DONT Payoff your Mortgage Club

[dandarc]

Last payment on 0% car loan made today. I wish cash-out refinancing was available at good terms on cars . . .

[Psychstache]

Last payment on 0% car loan made today. I wish cash-out refinancing was available at good terms on cars . . .

Sorry for your loss :P

[Dicey]

Last payment on 0% car loan made today. I wish cash-out refinancing was available at good terms on cars . . .

Sometimes it is. Keep your eyes peeled.

[valsecito]

Our situation is different:
- 1.23% 20 years fixed mortgage
- interest payments almost fully (80%) paid for by tax incentives
- >10% inflation
- legally mandated auto-adjustments of wages to inflation
- low personal inflation

This mortgage feels like printing money. Even so, I could imagine killing it at some point in the future. I'd have to be FIRE with a low mortgage/portfolio ratio, and not motivated anymore to optimise the last bit of my portfolio. Flexibility and simplicity definitely have value.

[rmorris50]

Got it. Sorry.

I guess the other point is that people on this forum should be optimizing for the greatest chance of success in early retirement and not the greatest final wealth after 30 years. The no mortgage path mitigates sequence of returns risk and so has better 5th and 10th percentile SWR rates than the mortgage+more stock path

Sounds like we are in broad agreement.
My main takeaway from literally years of discussion and analysis is that it's particularly risky to POYM if it means foregoing tax-advantaged accounts, when it results in a very large (~>30%) of your NW being tied to your home, and when the rate on a fixed mortgage is very low (≤ 4%). There are times when paying off your mortgage is essentially no different (e.g. very large savings) and a few when in which it can be beneficial (e.g. when guarding against SORR is your primary goal, or to keep spending below certain thresholds for subsidies).

Often the discussions aren't that nuanced, or include [misleading/non-universal] mantras like "____ will make you sleep better at night" or "no one can take your home from you".

Every household’s finances are different. For my household for many years we shoved money into all kinds of accounts, retirement, prepaying the mortgage, deferring comp/bonuses, etc. after tax cash was kept low. But I was dumb and young and thought I’d always have a job and work a long time.

Then after 15 years bam, I’m laid off and I realize I wish I had access to our retirement and real estate rich portfolio. All the sudden I regretted prepaying that mortgage (still had a balance) and not saving a lot more money in after tax accounts. Thank goodness my severance was good, it was the only saving grace, and the fact I was was working three months later.

After that experience, and given we are closer to retirement, really retire asap, I don’t pay one extra penny to the mortgage, I only contribute enough to retirement accounts to get matches. All other savings goes into after tax accounts.

We all have the best laid plans, then life happens. Unless it is greatly advantageous to prepay the mortgage, I would at least save those payments into a special account and then pay the mortgage off all at once when there was enough savings. Never know when you might just need the money.

Easy for me to save tho, we have a 2.5% fixed unicorn.


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[dandarc]

@rmorris50 - Money in mortgage is significantly more locked-away than money in retirement accounts. https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/ is a good resource on that.

While the Roth-Ladder technique requires some planning, every year that passes you get to where a SEPP's inflexibility is less of a problem and "just pay the effing penalty" has a lower projected cost since you're closer to 59.5.

100% agree that investing in taxable is far preferable to prepaying a fixed, low-rate mortgage. Tax advantaged is also preferable to taxable and the whole "yes you can withdraw early . . ." can go a long way towards easing concerns as to availability of money. At least do a Roth IRA before taxable if you can make regular contributions - you can take those contributions out with no tax or penalty at any time if you need to.

[rmorris50]

Yes I know all the rules how to access retirement accounts, just don’t want to until the time I’ve planned to. Also my story is from some years ago, we are in a much better spot now.


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[catccc]

Got it. Sorry.

I guess the other point is that people on this forum should be optimizing for the greatest chance of success in early retirement and not the greatest final wealth after 30 years. The no mortgage path mitigates sequence of returns risk and so has better 5th and 10th percentile SWR rates than the mortgage+more stock path

Thanks for linking that article from ERN.  It's a great analysis.  Here's one section that stood out to me, under the header "Exceptions to the No Mortgage Recommendation":

"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!"

Welp, that's here.  My mortgage is at 2.75% and I-bonds are yielding 6.89%.  (I don't actually have any I bonds, but that's another story.  If I had the extra cash, I would buy I-bonds over prepaying the mortgage.)

[grantmeaname]

I bonds are variable rate, and they're not bonds, so not the best comparison. You're only getting six months of I Bond yield at those levels before it declines further.

The SEC yield of the Vanguard corporate bond index is 3.14%, or the US 10Y Treasury yields 3.52% - one of those is probably a better comparison point.

Agree with the broader point that a sub-3% mortgage and a bond portfolio with a better yield could make a lot of sense, and that's pretty much the analysis I did in my introduction post above. As someone with a 5% mortgage, the bond market and stock market are not close to appealing enough for my marginal dollar.

[rmorris50]

I bonds are variable rate, and they're not bonds, so not the best comparison. You're only getting six months of I Bond yield at those levels before it declines further.

The SEC yield of the Vanguard corporate bond index is 3.14%, or the US 10Y Treasury yields 3.52% - one of those is probably a better comparison point.

Agree with the broader point that a sub-3% mortgage and a bond portfolio with a better yield could make a lot of sense, and that's pretty much the analysis I did in my introduction post above. As someone with a 5% mortgage, the bond market and stock market are not close to appealing enough for my marginal dollar.

Would you get a different answer if you adjust your mortgage rate downward or alternative invest return upward for a liquidity premium. Liquidity is worth something.


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[dandarc]

Last payment on 0% car loan made today. I wish cash-out refinancing was available at good terms on cars . . .

Sometimes it is. Keep your eyes peeled.

Saw one that claimed to offer rates as low as 2.83%, but as soon as I entered that 0 for amount owed "sorry we can't help you". Only like $10Kish, so I'm not that worried about it.

[grantmeaname]

I bonds are variable rate, and they're not bonds, so not the best comparison. You're only getting six months of I Bond yield at those levels before it declines further.

The SEC yield of the Vanguard corporate bond index is 3.14%, or the US 10Y Treasury yields 3.52% - one of those is probably a better comparison point.

Agree with the broader point that a sub-3% mortgage and a bond portfolio with a better yield could make a lot of sense, and that's pretty much the analysis I did in my introduction post above. As someone with a 5% mortgage, the bond market and stock market are not close to appealing enough for my marginal dollar.

Would you get a different answer if you adjust your mortgage rate downward or alternative invest return upward for a liquidity premium. Liquidity is worth something.

Sure. If you put an arbitrarily large bonus on a smaller number you can make it bigger than a number that used to be bigger than it. I'm not sure why that's interesting or relevant?

[Radagast]

I bonds are variable rate, and they're not bonds

They are called "bonds", and they literally say "BOND" at the top, and the issuer makes the rules, so I am going to say they are bonds...

[rmorris50]

I bonds are variable rate, and they're not bonds, so not the best comparison. You're only getting six months of I Bond yield at those levels before it declines further.

The SEC yield of the Vanguard corporate bond index is 3.14%, or the US 10Y Treasury yields 3.52% - one of those is probably a better comparison point.

Agree with the broader point that a sub-3% mortgage and a bond portfolio with a better yield could make a lot of sense, and that's pretty much the analysis I did in my introduction post above. As someone with a 5% mortgage, the bond market and stock market are not close to appealing enough for my marginal dollar.

Would you get a different answer if you adjust your mortgage rate downward or alternative invest return upward for a liquidity premium. Liquidity is worth something.

Sure. If you put an arbitrarily large bonus on a smaller number you can make it bigger than a number that used to be bigger than it. I'm not sure why that's interesting or relevant?

Trying to say you might want include the value of liquidity in your analysis of whether to prepay the mortgage or not. Finance types do that via a liquidity premium. Of course most people on this thread don’t do that, they just qualitatively decide whether they want their money tied up, or decide based on a cash flow analysis, another type of analysis that can help determine which option might be best. You seem focused strictly on return and volatility. For me cash flow and liquidity have significant value. Meaning my mortgage rate would prob need to be at LEAST 100bps higher than my alternative investment for me to prepay it. Maybe even 150bps. And I’d be looking constantly in the meantime to refi to a lower rate.

[Dicey]

Last payment on 0% car loan made today. I wish cash-out refinancing was available at good terms on cars . . .

Sometimes it is. Keep your eyes peeled.

Saw one that claimed to offer rates as low as 2.83%, but as soon as I entered that 0 for amount owed "sorry we can't help you". Only like $10Kish, so I'm not that worried about it.

You're a bit of an outlier. All may not be lost. Unless it's online only, it's worth a phone call. You could also try entering the amount you'd like to borrow and see what happens.

[talltexan]

You guys know I'm a believer in safe leverage, but refinancing a car loan seems...un-Mustachian. The value of our cars should be so small relative to everything else that it shouldn't move the needle.

[sonofsven]

You guys know I'm a believer in safe leverage, but refinancing a car loan seems...un-Mustachian. The value of our cars should be so small relative to everything else that it shouldn't move the needle.

But if you could save money by refinancing a car loan why wouldn't you?
I did one years ago to a local CU for one free month plus a $200 bonus.

[Psychstache]

You guys know I'm a believer in safe leverage, but refinancing a car loan seems...un-Mustachian. The value of our cars should be so small relative to everything else that it shouldn't move the needle.

We have an entire thread devoted to parking large chunks of money in checking accounts for months in order to get a $200-$500 sign up bonus. How is this any different?

[nereo]

You guys know I'm a believer in safe leverage, but refinancing a car loan seems...un-Mustachian. The value of our cars should be so small relative to everything else that it shouldn't move the needle.

But if you could save money by refinancing a car loan why wouldn't you?
I did one years ago to a local CU for one free month plus a $200 bonus.

You could follow a similar argument with churning credit cards for points and bonuses. Plenty here do this to get a $200 signup bonus or 30,000 free miles (heck, MMM even promotes a few of these via ads and his blog) but unless you take it to extremes it's going to be fraction of a percent of most people's NW, and maybe 1-2% of annual gross salary.

[grantmeaname]

Trying to say you might want include the value of liquidity in your analysis of whether to prepay the mortgage or not. Finance types do that via a liquidity premium. Of course most people on this thread don’t do that, they just qualitatively decide whether they want their money tied up, or decide based on a cash flow analysis, another type of analysis that can help determine which option might be best. You seem focused strictly on return and volatility. For me cash flow and liquidity have significant value. Meaning my mortgage rate would prob need to be at LEAST 100bps higher than my alternative investment for me to prepay it. Maybe even 150bps. And I’d be looking constantly in the meantime to refi to a lower rate.

I work in finance, and I get the concept, but I just don't see how it's really relevant here. Over 80% of my net worth today is liquid, and at FIRE time that will have decreased to 'only' 60% (but a larger dollar amount), with an additional portion conditionally accessible by a HELOC. I will be swimming in liquidity relative to my needs and don't see why I should accept a 100-150bp lower return to get additional liquidity I should have no reasonable need for.

[rpr]

I came across this article at ERN.

https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/

From what I can understand, if you are risk averse (SORR risk), he says to pay off the mortgage. If not, he says stick with the mortgage but that for optimum you should have no bonds in your portfolio.

The liquidity issue is not addressed. In his table on SWRs, it looks to me that case 5 with 30 year fixed rate mortgage at 3.875% and an 80/20 asset allocation seems pretty decent. Ultimately it depends on the difference between the bond and the mortgage rates.

Anyone have any thoughts?

[sonofsven]

You guys know I'm a believer in safe leverage, but refinancing a car loan seems...un-Mustachian. The value of our cars should be so small relative to everything else that it shouldn't move the needle.

But if you could save money by refinancing a car loan why wouldn't you?
I did one years ago to a local CU for one free month plus a $200 bonus.

You could follow a similar argument with churning credit cards for points and bonuses. Plenty here do this to get a $200 signup bonus or 30,000 free miles (heck, MMM even promotes a few of these via ads and his blog) but unless you take it to extremes it's going to be fraction of a percent of most people's NW, and maybe 1-2% of annual gross salary.

I would make that argument, too. When offered "free money" I say yes, please 🙂.

[catccc]

I bonds are variable rate, and they're not bonds, so not the best comparison. You're only getting six months of I Bond yield at those levels before it declines further.

It's a bond.  I guess you could also say the rate is fixed for 6 months.  For the last three 6 month periods, the rate has been over 6.89%, so that's 18 months of DPOYM, according to ERN.  And depending on your mortgage rate, the period before that could also have been a good time to not POYM.

Bonds aside... I think DPOYM or POYM based on SORR risk should be assessed along with time from FIRE.  If SORR risk is the main concern, in most cases, DPOYM until you are very near FIRE, then POYM.  I wouldn't tell a 20 year old that plans to FIRE at 40 that they should POYM to mitigate SORR.

[catccc]

When offered "free money" I say yes, please 🙂.

Yes, please!  (I'm currently floating $20K on 0% CCs while earning interest on equivalent amounts stashed elsewhere!)

[talltexan]

I'll restrict my comments to primary mortgage loan versus these other ways of finding a few $$:

• A primary mortgage is the largest line item in many household budgets, and it has a lot of characteristics (non-callable, lengthy term, fixed rate) not associated with most other loan products;
• The threshold for having your life together (set up one automatic payment/month) is so much lower if all you want to do is stay current on one payment; than for the credit card churning/manufactured spending route
• it really feels like optimizing on the mortgage is one of those ways where you can get a lot of results for minimal amount of effort places.

[nereo]

I'll restrict my comments to primary mortgage loan versus these other ways of finding a few $$:

• A primary mortgage is the largest line item in many household budgets, and it has a lot of characteristics (non-callable, lengthy term, fixed rate) not associated with most other loan products;
• The threshold for having your life together (set up one automatic payment/month) is so much lower if all you want to do is stay current on one payment; than for the credit card churning/manufactured spending route
• it really feels like optimizing on the mortgage is one of those ways where you can get a lot of results for minimal amount of effort places.

I agree with all of these points!

[index]

Got it. Sorry.

I guess the other point is that people on this forum should be optimizing for the greatest chance of success in early retirement and not the greatest final wealth after 30 years. The no mortgage path mitigates sequence of returns risk and so has better 5th and 10th percentile SWR rates than the mortgage+more stock path, even thought it has a lower average final wealth after 30-50 years. If your goal is to retire early as safely as possible, and not just to be as rich as possible at 80, it better fits that goal.

With a 5% mortgage and bond rates marching higher. It might be smarter to hang onto those extra payments is Vanguard or Fidelity MMA where you are paying a 50-100bps spread and play the wait and see game with interest rates. The opportunity cost is $60-250/yr on $12-25k which is a pretty cheap option on the possibility we see some structural financial changes coming in the next year or two and interest rates remain high... There was another thread on here about how to play the US debt ceiling debate coming to a congress near you. I'd love to have $15k to drop into treasuries if that debate goes south. 

[grantmeaname]

It's a bond.

I Bonds are not negotiable and bonds must be negotiable by definition, so I Bonds are not bonds despite their name. (The second sentence the wikipedia definition of a financial security says that the word "security" is used vernacularly to refer to any financial instrument even if that instrument is not technically a security, and it works just the same with bonds.) If you don't want to own a T bond anymore, you can sell it to someone. If you don't want to own an I Bond anymore, then just like a nonnegotiable CD you have to put it back to the issuer at terms they decide, using a formula that cares nothing for 'market value'.

I guess you could also say the rate is fixed for 6 months.  For the last three 6 month periods, the rate has been over 6.89%, so that's 18 months of DPOYM, according to ERN.  And depending on your mortgage rate, the period before that could also have been a good time to not POYM.

If you buy a fixed rate bond (or another fixed rate instrument like a CD) you know you are getting the yield to maturity until the instrument's maturity. Look at three instruments with very similar risk profiles and identical maturities: the fact that the 30 year TIPS trades at 1.5%, the 30 year treasury bond trades at 3.7%, and the I Bond has a 6% current yield (but no meaningful yield to maturity), should tell you all you need to know about inflation expectations for the second, third, and fourth six month windows on that I Bond.

Or for another analogy, if a low quality company is selling off furniture to make common or preferred dividend payments and the dividend yield is 18% that doesn't mean 18% is your hurdle rate and buying anything yielding less is a poor investment, it means that market participants have taken a look at the expected lifetime returns of the instrument and that's the return they need to accept the poor yields in the next year and for the rest of their holding period.

Bonds aside... I think DPOYM or POYM based on SORR risk should be assessed along with time from FIRE.  If SORR risk is the main concern, in most cases, DPOYM until you are very near FIRE, then POYM.  I wouldn't tell a 20 year old that plans to FIRE at 40 that they should POYM to mitigate SORR.

I would say that sequence of returns risk is always the primary concern. That's why we have the 4% rule and not the 7% rule or the 10% rule.

[grantmeaname]

With a 5% mortgage and bond rates marching higher. It might be smarter to hang onto those extra payments is Vanguard or Fidelity MMA where you are paying a 50-100bps spread and play the wait and see game with interest rates.

Doesn't a 4.22% money market yield vs a 3.74% 30 year treasury yield tell you that rates are marching lower, not higher?

[rmorris50]

Trying to say you might want include the value of liquidity in your analysis of whether to prepay the mortgage or not. Finance types do that via a liquidity premium. Of course most people on this thread don’t do that, they just qualitatively decide whether they want their money tied up, or decide based on a cash flow analysis, another type of analysis that can help determine which option might be best. You seem focused strictly on return and volatility. For me cash flow and liquidity have significant value. Meaning my mortgage rate would prob need to be at LEAST 100bps higher than my alternative investment for me to prepay it. Maybe even 150bps. And I’d be looking constantly in the meantime to refi to a lower rate.

I work in finance, and I get the concept, but I just don't see how it's really relevant here. Over 80% of my net worth today is liquid, and at FIRE time that will have decreased to 'only' 60% (but a larger dollar amount), with an additional portion conditionally accessible by a HELOC. I will be swimming in liquidity relative to my needs and don't see why I should accept a 100-150bp lower return to get additional liquidity I should have no reasonable need for.

Is that 80 percent all post tax? My household only has 5% of our NW in after tax accounts. RE equity is about 10% and the rest is pre-tax. our NW is just shy of $3m .I view the pre-tax as illiquid even tho yes I know I can break those golden eggs early if I want to.

And the liquidity premium is relevant to this thread in the sense it should be considered, you’re just valuing that premium at zero. Where as someone like me is putting a high value on it. Others reading this thread might find this concept useful.

[grantmeaname]

Is that 80 percent all post tax? My household only has 5% of our NW in after tax accounts. RE equity is about 10% and the rest is pre-tax. our NW is just shy of $3m .I view the pre-tax as illiquid even tho yes I know I can break those golden eggs early if I want to.

You could make the argument that pretax/trad money is liquid too once you're retired since you can Roth convert, but I think I am in your boat and I would really only consider taxable and Roth money accessible. I am very lucky in that my 401k has a mega backdoor option, so I only have a tiny bit (~15% each) in pretax and taxable, and a ton in post-tax. And thankfully since the market has thrown up all over my hopes and dreams, I have no gains in my Roth - it's all contributions. Yay?

the liquidity premium is relevant to this thread in the sense it should be considered, you’re just valuing that premium at zero. Where as someone like me is putting a high value on it. Others reading this thread might find this concept useful.

Agreed. There are times a liquidity premium makes sense. But I think most early retirees are awash in more liquidity than they know what to do with. The most expensive thing I've ever bought, excluding my house, is $6200, and I have ~10x that available tomorrow in E fund and taxable accounts. 

[index]

With a 5% mortgage and bond rates marching higher. It might be smarter to hang onto those extra payments is Vanguard or Fidelity MMA where you are paying a 50-100bps spread and play the wait and see game with interest rates.

Doesn't a 4.22% money market yield vs a 3.74% 30 year treasury yield tell you that rates are marching lower, not higher?

The 5 to 10 yr treasury is probably more your speed since that is the time frame you are using to pay off your mortgage. The inverted yield curve means the expected interest rate over 30 yrs is less than the current fed funds rate. If inflation doesn't head lower or it proves harder to stamp out than anticipated like the 70's there is a very real chance 5-10yr treasuries go higher. It just seems a little silly to dump more into your mortgage when it is so close to current MMA rates and losing all that optionality. You seem dissuaded from pouring more into the market when the implied earnings yield is 6%. What if the market takes another 30% dump and than yield becomes 8-9%? 

This is all to say you are right on the cusp of where paying your mortgage off makes sense in 10% of situations. You are making the case you have enough money that you want to insure against a 10% scenario. I'm making the case to light $60 to $250 on fire (because you have so much money) and wait and see what happens. If MMA conditions change, then sure, it makes sense to dump the money on your 5% mortgage, but you are playing a game that is going to net you $250 at most.
 

[grantmeaname]

To be clear, I am not proposing to buy 30 year treasuries! Just saying the yield curve inversion is telling us that the market's expectation is for rates to decline, not to rise.

[catccc]

bonds must be negotiable by definition,

No, they don't.  A bond is simply a financial instrument that represents debt.  Bonds can be fixed (traditional) or variable (more of this lately), non-negotiable or negotiable.

[grantmeaname]

The SEC, FINRA, the CFAI, SIPC, and Wikipedia disagree. Die on that hill if you like, but regardless the point remains that a mortgage prepayment or a fixed rate bond held to maturity gives you a knowable and unchanging return, and an I bond does not and so is an inapt comparison.

[nereo]

The SEC, FINRA, the CFAI, SIPC, and Wikipedia disagree. Die on that hill if you like, but regardless the point remains that a mortgage prepayment or a fixed rate bond held to maturity gives you a knowable and unchanging return, and an I bond does not and so is an inapt comparison.

Does it thought?  I agree it gives you a fixed return, but unchanging would only be accurate if we are ignoring real returns (i.e inflation).  Which IMO is the whole problem here - you can calculate to the penny what a fixed rate bond will pay out 10 years from now, but not what that bond will be worth.
The same is true with pre-paying your mortgage - you can calculate exactly how many dollars that will save in years to come, but not what those dollars will be worth. Judging on my mortgage rate, the markets were expecting my dollars today to be worth a lot more than they are back when they issued my loan a few years ago.

[rmorris50]

Does anyone let the value of their house influence whether you are prepaying? My outstanding mortgage is 60% of zillows purported MV. What if it crashed to the same amount as my mortgage and wiped out my equity? Any potential HELOC is gone. This whole recent conversation appears to have the assumption our housing value is stable/going up.


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[nereo]

Does anyone let the value of their house influence whether you are prepaying? My outstanding mortgage is 60% of zillows purported MV. What if it crashed to the same amount as my mortgage and wiped out my equity? Any potential HELOC is gone. This whole recent conversation appears to have the assumption our housing value is stable/going up.

For me personally, I value investment assets far higher than potential credit through a HELOC, which to me is yet another reason not to pre-pay the mortgage.  As you said, if you rely too heavily on a HELOC, you run the risk of it not being available when you need it. This can be because the rates go up (like now), because banks can freeze access to your HELOC (as in 2008-09, '01, and when the bank considers you an elevated credit risk), or when the value of your home declines (limiting how big your HELOC can be).

If/when a HELOC is available and has favorable terms we will absolutely use it - but it's pretty far down there in terms of financial planning. Having more in savings creates more options.

[rmorris50]

Does anyone let the value of their house influence whether you are prepaying? My outstanding mortgage is 60% of zillows purported MV. What if it crashed to the same amount as my mortgage and wiped out my equity? Any potential HELOC is gone. This whole recent conversation appears to have the assumption our housing value is stable/going up.

For me personally, I value investment assets far higher than potential credit through a HELOC, which to me is yet another reason not to pre-pay the mortgage.  As you said, if you rely to heavily on a HELOC, you run the risk of it not being available when you need it. This can be because the rates go up (like now), because banks can freeze access to your HELOC (as in 2008-09, '01, and when the bank considers you an elevated credit risk), or when the value of your home declines.

If/when a HELOC is available and has favorable terms we will absolutely use it - but it's pretty far down there in terms of financial planning. Having more in savings creates more options.

Completely agree. I have one open that I purposely keep a small balance on, like $1000. Just to keep the line functioning in the banks eyes I guess. But it really is just a “oh crap” line of credit. The rate is also high on it.


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[couponvan]

Does anyone let the value of their house influence whether you are prepaying? My outstanding mortgage is 60% of zillows purported MV. What if it crashed to the same amount as my mortgage and wiped out my equity? Any potential HELOC is gone. This whole recent conversation appears to have the assumption our housing value is stable/going up.

For me personally, I value investment assets far higher than potential credit through a HELOC, which to me is yet another reason not to pre-pay the mortgage.  As you said, if you rely to heavily on a HELOC, you run the risk of it not being available when you need it. This can be because the rates go up (like now), because banks can freeze access to your HELOC (as in 2008-09, '01, and when the bank considers you an elevated credit risk), or when the value of your home declines.

If/when a HELOC is available and has favorable terms we will absolutely use it - but it's pretty far down there in terms of financial planning. Having more in savings creates more options.

Completely agree. I have one open that I purposely keep a small balance on, like $1000. Just to keep the line functioning in the banks eyes I guess. But it really is just a “oh crap” line of credit. The rate is also high on it.


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Ditto on this-I keep the minimum amount on it to avoid the annual line access fee in interest payments and pay about $75 per month for the convenience.

[grantmeaname]

you can calculate to the penny what a fixed rate bond will pay out 10 years from now, but not what that bond will be worth.

That's right, and a good point. But comparing a TIPS to a mortgage paydown does not fix this problem.

With a TIPS you are guaranteed to be paid nothing for the time value of money, but paid for inflation. The ex inflation return of a TIPS is nothing.
With a fixed bond you are paid for the time value of money but not for inflation. You get a fixed, knowable nominal return for N years.

They're different assets with different returns and so saying "I'm not paying down my mortgage and foregoing 30 years of a fixed nominal return because I can get a better nominal return for the next six months" is inapt. The appropriate comparison is a fixed rate bond. You can forego paying down a 30Y mortgage that bears an X% interest rate and instead purchase a 3.65% 30Y treasury bond, or not, and the risks are comparable, and the return difference is knowable.

Edit: one more thought: we all mostly own stocks of companies that sell their products in nominal dollars. The stock market absolutely rips in high inflation environments (short of hyperinflation and societal collapse). Most people with a mostly stock portfolio don't need more inflation protection in my opinion. Do you feel differently?

[sonofsven]

Does anyone let the value of their house influence whether you are prepaying? My outstanding mortgage is 60% of zillows purported MV. What if it crashed to the same amount as my mortgage and wiped out my equity? Any potential HELOC is gone. This whole recent conversation appears to have the assumption our housing value is stable/going up.

For me personally, I value investment assets far higher than potential credit through a HELOC, which to me is yet another reason not to pre-pay the mortgage.  As you said, if you rely too heavily on a HELOC, you run the risk of it not being available when you need it. This can be because the rates go up (like now), because banks can freeze access to your HELOC (as in 2008-09, '01, and when the bank considers you an elevated credit risk), or when the value of your home declines (limiting how big your HELOC can be).

If/when a HELOC is available and has favorable terms we will absolutely use it - but it's pretty far down there in terms of financial planning. Having more in savings creates more options.

I agree. In '09 my untapped HELOC was cancelled. At the time I had more than double the amount of the HELOC in my home's equity, but it did not matter. It's hard to know what your equity is when prices are dropping, and the banks were taking no chances.
I was going to use it to buy another fixer in the downturn.

[Fomerly known as something]

Does anyone let the value of their house influence whether you are prepaying? My outstanding mortgage is 60% of zillows purported MV. What if it crashed to the same amount as my mortgage and wiped out my equity? Any potential HELOC is gone. This whole recent conversation appears to have the assumption our housing value is stable/going up.

For me personally, I value investment assets far higher than potential credit through a HELOC, which to me is yet another reason not to pre-pay the mortgage.  As you said, if you rely too heavily on a HELOC, you run the risk of it not being available when you need it. This can be because the rates go up (like now), because banks can freeze access to your HELOC (as in 2008-09, '01, and when the bank considers you an elevated credit risk), or when the value of your home declines (limiting how big your HELOC can be).

If/when a HELOC is available and has favorable terms we will absolutely use it - but it's pretty far down there in terms of financial planning. Having more in savings creates more options.

I agree. In '09 my untapped HELOC was cancelled. At the time I had more than double the amount of the HELOC in my home's equity, but it did not matter. It's hard to know what your equity is when prices are dropping, and the banks were taking no chances.
I was going to use it to buy another fixer in the downturn.

With that I’d rather take a margin loan on my brokerage count if necessary than use a HELOC when it comes down to it. 

[grantmeaname]

Are you with IBKR? That's the only place I've seen even somewhat decent margin loan terms, and even there with only megabucks account, but I'd love to hear other options...

[talltexan]

Does anyone let the value of their house influence whether you are prepaying? My outstanding mortgage is 60% of zillows purported MV. What if it crashed to the same amount as my mortgage and wiped out my equity? Any potential HELOC is gone. This whole recent conversation appears to have the assumption our housing value is stable/going up.

For me personally, I value investment assets far higher than potential credit through a HELOC, which to me is yet another reason not to pre-pay the mortgage.  As you said, if you rely too heavily on a HELOC, you run the risk of it not being available when you need it. This can be because the rates go up (like now), because banks can freeze access to your HELOC (as in 2008-09, '01, and when the bank considers you an elevated credit risk), or when the value of your home declines (limiting how big your HELOC can be).

If/when a HELOC is available and has favorable terms we will absolutely use it - but it's pretty far down there in terms of financial planning. Having more in savings creates more options.

I agree. In '09 my untapped HELOC was cancelled. At the time I had more than double the amount of the HELOC in my home's equity, but it did not matter. It's hard to know what your equity is when prices are dropping, and the banks were taking no chances.
I was going to use it to buy another fixer in the downturn.

Would the lender not issue a letter saying something like, you may continue to pay down the balance owed on the HELOC, but you may not borrow additional principal during a financial crisis? Or is that covered under the terms of the line of credit?

[rmorris50]

Does anyone let the value of their house influence whether you are prepaying? My outstanding mortgage is 60% of zillows purported MV. What if it crashed to the same amount as my mortgage and wiped out my equity? Any potential HELOC is gone. This whole recent conversation appears to have the assumption our housing value is stable/going up.

For me personally, I value investment assets far higher than potential credit through a HELOC, which to me is yet another reason not to pre-pay the mortgage.  As you said, if you rely too heavily on a HELOC, you run the risk of it not being available when you need it. This can be because the rates go up (like now), because banks can freeze access to your HELOC (as in 2008-09, '01, and when the bank considers you an elevated credit risk), or when the value of your home declines (limiting how big your HELOC can be).

If/when a HELOC is available and has favorable terms we will absolutely use it - but it's pretty far down there in terms of financial planning. Having more in savings creates more options.

I agree. In '09 my untapped HELOC was cancelled. At the time I had more than double the amount of the HELOC in my home's equity, but it did not matter. It's hard to know what your equity is when prices are dropping, and the banks were taking no chances.
I was going to use it to buy another fixer in the downturn.

Would the lender not issue a letter saying something like, you may continue to pay down the balance owed on the HELOC, but you may not borrow additional principal during a financial crisis? Or is that covered under the terms of the line of credit?

Possible, I’d have to read the fine print. Maybe carrying a small balance doesn’t mean anything in the end.  Maybe it’s more for my own sake, knowing it works. I assume at the end of the day the bank can just shut it down for whatever reason it wants.


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[sonofsven]

Does anyone let the value of their house influence whether you are prepaying? My outstanding mortgage is 60% of zillows purported MV. What if it crashed to the same amount as my mortgage and wiped out my equity? Any potential HELOC is gone. This whole recent conversation appears to have the assumption our housing value is stable/going up.

For me personally, I value investment assets far higher than potential credit through a HELOC, which to me is yet another reason not to pre-pay the mortgage.  As you said, if you rely too heavily on a HELOC, you run the risk of it not being available when you need it. This can be because the rates go up (like now), because banks can freeze access to your HELOC (as in 2008-09, '01, and when the bank considers you an elevated credit risk), or when the value of your home declines (limiting how big your HELOC can be).

If/when a HELOC is available and has favorable terms we will absolutely use it - but it's pretty far down there in terms of financial planning. Having more in savings creates more options.

I agree. In '09 my untapped HELOC was cancelled. At the time I had more than double the amount of the HELOC in my home's equity, but it did not matter. It's hard to know what your equity is when prices are dropping, and the banks were taking no chances.
I was going to use it to buy another fixer in the downturn.

Would the lender not issue a letter saying something like, you may continue to pay down the balance owed on the HELOC, but you may not borrow additional principal during a financial crisis? Or is that covered under the terms of the line of credit?

Possible, I’d have to read the fine print. Maybe carrying a small balance doesn’t mean anything in the end.  Maybe it’s more for my own sake, knowing it works. I assume at the end of the day the bank can just shut it down for whatever reason it wants.


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I believe they can call them at any time, but in my case there was $0 balance and they just shut it down. That was the (temporary) end of easy credit.

[catccc]

The SEC, FINRA, the CFAI, SIPC, and Wikipedia disagree. Die on that hill if you like, but regardless the point remains that a mortgage prepayment or a fixed rate bond held to maturity gives you a knowable and unchanging return, and an I bond does not and so is an inapt comparison.

I'm always willing to learn, so I checked out the links you shared, except wikipedia for obvious reasons, and the word "negotiable" is included in exactly zero of them.  (One of them did say this, though: "Moreover, the term “fixed income” is not to be understood literally: Some fixed-income securities have interest payments that change over time.")

Actually, then I got curious and looked at the wikipedia link just now.  It says "Very often the bond is negotiable, that is, the ownership of the instrument can be transferred in the secondary market. "  Very often.  Not always.  All your sources confirm my assertion, and I bond is a bond.

Bond definition aside, the point remains that at a given time, you have a choice between the rate on your mortgage and a rate of return elsewhere, and there is a mathematically superior option.  Choosing the I bond for the 18 months rates have been higher than most people's mortgage rates is mathematically superior.  That doesn't mean one can't change course when circumstances change or choose the inferior option, anyway.

Are you with IBKR? That's the only place I've seen even somewhat decent margin loan terms, and even there with only megabucks account, but I'd love to hear other options...

I had an account with IBKR, opened in the wake of MMM's post about low margin rates of 1.09%.  I had planned to use margin loans for some home R&M and improvements, rather than diverting excess cash from what would be investments.  IBKR now offers rates of nearing 5% on their margin loans.  Like the other low rates of that time, they didn't last.  This is why I favor my 2.75% fixed mortgage and investments over other potential credit facilities such as HELOCs and margin loans.  I ultimately passed on the IBKR margin loans in favor of CC arbitrage at the low rate of 0% (plus a couple of hard inquiries) and have since closed the account with IBKR.

[catccc]

Does anyone let the value of their house influence whether you are prepaying? My outstanding mortgage is 60% of zillows purported MV. What if it crashed to the same amount as my mortgage and wiped out my equity? Any potential HELOC is gone. This whole recent conversation appears to have the assumption our housing value is stable/going up.


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I don't think I would let it influence whether I choose to prepay or not, but of course I'm choosing not to prepay.  If I were in the POYM camp, I think it would, since those in the POYM club are apt to be more concerned about liquidity and see the HELOC as a remedy for that.  If the HELOC isn't an option, that could be a problem.  I am unconcerned about MV of my home, since I have no plans to move or sell.

[YttriumNitrate]

Does anyone let the value of their house influence whether you are prepaying? My outstanding mortgage is 60% of zillows purported MV. What if it crashed to the same amount as my mortgage and wiped out my equity? Any potential HELOC is gone. This whole recent conversation appears to have the assumption our housing value is stable/going up.

Well, if I was underwater on my mortgage then I would definitely not prepay anything. On the flip side, if I was paying PMI and the value had gone up enough so I was just on the cusp of getting the PMI removed, then I would certainly consider prepaying a bit.