Author Topic: DONT Payoff your Mortgage Club  (Read 391348 times)

TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #900 on: October 19, 2018, 12:26:21 PM »
Full disclosure: we are still planning on paying off our mortgage early, but I've always had the recast option in my back pocket just in case we want to change course.  Our lender has a fairly modest $100 fee for recasting.  If it were free, I'd probably do it immediately whether or not we planned on paying off the mortgage (P&I would drop from ~$1,700 to ~$500 in our case).

The problem isn't people paying down their mortgage.  The problem is people blindly paying down there mortgage without doing to math first and recognizing the costs of doing so.  Especially if they are not maxing out their tax-free investment options or don't have a significant E-fund.  Those are the issues.  As long as one understand the math and the costs, then a decision to pay down is still financially wise, just not financially optimal.

Kudos on the paydown.  :)

TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #901 on: October 19, 2018, 12:30:55 PM »

...

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #902 on: October 19, 2018, 12:33:22 PM »
Full disclosure: we are still planning on paying off our mortgage early, but I've always had the recast option in my back pocket just in case we want to change course.  Our lender has a fairly modest $100 fee for recasting.  If it were free, I'd probably do it immediately whether or not we planned on paying off the mortgage (P&I would drop from ~$1,700 to ~$500 in our case).

The problem isn't people paying down their mortgage.  The problem is people blindly paying down there mortgage without doing to math first and recognizing the costs of doing so.  Especially if they are not maxing out their tax-free investment options or don't have a significant E-fund.  Those are the issues.  As long as one understand the math and the costs, then a decision to pay down is still financially wise, just not financially optimal.

Kudos on the paydown.  :)
it gives me goosebumps to see posts like this, @TexasRunner! I love it when people get the math.

@Bird In Hand, you're balking over a hundred bucks? Seriously? I'd grab that offer and never look back. There's no guarantee it will be around forever.

TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #903 on: October 19, 2018, 12:36:16 PM »

v8rx7guy

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Re: DONT Payoff your Mortgage Club
« Reply #904 on: October 19, 2018, 12:43:52 PM »
Full disclosure: we are still planning on paying off our mortgage early, but I've always had the recast option in my back pocket just in case we want to change course.  Our lender has a fairly modest $100 fee for recasting.  If it were free, I'd probably do it immediately whether or not we planned on paying off the mortgage (P&I would drop from ~$1,700 to ~$500 in our case).

The problem isn't people paying down their mortgage.  The problem is people blindly paying down there mortgage without doing to math first and recognizing the costs of doing so.  Especially if they are not maxing out their tax-free investment options or don't have a significant E-fund.  Those are the issues.  As long as one understand the math and the costs, then a decision to pay down is still financially wise, just not financially optimal.

Kudos on the paydown.  :)
it gives me goosebumps to see posts like this, @TexasRunner! I love it when people get the math.

@Bird In Hand, you're balking over a hundred bucks? Seriously? I'd grab that offer and never look back. There's no guarantee it will be around forever.

You two do realize that having an significant e-fund is also not mathematically optimal?  Right?

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #905 on: October 19, 2018, 01:03:00 PM »
Full disclosure: we are still planning on paying off our mortgage early, but I've always had the recast option in my back pocket just in case we want to change course.  Our lender has a fairly modest $100 fee for recasting.  If it were free, I'd probably do it immediately whether or not we planned on paying off the mortgage (P&I would drop from ~$1,700 to ~$500 in our case).

The problem isn't people paying down their mortgage.  The problem is people blindly paying down there mortgage without doing to math first and recognizing the costs of doing so.  Especially if they are not maxing out their tax-free investment options or don't have a significant E-fund.  Those are the issues.  As long as one understand the math and the costs, then a decision to pay down is still financially wise, just not financially optimal.

Kudos on the paydown.  :)
it gives me goosebumps to see posts like this, @TexasRunner! I love it when people get the math.

@Bird In Hand, you're balking over a hundred bucks? Seriously? I'd grab that offer and never look back. There's no guarantee it will be around forever.

You two do realize that having an significant e-fund is also not mathematically optimal?  Right?
Right! But that depends on where you put your EF money. Agreed that under the mattress and passbook savings are terrible options. Losing your home because you have no EF is worse.

You do realize that having no EF, prepaying a cheap-ass, fixed rate mortgage, and not getting your employer's full match is worse still. Right?

Can you believe there are people who do this and still believe they're being mustachian? And they're not getting facepunched??

Bird In Hand

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Re: DONT Payoff your Mortgage Club
« Reply #906 on: October 19, 2018, 01:16:58 PM »
The problem isn't people paying down their mortgage.  The problem is people blindly paying down there mortgage without doing to math first and recognizing the costs of doing so.  Especially if they are not maxing out their tax-free investment options or don't have a significant E-fund.  Those are the issues.  As long as one understand the math and the costs, then a decision to pay down is still financially wise, just not financially optimal.

I'm not here to argue in favor of paydown -- it's clearly the wrong thread for that.  :)  I'm just offering my congratulations to those who are making headway in their non-paydown strategy.  I think it's super cool that Youngranny found a strategy that works for her, and the unexpected recast opportunity is some pretty sweet icing on the cake.

And I definitely agree that understanding the trade-offs is really important.  In a sense we're paying off our mortgage from an ivory tower; already (barebones) FI, maxing out pre-tax accounts, relatively small mortgage compared to income/nest egg, taxable account balance exceeds mortgage balance, etc.  I wouldn't necessarily recommend our strategy for someone in different circumstances.

One minor quibble: it's possible (very unlikely over longer timelines, if history turns out to be a decent guide) that a paydown strategy will be optimal.  But that won't be known until some time in the future, since it depends on future market returns, inflation, tax laws, etc.  Having said that, I sure as heck hope SP500 returns beat the snot out of my 4.25% mortgage going forward, since the market is where the vast majority of our net worth is stashed!

TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #907 on: October 19, 2018, 01:23:49 PM »
Full disclosure: we are still planning on paying off our mortgage early, but I've always had the recast option in my back pocket just in case we want to change course.  Our lender has a fairly modest $100 fee for recasting.  If it were free, I'd probably do it immediately whether or not we planned on paying off the mortgage (P&I would drop from ~$1,700 to ~$500 in our case).

The problem isn't people paying down their mortgage.  The problem is people blindly paying down there mortgage without doing to math first and recognizing the costs of doing so.  Especially if they are not maxing out their tax-free investment options or don't have a significant E-fund.  Those are the issues.  As long as one understand the math and the costs, then a decision to pay down is still financially wise, just not financially optimal.

Kudos on the paydown.  :)
it gives me goosebumps to see posts like this, @TexasRunner! I love it when people get the math.

@Bird In Hand, you're balking over a hundred bucks? Seriously? I'd grab that offer and never look back. There's no guarantee it will be around forever.

You two do realize that having an significant e-fund is also not mathematically optimal?  Right?
Right! But that depends on where you put your EF money. Agreed that under the mattress and passbook savings are terrible options. Losing your home because you have no EF is worse.

You do realize that having no EF, prepaying a cheap-ass, fixed rate mortgage, and not getting your employer's full match is worse still. Right?

Can you believe there are people who do this and still believe they're being mustachian? And they're not getting facepunched??

My 6-Month rolling timeline of CD's at 2.4% is accesible in an emergency...  My 30k+ in equity is not accessible at all.  Having a 6 month to 1 year E-fund is not perfectly optimal but is insurance.  However, paying early into a mortgage doesn't net any of those benefits.

Also, people with 2 to 3 year EM Funds need facepunching too, unless they are already FIRE and do not include the cash in there 4% rule calcs.  But even still, early paydown on a low fixed-rate mortgage is worse...  thats how bad it is.

Bird In Hand

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Re: DONT Payoff your Mortgage Club
« Reply #908 on: October 19, 2018, 01:25:07 PM »
@Bird In Hand, you're balking over a hundred bucks? Seriously? I'd grab that offer and never look back. There's no guarantee it will be around forever.

That's a good point!  We've had the same lender for many years, and the recast policy/fee hasn't changed in those years.  Obviously not a guarantee that it will continue in the future, but since we've reached barebones FI, and our taxable account exceeds our mortgage balance, we're feeling pretty relaxed about the whole thing.  If they unexpectedly offered us a free recast I'd jump on it just to save the $100 -- lowering the P&I from $1,700 to $500 would just be a fun side effect  :D

Bird In Hand

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Re: DONT Payoff your Mortgage Club
« Reply #909 on: October 19, 2018, 01:28:39 PM »
You two do realize that having an significant e-fund is also not mathematically optimal?  Right?

Hey, don't drag me into this -- most of our EF is in our Roth IRAs invested in index funds!

rpr

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Tax deferral benefits Re: DONT Payoff your Mortgage Club
« Reply #910 on: October 19, 2018, 09:11:19 PM »
For a US married couple above 50 with both working, the amount of tax deferred space next year will be $64 K (assuming a 401K and IRA for each). If said couple were in a 30% bracket (including federal + state), the savings are $19.2K. That is a pretty hefty chunk of change. For a couple below 50, the tax savings are  ~$15K.

Basically, for every $1K that you prepay the mortgage instead of maxing your tax deferred space, you are forfeiting an immediate tax savings of $300. Once this tax deferred space is lost it is likely to be gone forever.
 
In ER assuming lower income, setup a Roth Ladder and slowly convert the money in lower (no) tax brackets to harvest the savings.

It is so totally worth it to be in the DPYMC (especially if you are in the US and not maxing your tax deferred space). 

rpr

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Re: DONT Payoff your Mortgage Club
« Reply #911 on: October 19, 2018, 09:18:20 PM »


Haha! I would suggest this for post of the day but it would probably be too incendiary.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #912 on: October 19, 2018, 11:20:10 PM »
You realize that's pretty much how this thread got started? Believe it or not, there is actually another thread where discussion is not allowed. Posters may only encourage each other's potentially sub-optimal decisions. Anyone who suggested they do the math first was firmly ejected. Imagine that!

Luckily, that is not the "Best Post..." thread, so you are certainly welcome to post it there, @rpr. It's certainly worthy of wider distribution and always, always, always, further discussion.

PizzaSteve

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Re: DONT Payoff your Mortgage Club
« Reply #913 on: October 20, 2018, 11:20:23 AM »
You realize that's pretty much how this thread got started? Believe it or not, there is actually another thread where discussion is not allowed. Posters may only encourage each other's potentially sub-optimal decisions. Anyone who suggested they do the math first was firmly ejected. Imagine that!

Luckily, that is not the "Best Post..." thread, so you are certainly welcome to post it there, @rpr. It's certainly worthy of wider distribution and always, always, always, further discussion.
This is a complete misscharacterization of the debate, with maximum spin.  No one objected to the illustration that keeping a morgage to leverage investments could deliver a better long term return.

We objected to

1) Calling someone stupid or idiots if they chose not to pursue that strategy
2) Implying that these better returns are guaranteed due to 'math', rather than the historically the case based on back testing.
3) Endlessly trolling any post stating a different opinion.  Repeating points 2 and 3, over and over again.  Because anyone who didnt agree with holding fixed rate debt for long leverage needed to be yelled at, cussing at, etc., even in threads where peolee were not seeking this 'advice,' like a case study.
« Last Edit: October 21, 2018, 06:07:52 PM by PizzaSteve »

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #914 on: October 21, 2018, 08:43:11 AM »
I was not responding to you, but I do find it mildly interesting that you are so sure that "no one objected to"...anything.  How can you possibly know that? Talk about "maximum spin". Also not clear who "we" is.

You are forgetting that Boarder42 started this thread, perhaps?

You and I are never going to see eye to eye, so let's just agree not to agree, m'kay? I'm sure we can both live happy, productive lives with no further interaction.

.

Goldielocks

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Re: DONT Payoff your Mortgage Club
« Reply #915 on: October 21, 2018, 12:25:18 PM »
I had a stray thought about mortgage payoff.  One that I do not recall being addressed.

Because I live in the land of 5 year terms, we essentially need to shop for a mortgage every 5 years.

When I was in the USA I was a bit shocked at first, at the upfront costs to get into a mortgage, and "buying points" costs for mortgages.   Here, the costs are all back end loaded, so it can be nearly free upfront, but with a huge penalty if you end your mortgage before 5 years are up.

Now for the stray thought -- How does the fact that the average person may move every 7 to 10 years impact the math to "keep your mortgage".?   I have owned / lived in 4 different locations, plus a rental location, since I first became a home owner 23 years ago. 


  If new mortgage origination costs are incurred by selling every 7 years, or 3x over a 30 year investment horizon.... how much of an impact/ drag does it put into the equation.

For someone with a "pay off" mentality:
I would assume that loan origination costs are needed at the start, then are quite small for the first move after 7 years, (e.g., 1/2) because half the mortgage is gone.   The next 2 moves would then have zero loan origination costs because there is no loan.

For the person keeping the mortgage to invest, they would have added loan origination costs after 7 years, 17 years, 27 years, for each move.

How big of an impact to the "keep mortgage" math is it to someone moving every 7 to 10 years?

For most, I agree that maximizing one's mortgage and investments typically pays off.  -- this is my genuine question, not an attempt to negate the theme of this thread.

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #916 on: October 21, 2018, 12:48:31 PM »
I had a stray thought about mortgage payoff.  One that I do not recall being addressed.

Because I live in the land of 5 year terms, we essentially need to shop for a mortgage every 5 years.

When I was in the USA I was a bit shocked at first, at the upfront costs to get into a mortgage, and "buying points" costs for mortgages.   Here, the costs are all back end loaded, so it can be nearly free upfront, but with a huge penalty if you end your mortgage before 5 years are up.

Now for the stray thought -- How does the fact that the average person may move every 7 to 10 years impact the math to "keep your mortgage".?   I have owned / lived in 4 different locations, plus a rental location, since I first became a home owner 23 years ago. 


  If new mortgage origination costs are incurred by selling every 7 years, or 3x over a 30 year investment horizon.... how much of an impact/ drag does it put into the equation.

For someone with a "pay off" mentality:
I would assume that loan origination costs are needed at the start, then are quite small for the first move after 7 years, (e.g., 1/2) because half the mortgage is gone.   The next 2 moves would then have zero loan origination costs because there is no loan.

For the person keeping the mortgage to invest, they would have added loan origination costs after 7 years, 17 years, 27 years, for each move.

How big of an impact to the "keep mortgage" math is it to someone moving every 7 to 10 years?

For most, I agree that maximizing one's mortgage and investments typically pays off.  -- this is my genuine question, not an attempt to negate the theme of this thread.

You should evaluate on a case by case basis and not as a general rule. For each new mortgage you should estimate how long you plan to keep the property and weigh that against the expected investment returns for the same period.

As for origination costs if you are renewing your mortgage on a regular basis then you should roll that into your interest calculation. If you have the choice of buying a house outright or financing then you should include the origination costs as part of your interest rate as well. But after you already have a mortgage those costs are sunk and you should compare investing to the ongoing interest rate.

Even for the "pay off" crowd there are still plenty of costs associated with buying/selling property once they get to the point of being able to buy a house without financing. It cost us roughly 6.7% of the selling price to sell our last house. When we bought our current house we paid $500 in mortgage origination fees and $1600 in title and other fees. So not getting a mortgage would have saved us a whopping 0.2% of the purchase price. So I think mortgage origination fees are pretty inconsequential.

SwordGuy

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Re: DONT Payoff your Mortgage Club
« Reply #917 on: October 21, 2018, 01:56:37 PM »
Now for the stray thought -- How does the fact that the average person may move every 7 to 10 years impact the math to "keep your mortgage".?   


I think it's the wrong question motivated by the right idea. :)


If someone is moving very often, they should be asking themselves if they should be buying a house AT ALL.   It's not the mortage fees that get you (if you're decent at shopping around), it's the real estate commissions.



Goldielocks

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Re: DONT Payoff your Mortgage Club
« Reply #918 on: October 21, 2018, 07:31:43 PM »
RWD -- Thanks,  I am not up to date on the US origination fees (amount for a given size of mortgage)... It makes a lot of sense that they might represent up to 0.5%, but at the end of the day, evaluate the decision based on the rolled up mortgage rate, versus the invest decision.

This is the kind of "math" question that pops into my head at night...   I love to mentally test financial frameworks that I believe in to see how risk or other "drags' would affect them.   Usually the impact is minor, but I have been very surprised.

SwordGuy -- to true!   That is why I indicated 7 to 10 years, and not 4 ot 7 years.  :-)   


I think that the math pays out to keep your mortgage.   

The primary reason to pay it down / off, is not actually because the math is better, long term, but because of cash flow impacts.    As long as income is rolling in, it is easy to be comfortable with the mortgage.

I find in FIRE that YES, I could draw more capital out of investments to pay down the mortgage rate... but... my nature is that I MUCH prefer to not touch my investments monthly, and to keep the cash flow outlays small.  A large mortgage (mine is currently over $2k per month) does not mesh well with low cash flow / ability to be agile with investment withdrawals.

    It is easier for me  to make a large, once a year decision of how much to draw, and when, than it is to draw from investments when they dip....  So, I am uncomfortable with the large mortgage, but so far I have chosen to keep it because of MATH.




Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #919 on: October 21, 2018, 08:11:12 PM »


Let me fix that:

Mustachians: "We have the choice between a low fixed-rate mortgage and equities that are currently very expensive from a historical viewpoint. We know that if we pay off the mortgage instead of investing, we are no longer looking at 30-year timelines but much shorter ones where fixed-rate investments can blow equities out of the water. We also have various other reasons why choosing the fixed return can help eliminate left-tail risk under certain circumstances. What do we do?"

Boarder42: "You are all fucking idiots for not accepting my naive worldview that there is absolutely no risk related to investing in equities. You deserve a facepunch and stripping of all Mustachian honors because it's obvious that historical returns predict future performance."

The Moderator, while throwing B42 out the window: "If you continue to be an asshole after numerous reasonable comments to the contrary, good riddance. And payoff is not a verb, assclown!"

[MOD NOTE: Please don't misquote us, especially with insults.  We would be violating our own rules if we communicated with users in that fashion.]
« Last Edit: October 22, 2018, 06:42:14 AM by FrugalToque »

Radagast

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Re: DONT Payoff your Mortgage Club
« Reply #920 on: October 21, 2018, 08:37:53 PM »
I had a stray thought about mortgage payoff.  One that I do not recall being addressed.

Because I live in the land of 5 year terms, we essentially need to shop for a mortgage every 5 years.

When I was in the USA I was a bit shocked at first, at the upfront costs to get into a mortgage, and "buying points" costs for mortgages.   Here, the costs are all back end loaded, so it can be nearly free upfront, but with a huge penalty if you end your mortgage before 5 years are up.

Now for the stray thought -- How does the fact that the average person may move every 7 to 10 years impact the math to "keep your mortgage".?   I have owned / lived in 4 different locations, plus a rental location, since I first became a home owner 23 years ago. 


  If new mortgage origination costs are incurred by selling every 7 years, or 3x over a 30 year investment horizon.... how much of an impact/ drag does it put into the equation.

For someone with a "pay off" mentality:
I would assume that loan origination costs are needed at the start, then are quite small for the first move after 7 years, (e.g., 1/2) because half the mortgage is gone.   The next 2 moves would then have zero loan origination costs because there is no loan.

For the person keeping the mortgage to invest, they would have added loan origination costs after 7 years, 17 years, 27 years, for each move.

How big of an impact to the "keep mortgage" math is it to someone moving every 7 to 10 years?

For most, I agree that maximizing one's mortgage and investments typically pays off.  -- this is my genuine question, not an attempt to negate the theme of this thread.
The first step would be to make your best guesses at the information required to fill out https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html and see if buying made sense. Owning a house can introduce anchoring bias into your decisions, making them take a turn for the worse. Also they really do take time and work to sell.

After that, I agree that the US posters on the forum often make too much fuss about a 30 year mortgage. The average American moves about once every 9 years, and interest rates are usually better at the shorter end. Lots of people, who have already decided that buying is better than renting, should strongly consider a 5/1, 5/5, 7/1, or 10/1 adjustable rate mortgage unless they think this is truly their forever house, which is where they will reside for decades come hell or high water. I regret such a long mortgage on my house, shoulda used one of the ARM's I listed. I'd likely end with thousands more, unless things break just right.

Goldielocks

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Re: DONT Payoff your Mortgage Club
« Reply #921 on: October 21, 2018, 11:01:54 PM »
That 30 year mortgage is pretty cool, however, if you intend to carry a mortgage into FIRE -- no more requalifying with a now-low income!

Bateaux

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Re: DONT Payoff your Mortgage Club
« Reply #922 on: October 21, 2018, 11:56:52 PM »
I'm going to accept the math of not paying off producing a bigger stash in the end.  B42 beat that into me last year.   But, I still think I'm going to pay the SOB off before FIRE.  The stash is 10 times what is owed on the mortgage.  I just don't want the hassle of owing money.  Especially since I've pretty much decided to wait for 2020 anyhow. 

tralfamadorian

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Re: DONT Payoff your Mortgage Club
« Reply #923 on: October 22, 2018, 07:26:54 AM »
I think as we see interest rates continue to rise back to near historical average and the associated rise of CD rates, it will become very obvious that those who held onto their fixed low rate debt took advantage of an economic situation that we most probably will not see again in our lifetime. When six month CD rates are 6% and the mortgage debt is 3%, all the risk arguments fall away.

If the debt is tied to a personal residence and you may move in the near to mid future, then the above does not apply.

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #924 on: October 22, 2018, 08:54:49 AM »
I think as we see interest rates continue to rise back to near historical average and the associated rise of CD rates, it will become very obvious that those who held onto their fixed low rate debt took advantage of an economic situation that we most probably will not see again in our lifetime. When six month CD rates are 6% and the mortgage debt is 3%, all the risk arguments fall away.

If the debt is tied to a personal residence and you may move in the near to mid future, then the above does not apply.

Agreed. If one can get an after-tax risk-free return greater than the mortgage rate, one should absolutely never pay down the mortgage. But that's not the current case. The current choice involves risky equities versus low-interest bonds versus mortgage "bonds" with a duration equal to the amortization payoff schedule (and of course numerous other investment possibilities). The winner in this picture will only be clear after the fact.

TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #925 on: October 22, 2018, 10:22:25 AM »
I think as we see interest rates continue to rise back to near historical average and the associated rise of CD rates, it will become very obvious that those who held onto their fixed low rate debt took advantage of an economic situation that we most probably will not see again in our lifetime. When six month CD rates are 6% and the mortgage debt is 3%, all the risk arguments fall away.

If the debt is tied to a personal residence and you may move in the near to mid future, then the above does not apply.

Agreed. If one can get an after-tax risk-free return greater than the mortgage rate, one should absolutely never pay down the mortgage. But that's not the current case. The current choice involves risky equities versus low-interest bonds versus mortgage "bonds" with a duration equal to the amortization payoff schedule (and of course numerous other investment possibilities). The winner in this picture will only be clear after the fact.

Equities are not risky across 30 year timespans.  That is a fact.

If you believe they are, then you cannot FIRE until you have a stash of <years expecting to live> x <annual spending> saved, which is WAY higher than the 4% rule.

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #926 on: October 22, 2018, 10:42:08 AM »
I think as we see interest rates continue to rise back to near historical average and the associated rise of CD rates, it will become very obvious that those who held onto their fixed low rate debt took advantage of an economic situation that we most probably will not see again in our lifetime. When six month CD rates are 6% and the mortgage debt is 3%, all the risk arguments fall away.

If the debt is tied to a personal residence and you may move in the near to mid future, then the above does not apply.

Agreed. If one can get an after-tax risk-free return greater than the mortgage rate, one should absolutely never pay down the mortgage. But that's not the current case. The current choice involves risky equities versus low-interest bonds versus mortgage "bonds" with a duration equal to the amortization payoff schedule (and of course numerous other investment possibilities). The winner in this picture will only be clear after the fact.

Equities are not risky across 30 year timespans.  That is a fact.

If you believe they are, then you cannot FIRE until you have a stash of <years expecting to live> x <annual spending> saved, which is WAY higher than the 4% rule.

And mortgages do not have a 30-year duration if one is paying it off early. That is also a fact. Therefore, one needs to look at the appropriate timespan when performing a true comparison.

OurTown

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Re: DONT Payoff your Mortgage Club
« Reply #927 on: October 22, 2018, 01:36:10 PM »
I'm going to accept the math of not paying off producing a bigger stash in the end.  B42 beat that into me last year.   But, I still think I'm going to pay the SOB off before FIRE.  The stash is 10 times what is owed on the mortgage.  I just don't want the hassle of owing money.  Especially since I've pretty much decided to wait for 2020 anyhow.

I won't "get there" for a few years, so it's still kind of academic at this point.  But let's say I arrive at my number, for purposes of argument $1M.  Then let's say I save up an additional amount that is equivalent to the outstanding mortgage balance at that time, say $75k for example.  Let's further assume I have about five years left to go on the mortgage at that point and I'm booking along at 3 1/8 percent.  The arbitrage is, of course, make the mortgage payments as they come along and invest the 75k.  Here's the deal:  at a short time horizon (five years or less) it's not necessarily a sure thing that my investment will beat the interest rates.  It's more likely than not, but it's not a sure thing.  At that point it might be simpler to just pay the sucker off and go on with life.

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #928 on: October 22, 2018, 01:52:00 PM »
I'm going to accept the math of not paying off producing a bigger stash in the end.  B42 beat that into me last year.   But, I still think I'm going to pay the SOB off before FIRE.  The stash is 10 times what is owed on the mortgage.  I just don't want the hassle of owing money.  Especially since I've pretty much decided to wait for 2020 anyhow.

I won't "get there" for a few years, so it's still kind of academic at this point.  But let's say I arrive at my number, for purposes of argument $1M.  Then let's say I save up an additional amount that is equivalent to the outstanding mortgage balance at that time, say $75k for example.  Let's further assume I have about five years left to go on the mortgage at that point and I'm booking along at 3 1/8 percent.  The arbitrage is, of course, make the mortgage payments as they come along and invest the 75k.  Here's the deal:  at a short time horizon (five years or less) it's not necessarily a sure thing that my investment will beat the interest rates.  It's more likely than not, but it's not a sure thing.  At that point it might be simpler to just pay the sucker off and go on with life.

The SP500 has historically returned 4.65% or better 70% of the time over 5 year periods. Nothing is a sure thing in investing. We have had plenty of periods in US history where inflation has exceeded 3.125%. In those time periods the return on investment of paying down this mortgage would be negative in real terms.

I get the simplification argument. If your mortgage is an insignificant portion of your finances then just getting rid of it reduces the number of things you have to think about.

TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #929 on: October 22, 2018, 03:49:58 PM »
I get the simplification argument. If your mortgage is an insignificant portion of your finances then just getting rid of it reduces the number of things you have to think about.

Yup.  This isn't the problem.  The problem is people not maxing out their tax-differed accounts or saving aggressively and instead paying down an extremely safe, low rate debt.

If someone is FIRE and wants to blast the mortgage, especially with significantly less time remaining, more power to them.  But doing so early in your FIRE savings timeline will hurt you by years- even more so if you don't max out your buckets....

Radagast

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Re: DONT Payoff your Mortgage Club
« Reply #930 on: October 22, 2018, 08:06:56 PM »
I'm going to accept the math of not paying off producing a bigger stash in the end.  B42 beat that into me last year.   But, I still think I'm going to pay the SOB off before FIRE.  The stash is 10 times what is owed on the mortgage.  I just don't want the hassle of owing money.  Especially since I've pretty much decided to wait for 2020 anyhow.

I won't "get there" for a few years, so it's still kind of academic at this point.  But let's say I arrive at my number, for purposes of argument $1M.  Then let's say I save up an additional amount that is equivalent to the outstanding mortgage balance at that time, say $75k for example.  Let's further assume I have about five years left to go on the mortgage at that point and I'm booking along at 3 1/8 percent.  The arbitrage is, of course, make the mortgage payments as they come along and invest the 75k.  Here's the deal:  at a short time horizon (five years or less) it's not necessarily a sure thing that my investment will beat the interest rates.  It's more likely than not, but it's not a sure thing.  At that point it might be simpler to just pay the sucker off and go on with life.

The SP500 has historically returned 4.65% or better 70% of the time over 5 year periods. Nothing is a sure thing in investing. We have had plenty of periods in US history where inflation has exceeded 3.125%. In those time periods the return on investment of paying down this mortgage would be negative in real terms.

I get the simplification argument. If your mortgage is an insignificant portion of your finances then just getting rid of it reduces the number of things you have to think about.
For my case I don't. My house's owner-bank sorts out the insurance and county property tax for me. If I paid down the mortgage not only would I have higher risk while partly paid, lower returns expected in any case, but if I succeeded I'd have to deal with two institutions instead of one (county....*shudder*). Totally a loser situation in every respect, and if you would be making periodic investments into the S&P500 the percentage of 5-year periods with returns under 4.65% would be notably lower than for the bad-luck-of-the-draw lump sum sucker.

Bird In Hand

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Re: DONT Payoff your Mortgage Club
« Reply #931 on: October 23, 2018, 08:13:00 AM »
For my case I don't. My house's owner-bank sorts out the insurance and county property tax for me. If I paid down the mortgage not only would I have higher risk while partly paid, lower returns expected in any case, but if I succeeded I'd have to deal with two institutions instead of one (county....*shudder*). Totally a loser situation in every respect, and if you would be making periodic investments into the S&P500 the percentage of 5-year periods with returns under 4.65% would be notably lower than for the bad-luck-of-the-draw lump sum sucker.

I'm not really arguing with you, because you're right that you have to deal with the insurance company and the tax entity (county in your case) instead of just the mortgage company.  But I am curious what makes that a significant burden.

In our case we would have our home insurance payments auto-deducted from our checking account once or twice a year, just like our car insurance.  And we would write a property tax check twice a year.  Comparing that to 12 auto-deducted mortgage payments, plus the annual ritual of escrow analysis and writing a lump sum check or changing the monthly payment amounts going forward?  I don't see a clear advantage to either approach.

I actually look forward to getting rid of tax/insurance escrow.  When tax/insurance is handled in escrow through the mortgage company, I don't even really think about the amounts -- they just get lost in the monthly payment.  If we handled it ourselves, I would probably scrutinize the insurance portion more carefully and perhaps be motivated to shop for a better deal.  Not only that, but it's annoying that the mortgage company gets to hold thousands of our dollars in escrow for months with a pathetic interest rate.  At our current property tax / savings account rates, we're giving up about $120/year.  As rates (and taxes!) keep ticking up, that number keeps climbing.

RWD

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Re: DONT Payoff your Mortgage Club
« Reply #932 on: October 23, 2018, 08:17:04 AM »
I get the simplification argument. If your mortgage is an insignificant portion of your finances then just getting rid of it reduces the number of things you have to think about.
For my case I don't. My house's owner-bank sorts out the insurance and county property tax for me. If I paid down the mortgage not only would I have higher risk while partly paid, lower returns expected in any case, but if I succeeded I'd have to deal with two institutions instead of one (county....*shudder*). Totally a loser situation in every respect, and if you would be making periodic investments into the S&P500 the percentage of 5-year periods with returns under 4.65% would be notably lower than for the bad-luck-of-the-draw lump sum sucker.
Having the taxes and insurance all rolled into one monthly payment is certainly convenient. I once owned a small amount of land outright (was a gift) and paying taxes on it was a nightmare. The county kept mailing paperwork to the wrong address and since it was so infrequent I would forget that I should be expecting said paperwork. I got hit with lots of late penalties on that. I'm pretty sure I paid more than 10% of the value of the property in late fees alone...

letsdoit

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Re: DONT Payoff your Mortgage Club
« Reply #933 on: October 23, 2018, 11:20:13 AM »
many ppl make mistake of buying too much house.  but it's an easy trap to fall into , espec in HCOL
does anyone have any threasds or info about ascertaining how much house is too much? 


Radagast

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Re: DONT Payoff your Mortgage Club
« Reply #935 on: October 23, 2018, 07:51:59 PM »
For my case I don't. My house's owner-bank sorts out the insurance and county property tax for me. If I paid down the mortgage not only would I have higher risk while partly paid, lower returns expected in any case, but if I succeeded I'd have to deal with two institutions instead of one (county....*shudder*). Totally a loser situation in every respect, and if you would be making periodic investments into the S&P500 the percentage of 5-year periods with returns under 4.65% would be notably lower than for the bad-luck-of-the-draw lump sum sucker.

I'm not really arguing with you, because you're right that you have to deal with the insurance company and the tax entity (county in your case) instead of just the mortgage company.  But I am curious what makes that a significant burden.
Actually it would not really be enough of a burden to think about twice, just not an advantage either. Though I can say the county mails me my property tax summaries once a year to be paid out quarterly as far as I can tell, and they look really annoying. I might have to join RWD in the 10% penalty club if I was in charge.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #936 on: October 23, 2018, 10:21:33 PM »
For my case I don't. My house's owner-bank sorts out the insurance and county property tax for me. If I paid down the mortgage not only would I have higher risk while partly paid, lower returns expected in any case, but if I succeeded I'd have to deal with two institutions instead of one (county....*shudder*). Totally a loser situation in every respect, and if you would be making periodic investments into the S&P500 the percentage of 5-year periods with returns under 4.65% would be notably lower than for the bad-luck-of-the-draw lump sum sucker.

I'm not really arguing with you, because you're right that you have to deal with the insurance company and the tax entity (county in your case) instead of just the mortgage company.  But I am curious what makes that a significant burden.
Actually it would not really be enough of a burden to think about twice, just not an advantage either. Though I can say the county mails me my property tax summaries once a year to be paid out quarterly as far as I can tell, and they look really annoying. I might have to join RWD in the 10% penalty club if I was in charge.
Yes, I know this is an MPP - I used to like having an impound account, but DH does not, therefore, we pay our taxes semi-annually ourselves. The taxes on all our properties total $32,500 per year. I know the tenants pay their share of the taxes in their rent, but that is still a fuck-ton of money. Fortunately, DH pays the bills, so I don't actually have to write the check(s), but damn, it hurts. I totally understand how an impound account takes some of the sting out of the taxman's bite.

TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #937 on: October 24, 2018, 10:20:09 AM »
For my case I don't. My house's owner-bank sorts out the insurance and county property tax for me. If I paid down the mortgage not only would I have higher risk while partly paid, lower returns expected in any case, but if I succeeded I'd have to deal with two institutions instead of one (county....*shudder*). Totally a loser situation in every respect, and if you would be making periodic investments into the S&P500 the percentage of 5-year periods with returns under 4.65% would be notably lower than for the bad-luck-of-the-draw lump sum sucker.

I'm not really arguing with you, because you're right that you have to deal with the insurance company and the tax entity (county in your case) instead of just the mortgage company.  But I am curious what makes that a significant burden.
Actually it would not really be enough of a burden to think about twice, just not an advantage either. Though I can say the county mails me my property tax summaries once a year to be paid out quarterly as far as I can tell, and they look really annoying. I might have to join RWD in the 10% penalty club if I was in charge.
Yes, I know this is an MPP - I used to like having an impound account, but DH does not, therefore, we pay our taxes semi-annually ourselves. The taxes on all our properties total $32,500 per year. I know the tenants pay their share of the taxes in their rent, but that is still a fuck-ton of money. Fortunately, DH pays the bills, so I don't actually have to write the check(s), but damn, it hurts. I totally understand how an impound account takes some of the sting out of the taxman's bite.

Do your counties really not offer an online pre-payment or fixed payment schedule?  Ours charges $1 per online transactions and allows you to prepay as early as you want for the tax.  I was curious so I looked up the rules.  Get a rewards credit card, set up auto payments online and don't worry about it...?

Everyone might not have the same options though.

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #938 on: October 27, 2018, 04:17:37 PM »
For my case I don't. My house's owner-bank sorts out the insurance and county property tax for me. If I paid down the mortgage not only would I have higher risk while partly paid, lower returns expected in any case, but if I succeeded I'd have to deal with two institutions instead of one (county....*shudder*). Totally a loser situation in every respect, and if you would be making periodic investments into the S&P500 the percentage of 5-year periods with returns under 4.65% would be notably lower than for the bad-luck-of-the-draw lump sum sucker.

I'm not really arguing with you, because you're right that you have to deal with the insurance company and the tax entity (county in your case) instead of just the mortgage company.  But I am curious what makes that a significant burden.
Actually it would not really be enough of a burden to think about twice, just not an advantage either. Though I can say the county mails me my property tax summaries once a year to be paid out quarterly as far as I can tell, and they look really annoying. I might have to join RWD in the 10% penalty club if I was in charge.
Yes, I know this is an MPP - I used to like having an impound account, but DH does not, therefore, we pay our taxes semi-annually ourselves. The taxes on all our properties total $32,500 per year. I know the tenants pay their share of the taxes in their rent, but that is still a fuck-ton of money. Fortunately, DH pays the bills, so I don't actually have to write the check(s), but damn, it hurts. I totally understand how an impound account takes some of the sting out of the taxman's bite.

Do your counties really not offer an online pre-payment or fixed payment schedule?  Ours charges $1 per online transactions and allows you to prepay as early as you want for the tax.  I was curious so I looked up the rules.  Get a rewards credit card, set up auto payments online and don't worry about it...?

Everyone might not have the same options though.
Last we checked, the fees were prohibitive - i.e. for cash strapped Sukkas only, not worth the "rewards". Also, that 32.5k is spread out over five properties in two counties. Any fee, however modest, multiplied times five, tends to turn us off. I will look into the fixed payment schedule, but it would still essentially be pre-paying. We have the money to pay the taxes, it just hurts in a mustachian kind of way when the big checks get written.

TexasRunner

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Re: DONT Payoff your Mortgage Club
« Reply #939 on: October 29, 2018, 07:47:03 PM »
Last we checked, the fees were prohibitive - i.e. for cash strapped Sukkas only, not worth the "rewards". Also, that 32.5k is spread out over five properties in two counties. Any fee, however modest, multiplied times five, tends to turn us off. I will look into the fixed payment schedule, but it would still essentially be pre-paying. We have the money to pay the taxes, it just hurts in a mustachian kind of way when the big checks get written.

Dang that stinks.  Though it might help to compare the cost of the fees - even stacked together - compared to the costs of missing one payment by even a week.  The online fees might simply be a cheap insurance against forgetting to pay it (assuming your allowed to schedule in advance).

Dicey

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Re: DONT Payoff your Mortgage Club
« Reply #940 on: October 29, 2018, 11:57:23 PM »
Last we checked, the fees were prohibitive - i.e. for cash strapped Sukkas only, not worth the "rewards". Also, that 32.5k is spread out over five properties in two counties. Any fee, however modest, multiplied times five, tends to turn us off. I will look into the fixed payment schedule, but it would still essentially be pre-paying. We have the money to pay the taxes, it just hurts in a mustachian kind of way when the big checks get written.

Dang that stinks.  Though it might help to compare the cost of the fees - even stacked together - compared to the costs of missing one payment by even a week.  The online fees might simply be a cheap insurance against forgetting to pay it (assuming your allowed to schedule in advance).
Zero chance that we'll forget to pay, the penalties are huge. Not gonna happen.

We're in the middle of a very extensive flip; we're spending over $100k OOP* on renovations. First question as we were roughing out the budget was, "Do we have enough cash on hand to do this and easily pay our taxes?" Yes.

*If you've seen me say $200k before, you're sharp. We have a partner. They're putting in the other $100k. Even if we really screw up and go over the budget, we can still pay our property taxes, all of them.

dandarc

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Re: DONT Payoff your Mortgage Club
« Reply #941 on: November 02, 2018, 04:20:17 PM »
In the comments on an article that say "30 year mortgage are stupid", responding to a comment about a 30-year 3.75% mortgage, MMM himself advising to hold onto the mortgage for the long haul.

https://www.mrmoneymustache.com/2011/05/24/mmm-challenge-get-yourself-a-lower-mortgage-rate/#comment-1748446

Guess some things have changed since 2011.

talltexan

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Re: DONT Payoff your Mortgage Club
« Reply #942 on: December 06, 2018, 11:02:50 AM »
His cash flow is greater than expected. Planning a mortgage position on a property is about balancing your cash flow--which could potentially be from other sources--with the interest rate. It's documented that MMM's cash flow from the blog is wildly beyond what he might have expected in 2011, therefore keeping the mortgage becomes more favorable.

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #943 on: December 06, 2018, 12:00:45 PM »
I agree, MMM is experiencing some hindsight bias. He clearly made the right choice to pay off the mortgage before retirement, given his input assumptions. I don't like to think of it as a cash flow situation, but rather as left-tail risk mitigation.

Let's compare two Mustachians, one just starting out and one getting ready for FIRE. They both share similar assumptions: a) given a low interest rate mortgage, stocks are expected to outperform paying off the mortgage over the long term; b) stocks come with some risk that they will not outperform paying off the mortgage over shorter time periods.

1) Mustachian Abe is a couple years out of college and just bought his house. He knows stocks are one of the best passive investment strategies to maximize earnings and minimize time to FIRE. He also considers the risk of what might happen if stocks decide to take a huge dump in his middle-to-late earnings years: if this were to happen, he knows they will probably rebound, but even if not he could work another year or two at his highest earning potential to attain FIRE.

2) Mustachian Beatrice is getting ready to FIRE in the next year or two. She knows stocks are one of the best passive investment strategies to help sustain her safe withdrawal rate through retirement. She also considers the risk of what might happen if stocks decide to take a huge dump early in FIRE; if this were to happen, she knows the chances are decent she might have to work as a Walmart greeter for five to ten years sometime in the next twenty years in order to not lose her house (and go hungry).

To conclude the parable of the two Mustachians, the tail risk consequences are the big differences as to why paying off the mortgage might make a lot of sense for the early retiree. For the earner, the choice is easy: with stocks, Abe is likely to cut years off his working career, with the very small risk he might need to work an extra year or two. Beatrice, on the other hand, knows that the consequence of failing in FIRE leads to a much less desirable conclusion.


By the way, came across this very thorough approach to the question of having a mortgage during early retirement: https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/

Telecaster

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Re: DONT Payoff your Mortgage Club
« Reply #944 on: December 06, 2018, 01:31:48 PM »

By the way, came across this very thorough approach to the question of having a mortgage during early retirement: https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/

That was has come up before.   He makes a basic assumption inflation will remain constant at 2%.   Terrible assumption.  Current inflation rate is 2.5% and the historical average is about 3.5%.   Many people on this board remember when inflation was well into the double digits.  In fact, he sort of acknowledges this issue:


Finally, I can see how at some point down the road interest rates could be much higher than today. If you retire in 5 years and still have 20 years left on your 3.25% fixed rate mortgage but bond interest rates are now 3.5 or 4%, then by all means, hold on to that mortgage. Now the mortgage vs. bond leverage works beautifully!


The 10-year bond has already been over 3% a couple times this year, and historically has been been well above 4%.  There is a natural human tendency to assume that current conditions will extend into the future forever, but that's not the case in the real world.   We should anticipate bond and interest rates will return to something like average eventually.     Which is the more likely event?   A 1929-style market collapse or bonds yielding average returns?   And if the latter  happens--which it almost certainly will--his whole argument about paying down the mortgage goes away.

Speaking of changes in input assumptions:  Divorce.  I don't know MMM's personal circumstances so I won't speculate.  But let's take a hypothetical couple who has say, $700,000 in investments and a paid off house, and some years later they decide to get divorced.   How do you split the house?   One former spouse has to buy out the other one.  Where does that money come from? Or they have to sell the house, which is expensive and time consuming--and you don't wind up with a house.

If they had kept the mortgage, it would be much easier to buy out the other ex-spouse and they would have more liquid assets to do so.   Nobody plans on getting divorced, but it happens.   Sadly, it is a more likely event for most people than a 1929-style market collapse.   

tralfamadorian

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Re: DONT Payoff your Mortgage Club
« Reply #945 on: December 06, 2018, 02:00:49 PM »
...she knows the chances are decent she might have to work as a Walmart greeter for five to ten years sometime in the next twenty years in order to not lose her house (and go hungry).

...Beatrice, on the other hand, knows that the consequence of failing in FIRE leads to a much less desirable conclusion.

I think the situation of the second person as presented is unnecessarily dire. Despite the fact that a 3% withdrawal rate has a 100% success in the forecasters we have available, if Beatrice was concerned about a market drop affecting the longevity of her portfolio, she has a myriad of choices besides working at Walmart.  She could do any or combination of the following- 1) cut her vacation budget by 50% for a year or two, 2) cut her hobby/fun budget by 50% for a year or so, 3) work a fun part time job that ties into an interest of hers- taster at a winery, PT at an art gallery, brewer's assistant as a brewery. Or she could do both by working PT at an outdoor store, knitting shop, her gym, etc to both boost her income and an employee discount to help her fun budget stretch further.

Don't make the mistake of thinking that once someone leaves their chosen profession, they become a pariah in the working world. FIREd people are smart and hardworking- what every employer wants in an employee and isn't always easy to find in someone looking to work part time.

Hell, given what they pay people at wally world, she could probably earn more churning bank account bonuses.

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #946 on: December 06, 2018, 03:28:19 PM »
...she knows the chances are decent she might have to work as a Walmart greeter for five to ten years sometime in the next twenty years in order to not lose her house (and go hungry).

...Beatrice, on the other hand, knows that the consequence of failing in FIRE leads to a much less desirable conclusion.

I think the situation of the second person as presented is unnecessarily dire. Despite the fact that a 3% withdrawal rate has a 100% success in the forecasters we have available, if Beatrice was concerned about a market drop affecting the longevity of her portfolio, she has a myriad of choices besides working at Walmart.  She could do any or combination of the following- 1) cut her vacation budget by 50% for a year or two, 2) cut her hobby/fun budget by 50% for a year or so, 3) work a fun part time job that ties into an interest of hers- taster at a winery, PT at an art gallery, brewer's assistant as a brewery. Or she could do both by working PT at an outdoor store, knitting shop, her gym, etc to both boost her income and an employee discount to help her fun budget stretch further.

Don't make the mistake of thinking that once someone leaves their chosen profession, they become a pariah in the working world. FIREd people are smart and hardworking- what every employer wants in an employee and isn't always easy to find in someone looking to work part time.

Hell, given what they pay people at wally world, she could probably earn more churning bank account bonuses.

The Walmart greeter was a bit of an exaggeration, but the tail risk is nonetheless real. And of course a lot depends on the job market; in the current market, you can probably get a decent job if you have a pulse, but there have been some rough job markets that coincided with a shitty stock market.

Boofinator

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Re: DONT Payoff your Mortgage Club
« Reply #947 on: December 06, 2018, 03:54:48 PM »

By the way, came across this very thorough approach to the question of having a mortgage during early retirement: https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/

That was has come up before.   He makes a basic assumption inflation will remain constant at 2%.   Terrible assumption.  Current inflation rate is 2.5% and the historical average is about 3.5%.   Many people on this board remember when inflation was well into the double digits.  In fact, he sort of acknowledges this issue:


Finally, I can see how at some point down the road interest rates could be much higher than today. If you retire in 5 years and still have 20 years left on your 3.25% fixed rate mortgage but bond interest rates are now 3.5 or 4%, then by all means, hold on to that mortgage. Now the mortgage vs. bond leverage works beautifully!


The 10-year bond has already been over 3% a couple times this year, and historically has been been well above 4%.  There is a natural human tendency to assume that current conditions will extend into the future forever, but that's not the case in the real world.   We should anticipate bond and interest rates will return to something like average eventually.     Which is the more likely event?   A 1929-style market collapse or bonds yielding average returns?   And if the latter  happens--which it almost certainly will--his whole argument about paying down the mortgage goes away.

Speaking of changes in input assumptions:  Divorce.  I don't know MMM's personal circumstances so I won't speculate.  But let's take a hypothetical couple who has say, $700,000 in investments and a paid off house, and some years later they decide to get divorced.   How do you split the house?   One former spouse has to buy out the other one.  Where does that money come from? Or they have to sell the house, which is expensive and time consuming--and you don't wind up with a house.

If they had kept the mortgage, it would be much easier to buy out the other ex-spouse and they would have more liquid assets to do so.   Nobody plans on getting divorced, but it happens.   Sadly, it is a more likely event for most people than a 1929-style market collapse.

I agree with you that if we are looking at average expected returns, the best bet is to not pay the mortgage for a variety of reasons (including inflation). My comment was referring to minimizing tail risk in early retirement (which is the same objective of the 4% rule and cFIREsim), and looking at the tails one can see that deflationary events and poor stock returns (and shitty job markets) are correlated. (Do you think the unleveraged brokers were jumping out windows in 1929?)

As for divorce, it blows the 4% rule out of the water, regardless of whether or not the mortgage is paid off. One reason I think 4% is too conservative for me (not that I plan to divorce).

tralfamadorian

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Re: DONT Payoff your Mortgage Club
« Reply #948 on: December 06, 2018, 03:55:56 PM »
The Walmart greeter was a bit of an exaggeration, but the tail risk is nonetheless real. And of course a lot depends on the job market; in the current market, you can probably get a decent job if you have a pulse, but there have been some rough job markets that coincided with a shitty stock market.

But that is one of the benefits of FIRE, no? If the stock market dropped 40% on year 2 of your retirement with 4% SWR and you're in that one Oh, Shit! monte carlo simulation, you wouldn't be need to go out immediately to get a job to make ends meet. You could cut back some of the discretionary spending for a couple years and casually search for a PT job that interests you. If the market stinks and it takes awhile that find that job, big deal.

moof

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Re: DONT Payoff your Mortgage Club
« Reply #949 on: December 06, 2018, 04:22:48 PM »
I played with Cfiresim and compared my own personal situation as to paying down the mortgage now vs over its natural life.  For my OWN situation with a 3% mortgage, 95% success rate while factoring approximate tax differences (barely affects things), and so forth I get a shoulder shrug result.

My SWR goes down 1.5% by paying down my mortgage early over the next 5 years compared to finishing it off over the next 13 remaining years.

So in my case I chose to stick with the 13 year payout.  I completely understand the the arguments on both sides, I chose to base my own decision on numbers.  If my rate was anything north of 4% I would probably have gone the other way.