Author Topic: DONT Payoff your Mortgage Club  (Read 359404 times)

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #650 on: July 04, 2018, 11:16:19 PM »
There's a book, "Ordinary People, Extraordinary Wealth" which has the clearest explanation of this concept I've ever seen. The first chapter (the only one you need to read, IMO) was literally life-changing for me. It is my Ah-Ha! moment on the path to FIRE. I used to believe that killing the mortgage was the gold standard. My SO tried valiantly to explain why putting more than 20% down and prepaying the mortgage was woefully sub-optimal, but I wasn't having any of it.

Some years later, I stumbled upon this book in the library. What a game changer! It's old now, but the concept is still rock-solid and presented in an easy to read and understand way. It's written by Ric Edelman. He's a financial planner with a radio show, which I know isn't Mustachian, but it is if you get the book at the library. Excellent advice that you don't have to pay for, for the win. Even if you pay full retail and only read the one chapter, it's well worth it.

I read this the other day on your recommendation (on Hoopla, which I had never tried before but is actually pretty solid) and just recommended it on reddit to someone in /r/pf. Gonna try to get my wife to read it, although I'm pretty sure she's not going to care. She doesn't have an opinion about our finances past "don't lose the money".
You know it's a fast read. Try offering her $100 to read it. Might be the best money you ever spent.

Huh. Well, she read it. Turns out she’s been on team “don’t pay off the mortgage” forever, we just hadn’t really discussed it in those terms. She’s skeptical of the author’s 7-8% returns but I think I can build on this.

Oh and all she required was foot rubs.
Holy cow!

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #651 on: July 05, 2018, 08:40:16 AM »
There's a book, "Ordinary People, Extraordinary Wealth" which has the clearest explanation of this concept I've ever seen. The first chapter (the only one you need to read, IMO) was literally life-changing for me. It is my Ah-Ha! moment on the path to FIRE. I used to believe that killing the mortgage was the gold standard. My SO tried valiantly to explain why putting more than 20% down and prepaying the mortgage was woefully sub-optimal, but I wasn't having any of it.

Some years later, I stumbled upon this book in the library. What a game changer! It's old now, but the concept is still rock-solid and presented in an easy to read and understand way. It's written by Ric Edelman. He's a financial planner with a radio show, which I know isn't Mustachian, but it is if you get the book at the library. Excellent advice that you don't have to pay for, for the win. Even if you pay full retail and only read the one chapter, it's well worth it.

I read this the other day on your recommendation (on Hoopla, which I had never tried before but is actually pretty solid) and just recommended it on reddit to someone in /r/pf. Gonna try to get my wife to read it, although I'm pretty sure she's not going to care. She doesn't have an opinion about our finances past "don't lose the money".
You know it's a fast read. Try offering her $100 to read it. Might be the best money you ever spent.

Huh. Well, she read it. Turns out she’s been on team “don’t pay off the mortgage” forever, we just hadn’t really discussed it in those terms. She’s skeptical of the author’s 7-8% returns but I think I can build on this.

Oh and all she required was foot rubs.

It would be a great value to start building a list of service providers who will accept foot rubs in place of $100. (It also wouldn't be on the topic of this discussion)

Tyson

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Re: DONT Payoff your Mortgage Club
« Reply #652 on: July 05, 2018, 11:14:35 AM »
There's a book, "Ordinary People, Extraordinary Wealth" which has the clearest explanation of this concept I've ever seen. The first chapter (the only one you need to read, IMO) was literally life-changing for me. It is my Ah-Ha! moment on the path to FIRE. I used to believe that killing the mortgage was the gold standard. My SO tried valiantly to explain why putting more than 20% down and prepaying the mortgage was woefully sub-optimal, but I wasn't having any of it.

Some years later, I stumbled upon this book in the library. What a game changer! It's old now, but the concept is still rock-solid and presented in an easy to read and understand way. It's written by Ric Edelman. He's a financial planner with a radio show, which I know isn't Mustachian, but it is if you get the book at the library. Excellent advice that you don't have to pay for, for the win. Even if you pay full retail and only read the one chapter, it's well worth it.

I read this the other day on your recommendation (on Hoopla, which I had never tried before but is actually pretty solid) and just recommended it on reddit to someone in /r/pf. Gonna try to get my wife to read it, although I'm pretty sure she's not going to care. She doesn't have an opinion about our finances past "don't lose the money".
You know it's a fast read. Try offering her $100 to read it. Might be the best money you ever spent.

Huh. Well, she read it. Turns out she’s been on team “don’t pay off the mortgage” forever, we just hadn’t really discussed it in those terms. She’s skeptical of the author’s 7-8% returns but I think I can build on this.

Oh and all she required was foot rubs.

It would be a great value to start building a list of service providers who will accept foot rubs in place of $100. (It also wouldn't be on the topic of this discussion)

Careful, foot massages are pretty dangerous territory - https://www.youtube.com/watch?v=KCO-SBPTF5E

moonpalace

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Re: DONT Payoff your Mortgage Club
« Reply #653 on: July 09, 2018, 03:02:19 PM »
I'm all in on not paying my mortgage early (15-year fixed at 2.75%, with ~13 years to go).

But I am starting to wobble on some of my law-school loans. It's a group of loans, all at adjustable rates. The weighted average rate been as low as 3.6% but is now at about 5.1%.

Total balance is $11k but that includes a bunch of small loans, so I could pay off one or more of the constituent loans (i.e. the ones with the highest interest rates) and reduce my monthly payment.

Question for the group is: at what interest rate should I start doing that?

Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #654 on: July 09, 2018, 04:04:02 PM »
I don't know if there is a hard-fast rule, but I think once you get above around 10-year Treasury plus 3%-ish it is a good idea to get rid of the debt. 

The fact it is variable makes it more attractive to retire it. 

tomsang

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Re: DONT Payoff your Mortgage Club
« Reply #655 on: July 09, 2018, 04:55:36 PM »
I'm all in on not paying my mortgage early (15-year fixed at 2.75%, with ~13 years to go).

But I am starting to wobble on some of my law-school loans. It's a group of loans, all at adjustable rates. The weighted average rate been as low as 3.6% but is now at about 5.1%.

Total balance is $11k but that includes a bunch of small loans, so I could pay off one or more of the constituent loans (i.e. the ones with the highest interest rates) and reduce my monthly payment.

Question for the group is: at what interest rate should I start doing that?

I think you are there.  Short term, variable and non dischargeable debt in this range is fine to pay down.  Rates are going up in the near future for these loans.  The whole value of the 30 year or in your case 15 year fixed rate mortgages is that they are fixed, if you have a few bad years of returns, you still have plenty of time for the market to turn, and they were at historic lows.  Mortgages are still incredibly cheap, but when the government was giving out a 30 year fixed rate loan for 3%, that was crazy.

Blahhhh456

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Re: DONT Payoff your Mortgage Club
« Reply #656 on: July 09, 2018, 07:09:05 PM »
Question for the group - is there ever a good reason to pay points?? We are looking at a house and the lender has offered 4.625% with no points and credits to the closing so we would pay $1K total (not including DP) or pay points and no closing credit for $10K down. The rate would then be 4.000% for 30 years. Trying to justify the $4550 points payment for dropping the rate 625 basis points. (I am also asking if they have any credits for the 4.000% too.) If I stay there for 30 years and just pay the mortgage every month the $4550 will save us over $37K in interest. The savings crossover for the $4550 is just under 4 years. Thoughts? I feel like I am going crazy number crunching here and I need my sanity straightened out. 

*edited for interest calculation.
« Last Edit: July 09, 2018, 07:15:40 PM by Blahhhh456 »

moonpalace

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Re: DONT Payoff your Mortgage Club
« Reply #657 on: July 09, 2018, 07:20:09 PM »
I think you are there.  Short term, variable and non dischargeable debt in this range is fine to pay down.  Rates are going up in the near future for these loans.

Thanks a lot for the thoughts. I think I'll start paying down some of those small loans soon and do a bit of a snowball on the others with the extra payment I avoid every month. Exciting!

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #658 on: July 09, 2018, 07:41:30 PM »
Question for the group - is there ever a good reason to pay points?? We are looking at a house and the lender has offered 4.625% with no points and credits to the closing so we would pay $1K total (not including DP) or pay points and no closing credit for $10K down. The rate would then be 4.000% for 30 years. Trying to justify the $4550 points payment for dropping the rate 625 basis points. (I am also asking if they have any credits for the 4.000% too.) If I stay there for 30 years and just pay the mortgage every month the $4550 will save us over $37K in interest. The savings crossover for the $4550 is just under 4 years. Thoughts? I feel like I am going crazy number crunching here and I need my sanity straightened out. 

*edited for interest calculation.

With the current rising rate environment I'd take the 4 year break even gamble. But I'm seeing a difference of 9k. Not 4550 unless I'm missing how youre calcing this. Also you should be compounding your savings at 5-6% annually. I use 7 some think that's high. You also should at the same time compound the 9k extra now annually. This difference is likely longer than 4 years. Would need to know the mortgage amount to do this calc better.

Blahhhh456

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Re: DONT Payoff your Mortgage Club
« Reply #659 on: July 09, 2018, 08:59:41 PM »
Question for the group - is there ever a good reason to pay points?? We are looking at a house and the lender has offered 4.625% with no points and credits to the closing so we would pay $1K total (not including DP) or pay points and no closing credit for $10K down. The rate would then be 4.000% for 30 years. Trying to justify the $4550 points payment for dropping the rate 625 basis points. (I am also asking if they have any credits for the 4.000% too.) If I stay there for 30 years and just pay the mortgage every month the $4550 will save us over $37K in interest. The savings crossover for the $4550 is just under 4 years. Thoughts? I feel like I am going crazy number crunching here and I need my sanity straightened out. 

*edited for interest calculation.

With the current rising rate environment I'd take the 4 year break even gamble. But I'm seeing a difference of 9k. Not 4550 unless I'm missing how youre calcing this. Also you should be compounding your savings at 5-6% annually. I use 7 some think that's high. You also should at the same time compound the 9k extra now annually. This difference is likely longer than 4 years. Would need to know the mortgage amount to do this calc better.

Purchase Price $350K - Down Payment of $70K for loan of $280K. Yes, the $9K is actually the bank not providing any credits. If I take the 4.625% the bank gives me $3.5K credits, so I just have to bring $1k to close. If I take the 4.000% rate, there are $0 credits, so essentially it is a difference of $9K. I am asking the bank to consider credits for the 4.000% so I can compare apples to apples for the points (the points are listed as $4550 on the quote), but if I am not successful, do you suggest comparing at the $9K level of funds to pay into the loan? I usually use 4% for compounding - super conservative over here :).

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #660 on: July 10, 2018, 04:28:47 AM »
It's about a 12 year break even. You should use nominal returns here at 10% and 9k difference to invest today. I probably wouldn't buy those points.

Blahhhh456

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Re: DONT Payoff your Mortgage Club
« Reply #661 on: July 10, 2018, 08:20:09 AM »
It's about a 12 year break even. You should use nominal returns here at 10% and 9k difference to invest today. I probably wouldn't buy those points.

Thanks - this is helpful. I do also have an option from the lender for no points but I pay all the closing costs of $4148 and the rate is 4.375%. I think I am going to lean more to this as I have the money to pay the closing costs and really don't want the bank to give a credit for a higher rate.

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #662 on: July 10, 2018, 09:17:57 AM »
It's about a 12 year break even. You should use nominal returns here at 10% and 9k difference to invest today. I probably wouldn't buy those points.

Thanks - this is helpful. I do also have an option from the lender for no points but I pay all the closing costs of $4148 and the rate is 4.375%. I think I am going to lean more to this as I have the money to pay the closing costs and really don't want the bank to give a credit for a higher rate.

this is actually worse its a 15 year payback - i'd jsut take the 4.625 assuming you will invest the 4148 and if you're not maxing tax advantaged accounts then definitely take the higher rate and funnel all that money into the accounts. 

Blahhhh456

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Re: DONT Payoff your Mortgage Club
« Reply #663 on: July 10, 2018, 11:27:01 AM »
It's about a 12 year break even. You should use nominal returns here at 10% and 9k difference to invest today. I probably wouldn't buy those points.

Thanks - this is helpful. I do also have an option from the lender for no points but I pay all the closing costs of $4148 and the rate is 4.375%. I think I am going to lean more to this as I have the money to pay the closing costs and really don't want the bank to give a credit for a higher rate.

this is actually worse its a 15 year payback - i'd jsut take the 4.625 assuming you will invest the 4148 and if you're not maxing tax advantaged accounts then definitely take the higher rate and funnel all that money into the accounts.

Thanks - I still have to pay $1k for the 4.625, so the payback is not quite 15 years. Yes, I max all the tax advantage accounts including dependent care :) and put another 10-20k towards an investment account. The extra $3k would likely just be paid toward moving costs as I am really cash light as I invest as much as possible.

I really appreciate your feedback. This has been very helpful.

Slee_stack

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Re: DONT Payoff your Mortgage Club
« Reply #664 on: July 10, 2018, 02:19:43 PM »
I screwed up and paid my mortgage off.

OK, so I had no choice because I sold the house.   Boy do I miss that sweet low rate!  Didn't need the property any longer though.   

If/when the next house purchase comes up..hopefully nice long, low rates will still be there.

tralfamadorian

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Re: DONT Payoff your Mortgage Club
« Reply #665 on: July 10, 2018, 03:06:40 PM »
Wow! Trollish behavior in here today!

Still paying off the mortgages as slowly as possible.

I think this guy is just another crystal ball gazer but wouldn't sub 3% rates a la europe be amazing? There's still some room before I hit my fannie/freddie loan limits:
https://www.realwealthnetwork.com/learn/interest-rates-predictions-bruce-norris/
« Last Edit: July 10, 2018, 03:11:11 PM by tralfamadorian »

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #666 on: July 10, 2018, 08:50:08 PM »
I believe we were politely asked to leave that thread alone, @boarder42, not the entire site, lol.

Like you, it pains me that a thread like that one exists, with no neutral place for balanced explanation/discussion. It's almost as if someone started a "Let's Celebrate Our New Monster Trucks" thread, and then complained they were getting too many face punches, and the mods agreed with them. Even this thread isn't the best solution, because people dead-set on killing.all.the.debt are never going to even open this thread. They just beeline to the Payoff Party.

I suppose we can take comfort that a small, but growing number of mustachians have been open to learning before they make a decision, and have made the choice that best suits their situation, hooray!

I hang around here to help make the path to FIRE easier for other people. I'm happy that I'm able to contribute to the discussion, and that has to be enough. Finally, b42, I admire the shit out of your tenacity. You never give up. But maybe we have to admit that we just can't save 'em all, much as we'd really, really like to.

Dicey

P.S, I wrote this immediately after b42's post at 10:50 this morning, but it didn't post. I'm going to leave it and send as written, because I stand by it, no matter what the cross chat has been in the interim.

mrmoonymartian

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Re: DONT Payoff your Mortgage Club
« Reply #667 on: July 11, 2018, 06:09:18 AM »
Looks like a bad time to step in here, but maybe I can offer a different perspective that could show this is not a black and white thing for everyone.

I'm on the other thread despite my instinctive desire to be here, because that is what makes the most mathematical sense for me. In Australia, things are different...

  • We never had your really low interest rates - no great recession or QE here.
  • Our mortgage rates are mostly variable and the banks put up the rates whenever they want (you can pay higher rates to fix them for a few years).
  • There is no tax deduction for mortgage interest.
  • There is high tax on investment income and moderate tax on realised capital gains (home excluded), while saving on mortgage interest is tax free.
  • Homes are not included in asset tests for various things like welfare, so as long as you have a paid off house you're set for life no matter what.
  • There are caps on low-tax retirement funds and we have no backdoor options to access them before the age of 60 (except in extreme circumstances).
  • Our stock market returns are not as high as the US, and returns from international stocks are taxed at a higher rate.
  • Redrawing on extra loan payments is free and easy, so it's not like the money is locked up in the event of emergencies.
  • Inflation is kept reasonably low.

I really wanted to get started on investing in full-tax accounts but had to reluctantly conclude it wasn't the right move for me to make. I max out my low-tax account concessional contributions and throw everything else at the mortgage. I have about 18 months left on it.

My main consolation is that if the market crashes then it may become worthwhile to 'rebalance' into discounted stocks at some stage regardless of these points. I consider the home equity to be similar to holding cash in that regard, only with a much better return.

Anyway, I hope everyone is able to analyse their circumstances rationally and take actions in their long-term best interests... even if it sometimes seems too boring or volatile, as the case may be.
« Last Edit: July 11, 2018, 06:16:06 AM by mrmoonymartian »

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #668 on: July 11, 2018, 06:47:52 AM »
Looks like a bad time to step in here, but maybe I can offer a different perspective that could show this is not a black and white thing for everyone.

I'm on the other thread despite my instinctive desire to be here, because that is what makes the most mathematical sense for me. In Australia, things are different...

  • We never had your really low interest rates - no great recession or QE here.
  • Our mortgage rates are mostly variable and the banks put up the rates whenever they want (you can pay higher rates to fix them for a few years).
  • There is no tax deduction for mortgage interest.
  • There is high tax on investment income and moderate tax on realised capital gains (home excluded), while saving on mortgage interest is tax free.
  • Homes are not included in asset tests for various things like welfare, so as long as you have a paid off house you're set for life no matter what.
  • There are caps on low-tax retirement funds and we have no backdoor options to access them before the age of 60 (except in extreme circumstances).
  • Our stock market returns are not as high as the US, and returns from international stocks are taxed at a higher rate.
  • Redrawing on extra loan payments is free and easy, so it's not like the money is locked up in the event of emergencies.
  • Inflation is kept reasonably low.

I really wanted to get started on investing in full-tax accounts but had to reluctantly conclude it wasn't the right move for me to make. I max out my low-tax account concessional contributions and throw everything else at the mortgage. I have about 18 months left on it.

My main consolation is that if the market crashes then it may become worthwhile to 'rebalance' into discounted stocks at some stage regardless of these points. I consider the home equity to be similar to holding cash in that regard, only with a much better return.

Anyway, I hope everyone is able to analyse their circumstances rationally and take actions in their long-term best interests... even if it sometimes seems too boring or volatile, as the case may be.

correct this has nothing to do with you - you're not an american you dont have low fixed rates - we understand these counterpoints - we dont blindly support not paying down mortgages. We support them when they make sense. 

FIreDrill

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Re: DONT Payoff your Mortgage Club
« Reply #669 on: July 14, 2018, 10:01:07 PM »
Just threw 1k into vanguard and I became 401k eligible at my new job this month.  Really excited to start throwing money towards investments now that we've settled in down here to a certain extent.  Time to get back on it! :D

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talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #670 on: July 16, 2018, 06:58:39 AM »
I drove by a nice neighborhood they're putting in about half-way between church and my in-laws house. (Currently we drive 7 mi to one and another 6 mi further past that to the other). But they're just starting to build there now, and we probably won't be ready to move for another two years. By then, the window on these crazy low interest rates may close for good.

sherr

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Re: DONT Payoff your Mortgage Club
« Reply #671 on: July 16, 2018, 07:24:26 AM »
I drove by a nice neighborhood they're putting in about half-way between church and my in-laws house. (Currently we drive 7 mi to one and another 6 mi further past that to the other). But they're just starting to build there now, and we probably won't be ready to move for another two years. By then, the window on these crazy low interest rates may close for good.

If I'm missing the point and you just want to complain to a sympathetic audience, then that's fine and ignore me.

However I'd say that one of the freedoms a frugal lifestyle gives you is not having to worry about money as a primary consideration. First move where you want when you want, and then secondarily optimize the finances of the situation as much as possible. You don't have to be trapped into moving somewhere sub-optimal now because the interest rates might go up in the future.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #672 on: July 16, 2018, 09:25:03 AM »
This is an excellent response, and I agree. My wife and I have discussed the two-year timetable for moving as it aligns better with her childcare goals for our son (who is currently three). It will be nice to have easier drives to in-laws' house and church.

Secretly, I'm hoping that the recession everyone is expecting will come by then, and house prices will drop, making it cheaper to "trade up". As long as the recession doesn't also cost one of us a job, that is ;-)

FIRE@50

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Re: DONT Payoff your Mortgage Club
« Reply #673 on: July 16, 2018, 09:40:22 AM »
This is an excellent response, and I agree. My wife and I have discussed the two-year timetable for moving as it aligns better with her childcare goals for our son (who is currently three). It will be nice to have easier drives to in-laws' house and church.

Secretly, I'm hoping that the recession everyone is expecting will come by then, and house prices will drop, making it cheaper to "trade up". As long as the recession doesn't also cost one of us a job, that is ;-)
We are in a similar situation. We plan to move before our daughter starts middle school in 3 years. I'm interested in seeing how the housing market reacts to the rising interest rates. The timing of the inevitable next recession will be interesting as well.

In the meantime, I'm planning to pay down our current mortgage at least some so that we make enough from the sale of our current home to cover a 20% down payment on the new home. I'm still undecided on how aggressively we should pay down that future mortgage. Do I want to join a club???

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #674 on: July 16, 2018, 09:47:46 AM »
That would greatly depend on your interest rate in a few years.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #675 on: July 16, 2018, 11:14:20 AM »
In the meantime, I'm planning to pay down our current mortgage at least some so that we make enough from the sale of our current home to cover a 20% down payment on the new home.
[/quote]
This is the equivalent of having extra money withheld from your paycheck so you can get a bigger tax return. Sure, it works, but it's completely inefficient

The smart thing to do is save aggressively, and keep the money under your own control so you have the most flexibility. What if home values go down in the meantime and you've locked up your money in a depreciating asset? (See: 2008. It happened to thousands upon thousands of homeowners.)
.

Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #676 on: July 16, 2018, 12:12:07 PM »
In the meantime, I'm planning to pay down our current mortgage at least some so that we make enough from the sale of our current home to cover a 20% down payment on the new home. I'm still undecided on how aggressively we should pay down that future mortgage. Do I want to join a club???

I'm with Dicey here.  If the money is in your bank account, then you control it.  If it is in your house, then you don't control it.

On a related note, I have a dear friend who is a physician.  Unlike a lot of doctors, she's been pretty smart with money.  After med school, she lived in two bedroom apartment with room mate and paid her student loans in just a few years.  She drives a car with 150K on the clock.  She is debt adverse and smartly frugal.  Maxes her 401K, etc.   She got married and bought a a dream house.  Not huge, but just a really cool home, and bought at the bottom of the market. And characteristically, she's been paying aggressively on the mortgage (15 year), with the idea in a few years she'll have no mortgage payment, and that will give flexibility to work fewer hours, travel more, easier to pay for college for the kids, etc.   And maybe down the road she sells it and downsizes, and that will be her retirement.  Not the most efficient retirement plan perhaps, but at least it is one, which is more than most people have. 

Very sadly, she is getting divorced.  She lives in a community property state, so that means the husband gets half of everything while they were married.  Now she is in situation where she will either have to sell the house, or pay the soon-to-be ex-husband about $150K for his share of the equity--which she'll have to borrow.  The house and area have appreciated a lot, so it is basically irreplaceable.  Now her retirement plan has been dealt a mortal blow, and she'll have to go into debt, which she absolutely hates. 

Moral of the story is keep the money out of the house.  At today's interest rates, it is simply not a good thing to do.   A high risk/low reward proposition. 

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #677 on: July 17, 2018, 09:17:37 AM »
I've met two kinds of doctors:

  • I'm a doctor who earns more money than any living soul and that will fix all my mistakes
  • I had to pay off medical school loans, and I'm going to eat glass before I ever go into debt again


FIRE@50

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Re: DONT Payoff your Mortgage Club
« Reply #678 on: July 17, 2018, 09:25:19 AM »
In the meantime, I'm planning to pay down our current mortgage at least some so that we make enough from the sale of our current home to cover a 20% down payment on the new home.
This is the equivalent of having extra money withheld from your paycheck so you can get a bigger tax return. Sure, it works, but it's completely inefficient

The smart thing to do is save aggressively, and keep the money under your own control so you have the most flexibility. What if home values go down in the meantime and you've locked up your money in a depreciating asset? (See: 2008. It happened to thousands upon thousands of homeowners.)
.
[/quote]If I do decide to forgo the guaranteed return of paying down my mortgage over the next 2-3 years, where do you recommend I put my money? I should also mention that we are currently paying PMI which I would like to get rid of. Thanks.

FIreDrill

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Re: DONT Payoff your Mortgage Club
« Reply #679 on: July 17, 2018, 10:00:12 AM »


In the meantime, I'm planning to pay down our current mortgage at least some so that we make enough from the sale of our current home to cover a 20% down payment on the new home.
This is the equivalent of having extra money withheld from your paycheck so you can get a bigger tax return. Sure, it works, but it's completely inefficient

The smart thing to do is save aggressively, and keep the money under your own control so you have the most flexibility. What if home values go down in the meantime and you've locked up your money in a depreciating asset? (See: 2008. It happened to thousands upon thousands of homeowners.)
.
If I do decide to forgo the guaranteed return of paying down my mortgage over the next 2-3 years, where do you recommend I put my money? I should also mention that we are currently paying PMI which I would like to get rid of. Thanks.
[/quote]

When do you expect to use the money? Since your first choice was paying down the mortgage, than I would guess you are not planning on using it for a very long time.  If that's the case, I would just invest it according to your current asset allocation.  For me that would be 100% into a total us stock market fund.  If you are looking at using it in the next 5 years I may do a 60/40 stock to bond split.  Generally I'm 100% stock though.

Sent from my SM-G935F using Tapatalk


RWD

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Re: DONT Payoff your Mortgage Club
« Reply #680 on: July 17, 2018, 10:07:18 AM »
In the meantime, I'm planning to pay down our current mortgage at least some so that we make enough from the sale of our current home to cover a 20% down payment on the new home.
This is the equivalent of having extra money withheld from your paycheck so you can get a bigger tax return. Sure, it works, but it's completely inefficient

The smart thing to do is save aggressively, and keep the money under your own control so you have the most flexibility. What if home values go down in the meantime and you've locked up your money in a depreciating asset? (See: 2008. It happened to thousands upon thousands of homeowners.)
If I do decide to forgo the guaranteed return of paying down my mortgage over the next 2-3 years, where do you recommend I put my money? I should also mention that we are currently paying PMI which I would like to get rid of. Thanks.
When do you expect to use the money? Since your first choice was paying down the mortgage, than I would guess you are not planning on using it for a very long time.  If that's the case, I would just invest it according to your current asset allocation.  For me that would be 100% into a total us stock market fund.  If you are looking at using it in the next 5 years I may do a 60/40 stock to bond split.  Generally I'm 100% stock though.

Replying partly just to fix the quoting... I once dropped a ~$30k principal payment on our mortgage because I knew we were going to sell the house in a few months. Guaranteed short term return on investment (interest rate was 5%). It also simplified the closing process because it meant we weren't underwater anymore... The best course of action does depend a lot on your time frame for how much longer you'll be in the house.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #681 on: July 17, 2018, 07:07:55 PM »
In the meantime, I'm planning to pay down our current mortgage at least some so that we make enough from the sale of our current home to cover a 20% down payment on the new home.
This is the equivalent of having extra money withheld from your paycheck so you can get a bigger tax return. Sure, it works, but it's completely inefficient

The smart thing to do is save aggressively, and keep the money under your own control so you have the most flexibility. What if home values go down in the meantime and you've locked up your money in a depreciating asset? (See: 2008. It happened to thousands upon thousands of homeowners.)
If I do decide to forgo the guaranteed return of paying down my mortgage over the next 2-3 years, where do you recommend I put my money? I should also mention that we are currently paying PMI which I would like to get rid of. Thanks.
Since I would not be planning an early mortgage payoff on this house or the next one, I'd put it in the market, a la jlcollinsnh's brilliant Stock Series.

PMI doesn't bother me. It's the price you pay for not having 20% down. Big deal. At least it got you into the RE market. Okay, it does bother me, but sometimes it just can't be helped.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #682 on: July 18, 2018, 08:05:36 AM »
PMI is one of those areas where Boarder and I have debated back and forth, each failing to convince the other. I personally choose to live my life never having paid it. I turn my nose up at that meager amount of high-price debt as a way of virtue-signalling to people outside of this club that I'm still worthy. 

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #683 on: July 18, 2018, 09:27:00 AM »
I turn my nose up at that meager amount of high-price debt as a way of virtue-signalling to people outside of this club that I'm still worthy.
I have no idea what this means. Care to elaborate?

FIRE@50

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Re: DONT Payoff your Mortgage Club
« Reply #684 on: July 18, 2018, 12:28:29 PM »
In the meantime, I'm planning to pay down our current mortgage at least some so that we make enough from the sale of our current home to cover a 20% down payment on the new home.
This is the equivalent of having extra money withheld from your paycheck so you can get a bigger tax return. Sure, it works, but it's completely inefficient

The smart thing to do is save aggressively, and keep the money under your own control so you have the most flexibility. What if home values go down in the meantime and you've locked up your money in a depreciating asset? (See: 2008. It happened to thousands upon thousands of homeowners.)
If I do decide to forgo the guaranteed return of paying down my mortgage over the next 2-3 years, where do you recommend I put my money? I should also mention that we are currently paying PMI which I would like to get rid of. Thanks.
Since I would not be planning an early mortgage payoff on this house or the next one, I'd put it in the market, a la jlcollinsnh's brilliant Stock Series.

PMI doesn't bother me. It's the price you pay for not having 20% down. Big deal. At least it got you into the RE market. Okay, it does bother me, but sometimes it just can't be helped.
I'm looking at the 20% down as a mental price control mechanism both for me and my slightly less frugal wife. Putting down less than 20% and paying PMI feels equivalent to the 'I bought the new car because I got 0% financing' logic. I don't want to allow myself to overspend just because I can.

redbirdfan

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Re: DONT Payoff your Mortgage Club
« Reply #685 on: July 18, 2018, 02:11:28 PM »
I always like to look a things from all reasonable sides.  I've recently decided to pay off my mortgage (don't yell at me).  Please forgive me if I've missed this info in earlier posts.  At what interest rate would the scale tip the other way for you?  Would the likely volatility in the market over the next few years sway you or are you focused mostly on historic long term returns? I was firmly in the invest camp, but my desire to walk away earlier put me in the pay off the mortgage earlier camp. 

My situation - I want to the option to not work at all in a couple of years (this might not actually happen).  My monthly mortgage payment is just under $1k.  I would like to max out Roth conversion ladders in "retirement."  My mortgage balance is about $183k.  I have access to a $56k HELOC.  If I put the full HELOC towards the mortgage and pay it back ASAP, I should be able to pay off the mortgage completely in less than 36 months.  The interest rate on the HELOC will be less than the interest rate on the mortgage for the first 12 months.  After that the HELOC interest rate will be slightly higher than the rate on the mortgage.  Due to the new tax law I will be taking the standard deduction for the foreseeable future.  To pay the mortgage I would need $300k in the portfolio to kick off the $12k per year for the mortgage using a 4% SWR.  I thought it was a bit of a toss up but the Roth conversion ladder space was my tiebreaker. 

Is anyone in this thread on the fence or was investment always a foregone conclusion for you? 


RWD

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Re: DONT Payoff your Mortgage Club
« Reply #686 on: July 18, 2018, 02:26:05 PM »
At what interest rate would the scale tip the other way for you?
I follow the Investment Order post. So currently 7.877% for comparing to tax-advantaged accounts and 5.877% for taxable accounts.


To pay the mortgage I would need $300k in the portfolio to kick off the $12k per year for the mortgage using a 4% SWR.
That would be to pay the mortgage without your investments running out. A SWR is not the expected return on investment. It's perfectly fine for your investments to be depleted as you pay off your mortgage in retirement.

For example, let's say instead you invest $183k (exactly your mortgage balance). We'll assume a conservative 6% return on investment. Your investments will generate $915/month, almost enough to pay the mortgage. Each year your investment will deplete by ~$1k, but eventually the mortgage will be paid off and you'll still have the majority of your investment remaining.

redbirdfan

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Re: DONT Payoff your Mortgage Club
« Reply #687 on: July 18, 2018, 03:28:23 PM »
Quote
For example, let's say instead you invest $183k (exactly your mortgage balance). We'll assume a conservative 6% return on investment. Your investments will generate $915/month, almost enough to pay the mortgage. Each year your investment will deplete by ~$1k, but eventually the mortgage will be paid off and you'll still have the majority of your investment remaining.

I'm assuming that people on this thread are saving money in taxable accounts.  Wouldn't that $915/mo* also be subject to tax?  My thoughts were that if I can pay off the mortgage quickly and invest after it's paid off, I could stay under taxable thresholds for withdrawals in the future.  If I have to pull out $12k/year for the mortgage, it makes staying in the (current) 12% tax bracket much more difficult going forward.  Being single for tax purposes shifts this to the payoff mode for me.  MFJ provides way more space for long-term capital gains. 

Again, forgive me for posting in this thread.  I'm not trolling. I just enjoy getting feedback from all angles.  My gut instinct is to be in the the don't payoff the mortgage group...but the idea of getting pre-tax money into Roth accounts and to withdraw money from taxable accounts tax-free is pushing me the other way.   

*the mortgage payment is closer to $1k.  $915 could be withdrawn as the initial amount invested on the $183k.  I believe the other $85 would be subject to tax depending on LTCG v. STCG and tax bracket at the time.
« Last Edit: July 18, 2018, 03:38:33 PM by redbirdfan »

Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #688 on: July 18, 2018, 03:59:25 PM »
I always like to look a things from all reasonable sides.  I've recently decided to pay off my mortgage (don't yell at me).  Please forgive me if I've missed this info in earlier posts.  At what interest rate would the scale tip the other way for you?  Would the likely volatility in the market over the next few years sway you or are you focused mostly on historic long term returns? I was firmly in the invest camp, but my desire to walk away earlier put me in the pay off the mortgage earlier camp. 

My situation - I want to the option to not work at all in a couple of years (this might not actually happen).  My monthly mortgage payment is just under $1k.  I would like to max out Roth conversion ladders in "retirement."  My mortgage balance is about $183k.  I have access to a $56k HELOC.  If I put the full HELOC towards the mortgage and pay it back ASAP, I should be able to pay off the mortgage completely in less than 36 months.  The interest rate on the HELOC will be less than the interest rate on the mortgage for the first 12 months.  After that the HELOC interest rate will be slightly higher than the rate on the mortgage.  Due to the new tax law I will be taking the standard deduction for the foreseeable future.  To pay the mortgage I would need $300k in the portfolio to kick off the $12k per year for the mortgage using a 4% SWR.  I thought it was a bit of a toss up but the Roth conversion ladder space was my tiebreaker. 

Is anyone in this thread on the fence or was investment always a foregone conclusion for you?

I personally have done a 180.   Back when I was a young lad, aggressively paid on the mortgage, because that is what you are supposed to do, right?    Then my contract position ended very unexpectedly, and I still had the mortgage and not much cash.   Non-fun times followed.  The more I investigated the pros and cons, I concluded there are almost no pros, and lots of cons.    I certainly understand the appeal of no mortgage, but the appeal is mostly an illusion.   

RE: The HELOC.  You talked about this in the other thread, and I believe you said part of reason for doing this was that you thought it would keep you more motivated.  If that's the case, then fair enough.     However, since it sounds like you are still thinking about, I'll chime in with my two cents. 

Using the HELOC to payoff the mortgage early is also an illusion, and the people who promote it almost always have something they are selling, even if it is only adviews on Youtube. There are two parts that trip people up (not saying this applies to you personally, but in general):  Many people think that mortgage interest is front loaded.   It is not.  You pay more interest in the beginning because you owe more money.   And the other part that trips people up up is that they think HELOC interest and mortgage interest are calculated differently.   They are calculated exactly the same way.  The only difference is how the payment is calculated. 

Bottom line is that you are just moving the interest from the mortgage to the HELOC, and the amount of interest you owe is calculated the same way.   The HELOC Gurus claim that you save money overall because interest on the mortgage is "front loaded."  But it isn't.  The lump sum payment from the HELOC on the mortage, and then paying the HELOC,  works out pretty close to, if not actually identical to simply paying extra on the mortgage.   

I believe you have lower HELOC interest for the first year, so you might actually get some savings there, but it is only for one year, and you also have fees you have to subtract too, so I suspect you aren't saving very much, if anything, when the smoke clears.  Also keep in mind that you are trading long term, low fixed interest debt for variable interest debt.   No one expects to get divorced, get sick, or lose their job, but what if that happens?  The your the interest on your HELOC very well could go up.   Is that safer than simply paying down the mortgage?

Quote
To pay the mortgage I would need $300k in the portfolio to kick off the $12k per year for the mortgage using a 4% SWR.

Not quite correct.   Remember, the SWR is inflation adjusted (average inflation is 3.5% per year), but your mortgage is fixed.   I'm not sure how to easily do the SWR calculation properly for a fixed expense like a mortgage, but in 30 years inflation will cut that $12k a year payment to something more like $5K in today's dollars.   As RWD indicates,  even with very conservative rates of return you should easily be able to make your mortgage payment indefinitely just by setting aside the mortgage balance, and very likely wind up with a giant pile of money at the end.   

Which is another reason not to pay off your mortgage.  You are using fully valued dollars today to save puny, inflation ravaged dollars in the future. 


Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #689 on: July 18, 2018, 04:10:20 PM »

I'm assuming that people on this thread are saving money in taxable accounts.  Wouldn't that $915/mo* also be subject to tax?  My thoughts were that if I can pay off the mortgage quickly and invest after it's paid off, I could stay under taxable thresholds for withdrawals in the future.  If I have to pull out $12k/year for the mortgage, it makes staying in the (current) 12% tax bracket much more difficult going forward.  Being single for tax purposes shifts this to the payoff mode for me.  MFJ provides way more space for long-term capital gains. 

*the mortgage payment is closer to $1k.  $915 could be withdrawn as the initial amount invested on the $183k.  I believe the other $85 would be subject to tax depending on LTCG v. STCG and tax bracket at the time.

This is correct.  But that means you only increased your taxable income by $1000/year.   So unless you are right on the cusp that shouldn't push you into a higher tax bracket.    And even if it does, only income about that amount is taxed at the higher rate.  So unnlikely to be much of a factor.   

The same issue could affect Obamacare subsidies.  Might might be worth looking into. 

redbirdfan

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Re: DONT Payoff your Mortgage Club
« Reply #690 on: July 18, 2018, 06:18:43 PM »
Ugh...I've flip flopped again.  I think the only path I can force myself to stay on is to split this 50/50.  I know mathematically speaking investing wins over the long run.  I also have an illogical desire to be debt-free because it feels like I will have more freedom/options.  If I go 100% in either direction I end up doing a complete 180.  A Vulcan I am not. 

protostache

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Re: DONT Payoff your Mortgage Club
« Reply #691 on: July 18, 2018, 06:58:32 PM »
Ugh...I've flip flopped again.  I think the only path I can force myself to stay on is to split this 50/50.  I know mathematically speaking investing wins over the long run.  I also have an illogical desire to be debt-free because it feels like I will have more freedom/options.  If I go 100% in either direction I end up doing a complete 180.  A Vulcan I am not.

I've flipped a few times myself but I think I've finally, permanently come around to the view that investing the cash instead of paying extra on the mortgage yields more flexibility, and ultimately a bigger return. Like, yes, debt free is for sure a great feeling (I was there before we bought this house) but if I have enough investments to pay off the debt and then some, that's also pretty great.

palerider1858

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Re: DONT Payoff your Mortgage Club
« Reply #692 on: July 18, 2018, 07:01:37 PM »
Ugh...I've flip flopped again.  I think the only path I can force myself to stay on is to split this 50/50.  I know mathematically speaking investing wins over the long run.  I also have an illogical desire to be debt-free because it feels like I will have more freedom/options.  If I go 100% in either direction I end up doing a complete 180.  A Vulcan I am not.
This is where I am at. Max IRA & 401k accounts and then throw a large chunk at the mortgage. On track to have it paid off in 4 years, then I will buy another house.

mudstache

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Re: DONT Payoff your Mortgage Club
« Reply #693 on: July 19, 2018, 10:38:08 AM »
Ugh...I've flip flopped again.  I think the only path I can force myself to stay on is to split this 50/50.  I know mathematically speaking investing wins over the long run.  I also have an illogical desire to be debt-free because it feels like I will have more freedom/options.  If I go 100% in either direction I end up doing a complete 180.  A Vulcan I am not.

I've flipped a few times myself but I think I've finally, permanently come around to the view that investing the cash instead of paying extra on the mortgage yields more flexibility, and ultimately a bigger return. Like, yes, debt free is for sure a great feeling (I was there before we bought this house) but if I have enough investments to pay off the debt and then some, that's also pretty great.

I just keep coming back here to keep my emotions in check, and follow the math.  I hadn't really thought about how, if you're investing the extra cash, rather than paying down the mortgage, at FIRE, I'll have more than enough cash to pay off the mortgage at that point (if I stop following the math then), plus the extra earned in the market.  And in the meantime, if something takes a nasty turn, the money is available without selling/refinancing. 

There was a huge disconnect in my brain, where I could still have a paid off mortgage at FIRE, while not paying extra toward the principal now.  But I don't even have to decide that now, and may just choose to hold the mortgage for the distance.  I like that flexibility. :)

boarder42

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Re: DONT Payoff your Mortgage Club
« Reply #694 on: July 19, 2018, 01:42:30 PM »
Ugh...I've flip flopped again.  I think the only path I can force myself to stay on is to split this 50/50.  I know mathematically speaking investing wins over the long run.  I also have an illogical desire to be debt-free because it feels like I will have more freedom/options.  If I go 100% in either direction I end up doing a complete 180.  A Vulcan I am not.

more freedom and options when and at what cost - and as a sacrafice to freedom and options today.  Also saying you have a logical desire to be debt free because of a feeling is an oxymoron. Your freedom being debt free may by you while emotional will in all liklihood come faster if you hit the stocks 100% then made the choice to pay down at the end - the optimal way to get the most of the feeling you're looking for - more freedom and options on your path to debt paydown then the feeling of more cashflow if you choose to pay down in the end - the way i see it based on your feelings here you're attacking this incorrectly to maximize you freedom/options.

SwordGuy

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Re: DONT Payoff your Mortgage Club
« Reply #695 on: July 19, 2018, 03:28:48 PM »
Ugh...I've flip flopped again.  I think the only path I can force myself to stay on is to split this 50/50.  I know mathematically speaking investing wins over the long run.  I also have an illogical desire to be debt-free because it feels like I will have more freedom/options.  If I go 100% in either direction I end up doing a complete 180.  A Vulcan I am not.

50/50 is the worst of both choices, not the best of both choices.

Your living expenses are just as high because the mortgage payment is just as high even though the balance is lower.
So it gives you no cash flow advantage at all, nor does it help you keep your income lower for tax or subsidy purposes.

You have depleted your reserves, so if things go bad, you have less saved up to ride out the bad times.  Even worse, if things get really bad and the bank forecloses on your house, you just made it EASIER for them to do so!   How?  Because they only need to sell it for enough to cover what you owe them plus administrative/closing costs.   Since you cut the debt in half, they'll have a much easier time finding a buyer!

This situation, depending upon interest rates of course, is one of those times where compromise is a bad idea.

.


TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #696 on: July 19, 2018, 04:28:57 PM »
Ugh...I've flip flopped again.  I think the only path I can force myself to stay on is to split this 50/50.  I know mathematically speaking investing wins over the long run.  I also have an illogical desire to be debt-free because it feels like I will have more freedom/options.  If I go 100% in either direction I end up doing a complete 180.  A Vulcan I am not.

50/50 is the worst of both choices, not the best of both choices.

Your living expenses are just as high because the mortgage payment is just as high even though the balance is lower.
So it gives you no cash flow advantage at all, nor does it help you keep your income lower for tax or subsidy purposes.

You have depleted your reserves, so if things go bad, you have less saved up to ride out the bad times.  Even worse, if things get really bad and the bank forecloses on your house, you just made it EASIER for them to do so!   How?  Because they only need to sell it for enough to cover what you owe them plus administrative/closing costs.   Since you cut the debt in half, they'll have a much easier time finding a buyer!

This situation, depending upon interest rates of course, is one of those times where compromise is a bad idea.

.


Listen to the man.

If the bank lender has two homes on his desk, both bought for 400k in the same month, both depreciated to 300k in estimated resale value, and both up for foreclosure....  but one is at 200k principal and one is at 365k principal, which one do you think he is going to foreclose on first?  How much rope will he give the underwater guy?....

That is a very legitimate risk.


Compare it to having 600k in the bank/assets with a 350k mortgage, I doubt you will ever be foreclosed on.  In reality, your "E-Fund" if you were to decide to tap into retirement could last for years, as opposed to the standard E-fund of six months or so.

OurTown

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Re: DONT Payoff your Mortgage Club
« Reply #697 on: July 20, 2018, 11:09:08 AM »
I will be in the vicinity of FIRE in or around 2023.  At that time I will have a mortgage balance of appx $69,000, with 5 years left to go on a 15-year fixed at 3 3/8 %.  My monthly payment is $1,800; which is approximately $500 escrow and $1,300 P&I.  So the magic question is, how much do I need above my FIRE number to retire with a mortgage payment?  Is it 60 months of payments, which would be $108k?  Is it 60 months of P&I, which would be $78k?  Or is it the remaining principal balance, which at that time would be about $69k?

protostache

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Re: DONT Payoff your Mortgage Club
« Reply #698 on: July 20, 2018, 11:34:10 AM »
I will be in the vicinity of FIRE in or around 2023.  At that time I will have a mortgage balance of appx $69,000, with 5 years left to go on a 15-year fixed at 3 3/8 %.  My monthly payment is $1,800; which is approximately $500 escrow and $1,300 P&I.  So the magic question is, how much do I need above my FIRE number to retire with a mortgage payment?  Is it 60 months of payments, which would be $108k?  Is it 60 months of P&I, which would be $78k?  Or is it the remaining principal balance, which at that time would be about $69k?

You can sim this out in cfiresim, but I think the prudent thing would be to count the $500 escrow as part of your basic FIRE expenses (because it covers taxes and insurance which don't go away) but not the P&I, and then an additional $78k to cover the rest of the P&I.

Vapour

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Re: DONT Payoff your Mortgage Club
« Reply #699 on: July 20, 2018, 07:01:57 PM »
I will be in the vicinity of FIRE in or around 2023.  At that time I will have a mortgage balance of appx $69,000, with 5 years left to go on a 15-year fixed at 3 3/8 %.  My monthly payment is $1,800; which is approximately $500 escrow and $1,300 P&I.  So the magic question is, how much do I need above my FIRE number to retire with a mortgage payment?  Is it 60 months of payments, which would be $108k?  Is it 60 months of P&I, which would be $78k?  Or is it the remaining principal balance, which at that time would be about $69k?

You can sim this out in cfiresim, but I think the prudent thing would be to count the $500 escrow as part of your basic FIRE expenses (because it covers taxes and insurance which don't go away) but not the P&I, and then an additional $78k to cover the rest of the P&I.

I agree that you need to plan to cover the escrow payment (taxes and insurance) for as long as you own the house.  And these will likely increase with inflation unlike your mortgage P&I.   So property taxes and insurance should be included in your estimated expenses which you use to calculate the stash you need to FIRE at 4% or whatever number works for you.

I don't know that you would need to save an additional $78k for the P&I payments though.  It doesn't make sense to save more than the mortgage if you could just pay it off instead.  Normally, I'd say you just need to save the amount of the mortgage.  I'm hoping to FIRE with around 20 years left of a 30 year mortgage at 3.5%.  When I simulate the amount remaining on my mortgage at that time and my yearly P&I payments (not adjusted for inflation) for 20 years in cFIREsim, it shows around 91% success rate.  When I do the same for OurTown's mortgage of $69k with yearly payments of $15,600 for 5 years, the success rate is 56%.  Not great.  In your case, I think it might make sense to just pay of the mortgage when you FIRE and be done with it.  Or, since this is the Don't Pay off your Mortgage Club, refinance at some point before you FIRE to a 30 year mortgage and then just have the amount of the mortgage saved when you FIRE in addition to your stash for your regular expenses.  This should work out to more like a 90+% success rate compared to 50%.  5 years is just too short of a time period so there's a lot more risk compared to 20-30 years.