must_ache

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Re: DONT Payoff your Mortgage Club
« Reply #3356 on: October 11, 2022, 02:32:36 PM »
I'm an extremely close personal friend of runewell! ;)
And I think that this post is right on the money. 

One thing people fail to think about is what us actuaries refer to as the time value of money.  This example involves 120 payments of $1,645, but assuming normal interest rates we all know that the $1,645 is going to be a lower % of our income at payment 120 than at payment 1 because we will hopefully make more 10 years in the future while the mortgage payment is level.

People also focus on the interest dollars.  120 payments of $1,645 is $197,400.  Subtract the original mortgage balance of $160,000 and you realize you will pay $37,400 in interest.  However you will pay it at different times, and that interest is an even lower amount in today's dollars.  If anyone doubts long-term that investing will generally net them more money, just focus on a single month. 

I bought my Honda Civic in August 2017 for 19,400 and sold it in January 2022 for 19,600.  While that doesn't happen everyday, it isn't as exciting as it sounds.  The purchase price adjusted for inflation (CPI index) in Jan2022 dollars is 19,400 x 1.145 = 22,215.  So in constant Jan2022 dollars I sold it for 88.2% of what I paid for it. 

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #3357 on: October 12, 2022, 07:07:44 AM »
Agreed that accounting for the purchasing power of money matters.

This is a community of people who make decisions around early retirement. The assumption that income will be higher ten years from now (let alone 30) may not hold.

nereo

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Re: DONT Payoff your Mortgage Club
« Reply #3358 on: October 12, 2022, 08:29:58 AM »
Agreed that accounting for the purchasing power of money matters.

This is a community of people who make decisions around early retirement. The assumption that income will be higher ten years from now (let alone 30) may not hold.

Do you mean in nominal or real terms?  I wouldn’t be surprised if my real income doesn’t increase in a decade, but it would painful if we saw zero increase and inflation north of 3% for the next decade.

Thankfully we have automatic COLAs in our current contracts…

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #3359 on: October 12, 2022, 12:12:35 PM »
A retiree would have no need to save. For an early retiree, that's 20%+ of their income (and more for a committed Mustachian) that would not be replaced in retirement. I suppose inflation could total 20% over a few years, especially at the rate that's going now.


rpr

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Re: DONT Payoff your Mortgage Club
« Reply #3360 on: November 15, 2022, 11:24:34 AM »
Back to this thread again.

We sold our house and moved cross country with a decent chunk of change to a VHCOL. Initial plan was to rent but we found a nice place to buy. So we are under contract.

Got a decent (in the current environment) sub 5% 7/1 ARM with 30 year amortization. However, the loan had to be jumbo, so could not put more down. The down payment is just a little bit over 20%.

Have another 20% of the house value in cash from the previous house sale which is sitting in Cap One savings at 3% now.

Question is: how to deploy that cash? 

Some background info: DINK couple low-to-mid 50s with reasonably stable jobs (but who knows). Currently able to max all tax deferred/tax advantaged accounts even with the higher mortgage payments. Asset allocation is 65/35 stocks/bonds. Golden handcuffs about 7-8 years away. Jobs are enjoyable at the moment but again management can change at any time ;)

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #3361 on: November 15, 2022, 12:27:00 PM »
So this is the DNPYM club, so we're ruling out paying down your mortgage.

You say your rate is < 5%, and that rate is guaranteed for seven years. I'm thinking you want to identify a portfolio that is X% Small-cap-value--I'd use $SLYV or $IJS--and (1-X)% treasury bills.

Here's how your solve for X: go to Portfolio visualizer, and plug in X to get an 80% chance of the seven-year return exceeding a CAGR of your mortgage rate. Then put that WHOLE CHUNK into that allocation before the end of the week. 

nereo

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Re: DONT Payoff your Mortgage Club
« Reply #3362 on: November 15, 2022, 01:46:02 PM »


Question is: how to deploy that cash? 

Some background info: DINK couple low-to-mid 50s with reasonably stable jobs (but who knows). Currently able to max all tax deferred/tax advantaged accounts even with the higher mortgage payments. Asset allocation is 65/35 stocks/bonds. Golden handcuffs about 7-8 years away. Jobs are enjoyable at the moment but again management can change at any time ;)

First: Do you have an Investor Policy STatement (IPS), or at least an established Asset Allocation (AA)?  If so, my recommendation is to just deploy the cash according to your pre-established IPS/AA - in one lump sum if you can stomach that and if not in a series of automated contributions.You mentioned a 65/35 stock/bond, but is that your complete AA

If you do not have an IPS - now is a great time to do just that. Not only will it determine where you should put your money, but it helps think through your goals (e.g. “‘golden handcuffs 7-8 years away”, we want to ____”)

I find the Investment Order is a good place to start - see how it applies to you and where you might diverge.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #3363 on: November 15, 2022, 02:23:40 PM »
Today I ran into someone I know slightly. We have discussed Real Estate in the past and I haven't seen her for six months or so. I jokingly said, "How do you like that low-interest rate mortgage now?" knowing she's >3%. She said, "Well, now I'm trapped". OMG, there is just no pleasing some people!

Alas, I've heard people use that same word elsewhere on the forums and I just kind of roll my eyes.

couponvan

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Re: DONT Payoff your Mortgage Club
« Reply #3364 on: November 15, 2022, 04:09:29 PM »
Today I ran into someone I know slightly. We have discussed Real Estate in the past and I haven't seen her for six months or so. I jokingly said, "How do you like that low-interest rate mortgage now?" knowing she's >3%. She said, "Well, now I'm trapped". OMG, there is just no pleasing some people!

Alas, I've heard people use that same word elsewhere on the forums and I just kind of roll my eyes.
Ha! That could be me! I am sitting at 2.6%, but feeling like I should stay because we have the great rate. I’m even looking at rental options, although this isn’t a good rental house I have built!

bryan995

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Re: DONT Payoff your Mortgage Club
« Reply #3365 on: November 16, 2022, 07:38:47 AM »
Today I ran into someone I know slightly. We have discussed Real Estate in the past and I haven't seen her for six months or so. I jokingly said, "How do you like that low-interest rate mortgage now?" knowing she's >3%. She said, "Well, now I'm trapped". OMG, there is just no pleasing some people!

Alas, I've heard people use that same word elsewhere on the forums and I just kind of roll my eyes.

We are absolutely trapped ! Meaning we could never sell this home. If we ever need/want to move, it will have to be without the aid of the equity we have.

2.9% 30yr fixed. And because of CA prop 13 we pay an assessed 803k taxes on a 1.7M home.
It would be financial suicide to sell! Monthly payment would be >2x to even move into a neighbors home.


ChpBstrd

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Re: DONT Payoff your Mortgage Club
« Reply #3366 on: November 16, 2022, 08:04:52 AM »
Today I ran into someone I know slightly. We have discussed Real Estate in the past and I haven't seen her for six months or so. I jokingly said, "How do you like that low-interest rate mortgage now?" knowing she's >3%. She said, "Well, now I'm trapped". OMG, there is just no pleasing some people!

Alas, I've heard people use that same word elsewhere on the forums and I just kind of roll my eyes.

We are absolutely trapped ! Meaning we could never sell this home. If we ever need/want to move, it will have to be without the aid of the equity we have.

2.9% 30yr fixed. And because of CA prop 13 we pay an assessed 803k taxes on a 1.7M home.
It would be financial suicide to sell! Monthly payment would be >2x to even move into a neighbors home.
The trap is that now all these people who rushed to lock in low interest rates on very high home prices are unable to move in order to pursue career advancement, or to shorten their commutes. They can't sell because their next home would have a higher rate, and because they have or will soon have negative equity. Many of them settled on homes the don't particularly like in the frenzy of bidding wars.

This is chapter 5,683 in the book "Never Do What The Herd Is Doing".

nereo

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Re: DONT Payoff your Mortgage Club
« Reply #3367 on: November 16, 2022, 08:45:42 AM »
Today I ran into someone I know slightly. We have discussed Real Estate in the past and I haven't seen her for six months or so. I jokingly said, "How do you like that low-interest rate mortgage now?" knowing she's >3%. She said, "Well, now I'm trapped". OMG, there is just no pleasing some people!

Alas, I've heard people use that same word elsewhere on the forums and I just kind of roll my eyes.

We are absolutely trapped ! Meaning we could never sell this home. If we ever need/want to move, it will have to be without the aid of the equity we have.

2.9% 30yr fixed. And because of CA prop 13 we pay an assessed 803k taxes on a 1.7M home.
It would be financial suicide to sell! Monthly payment would be >2x to even move into a neighbors home.
The trap is that now all these people who rushed to lock in low interest rates on very high home prices are unable to move in order to pursue career advancement, or to shorten their commutes. They can't sell because their next home would have a higher rate, and because they have or will soon have negative equity. Many of them settled on homes the don't particularly like in the frenzy of bidding wars.

This is chapter 5,683 in the book "Never Do What The Herd Is Doing".

To me, that's an odd way of thinking about it.  Their ability to take on a higher rate isn't strongly impacted by their current mortgage - if they didn't have that mortgage they would not be in a stronger position; they would still need to pay at a higher rate under the current environment. If anything, having a low rate now means they could have paid down more of the principle - they should not have 'negative equity'.
If they settled on homes they didn't particularly like... well that was just a dumb purchase.  Maybe some were driven by the market, but one can make stupid decisions with high rates too (just ask my inlaws, who bought into properties they didn't really like at >8% in the 1980s).


ChpBstrd

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Re: DONT Payoff your Mortgage Club
« Reply #3368 on: November 16, 2022, 10:43:48 AM »
Today I ran into someone I know slightly. We have discussed Real Estate in the past and I haven't seen her for six months or so. I jokingly said, "How do you like that low-interest rate mortgage now?" knowing she's >3%. She said, "Well, now I'm trapped". OMG, there is just no pleasing some people!

Alas, I've heard people use that same word elsewhere on the forums and I just kind of roll my eyes.

We are absolutely trapped ! Meaning we could never sell this home. If we ever need/want to move, it will have to be without the aid of the equity we have.

2.9% 30yr fixed. And because of CA prop 13 we pay an assessed 803k taxes on a 1.7M home.
It would be financial suicide to sell! Monthly payment would be >2x to even move into a neighbors home.
The trap is that now all these people who rushed to lock in low interest rates on very high home prices are unable to move in order to pursue career advancement, or to shorten their commutes. They can't sell because their next home would have a higher rate, and because they have or will soon have negative equity. Many of them settled on homes the don't particularly like in the frenzy of bidding wars.

This is chapter 5,683 in the book "Never Do What The Herd Is Doing".

To me, that's an odd way of thinking about it.  Their ability to take on a higher rate isn't strongly impacted by their current mortgage - if they didn't have that mortgage they would not be in a stronger position; they would still need to pay at a higher rate under the current environment. If anything, having a low rate now means they could have paid down more of the principle - they should not have 'negative equity'.
If they settled on homes they didn't particularly like... well that was just a dumb purchase.  Maybe some were driven by the market, but one can make stupid decisions with high rates too (just ask my inlaws, who bought into properties they didn't really like at >8% in the 1980s).
Low rates came with high prices, and high rates will come with low prices. People shop for homes just like they shop for cars, by asking what monthly payment they can afford.

To visualize the trap, imagine yourself as a specialist working a job in town X. You are offered a job in town Y for a raise or promotion. You look into the possibility of moving, and discover your house has lost 10% of its value since you bought it for $500k with a 3.5% mortgage and 10% down, so you have zero equity. Comparable houses in town Y are now also $450k, but now the mortgage rate is 7%.

To move, you'd have to trade your current $2020 P+I payment for a $2694 P+I payment, plus come up with a new $45,000 down payment. Let's not even mention closing and moving costs. The two factors above, related to rising rates and fall in prices, will stop most people from moving. Presumably the P+I most people are currently paying is the max they can afford, and they don't have $45k laying around to plow into another houses' equity, after losing all their current house's equity.

This is how one misses out on promotions for the next 5-10 years.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #3369 on: November 16, 2022, 11:46:57 AM »
Today I ran into someone I know slightly. We have discussed Real Estate in the past and I haven't seen her for six months or so. I jokingly said, "How do you like that low-interest rate mortgage now?" knowing she's >3%. She said, "Well, now I'm trapped". OMG, there is just no pleasing some people!

Alas, I've heard people use that same word elsewhere on the forums and I just kind of roll my eyes.

We are absolutely trapped ! Meaning we could never sell this home. If we ever need/want to move, it will have to be without the aid of the equity we have.

2.9% 30yr fixed. And because of CA prop 13 we pay an assessed 803k taxes on a 1.7M home.
It would be financial suicide to sell! Monthly payment would be >2x to even move into a neighbors home.
The trap is that now all these people who rushed to lock in low interest rates on very high home prices are unable to move in order to pursue career advancement, or to shorten their commutes. They can't sell because their next home would have a higher rate, and because they have or will soon have negative equity. Many of them settled on homes the don't particularly like in the frenzy of bidding wars.

This is chapter 5,683 in the book "Never Do What The Herd Is Doing".

To me, that's an odd way of thinking about it.  Their ability to take on a higher rate isn't strongly impacted by their current mortgage - if they didn't have that mortgage they would not be in a stronger position; they would still need to pay at a higher rate under the current environment. If anything, having a low rate now means they could have paid down more of the principle - they should not have 'negative equity'.
If they settled on homes they didn't particularly like... well that was just a dumb purchase.  Maybe some were driven by the market, but one can make stupid decisions with high rates too (just ask my inlaws, who bought into properties they didn't really like at >8% in the 1980s).
Low rates came with high prices, and high rates will come with low prices. People shop for homes just like they shop for cars, by asking what monthly payment they can afford.

To visualize the trap, imagine yourself as a specialist working a job in town X. You are offered a job in town Y for a raise or promotion. You look into the possibility of moving, and discover your house has lost 10% of its value since you bought it for $500k with a 3.5% mortgage and 10% down, so you have zero equity. Comparable houses in town Y are now also $450k, but now the mortgage rate is 7%.

To move, you'd have to trade your current $2020 P+I payment for a $2694 P+I payment, plus come up with a new $45,000 down payment. Let's not even mention closing and moving costs. The two factors above, related to rising rates and fall in prices, will stop most people from moving. Presumably the P+I most people are currently paying is the max they can afford, and they don't have $45k laying around to plow into another houses' equity, after losing all their current house's equity.

This is how one misses out on promotions for the next 5-10 years.
Mildly curious what you would propose as a solution to this "problem".

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Re: DONT Payoff your Mortgage Club
« Reply #3370 on: November 16, 2022, 12:30:19 PM »
Today I ran into someone I know slightly. We have discussed Real Estate in the past and I haven't seen her for six months or so. I jokingly said, "How do you like that low-interest rate mortgage now?" knowing she's >3%. She said, "Well, now I'm trapped". OMG, there is just no pleasing some people!

Alas, I've heard people use that same word elsewhere on the forums and I just kind of roll my eyes.

We are absolutely trapped ! Meaning we could never sell this home. If we ever need/want to move, it will have to be without the aid of the equity we have.

2.9% 30yr fixed. And because of CA prop 13 we pay an assessed 803k taxes on a 1.7M home.
It would be financial suicide to sell! Monthly payment would be >2x to even move into a neighbors home.
The trap is that now all these people who rushed to lock in low interest rates on very high home prices are unable to move in order to pursue career advancement, or to shorten their commutes. They can't sell because their next home would have a higher rate, and because they have or will soon have negative equity. Many of them settled on homes the don't particularly like in the frenzy of bidding wars.

This is chapter 5,683 in the book "Never Do What The Herd Is Doing".

To me, that's an odd way of thinking about it.  Their ability to take on a higher rate isn't strongly impacted by their current mortgage - if they didn't have that mortgage they would not be in a stronger position; they would still need to pay at a higher rate under the current environment. If anything, having a low rate now means they could have paid down more of the principle - they should not have 'negative equity'.
If they settled on homes they didn't particularly like... well that was just a dumb purchase.  Maybe some were driven by the market, but one can make stupid decisions with high rates too (just ask my inlaws, who bought into properties they didn't really like at >8% in the 1980s).
Low rates came with high prices, and high rates will come with low prices. People shop for homes just like they shop for cars, by asking what monthly payment they can afford.

To visualize the trap, imagine yourself as a specialist working a job in town X. You are offered a job in town Y for a raise or promotion. You look into the possibility of moving, and discover your house has lost 10% of its value since you bought it for $500k with a 3.5% mortgage and 10% down, so you have zero equity. Comparable houses in town Y are now also $450k, but now the mortgage rate is 7%.

To move, you'd have to trade your current $2020 P+I payment for a $2694 P+I payment, plus come up with a new $45,000 down payment. Let's not even mention closing and moving costs. The two factors above, related to rising rates and fall in prices, will stop most people from moving. Presumably the P+I most people are currently paying is the max they can afford, and they don't have $45k laying around to plow into another houses' equity, after losing all their current house's equity.

This is how one misses out on promotions for the next 5-10 years.
Mildly curious what you would propose as a solution to this "problem".

As someone who has moved every three or so years on average over the last couple decades, our solution has been to roll equity into the new down payment. So we only have a little mortgage right now (current total is about $15k less than what we pour into our taxable account every year). That makes us only have about one foot in this club. But it also provides us with little worry for the future as it is possible that our next move will be to our retirement home. We will do some figuring as we get close to that time about what to do with the equity that we have. For us it has been about optimizing our situation and how it looks relative to a large number of assumptions about the future.

ChpBstrd

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Re: DONT Payoff your Mortgage Club
« Reply #3371 on: November 16, 2022, 02:13:54 PM »
Today I ran into someone I know slightly. We have discussed Real Estate in the past and I haven't seen her for six months or so. I jokingly said, "How do you like that low-interest rate mortgage now?" knowing she's >3%. She said, "Well, now I'm trapped". OMG, there is just no pleasing some people!

Alas, I've heard people use that same word elsewhere on the forums and I just kind of roll my eyes.

We are absolutely trapped ! Meaning we could never sell this home. If we ever need/want to move, it will have to be without the aid of the equity we have.

2.9% 30yr fixed. And because of CA prop 13 we pay an assessed 803k taxes on a 1.7M home.
It would be financial suicide to sell! Monthly payment would be >2x to even move into a neighbors home.
The trap is that now all these people who rushed to lock in low interest rates on very high home prices are unable to move in order to pursue career advancement, or to shorten their commutes. They can't sell because their next home would have a higher rate, and because they have or will soon have negative equity. Many of them settled on homes the don't particularly like in the frenzy of bidding wars.

This is chapter 5,683 in the book "Never Do What The Herd Is Doing".

To me, that's an odd way of thinking about it.  Their ability to take on a higher rate isn't strongly impacted by their current mortgage - if they didn't have that mortgage they would not be in a stronger position; they would still need to pay at a higher rate under the current environment. If anything, having a low rate now means they could have paid down more of the principle - they should not have 'negative equity'.
If they settled on homes they didn't particularly like... well that was just a dumb purchase.  Maybe some were driven by the market, but one can make stupid decisions with high rates too (just ask my inlaws, who bought into properties they didn't really like at >8% in the 1980s).
Low rates came with high prices, and high rates will come with low prices. People shop for homes just like they shop for cars, by asking what monthly payment they can afford.

To visualize the trap, imagine yourself as a specialist working a job in town X. You are offered a job in town Y for a raise or promotion. You look into the possibility of moving, and discover your house has lost 10% of its value since you bought it for $500k with a 3.5% mortgage and 10% down, so you have zero equity. Comparable houses in town Y are now also $450k, but now the mortgage rate is 7%.

To move, you'd have to trade your current $2020 P+I payment for a $2694 P+I payment, plus come up with a new $45,000 down payment. Let's not even mention closing and moving costs. The two factors above, related to rising rates and fall in prices, will stop most people from moving. Presumably the P+I most people are currently paying is the max they can afford, and they don't have $45k laying around to plow into another houses' equity, after losing all their current house's equity.

This is how one misses out on promotions for the next 5-10 years.
Mildly curious what you would propose as a solution to this "problem".
There is no solution. The trapped person can either miss out on the promotion because they can't afford to relocate, or they can bite the bullet, come up with more down payment money, and struggle with higher payments for an equivalent house.

If layoffs force them to relocate, homeowners will have to bite the bullet, which may negate all the savings from the low rate they were chasing when they bought their house or refinanced. People's reluctance to relocate might result in longer periods of unemployment, longer average commutes, slower post-recession recoveries, more difficulties for businesses to hire workers, a shift of businesses toward denser urban areas, and fewer homes on the market. Between the financial disincentives for moving and the work-from-home movement, the future does not look bright for RE agents or mortgage originators.

It's the RE parallel to the "golden handcuffs" problem faced by FI people with pension and stock vesting.

bryan995

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Re: DONT Payoff your Mortgage Club
« Reply #3372 on: November 16, 2022, 02:24:44 PM »
Today I ran into someone I know slightly. We have discussed Real Estate in the past and I haven't seen her for six months or so. I jokingly said, "How do you like that low-interest rate mortgage now?" knowing she's >3%. She said, "Well, now I'm trapped". OMG, there is just no pleasing some people!

Alas, I've heard people use that same word elsewhere on the forums and I just kind of roll my eyes.

We are absolutely trapped ! Meaning we could never sell this home. If we ever need/want to move, it will have to be without the aid of the equity we have.

2.9% 30yr fixed. And because of CA prop 13 we pay an assessed 803k taxes on a 1.7M home.
It would be financial suicide to sell! Monthly payment would be >2x to even move into a neighbors home.
The trap is that now all these people who rushed to lock in low interest rates on very high home prices are unable to move in order to pursue career advancement, or to shorten their commutes. They can't sell because their next home would have a higher rate, and because they have or will soon have negative equity. Many of them settled on homes the don't particularly like in the frenzy of bidding wars.

This is chapter 5,683 in the book "Never Do What The Herd Is Doing".

To me, that's an odd way of thinking about it.  Their ability to take on a higher rate isn't strongly impacted by their current mortgage - if they didn't have that mortgage they would not be in a stronger position; they would still need to pay at a higher rate under the current environment. If anything, having a low rate now means they could have paid down more of the principle - they should not have 'negative equity'.
If they settled on homes they didn't particularly like... well that was just a dumb purchase.  Maybe some were driven by the market, but one can make stupid decisions with high rates too (just ask my inlaws, who bought into properties they didn't really like at >8% in the 1980s).
Low rates came with high prices, and high rates will come with low prices. People shop for homes just like they shop for cars, by asking what monthly payment they can afford.

To visualize the trap, imagine yourself as a specialist working a job in town X. You are offered a job in town Y for a raise or promotion. You look into the possibility of moving, and discover your house has lost 10% of its value since you bought it for $500k with a 3.5% mortgage and 10% down, so you have zero equity. Comparable houses in town Y are now also $450k, but now the mortgage rate is 7%.

To move, you'd have to trade your current $2020 P+I payment for a $2694 P+I payment, plus come up with a new $45,000 down payment. Let's not even mention closing and moving costs. The two factors above, related to rising rates and fall in prices, will stop most people from moving. Presumably the P+I most people are currently paying is the max they can afford, and they don't have $45k laying around to plow into another houses' equity, after losing all their current house's equity.

This is how one misses out on promotions for the next 5-10 years.
Mildly curious what you would propose as a solution to this "problem".
There is no solution. The trapped person can either miss out on the promotion because they can't afford to relocate, or they can bite the bullet, come up with more down payment money, and struggle with higher payments for an equivalent house.

If layoffs force them to relocate, homeowners will have to bite the bullet, which may negate all the savings from the low rate they were chasing when they bought their house or refinanced. People's reluctance to relocate might result in longer periods of unemployment, longer average commutes, slower post-recession recoveries, more difficulties for businesses to hire workers, a shift of businesses toward denser urban areas, and fewer homes on the market. Between the financial disincentives for moving and the work-from-home movement, the future does not look bright for RE agents or mortgage originators.

It's the RE parallel to the "golden handcuffs" problem faced by FI people with pension and stock vesting.

This is why you buy in a 'hub' for your line of work.  No need to relocate.

SF/Seattle for tech
SD/Boston for biotech
XYC for ABC

Mucho employment options, and housing demand seems to stay incredibly strong even through broader down-turns in these areas.

dandarc

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Re: DONT Payoff your Mortgage Club
« Reply #3373 on: November 16, 2022, 02:29:51 PM »
Today I ran into someone I know slightly. We have discussed Real Estate in the past and I haven't seen her for six months or so. I jokingly said, "How do you like that low-interest rate mortgage now?" knowing she's >3%. She said, "Well, now I'm trapped". OMG, there is just no pleasing some people!

Alas, I've heard people use that same word elsewhere on the forums and I just kind of roll my eyes.

We are absolutely trapped ! Meaning we could never sell this home. If we ever need/want to move, it will have to be without the aid of the equity we have.

2.9% 30yr fixed. And because of CA prop 13 we pay an assessed 803k taxes on a 1.7M home.
It would be financial suicide to sell! Monthly payment would be >2x to even move into a neighbors home.
The trap is that now all these people who rushed to lock in low interest rates on very high home prices are unable to move in order to pursue career advancement, or to shorten their commutes. They can't sell because their next home would have a higher rate, and because they have or will soon have negative equity. Many of them settled on homes the don't particularly like in the frenzy of bidding wars.

This is chapter 5,683 in the book "Never Do What The Herd Is Doing".

To me, that's an odd way of thinking about it.  Their ability to take on a higher rate isn't strongly impacted by their current mortgage - if they didn't have that mortgage they would not be in a stronger position; they would still need to pay at a higher rate under the current environment. If anything, having a low rate now means they could have paid down more of the principle - they should not have 'negative equity'.
If they settled on homes they didn't particularly like... well that was just a dumb purchase.  Maybe some were driven by the market, but one can make stupid decisions with high rates too (just ask my inlaws, who bought into properties they didn't really like at >8% in the 1980s).
Low rates came with high prices, and high rates will come with low prices. People shop for homes just like they shop for cars, by asking what monthly payment they can afford.

To visualize the trap, imagine yourself as a specialist working a job in town X. You are offered a job in town Y for a raise or promotion. You look into the possibility of moving, and discover your house has lost 10% of its value since you bought it for $500k with a 3.5% mortgage and 10% down, so you have zero equity. Comparable houses in town Y are now also $450k, but now the mortgage rate is 7%.

To move, you'd have to trade your current $2020 P+I payment for a $2694 P+I payment, plus come up with a new $45,000 down payment. Let's not even mention closing and moving costs. The two factors above, related to rising rates and fall in prices, will stop most people from moving. Presumably the P+I most people are currently paying is the max they can afford, and they don't have $45k laying around to plow into another houses' equity, after losing all their current house's equity.

This is how one misses out on promotions for the next 5-10 years.
Mildly curious what you would propose as a solution to this "problem".
There is no solution. The trapped person can either miss out on the promotion because they can't afford to relocate, or they can bite the bullet, come up with more down payment money, and struggle with higher payments for an equivalent house.

If layoffs force them to relocate, homeowners will have to bite the bullet, which may negate all the savings from the low rate they were chasing when they bought their house or refinanced. People's reluctance to relocate might result in longer periods of unemployment, longer average commutes, slower post-recession recoveries, more difficulties for businesses to hire workers, a shift of businesses toward denser urban areas, and fewer homes on the market. Between the financial disincentives for moving and the work-from-home movement, the future does not look bright for RE agents or mortgage originators.

It's the RE parallel to the "golden handcuffs" problem faced by FI people with pension and stock vesting.
There's "sell and rent". I know not many homeowners view renting as a viable option and it would be a tough pill to swallow with the equity, but you don't need the big down payment when renting usually. Depending on the market, rent can be cheaper than mortgage on similar places too, although that varies wildly.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #3374 on: November 16, 2022, 02:36:28 PM »
Today I ran into someone I know slightly. We have discussed Real Estate in the past and I haven't seen her for six months or so. I jokingly said, "How do you like that low-interest rate mortgage now?" knowing she's >3%. She said, "Well, now I'm trapped". OMG, there is just no pleasing some people!

Alas, I've heard people use that same word elsewhere on the forums and I just kind of roll my eyes.

We are absolutely trapped ! Meaning we could never sell this home. If we ever need/want to move, it will have to be without the aid of the equity we have.

2.9% 30yr fixed. And because of CA prop 13 we pay an assessed 803k taxes on a 1.7M home.
It would be financial suicide to sell! Monthly payment would be >2x to even move into a neighbors home.
The trap is that now all these people who rushed to lock in low interest rates on very high home prices are unable to move in order to pursue career advancement, or to shorten their commutes. They can't sell because their next home would have a higher rate, and because they have or will soon have negative equity. Many of them settled on homes the don't particularly like in the frenzy of bidding wars.

This is chapter 5,683 in the book "Never Do What The Herd Is Doing".

To me, that's an odd way of thinking about it.  Their ability to take on a higher rate isn't strongly impacted by their current mortgage - if they didn't have that mortgage they would not be in a stronger position; they would still need to pay at a higher rate under the current environment. If anything, having a low rate now means they could have paid down more of the principle - they should not have 'negative equity'.
If they settled on homes they didn't particularly like... well that was just a dumb purchase.  Maybe some were driven by the market, but one can make stupid decisions with high rates too (just ask my inlaws, who bought into properties they didn't really like at >8% in the 1980s).
Low rates came with high prices, and high rates will come with low prices. People shop for homes just like they shop for cars, by asking what monthly payment they can afford.

To visualize the trap, imagine yourself as a specialist working a job in town X. You are offered a job in town Y for a raise or promotion. You look into the possibility of moving, and discover your house has lost 10% of its value since you bought it for $500k with a 3.5% mortgage and 10% down, so you have zero equity. Comparable houses in town Y are now also $450k, but now the mortgage rate is 7%.

To move, you'd have to trade your current $2020 P+I payment for a $2694 P+I payment, plus come up with a new $45,000 down payment. Let's not even mention closing and moving costs. The two factors above, related to rising rates and fall in prices, will stop most people from moving. Presumably the P+I most people are currently paying is the max they can afford, and they don't have $45k laying around to plow into another houses' equity, after losing all their current house's equity.

This is how one misses out on promotions for the next 5-10 years.
Mildly curious what you would propose as a solution to this "problem".
There is no solution. The trapped person can either miss out on the promotion because they can't afford to relocate, or they can bite the bullet, come up with more down payment money, and struggle with higher payments for an equivalent house.

If layoffs force them to relocate, homeowners will have to bite the bullet, which may negate all the savings from the low rate they were chasing when they bought their house or refinanced. People's reluctance to relocate might result in longer periods of unemployment, longer average commutes, slower post-recession recoveries, more difficulties for businesses to hire workers, a shift of businesses toward denser urban areas, and fewer homes on the market. Between the financial disincentives for moving and the work-from-home movement, the future does not look bright for RE agents or mortgage originators.

It's the RE parallel to the "golden handcuffs" problem faced by FI people with pension and stock vesting.
Sounds like it's the same as it ever was. The historic low interest rates on the last decade gave people opportunities that never existed before, but everything else on your list is familiar.

To clarify: when I hear people say they're "trapped" it means they can't change their mind about where they want to live. i.e. they can't upsize, downsize, rightsize, whatever.

So many buyers had FOMO and made sub-optimal decisions in the last few years in their rush to buy something, anything.

Anecdote: When a home with undisclosed/hidden problems was for sale in our neighborhood, we chatted with as many potential buyers as we could. When we gently pointed out some of the things they might have wanted to pay extra attention to, more than one said, "But what else are we going to buy?"

rpr

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Re: DONT Payoff your Mortgage Club
« Reply #3375 on: November 16, 2022, 07:01:21 PM »
Interesting replies. Thanks -- @talltexan @nereo @Dicey others...

After reading through the exchange, it looks like having enough liquidity is really important. For now we decided to keep the remaining money in a HYSA and reassess after another year. It may not be optimal but is probably a simple option.

dragoncar

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Re: DONT Payoff your Mortgage Club
« Reply #3376 on: November 17, 2022, 11:43:13 AM »
Today I ran into someone I know slightly. We have discussed Real Estate in the past and I haven't seen her for six months or so. I jokingly said, "How do you like that low-interest rate mortgage now?" knowing she's >3%. She said, "Well, now I'm trapped". OMG, there is just no pleasing some people!

Alas, I've heard people use that same word elsewhere on the forums and I just kind of roll my eyes.

We are absolutely trapped ! Meaning we could never sell this home. If we ever need/want to move, it will have to be without the aid of the equity we have.

2.9% 30yr fixed. And because of CA prop 13 we pay an assessed 803k taxes on a 1.7M home.
It would be financial suicide to sell! Monthly payment would be >2x to even move into a neighbors home.

Yeah we bought our place before we knew we wanted/would have kids.  Now we are side eyeing our mediocre schools but even if we downsized to a better school district for the same price our property taxes would increase to the point private school tuition is competitive.  Plus we wouldn’t have to leave a house we otherwise like.

If prices absolutely crashed it would help but I don’t really think that’s going to happen

Because everyone else is “trapped” so there will be very low inventory outside of the three Ds
« Last Edit: November 17, 2022, 11:45:15 AM by dragoncar »

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #3377 on: November 21, 2022, 07:17:38 AM »
I agree that keeping that low rate is nice, but if you're doing the DPYM club correctly, you are taking what you're saving on the payments and building up that snowball so that you'll have more liquidity available for when the need to move does arise.

When the talltexan house was planning a move in 2019, I kept thinking that there'd be a pull-back in prices, and we could time with that to move to a larger house in a more desirable area (thinking that a 10% pullback would help us need to cover less of a gap to move "up"). We relented, and 2020 came, and the market moved in the opposite direction. 

Goldielocks

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Re: DONT Payoff your Mortgage Club
« Reply #3378 on: November 24, 2022, 02:32:27 PM »
Interesting replies. Thanks -- @talltexan @nereo @Dicey others...

After reading through the exchange, it looks like having enough liquidity is really important.

Winner winner!

Don't pay off your mortgage club works best when you can afford a 15 year mortgage, but choose the low interest 30 year one instead, to keep your cash flow flexible..

Tyson

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Re: DONT Payoff your Mortgage Club
« Reply #3379 on: November 24, 2022, 02:48:10 PM »
That's the key - don't just take your extra money and say "wheee, look at all the other stuff I can buy now". 

Be disciplined about saving/investing the extra cash every month and you will end up with WAY more money.

Holocene

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Re: DONT Payoff your Mortgage Club
« Reply #3380 on: November 25, 2022, 05:08:49 PM »
I bought some T bills today.  Rates were ~4-4.7% for 2-6 months.  When I refinanced my mortgage a little over a year ago at 3% and took some cash out, I definitely didn't imagine rates would climb so fast.  I've never experienced such high rates in my investing life.  I knew a mortgage at 3% was a good deal.  I didn't realize just how good of a deal it was until now.  I don't even need to compare paying off my mortgage to investing in stocks anymore.  I can invest in extremely safe short-term US government backed treasury bills and still come out ahead.  If I wanted to lock in longer term US bonds, those would also be beating my mortgage.  We definitely got the deal of a lifetime with these sub 4% mortgages.  Needless to say, I will continue to be a part of this club. :)

rpr

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Re: DONT Payoff your Mortgage Club
« Reply #3381 on: November 25, 2022, 06:37:46 PM »
I will admit I was a little annoyed when we sold our house earlier this year following a move. Had a 30 year FRM at 2.5%.   

Now I'm about to close on a house at 4.625 % 7/1 ARM. Maybe rates will come down again in the future. 

EchoStache

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Re: DONT Payoff your Mortgage Club
« Reply #3382 on: December 03, 2022, 08:35:59 AM »
Trying to decide whether to pay off my mortgage or not and if so, how to best do so.

Projected mortgage balance at FI: $300,000 @ 4.375% 30 year fixed.
Stash needed for FI while carrying mortgage $1,200,000


Stash needed for FI if I pay off the mortgage: $1,020,000
This assumes $1,020,000, -$300,000 to payoff mortgage, leaving a stash of $720,000

Paying off the mortgage reduces stash needed by $480,000.

Unless my math/facts are wrong, paying off my mortgage is significantly superior to not paying off my mortgage for FI.

(yes, I made a full thread about this elsewhere but thought I might get more eyes/input/discussion here as there won't be 100% overlap)

dandarc

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Re: DONT Payoff your Mortgage Club
« Reply #3383 on: December 03, 2022, 09:06:02 AM »
@UltraStache - how did you arrive at the $1.2 million figure? Likely being excessively conservative.

Another way to look at it - you need enough to cover "all other expenses" ($720,000) + enough to payoff the mortgage in full ($300,000), so you actually only need to $1,020,000 on your FIRE date. Because then - at any point once you have that amount in hand - you can support your lifestyle and choose to pay off the mortgage or not. Of course, once you get there, what you should do, in all probability, is not pay off the mortgage because 4.375% is still plenty low enough that you'd expect your portfolio to out-perform that by a wide margin.

How far out is FI?

rpr

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Re: DONT Payoff your Mortgage Club
« Reply #3384 on: December 03, 2022, 09:37:23 AM »
From @UltraStache 's other thread:
Quote
Let's assume that my retirement living expenses will be $48,000/year.  I need $1,200,000 for FI with 4% withdrawal.  This $48,000 includes a $300,000 mortgage @4.375% with principal and interest payment of $1600/month or $19,200/year.
As @dandarc points out, what do you expect $300K will return over the long term?

EchoStache

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Re: DONT Payoff your Mortgage Club
« Reply #3385 on: December 03, 2022, 10:17:35 AM »
@UltraStache - how did you arrive at the $1.2 million figure? Likely being excessively conservative.

Another way to look at it - you need enough to cover "all other expenses" ($720,000) + enough to payoff the mortgage in full ($300,000), so you actually only need to $1,020,000 on your FIRE date. Because then - at any point once you have that amount in hand - you can support your lifestyle and choose to pay off the mortgage or not. Of course, once you get there, what you should do, in all probability, is not pay off the mortgage because 4.375% is still plenty low enough that you'd expect your portfolio to out-perform that by a wide margin.

How far out is FI?

Yearly living expenses including the mortgage = $48,000/year.  Normal, 4% SWR requires $1.2m for $48,000 year.  If I have a mortgage payment, it has to be paid.  So I need $1.2m to retire with a mortgage.

Yearly living expenses without a mortgage are $29,000/year, which requires $720,000 for a 4% SWR, i.e. the same for either scenario.  Plus the $300,000 I would need to pay off the mortgage(if I saved until I have enough to pay the mortgage to zero).

FI is about 5-7 years out.

$1,020,000 does not allow me to fire while holding the $300,000 mortgage with a 4% SWR.

The math says that paying off the mortgage is superior to keeping my mortgage for FIRE. 

« Last Edit: December 03, 2022, 10:21:22 AM by UltraStache »

EchoStache

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Re: DONT Payoff your Mortgage Club
« Reply #3386 on: December 03, 2022, 10:19:26 AM »
From @UltraStache 's other thread:
Quote
Let's assume that my retirement living expenses will be $48,000/year.  I need $1,200,000 for FI with 4% withdrawal.  This $48,000 includes a $300,000 mortgage @4.375% with principal and interest payment of $1600/month or $19,200/year.
As @dandarc points out, what do you expect $300K will return over the long term?

If I keep the 300k invested, withdrawing 4% of that 300k does not pay the mortgage.  So I would have to postpone retirement by the length of time necessary to save/invest an additional $180,000 if it was important to me to keep making a mortgage payment.

dandarc

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Re: DONT Payoff your Mortgage Club
« Reply #3387 on: December 03, 2022, 10:29:01 AM »
The mortgage payment is not for the rest of your life like most lifestyle expenses are, and your mortgage also does not increase with inflation, so you don't need to cover it in the same way as living expenses with your investments - 4% is excessively conservative for this particular item. That's why better guidance is "everything else" * 25 + mortgage balance.

If you're going to insist on treating that mortgage payment like it is forever, then you should be cash-out refinancing every few years to extend out the payoff date. Which will get you to your higher number faster because you will be able to invest more with the proceeds every time you do that.
« Last Edit: December 03, 2022, 10:35:39 AM by dandarc »

dandarc

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Re: DONT Payoff your Mortgage Club
« Reply #3388 on: December 03, 2022, 10:34:34 AM »
That being said, if you've got qualms about 4% being too aggressive, then standard advice would be to simply choose a lower withdrawal rate, and this sort of "just lump the mortgage payment in the same as all other expenses even though it is fixed and has an end date" is effectively just lowering your withdrawal rate some.

EchoStache

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Re: DONT Payoff your Mortgage Club
« Reply #3389 on: December 03, 2022, 10:51:42 AM »
Thank you for the replies.  Already, I have received new information that alters my understanding and gives me more to consider.

Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #3390 on: December 03, 2022, 06:21:34 PM »
Yearly living expenses including the mortgage = $48,000/year.  Normal, 4% SWR requires $1.2m for $48,000 year.  If I have a mortgage payment, it has to be paid.  So I need $1.2m to retire with a mortgage.

Yearly living expenses without a mortgage are $29,000/year, which requires $720,000 for a 4% SWR, i.e. the same for either scenario.  Plus the $300,000 I would need to pay off the mortgage(if I saved until I have enough to pay the mortgage to zero).

FI is about 5-7 years out.

$1,020,000 does not allow me to fire while holding the $300,000 mortgage with a 4% SWR.

The math says that paying off the mortgage is superior to keeping my mortgage for FIRE.

This is incomplete.  If you are investing the money each month instead of paying down the mortgage that $300,000 will likely become more like $350,000 by RE date, which by itself pushes you up pretty close to $1.1 million, maybe with a tailwind you get to the full $1.2.  Optimistic thinking, but not crazy.

But there's more.  The mortgage is fixed, which the 4% rule assumes an inflation adjustment, so you need less money in retirement.  You can model this in FIREcalc. 

And the mortgage ends eventually, so again you need less money.  You can also model this in FIREcalc. 

I'd run a few sims and see where you are.  Paying down the mortgage is a high risk/low reward proposition, so make sure you consider all the variables before doing it.

jsap819

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Re: DONT Payoff your Mortgage Club
« Reply #3391 on: December 05, 2022, 05:57:26 PM »
From @UltraStache 's other thread:
Quote
Let's assume that my retirement living expenses will be $48,000/year.  I need $1,200,000 for FI with 4% withdrawal.  This $48,000 includes a $300,000 mortgage @4.375% with principal and interest payment of $1600/month or $19,200/year.
As @dandarc points out, what do you expect $300K will return over the long term?

If I keep the 300k invested, withdrawing 4% of that 300k does not pay the mortgage.  So I would have to postpone retirement by the length of time necessary to save/invest an additional $180,000 if it was important to me to keep making a mortgage payment.

It's too bad your rate is higher than current government bond rates. When I refinanced mine down to 2.375%, I can technically get a 30 year duration today that's currently higher than my mortgage rate and just withdraw my monthly mortgage payment and come out ahead after maturity, guaranteed. Your rate is still technically low enough to beat but it will come with risks (higher stock allocation). You can't focus on the 4% rule regarding your mortgage balance because it is the same fixed payment for the next 30 years and it will eventually be paid off.

LD_TAndK

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Re: DONT Payoff your Mortgage Club
« Reply #3392 on: December 15, 2022, 08:39:20 AM »
Didn't pay off my 2.875% mortgage today! Continued to enjoy having liquid assets! Continued to enjoy inflation driving down the value of my debt!

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #3393 on: December 15, 2022, 12:55:10 PM »
I popped over to the "pay off your mortgage" celebration thread, and people there are talking about how they need to have a HELOC in case they run into "liquidity problems" before they finish paying it off. It's like they're just. so. close. to figuring it out!

nereo

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Re: DONT Payoff your Mortgage Club
« Reply #3394 on: December 15, 2022, 01:53:14 PM »
I popped over to the "pay off your mortgage" celebration thread, and people there are talking about how they need to have a HELOC in case they run into "liquidity problems" before they finish paying it off. It's like they're just. so. close. to figuring it out!

Frankly, the reliance on HELOCs for liquidity problems scares me a little. HELOCs can be revoked at any time by your lender - indeed in 2008 most canceled them outright, and IIRC most recessions have resulted in a drastic tightening.


Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #3395 on: December 16, 2022, 12:08:38 AM »
I popped over to the "pay off your mortgage" celebration thread, and people there are talking about how they need to have a HELOC in case they run into "liquidity problems" before they finish paying it off. It's like they're just. so. close. to figuring it out!

Frankly, the reliance on HELOCs for liquidity problems scares me a little. HELOCs can be revoked at any time by your lender - indeed in 2008 most canceled them outright, and IIRC most recessions have resulted in a drastic tightening.
I had the same thought what I saw that. I started to respond and then remembered that we DPOYMers are not supposed to say anything that would be considered negative on that thread. It's exclusively for celebrating mortgage payoff, sigh.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #3396 on: December 16, 2022, 07:04:30 AM »
Indeed I remain committed to our cause. I follow the other thread because I think it's important to keep track of those beliefs that challenge my own. I suppose it's possible some of the mortgage payers are silently following us here, and I can only hope that our thoughtful discussion makes them wonder if we aren't slightly less crazy than they supposed.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #3397 on: December 16, 2022, 07:42:32 AM »
Indeed I remain committed to our cause. I follow the other thread because I think it's important to keep track of those beliefs that challenge my own. I suppose it's possible some of the mortgage payers are silently following us here, and I can only hope that our thoughtful discussion makes them wonder if we aren't slightly less crazy than they supposed.
Well put, sir!

YttriumNitrate

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Re: DONT Payoff your Mortgage Club
« Reply #3398 on: December 16, 2022, 12:27:56 PM »
I just noticed that the competitive online banks are now in the 2.25% range for FDIC insured deposits ... so only a little over a percentage point until the rate of return on risk free investing exceeds the rate on my 30 year mortgage.

I'm sure many others have beaten me to this point, but it finally happened to me. With this latest bump in rates I now have a risk-free FDIC insured bank account that's paying a higher rate than my mortgage. ;-)

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #3399 on: December 16, 2022, 12:55:15 PM »
I just noticed that the competitive online banks are now in the 2.25% range for FDIC insured deposits ... so only a little over a percentage point until the rate of return on risk free investing exceeds the rate on my 30 year mortgage.

I'm sure many others have beaten me to this point, but it finally happened to me. With this latest bump in rates I now have a risk-free FDIC insured bank account that's paying a higher rate than my mortgage. ;-)

Now that you mention it same here. 3.125% mortgage vs 3.3% savings account (Ally).

 

Wow, a phone plan for fifteen bucks!