DONT Payoff your Mortgage Club

[talltexan]

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?

I enjoy the company of people who care about personal finance things, whether they are "all debt is bad" people or "use debt smartly as a tool" people. Our club here is the latter group.

When I'm with the former group--whom I do not actively try to educate about the value smart use of debt can have--I can at least say I don't use PMI on my primary residence as a way of fitting in.

[Bird In Hand]

I enjoy the company of people who care about personal finance things, whether they are "all debt is bad" people or "use debt smartly as a tool" people. Our club here is the latter group.

When I'm with the former group--whom I do not actively try to educate about the value smart use of debt can have--I can at least say I don't use PMI on my primary residence as a way of fitting in.

And this also gives you bonus points among the "live and let live" crowd.  :D

Back to the topic at hand, I recently discovered that quite a few of the more prestigious colleges and universities in the US use the so-called "institutional methodology" in determining how much parents are expected to pay.  This considers home equity in the calculations.  I ran a couple simulations and discovered that our family's hypothetical expected family contribution (EFC) roughly doubles, from $9,xxx to $18,xxx per year, when our home equity is included.  I could imagine in HCOL areas with much higher real estate prices, a large amount of home equity could all but eliminate need-based institutional grants, even for a mustachian couple drawing ~$60k from retirement accounts.

I'm not sure it would make sense to take out a new mortgage on a paid-off house just to bring the EFC down, but a fresh 30 year low-rate mortgage and marginal home equity when your kids are starting college could be highly advantageous in some situations.

[Dicey]

I enjoy the company of people who care about personal finance things, whether they are "all debt is bad" people or "use debt smartly as a tool" people. Our club here is the latter group.

When I'm with the former group--whom I do not actively try to educate about the value smart use of debt can have--I can at least say I don't use PMI on my primary residence as a way of fitting in.

And this also gives you bonus points among the "live and let live" crowd.  :D

Back to the topic at hand, I recently discovered that quite a few of the more prestigious colleges and universities in the US use the so-called "institutional methodology" in determining how much parents are expected to pay.  This considers home equity in the calculations.  I ran a couple simulations and discovered that our family's hypothetical expected family contribution (EFC) roughly doubles, from $9,xxx to $18,xxx per year, when our home equity is included.  I could imagine in HCOL areas with much higher real estate prices, a large amount of home equity could all but eliminate need-based institutional grants, even for a mustachian couple drawing ~$60k from retirement accounts.

I'm not sure it would make sense to take out a new mortgage on a paid-off house just to bring the EFC down, but a fresh 30 year low-rate mortgage and marginal home equity when your kids are starting college could be highly advantageous in some situations.

Now that is some fine mustachian thinking! Where do you put the funds received so that they don't count against you? Seems like you could funnel it into retirement funds over a few years time. This requires some advanced planning, but that's another fine mustachian trait. Hmmm, more discussion please.

[ditkanate]

Finally knocked out my last piece of debt other than the house.  So, now that I have cash flow that can go towards actual savings / investing / future planning, I'm curious what the crowd in this thread would say about my home loans.  Here are the details:

Purchase price: $183,000 (appraised at $190,000)

1st Mortgage:
$145,900 current balance
3.125% until May 2023 (5 year ARM)

2nd Mortgage:
$34,400 current balance
4.5% until May 2025 (7 year ARM)

Scenario 1: Pay the minimums and if my rates go up down the road, deal with it then.  For now just invest. 

Scenario 2: Pay enough extra between now and May 2025 (or sooner if possible?) to get the LTV at 80% so I can refinance into a 30 year fixed rate. 

Or perhaps there's another path I'm not seeing. 

Other details.  Currently 47 years old.  Funding 401k up to employer match.  I'm not paying any PMI, the 2nd mortgage is basically set up as a home equity loan amortized over 30 years. 

If I've left something out that would prove helpful, let me know.  Maybe there is no great answer because it really depends on what interest rates do in the next 5-7 years. 

[Bird In Hand]

I'm not sure it would make sense to take out a new mortgage on a paid-off house just to bring the EFC down, but a fresh 30 year low-rate mortgage and marginal home equity when your kids are starting college could be highly advantageous in some situations.

Now that is some fine mustachian thinking! Where do you put the funds received so that they don't count against you? Seems like you could funnel it into retirement funds over a few years time. This requires some advanced planning, but that's another fine mustachian trait. Hmmm, more discussion please.

Yeah, this would be tricky.  You could spend down a fair bit of cash on Roth IRA conversions, but the tax implications make this less compelling as income goes up.  You'd probably have to spread it out over a bunch of years, far enough ahead of college that you wouldn't even know whether your kid would eventually be attending an institution that considered home equity.  :o

I suppose you could successfully hide the assets by buying a fleet of expensive cars, or a bunch of diamonds, or rare rock & roll memorabilia.  But these obviously come with a lot of risk, not to mention you might need to eventually repair your broken moral compass.  :D

If you had any large expenses you planned on incurring anyway (home renovation, new cars, etc.), it would probably make sense to spend on those right before filling out the financial aid applications.

But probably the most mustachian approach would be to help your kid choose a solid school that doesn't put an oversized financial burden on the family, regardless of home equity.

[Dicey]

I was idly thinking that if you weren't investing up the annual limits in your 401k because it simply wasn't possible*, you could ratchet them up to the max and use the proceeds from the re-fi to fill the gap. Do this for you and your spouse. I'd think by the time your offspring was about 12, you'd have a pretty good idea if they were college bound. That would give you a good chunk of years to make your position as optimal as possible before the reams of paperwork started.

As to the moral compass, I quite agree. However, I have no problem with massaging assets in any way that is legal and legitimate. I equate it to paying income taxes. I'll happily pay what I owe, but one penny more. Of course, the caveat is "within reason". Unlike another spicy blogger. I'm not willing to do backflips to get my tax liability down to zero.

*Flash: I never once managed to max out my 401k in my entire career. Funny, I got to FIRE anyway.

[boarder42]

Yep earlier Roth conversions to eat some tax now to get savings later. Would be quite the math equation. I'm fully aware my idea behind keeping the mortgage may change as life situations change the math with healthcare or college assistance driving the needle the other way. It's just extremely difficult to do. Esp when my rate is at inflation for 30 years.

[Bird In Hand]

I was idly thinking that if you weren't investing up the annual limits in your 401k because it simply wasn't possible*, you could ratchet them up to the max and use the proceeds from the re-fi to fill the gap. Do this for you and your spouse.

Actually this is could be an awesome idea for some folks who otherwise would balk at cashing out a mortgage to invest, yet who don't have enough income to max out retirement accounts.  In our case we have three $18.5k pretax buckets, plus two 5.5k Roth IRA buckets.  We don't earn enough and/or expenses are too high to fill all of that ($55.5k pre-tax and $11k Roth).  But if mortgage rates dipped a bit and we knew for a fact our kid would be attending a school that considers home equity, it sure would be tempting!

I'd think by the time your offspring was about 12, you'd have a pretty good idea if they were college bound. That would give you a good chunk of years to make your position as optimal as possible before the reams of paperwork started.

The problem is you don't know which problem to optimize ahead of time.  You could optimize for low assets (including home equity) and higher income, and this would work great for schools that looked at these assets.  Or you could optimize for low income and that would help for schools that don't care about home equity.  But until your kid starts looking at colleges, you won't have a good idea which to optimize for, and by then (junior or senior year of HS) it's basically too late because the FAFSA and other forms look at the previous year's financial info.[/quote]

[talltexan]

Yep earlier Roth conversions to eat some tax now to get savings later. Would be quite the math equation. I'm fully aware my idea behind keeping the mortgage may change as life situations change the math with healthcare or college assistance driving the needle the other way. It's just extremely difficult to do. Esp when my rate is at inflation for 30 years.

Your admittedly desirable rate could still be above inflation for those 30 years if things break badly and we have a substantially deflationary period a la Japan in the 1990's.

[Dicey]

Yep earlier Roth conversions to eat some tax now to get savings later. Would be quite the math equation. I'm fully aware my idea behind keeping the mortgage may change as life situations change the math with healthcare or college assistance driving the needle the other way. It's just extremely difficult to do. Esp when my rate is at inflation for 30 years.

Your admittedly desirable rate could still be above inflation for those 30 years if things break badly and we have a substantially deflationary period a la Japan in the 1990's.

But it wouldn't be much higher. Seriously, what are the odds that this will happen?

[TexasRunner]

Yep earlier Roth conversions to eat some tax now to get savings later. Would be quite the math equation. I'm fully aware my idea behind keeping the mortgage may change as life situations change the math with healthcare or college assistance driving the needle the other way. It's just extremely difficult to do. Esp when my rate is at inflation for 30 years.

Your admittedly desirable rate could still be above inflation for those 30 years if things break badly and we have a substantially deflationary period a la Japan in the 1990's.

But it wouldn't be much higher. Seriously, what are the odds that this will happen?

If the US had deflation in the same (or similar) vein as the Japan Deflationary Spiral, we would have much bigger problems to worry about....

I highly doubt the treasury would ever allow that to happen anyways.  If it ever were to get to that point, it is going to be a major crash anyway because the deflationary action would have to be sudden (1929's major...).  In that sort of instance, pretty much all bets are off and even traditional hedge against deflation could be at risk.

Either way, I'm not nearly as much of a fan of taking out another mortgage or refinancing at 5% or 6% as opposed to riding out the beautiful 30-Year mortgage at 3%. One of these is meh, the other nets millions of dollars in (essentially free) gains with lower risk. 

[talltexan]

I agree that the 3% mortgage is better.

But I don't want to be locked into a less-optimal living situation because I don't want to change my mortgage, either.

[Dicey]

I agree that the 3% mortgage is better.

But I don't want to be locked into a less-optimal living situation because I don't want to change my mortgage, either.

Don't know the specifics of what you're referring to, but one way to hang on to that mortgage whilst optimizing your living situation might be to keep it as a rental.

[DavidN]

Hi, all,

First post here! I've been binge-reading the blog and really researching investing and saving after having ignored it for the first 9 or so years of my professional career. Luckily, I have very good income now and will just work extra hard to getting to that sweet spot of financial freedom over the next 15 years or so.

Anyway, in regards to mortgage, I see a lot of folks just using the interest rate of the loan rather than APR when calculating how much their income would be worth once they are mortgage free. Which should we be using?

I ask, because in late 2016, I took a 30-year fixed rate mortgage in the US with only 3.5% down. My interest rate is 3.625%, but once you add in the costs and my MIP, which will always be a part of the loan since I was under 90% LTV when I took the loan, my APR comes out to 4.716%.

I could refinance to a conventional loan now to get rid of the MIP (around 0.85%), but interest rates have risen to the point that it probably doesn't make sense.

So, should I look at my potential mortgage-free income (assuming I prioritize paying it down) at having an effective interest rate of 3.625% or 4.716%?

Sorry if this is a dumb question, but all of this is still rather new to me.

[RWD]

Hi, all,

First post here! I've been binge-reading the blog and really researching investing and saving after having ignored it for the first 9 or so years of my professional career. Luckily, I have very good income now and will just work extra hard to getting to that sweet spot of financial freedom over the next 15 years or so.

Anyway, in regards to mortgage, I see a lot of folks just using the interest rate of the loan rather than APR when calculating how much their income would be worth once they are mortgage free. Which should we be using?

I ask, because in late 2016, I took a 30-year fixed rate mortgage in the US with only 3.5% down. My interest rate is 3.625%, but once you add in the costs and my MIP, which will always be a part of the loan since I was under 90% LTV when I took the loan, my APR comes out to 4.716%.

I could refinance to a conventional loan now to get rid of the MIP (around 0.85%), but interest rates have risen to the point that it probably doesn't make sense.

So, should I look at my potential mortgage-free income (assuming I prioritize paying it down) at having an effective interest rate of 3.625% or 4.716%?

Sorry if this is a dumb question, but all of this is still rather new to me.

Hi and welcome! I'm not sure APR is the right term for interest rate + MIP, but I understand what you're asking. You should definitely be including MIP in your calculations and comparisons. There are several other people with similar questions earlier in this thread (if you dare dig through 15 pages to find them).

The way to do this calculation is to look at how much you save by getting rid of MIP and divide it by how much it takes to get rid of MIP to calculate the return on investment of just this partial mortgage paydown. You also need to be sure that the terms of your MIP allow it to go away just by getting your LTV low enough. Some mortgages, like relatively recent FHA loans, require refinancing to get rid of PMI. This calculation may also change as you get closer to the drop point, so you may want to rerun it periodically to see if it makes sense to make a single principal payment to knock it out.

Here's an example of the calculation, since you didn't provide your specific numbers:
$100k value
$90k mortgage
$81.83/month MIP removed automatically at $78k
$12k required to remove MIP which will save $981.96/year = 8.18% return on investment

edit: you could also add your mortgage interest rate to that return on investment, depending on what you're trying to calculate

[DavidN]

Hi, all,

First post here! I've been binge-reading the blog and really researching investing and saving after having ignored it for the first 9 or so years of my professional career. Luckily, I have very good income now and will just work extra hard to getting to that sweet spot of financial freedom over the next 15 years or so.

Anyway, in regards to mortgage, I see a lot of folks just using the interest rate of the loan rather than APR when calculating how much their income would be worth once they are mortgage free. Which should we be using?

I ask, because in late 2016, I took a 30-year fixed rate mortgage in the US with only 3.5% down. My interest rate is 3.625%, but once you add in the costs and my MIP, which will always be a part of the loan since I was under 90% LTV when I took the loan, my APR comes out to 4.716%.

I could refinance to a conventional loan now to get rid of the MIP (around 0.85%), but interest rates have risen to the point that it probably doesn't make sense.

So, should I look at my potential mortgage-free income (assuming I prioritize paying it down) at having an effective interest rate of 3.625% or 4.716%?

Sorry if this is a dumb question, but all of this is still rather new to me.

Hi and welcome! I'm not sure APR is the right term for interest rate + MIP, but I understand what you're asking. You should definitely be including MIP in your calculations and comparisons. There are several other people with similar questions earlier in this thread (if you dare dig through 15 pages to find them).

The way to do this calculation is to look at how much you save by getting rid of MIP and divide it by how much it takes to get rid of MIP to calculate the return on investment of just this partial mortgage paydown. You also need to be sure that the terms of your MIP allow it to go away just by getting your LTV low enough. Some mortgages, like relatively recent FHA loans, require refinancing to get rid of PMI. This calculation may also change as you get closer to the drop point, so you may want to rerun it periodically to see if it makes sense to make a single principal payment to knock it out.

Here's an example of the calculation, since you didn't provide your specific numbers:
$100k value
$90k mortgage
$81.83/month MIP removed automatically at $78k
$12k required to remove MIP which will save $981.96/year = 8.18% return on investment

edit: you could also add your mortgage interest rate to that return on investment, depending on what you're trying to calculate

Thanks for the quick reply!

With my current terms, being an FHA mortgage from 2016 with less than 90% LTV, the mortgage insurance premiums are a fixed ~0.85% for the life the loan, but it is only re-calculated once per year based on the remaining loan amount at that time. I don't have the math skills to quickly figure out how that would work, but if I combine the 0.85% with the 3.625% interest, I get 4.475%.

I have around $470,000 remaining on the loan, but I am in a position to go full bore and put in an extra $50,000 per year (or around $4166 per month) towards the principal. According to a calculator on my loan handlers site, if I started doing that next month and continued it each month, I would be paid off by August 2025 (7 years) for a total of $470,446 principal and $62,281 interest for $532,727 total. At 4.475%, that would be $556,566, whereas if I invested it assuming a 7% return, I would be at $570,017 or a difference of $13,451. This is all assuming that I would continue to put in 10% or more in my pre-tax 401k and max out my Roth IRA every year.

Assuming my calculations are correct, that's a pretty tough choice. I would be effectively paying $13,451 for peace of mind and a good chunk of equity in rapidly appreciating Seattle-area real estate (who knows how long that will continue, though). On the other hand, I wouldn't have nearly $600k in investments that could easily pay for a lifestyle should I decide to sell the property at that point and downsize to something less expensive (although there's no telling where the Seattle real estate market will be then).

Got some thinking to do for sure.

[boarder42]

The above math to calculate your interest rate with pmi is incorrect I'll post some correct math later or you could provide your numbers and I can get real specific.

[RWD]

The above math to calculate your interest rate with pmi is incorrect I'll post some correct math later or you could provide your numbers and I can get real specific.

Are you referring to my math? You agreed with it last year.

I should reiterate that it is calculating the ROI on getting rid of MIP and not the effective rate of the whole mortgage.

[RWD]

If you can't make a single lump sum payment to get rid of of MIP you should invest instead. You only get the benefit of paying extra on the loan at the exact moment MIP goes away. Any partial amounts will only help the effective rate of 4.475%. Better to invest at that rate. Eventually when you have enough to get rid of it in one single payment you should reevaluate if it's worth it.

[Telecaster]

Assuming my calculations are correct, that's a pretty tough choice. I would be effectively paying $13,451 for peace of mind and a good chunk of equity in rapidly appreciating Seattle-area real estate (who knows how long that will continue, though). On the other hand, I wouldn't have nearly $600k in investments that could easily pay for a lifestyle should I decide to sell the property at that point and downsize to something less expensive (although there's no telling where the Seattle real estate market will be then).

Minor point of clarification.  Equity does not grow faster by paying down the mortgage.  For example, let's you put  $0 down on a property that appreciates from $400K to $600K.  You now have $200K in equity.  Now let's say you put $400K down on a property that appreciates from $400K to $600K.  You now have $200K in equity.  Same thing.  It doesn't matter if you put it down all at once or over time, equity does not grow faster. 

[boarder42]

Assuming my calculations are correct, that's a pretty tough choice. I would be effectively paying $13,451 for peace of mind and a good chunk of equity in rapidly appreciating Seattle-area real estate (who knows how long that will continue, though). On the other hand, I wouldn't have nearly $600k in investments that could easily pay for a lifestyle should I decide to sell the property at that point and downsize to something less expensive (although there's no telling where the Seattle real estate market will be then).

Minor point of clarification.  Equity does not grow faster by paying down the mortgage.  For example, let's you put  $0 down on a property that appreciates from $400K to $600K.  You now have $200K in equity.  Now let's say you put $400K down on a property that appreciates from $400K to $600K.  You now have $200K in equity.  Same thing.  It doesn't matter if you put it down all at once or over time, equity does not grow faster.

Profit doesn't grow faster equity does. In the second case you have 600k in equity. But that's also 600 little green soldiers tied up saving you less than 5%

[DavidN]

Good point on the equity. I feel a bit more enlightened with each of these facts as they get pointed out.

One more thing that this came to mind (and again, sorry if this is a stupid question) but how do you factor capital gains tax into all of this? My understanding is that you can make up to a $250,000 profit by selling your primary residence after having lived in it for at least two years without any of that being subject to capital gains. Obviously that wouldn't apply to any profits you made from investing in index funds at an assumed 7% growth rate.

[RWD]

If you invest inside a tax sheltered account (401k, Roth IRA, etc.) you won't have any capital gains tax. If you've used up all your tax advantaged space then you would be slightly more conservative to account for taxes. The Investment Order post recommends setting the debt payments vs invest threshold 2% lower (currently 8% for tax advantaged and 6% for taxable).

Depending on your tax situation you may owe very little in capital gains taxes.

[DavidN]

If you invest inside a tax sheltered account (401k, Roth IRA, etc.) you won't have any capital gains tax. If you've used up all your tax advantaged space then you would be slightly more conservative to account for taxes. The Investment Order post recommends setting the debt payments vs invest threshold 2% lower (currently 8% for tax advantaged and 6% for taxable).

Depending on your tax situation you may owe very little in capital gains taxes.

Wow, thanks a lot for this. Great information. Looks like I've got some more studying this stuff to do, but perhaps paying towards the mortgage after maxing out 401k and Roth IRA each year is not a bad idea.

[boarder42]

If you invest inside a tax sheltered account (401k, Roth IRA, etc.) you won't have any capital gains tax. If you've used up all your tax advantaged space then you would be slightly more conservative to account for taxes. The Investment Order post recommends setting the debt payments vs invest threshold 2% lower (currently 8% for tax advantaged and 6% for taxable).

Depending on your tax situation you may owe very little in capital gains taxes.

Wow, thanks a lot for this. Great information. Looks like I've got some more studying this stuff to do, but perhaps paying towards the mortgage after maxing out 401k and Roth IRA each year is not a bad idea.

In general at your rate its a terrible idea. It's the entire reason I created this thread. You increase your risk of financial failure during Paydown. Which causes many to hold large efs. Then you increase your chances of your money dieing before you after you FIRE. You also are all but guaranteed to work longer.

[boarder42]

Also if you're using a 7% growth rate for equities you've deducted inflation. Which means you should pull 3% off your mortgage interest too. So you're comparing apples to apples

[talltexan]

Assuming that your income is high and robust (such that it's a reasonable house for you), I favor not over-paying on the mortgage, and instead investing the difference.

If you own many bonds in your investment account, that might be a sign that your risk tolerance is not sufficient that this will make sense for you.

I appreciate you coming her to let the DNPYM Club make their case.

[RWD]

YouTube recommended this video to me about why it's a bad idea to pay down your mortgage early:
https://www.youtube.com/watch?v=AJSCT51Rfws

[Bird In Hand]

YouTube recommended this video to me about why it's a bad idea to pay down your mortgage early:
https://www.youtube.com/watch?v=AJSCT51Rfws

It's unfortunate that he started off his 3-part argument with the oft-repeated, usually specious claim that you can write off your entire mortgage interest as a tax deduction.  It's 2018, man.  The standard deduction was a thing before, but now it's a kind of huge thing for most people, and basically everyone outside of HCOL areas.  He lost a lot of credibility right off the bat, given that the video was posted in May 2018.

Also, from the comment section, I'm pretty dang sure that Golumn (sic) McSmeagolHomie is boarder42.  Or his long lost brother.

[boarder42]

YouTube recommended this video to me about why it's a bad idea to pay down your mortgage early:
https://www.youtube.com/watch?v=AJSCT51Rfws

It's unfortunate that he started off his 3-part argument with the oft-repeated, usually specious claim that you can write off your entire mortgage interest as a tax deduction.  It's 2018, man.  The standard deduction was a thing before, but now it's a kind of huge thing for most people, and basically everyone outside of HCOL areas.  He lost a lot of credibility right off the bat, given that the video was posted in May 2018.

Also, from the comment section, I'm pretty dang sure that Golumn (sic) McSmeagolHomie is boarder42.  Or his long lost brother.

No it's not me.  But that is a horrible way to start a video in 2018 with the new tax law. But it's still crazy advantageous

[RWD]

YouTube recommended this video to me about why it's a bad idea to pay down your mortgage early:
https://www.youtube.com/watch?v=AJSCT51Rfws

It's unfortunate that he started off his 3-part argument with the oft-repeated, usually specious claim that you can write off your entire mortgage interest as a tax deduction.  It's 2018, man.  The standard deduction was a thing before, but now it's a kind of huge thing for most people, and basically everyone outside of HCOL areas.  He lost a lot of credibility right off the bat, given that the video was posted in May 2018.

Also, from the comment section, I'm pretty dang sure that Golumn (sic) McSmeagolHomie is boarder42.  Or his long lost brother.

I was also disappointed he didn't clarify that you only can deduct as much interest as goes over the standard deduction. Also, it wasn't even necessary to the argument as with his 4.2% example it is still very clear you should be investing. I do like that he mentioned using an S&P 500 index fund. I'm just happy there are people out there (besides just on specialized forums like this one) that will challenge the Dave Ramsey mantra.

Haha, yeah, I'm going with long lost brother.

[boarder42]

Seriously. How the hell could you think that was s me lol I don't ever fucking lol this isn't a laughing matter lol this is people wasting money.

[boarder42]

Lol

[solon]

Seriously. How the hell could you think that was s me lol I don't ever fucking lol this isn't a laughing matter lol this is people wasting money.

Same difficulty with caps and run-on sentences, though.

[Dicey]

Seriously. How the hell could you think that was s me lol I don't ever fucking lol this isn't a laughing matter lol this is people wasting money.

Same difficulty with caps and run-on sentences, though.

yup he's never gonna change we've got to love him the way he is ♡♡♡♡♡

[letsdoit]

does anyone have any wisdom nuggets for how much house they can afford.?
the rubrics that exist are slanted in favor of buying too much house.

any thoughts on house value vs NW or annual savings/investments ?

 

[RWD]

does anyone have any wisdom nuggets for how much house they can afford.?
the rubrics that exist are slanted in favor of buying too much house.

any thoughts on house value vs NW or annual savings/investments ?

Whatever allows you to still hit your savings goals. I like to prioritize the longest time frame goals first. For example:
1. Saving enough for FIRE in 10 years
2. Saving enough for house down payment in 3 years
3. Saving enough for car replacement in 1 year
etc.

[talltexan]

Since this is the DNPYM Club, the most important variable in whether you can afford a property is cash-flow.

Some of it depends on your stage in life. My wife and I bought our current house at the start of a five-year period in which we've exceeded $20,000 annually in childcare expenses. Having three digit mortgage payments has been quite the relief, but we could have afforded much more. Our mortgage payment represents about 10% of our monthly take-home. About 1/2 of that mortgage payment is principal decrease. These numbers sound very low compared to what a bank will approve for a mortgage, but there was a discussion thread on this forum a while ago in which many mustachians reported figures in line with that.

Some of it depends on how well you think you can make the house perform as an investment. If you're a serious Mustachian (saving rate at least 40%), you can bear more risk to buy into a neighborhood in which you think you'll get capital appreciation, even if that won't appear in your checking account right away.

Some of it depends on how robust your income is: if you are in a two-income household, are you and your partner in the same industry? Could a single employer hitting bad times result in both of your incomes evaporating at the same time?

[Bird In Hand]

does anyone have any wisdom nuggets for how much house they can afford.?
the rubrics that exist are slanted in favor of buying too much house.

any thoughts on house value vs NW or annual savings/investments ?

There is really no one-size-fits-all answer here IMO.  It will depend on your financial goals, income, probably the size of your investment accounts, the cost of homes vs income in your area, desired/required size of house, etc.

My personal philosophy on housing is about the same as it is for any purchase: try to minimize the price given all the other constraints/requirements imposed by my personal preferences and financial situation.  I try to consider factors that may affect future resale value, but this can be hard to predict and many external factors could come into play that you have no control over.

FWIW my house value is approximately 22% of TNW and likely to get significantly smaller as pre-tax accounts continue to grow.  We've lived here for 10+ years and expect to stay here another 10+ years.

[talltexan]

People here hate on Dave Ramsey, but I've noticed on his millionaire call-in hours that very few of the millionaires make their money from primary house appreciation. It's usually 401k or investment properties.

[talltexan]

which is another way of saying: don't pick a house to live thinking of it as an investment. Think of it as a lifestyle choice, which implies trying to minimize what you spend.

[FIreDrill]

which is another way of saying: don't pick a house to live thinking of it as an investment. Think of it as a lifestyle choice, which implies trying to minimize what you spend.

I don't think that necessarily implies minimizing your spend.  Housing is one area where we recently "splurged".  We spent a lot of money on a modest house in a great location which also cut our commute time by about 70%.  The goal was to buy a house that we would be happy with for a long time and I honestly don't see us ever moving unless we decided to move out of state. Upgrading homes is a killer and real estate fees can really make an impact on your net worth if you "upgrade" 2 or 3 times in 30 years.

I guess it really just depends on how you envision your FIRE life.  Then make the home purchase based off of that as long as it's within reason from a cash flow standpoint.

For the longest time I couldn't understand how some people could spend so much on a house.  Then I moved to the hottest real estate market in America.....  That sure did teach me a lesson..

Anyways, all this to say that in my mind there is not a really clear answer here.  We may have general guidelines but in the end it just depends on what your FIRE lifestyle goals are and the value you get from house x vs house y after considering the financial costs.



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[DavidN]

Also if you're using a 7% growth rate for equities you've deducted inflation. Which means you should pull 3% off your mortgage interest too. So you're comparing apples to apples

Jesus, I didn't even think about that. 2 ~ 3% off of my interest (3.625%) would mean it's 0.625% ~ 1.625% and even if I look at my APR (4.716%), it's still just 1.716% ~ 2.716%. Hard to justify paying that down rather than investing it just for peace of mind.

[boarder42]

Also if you're using a 7% growth rate for equities you've deducted inflation. Which means you should pull 3% off your mortgage interest too. So you're comparing apples to apples

Jesus, I didn't even think about that. 2 ~ 3% off of my interest (3.625%) would mean it's 0.625% ~ 1.625% and even if I look at my APR (4.716%), it's still just 1.716% ~ 2.716%. Hard to justify paying that down rather than investing it just for peace of mind.

Great conclusion. That's why this thread was started it's counterintuitive bit will make you much wealthier faster which decreases your FIRE timeline

[RWD]

I'm already about $10k ahead by investing instead of paying down the mortgage we got two years ago.

Based on some quick calculations a recent graduate of the opposite thread missed out on ~$40k because they paid off their mortgage in five years. They're on an accelerated path to FI (2 years to go), but that decision will still likely cost them at least 4 months of working.

[Telecaster]

Jesus, I didn't even think about that. 2 ~ 3% off of my interest (3.625%) would mean it's 0.625% ~ 1.625% and even if I look at my APR (4.716%), it's still just 1.716% ~ 2.716%. Hard to justify paying that down rather than investing it just for peace of mind.

Indeed.   

And it is even worse (better?) than that, because not only is the cost of borrowing close to zero, you are using full value dollars today to save inflation ravaged dollars in the future.   The other thing is that the peace of mind issue is also an illusion.  I just made a post about it in another thread: 

https://forum.mrmoneymustache.com/welcome-to-the-forum/equity-shaming/msg2093302/#msg2093302

You're taking on more risk, not less, by paying down the mortgage even though most people don't think about it that way.     An analogy is learning to ski.   Beginners instinctively want to lean back because you essentially falling forward down the hill.  But you really need to learn forward to get control of your skis.   Leaning back is instinctive, but wrong.  Same with paying off the mortgage. 

[Dicey]

Jesus, I didn't even think about that. 2 ~ 3% off of my interest (3.625%) would mean it's 0.625% ~ 1.625% and even if I look at my APR (4.716%), it's still just 1.716% ~ 2.716%. Hard to justify paying that down rather than investing it just for peace of mind.

Indeed.   

And it is even worse (better?) than that, because not only is the cost of borrowing close to zero, you are using full value dollars today to save inflation ravaged dollars in the future. The other thing is that the peace of mind issue is also an illusion. I just made a post about it in another thread: 

https://forum.mrmoneymustache.com/welcome-to-the-forum/equity-shaming/msg2093302/#msg2093302

You're taking on more risk, not less, by paying down the mortgage even though most people don't think about it that way. An analogy is learning to ski. Beginners instinctively want to lean back because you essentially falling forward down the hill. But you really need to learn forward to get control of your skis. Leaning back is instinctive, but wrong.  Same with paying off the mortgage.

Great analogy!

When I first learned of this don't-pay-off-the-mortgage concept, I had a very hard time believing it could possibly be true. I am so glad that threads like these exist so that others can explore, learn, and make optimal decisions, not emotional ones.

[cartman1973]

Really interesting thread that has got me thinking about my own situation...looking for some advice.

Age 44, single with no kids (and staying that way), in the UK. Discovered MMM just a couple of years ago after being a consumer sucka for most of my life. Totally changed my life. Now finally completely debt free other than the mortgage, and looking to retire at 55 to 57 rather than 67 which would otherwise be my normal retirement age. So not at all early retirement compared to most folks around here, but a wonderfully early retirement for me, potentially, especially given my stupid financial behaviour for most of my life. Got a pretty secure job teaching at a university.

Got a relatively small mortgage, latest remortgage to a 5 year fixed rate of 2.94%, with a starting balance £87k from Feb 2017, currently down to £82k. Monthly payments £461. Property worth £150k.

Having read this thread I've started looking into options for withdrawing the equity I have to invest in my Vanguard account.

With my existing mortgage lender (only option really due to early repayments penalties I would face otherwise) I could increase to 80% LTV and have £38k to invest. This would add another £222 per month to my mortgage payment fixed for 5 years (rate would go to 3.25%).

I'm not 100% sure how to use cfiresim for this sort of modelling, so I put something together in Excel that seems to suggest over the next 10 years given a 5% return on top of the mortgage rate I could end up £60-63k better off ( or £22-25k once you subtract the £38k) , compared to just continuing maxing out my monthly investing.

The big unknown (despite any errors in my sums) is of course the impact of Brexit. It would not surprise me if inflation continues to rise after March next year so the mortgage would be a good hedge against that..?

Any and all advice gratefully received.

[talltexan]

Cartman-
I do not know what mortgage risk you're bearing with that rate. Will it reset again in five or more years? The extent to which you can guarantee the time during which you'll have the low rate is the most important variable in the DNPYM club. Otherwise, having a lower mortgage balance can significantly reduce the risk you bear from an increase in your mortgage rate.

[cartman1973]

Cartman-
I do not know what mortgage risk you're bearing with that rate. Will it reset again in five or more years? The extent to which you can guarantee the time during which you'll have the low rate is the most important variable in the DNPYM club. Otherwise, having a lower mortgage balance can significantly reduce the risk you bear from an increase in your mortgage rate.

Yes, in the UK we have variable, tracker and fixed rate mortgages, and you might typically fix for 2, 5 or increasingly 10 years, but not really any longer than that, and then they revert to the lender's normal variable rate (currently 4.35% on the one I looked at) - but then, providing rates haven't gone up massively in the meantime you normally take out another fixed rate mortgage... and of course for the last 10 years or so we've had really low rates here in the UK... these 30 year mortgages you guys have in the US sound wonderful in comparison.