is/was your home mortgage holding you back?

[Adam Zapple]

https://www.ftportfolios.com/Common/ContentFileLoader.aspx?ContentGUID=4ecfa978-d0bb-4924-92c8-628ff9bfe12d

History of bull/bear markets since 1920's.  Pretty interesting to see how short bear markets last.  Seeing it on a chart like this really hammers home how difficult it is to time the market.

[ender]

https://www.ftportfolios.com/Common/ContentFileLoader.aspx?ContentGUID=4ecfa978-d0bb-4924-92c8-628ff9bfe12d

History of bull/bear markets since 1920's.  Pretty interesting to see how short bear markets last.  Seeing it on a chart like this really hammers home how difficult it is to time the market.

Well it's rather misleading, honestly.

If the market dropped 75% in 1 year, then regained the losses in 5 years (back to where it started), you'd see a single 75% drop followed by a 300% increase. This looks huge, but realistically it's not that great.

This makes the recoveries look artificially good given how the chart is laid out.

[FrugalFan]

https://www.ftportfolios.com/Common/ContentFileLoader.aspx?ContentGUID=4ecfa978-d0bb-4924-92c8-628ff9bfe12d

History of bull/bear markets since 1920's.  Pretty interesting to see how short bear markets last.  Seeing it on a chart like this really hammers home how difficult it is to time the market.

Well it's rather misleading, honestly.

If the market dropped 75% in 1 year, then regained the losses in 5 years (back to where it started), you'd see a single 75% drop followed by a 300% increase. This looks huge, but realistically it's not that great.

This makes the recoveries look artificially good given how the chart is laid out.

True, but it does show that Mr. JL's earlier point that this is the longest bull market ever is obviously not true. Bull markets do tend to be long on average. There are many other factors involved, obviously, but it does suggest that one cannot bet on a correction or crash just because on hasn't happened in a while.

[EnjoyIt]

My mortgage lender takes early payments and makes my due date for next payment later. Prepaying mortgage by a year or two may make some sense if the mortgage lender allows it.

All you are doing is paying a future payment now.  You aren't prepaying the principal and thus aren't reducing the interest cost at all.  You'd be ahead to put the payment into a savings account.

+1

I am pretty sure I am prepaying and also paying down my principal at the same time.  I can tell because the principal itself is down, interest is collected on the lower principal and my actual due date is and extra 1 month ahead of usual. Since my mortgage is 2.75% I have only thrown very small amounts of "extra" money towards the loan.

[contra80]

We paid ours off last year.  Basically, I saved a bulk payoff amount which made me feel a bit better protected in the event of a big market correction or change in job situation.  In reality, the bulk saving approach was more of a emotional decision, once I had enough saved, plus some surplus I was mentally ready and comfortable writing a check. I can say that not having debt has totally changed my  perspective in a lot of areas (i.e. work, where I live, how I spend my time, goals, etc..).  My momentum towards FI as doubled in pace, both from a monthly cash flow perspective but my drive and willingness to win.  I had always heard people talk about the feeling of freedom, but its hard to describe how game changing it really is. 

[Farmgirl]

We are on the same path as Contra80.  After this week, we should be around $43,500 left to pay off.  The mortgage payment is $1611 a month.  Since we are FIREing with less stash than many on this board, the mortgage payment had to go in order to stay here as long as we are physically able.  Not ready to leave the farm yet.  The time most assuredly will come when we can't handle the physical work, but not now and we love living here. (Although after a particularly grueling weekend, DH said a condo was looking nice!)

For us, the mortgage pay down is both an emotional and financial decision.

[boarder42]

We are on the same path as Contra80.  After this week, we should be around $43,500 left to pay off.  The mortgage payment is $1611 a month.  Since we are FIREing with less stash than many on this board, the mortgage payment had to go in order to stay here as long as we are physically able.  Not ready to leave the farm yet.  The time most assuredly will come when we can't handle the physical work, but not now and we love living here. (Although after a particularly grueling weekend, DH said a condo was looking nice!)

For us, the mortgage pay down is both an emotional and financial decision.

fixed that for ya.

[Petunia 100]

My mortgage lender takes early payments and makes my due date for next payment later. Prepaying mortgage by a year or two may make some sense if the mortgage lender allows it.

All you are doing is paying a future payment now.  You aren't prepaying the principal and thus aren't reducing the interest cost at all.  You'd be ahead to put the payment into a savings account.

+1

I am pretty sure I am prepaying and also paying down my principal at the same time.  I can tell because the principal itself is down, interest is collected on the lower principal and my actual due date is and extra 1 month ahead of usual. Since my mortgage is 2.75% I have only thrown very small amounts of "extra" money towards the loan.

You aren't doing both, because that isn't how it works.  Set your mortgage up on an Excel spreadsheet and see for yourself.

[Trimatty471]

My mortgage has only 'held me back' because of my poor purchase timing a decade and a half ago.

Had my crystal ball have been working, I would have never have bought a house at the time.

Otherwise, a mortgage is fairly meaningless.

It is one number (or set of numbers) in the overall equation.

Personally (today and over the past decade), I have not spend one dime extra paying it down.  If/when the time comes that paying it off translates to overall greater net worth growth, it will be paid off.  Its also quite possible, that I'd just refinance, extract equity, and reset the mortgage clock if that made the most financial sense.  It all depends on too many future variables.  Its possible I'll escape personal real estate altogether and just rent someday.  Again, it depends on what makes the most sense.

Don't get emotional about this stuff.  'Peace of Mind' can come with a helluva expensive price tag attached.

I just had an AHA moment.  The mortgage can wait.  My goal is to deposit more money into my retirement and taxable money ASAP and let the magic of compounding do its work.

[Jack]

In September, I accidentally made two mortgage payments (my mortgage got sold to a new servicer and I set up automatic payments with them, but forgot to cancel the automatic payment to the old servicer). I mention this for two reasons:

1. I assumed the extra payment would be applied to principal, but found out that since it was exactly the amount of my monthly payment the servicer applied it as the October payment (to advance the due date) instead.

2. I asked for it to be refunded -- that's how committed I am to not prepaying my mortgage! That money will go into my wife's solo 401k account instead.

[Adam Zapple]

We paid ours off last year.  Basically, I saved a bulk payoff amount which made me feel a bit better protected in the event of a big market correction or change in job situation.  In reality, the bulk saving approach was more of a emotional decision, once I had enough saved, plus some surplus I was mentally ready and comfortable writing a check. I can say that not having debt has totally changed my  perspective in a lot of areas (i.e. work, where I live, how I spend my time, goals, etc..).  My momentum towards FI as doubled in pace, both from a monthly cash flow perspective but my drive and willingness to win.  I had always heard people talk about the feeling of freedom, but its hard to describe how game changing it really is. 

Thanks for that post.  What did you put your $$$ in over the short term while you were saving for your bulk payment?  Was it all cash or was it invested?  How long did it take you to save up?  This route is sounding more and more enticing.  The only metal hurdle is passing up tax deferred accounts for non-tax advantaged accounts.  I really do feel like paying off the mortgage, or having the money to pay it off in easily accessible accounts, will free up so many opportunities for me in a few years.  Its just hard to overlook the long-term potential for lost gains.

True, but it does show that Mr. JL's earlier point that this is the longest bull market ever is obviously not true. Bull markets do tend to be long on average. There are many other factors involved, obviously, but it does suggest that one cannot bet on a correction or crash just because on hasn't happened in a while.

 

You are correct.  I don't know where I came up with that...I just keep hearing "historic bull market" from all the talking heads on TV and somehow took this to mean it hadn't happened before without doing any research...obviously I was completely wrong on that one.   

[Trimatty471]

We paid ours off last year.  Basically, I saved a bulk payoff amount which made me feel a bit better protected in the event of a big market correction or change in job situation.  In reality, the bulk saving approach was more of a emotional decision, once I had enough saved, plus some surplus I was mentally ready and comfortable writing a check. I can say that not having debt has totally changed my  perspective in a lot of areas (i.e. work, where I live, how I spend my time, goals, etc..).  My momentum towards FI as doubled in pace, both from a monthly cash flow perspective but my drive and willingness to win.  I had always heard people talk about the feeling of freedom, but its hard to describe how game changing it really is.

Where did you place your bulk funds?  Did you put it in savings, bonds, or taxable account?

[2buttons]

I don't see the point of investing the money until lump sum if you are just going to pay off the mortgage anyway. If you put it on the mortgage it speeds you through the amortization schedule quicker, and reduces the aggregate interest its costing you all the while you have a guaranteed return.  Additionally, you are building equity that you can tap into, if all hell breaks loose. Its not like that money isn't recoverable if you absolutely need it (i.e. remortgage, heloc, hell you could even sell if you had to).

Personally, I have 6 months (5 months in cash - 1 month in investments) emergency fund, that mitigates risk as I race to my goal of owning my home free and clear. 

[boarder42]

My mortgage has only 'held me back' because of my poor purchase timing a decade and a half ago.

Had my crystal ball have been working, I would have never have bought a house at the time.

Otherwise, a mortgage is fairly meaningless.

It is one number (or set of numbers) in the overall equation.

Personally (today and over the past decade), I have not spend one dime extra paying it down.  If/when the time comes that paying it off translates to overall greater net worth growth, it will be paid off.  Its also quite possible, that I'd just refinance, extract equity, and reset the mortgage clock if that made the most financial sense.  It all depends on too many future variables.  Its possible I'll escape personal real estate altogether and just rent someday.  Again, it depends on what makes the most sense.

Don't get emotional about this stuff.  'Peace of Mind' can come with a helluva expensive price tag attached.

I just had an AHA moment.  The mortgage can wait.  My goal is to deposit more money into my retirement and taxable money ASAP and let the magic of compounding do its work.

awesome glad you have seen the light ... definitely a better solution if you arent already maxing tax advantaged accounts.  still way better even in taxable!

[boarder42]

I don't see the point of investing the money until lump sum if you are just going to pay off the mortgage anyway. If you put it on the mortgage it speeds you through the amortization schedule quicker, and reduces the aggregate interest its costing you all the while you have a guaranteed return.  Additionally, you are building equity that you can tap into, if all hell breaks loose. Its not like that money isn't recoverable if you absolutely need it (i.e. remortgage, heloc, hell you could even sell if you had to).

Personally, I have 6 months (5 months in cash - 1 month in investments) emergency fund, that mitigates risk as I race to my goal of owning my home free and clear.

yeha b/c last time all hell broke loose was 2008 when you couldnt get a heloc and housing prices plummeted and selling wasnt really an issue.  so go ahead and use all of those riskier ways of using equity in your home when you could just have larger investments which are easily accessible. HELOC can be recalled.  who knows what the mortgage environment will be to remortgage a house ... right now is the bottom of rates that we've ever seen as a society. 

the money tied up in a house while returning less over the life a mortgage than the market does is also much much less accessible dont trick yourself into thinking its a better option financially.. its an emotional decision.

[doug111]

I'm sorry to (potentially) rehash the most over-debated topic in the financial blog universe but I have been struggling with making the decision to payoff my home mortgage early.  I'm looking for stories from people who have paid off their mortgage early, and used the financial freedom associated with this choice to pursue great/fun things.  If you care to read my thoughts on this, see below.



I recognize all of the various benefits of borrowing money at 3.5% and investing to earn a potential 7-13% in the stock market and have done so for the last 15 years or so.  I now have a relatively healthy retirement account that is about 1/4 of the way to where I need it to be for FI.  If I continue down this path, I have a FI date that is about 9-10 years in the future, should markets cooperate. 

I have recently thought about possibly foregoing contributing to my retirement accounts and children's college savings accounts, and aggressively paying off my mortgage over the next 4 years.  I would then return to contributing to these accounts at my current rate plus contribute what are now my current principal/interest payments toward those accounts, or pursuing other investment opportunities.

I feel like many of the debates on this topic miss the following:

1.  Timeframe to payoff the mortgage and market timing

While I recognize nobody can predict the markets, we can make general assumptions toward where we are in the market cycle based on P/E ratios etc.  Obviously, making the decision to payoff your mortgage starting in the middle of 2008 thru 2012 instead of investing in the stock market would have proven to be a bad decision.  But is it a bad decision today?  Probably much less likely to be.

2.  The mental freedom associated with reducing expenses

I'm not talking about "We just paid off our mortgage and it feels great!"  I'm talking about, "We just paid off our mortgage, and feel much more secure, so we finally feel ready to pursue the following business ventures or personal goals...."  I feel as though having this large expense holds me back from jumping on good opportunities when the come along.  Anyone else agree?

I am about a week from paying off mine. Its as simple as this. Ask yourself do you agree with debt ? Would you have a car loan ? Would you have credit card debt. Then why in the heck would you have mortgage debt. Why be indebted to anyone period. Ive heard all the arguments out there that you can take that payoff money and invest it, but why would any logical person put the roof over their very head into a risk zone by investing it in the markets. Ask yourself. Does Warren Buffet owe anyone anything period ? Im pretty sure he doesn't. lol !!!!! But good luck to you in any decision that you make.

[contra80]

I threw it into a taxable account, which was in various ETFs and cash  - It was about a three year savings plan for payoff.  I figured if the market tanked during the time I was saving and I lost some principal I could just extend my plan out a bit longer to ride out the market.  I also saved an extra ~1 year expenses as a extra cushion/liquidity in the event of something happening right after I wrote a payoff check

[Jack]

I am about a week from paying off mine. Its as simple as this. Ask yourself do you agree with debt ? Would you have a car loan ? Would you have credit card debt. Then why in the heck would you have mortgage debt. Why be indebted to anyone period.

By that logic, you should never have taken out the mortgage in the first place.

[mtn]

Our mortgage is easily our biggest expense. Maybe it isn't bigger than our total combined retirement savings, but it is the biggest single check we have to write once we factor in PMI, insurance, and taxes.

I don't think we're going to pay it off early. Any extra money we have right now is going to student loans. When those are finished, I think we're going to throw the money that was going to student loans to our retirement or else future kids college funds/long term non-retirement funds.

Our mortgage is at such a low rate, that it just doesn't make sense to pay it off early. It barely makes sense to pay it down to get rid of the PMI. In fact, there is a good chance that we'll refinance at a later date for another 30 years if we can get a similar low rate. Keeping the monthly payments low means throwing more money towards retirement and other enjoyment.

[2buttons]

yeha b/c last time all hell broke loose was 2008 when you couldnt get a heloc and housing prices plummeted and selling wasnt really an issue.  so go ahead and use all of those riskier ways of using equity in your home when you could just have larger investments which are easily accessible. HELOC can be recalled.  who knows what the mortgage environment will be to remortgage a house ... right now is the bottom of rates that we've ever seen as a society. 

the money tied up in a house while returning less over the life a mortgage than the market does is also much much less accessible dont trick yourself into thinking its a better option financially.. its an emotional decision.

The people who got smoked in 2008 weren't in the financial position of most mustachians, so its a false comparison. Most of the people who lost were paycheck to paycheck - we (royal we) are not in that position.  Additionally, your sweet account full of funds took a hit as well.  Additionally, most of us have very large retirement accounts that could be tapped in case of total and utter disaster, which is obviously contingency of last resort. 

Interest rate does not matter as these are all contingencies that lessen risk over a much shorter time horizon. Of course this all assumes that people putting extra on the house have built the castle and moat of protection, which in my case, I have.

We have been over this repeatedly, we all know its an emotional decision - you and I specifically have discussed this repeatedly. There are pros and cons in all of these plans. No one likes to be told their plan is bad, but honestly, I think your black and white approach to this issue circumvents your ability to see that for some of us there is real value to emotionally, psychologically, and financially (as in having less risk in monthly outlay and guaranteed return) in owning your home free and clear.

[Petunia 100]

yeha b/c last time all hell broke loose was 2008 when you couldnt get a heloc and housing prices plummeted and selling wasnt really an issue.  so go ahead and use all of those riskier ways of using equity in your home when you could just have larger investments which are easily accessible. HELOC can be recalled.  who knows what the mortgage environment will be to remortgage a house ... right now is the bottom of rates that we've ever seen as a society. 

the money tied up in a house while returning less over the life a mortgage than the market does is also much much less accessible dont trick yourself into thinking its a better option financially.. its an emotional decision.

The people who got smoked in 2008 weren't in the financial position of most mustachians, so its a false comparison. Most of the people who lost were paycheck to paycheck - we (royal we) are not in that position.  Additionally, your sweet account full of funds took a hit as well.  Additionally, most of us have very large retirement accounts that could be tapped in case of total and utter disaster, which is obviously contingency of last resort. 

Interest rate does not matter as these are all contingencies that lessen risk over a much shorter time horizon. Of course this all assumes that people putting extra on the house have built the castle and moat of protection, which in my case, I have.

We have been over this repeatedly, we all know its an emotional decision - you and I specifically have discussed this repeatedly. There are pros and cons in all of these plans. No one likes to be told their plan is bad, but honestly, I think your black and white approach to this issue circumvents your ability to see that for some of us there is real value to emotionally, psychologically, and financially (as in having less risk in monthly outlay and guaranteed return) in owning your home free and clear.

Sure there is an emotional and psychological value.  And that's fine, if you can afford to pay for that value. 

I'm in a different situation.  I need to optimize every available dollar.  Currently,  I prepay my mortgage a bit by rounding up.  I will be selling this house though and retiring elsewhere.  (That makes any prepayment a short-term guaranteed return of 4.125%.  Not bad.)  When I purchase my next place, I will put 20% down and never prepay another cent.  I would rather have that money invested and available for whatever needs I might have, including mortgage payments.

[bacchi]

I am about a week from paying off mine. Its as simple as this. Ask yourself do you agree with debt ? Would you have a car loan ? Would you have credit card debt. Then why in the heck would you have mortgage debt. Why be indebted to anyone period.
[/quote]

Because a mortgage, in the states, is a non-callable, fixed-rate, lien often spread out over 30 years. In some cases, it's even a non-recourse loan. Further, the length of this loan at 30 years is the same length examined in the Trinity Study, which establishes a 4% SWR over 30 years.

The more relevant question is: Do you believe in a 4% SWR?

[boarder42]

I am about a week from paying off mine. Its as simple as this. Ask yourself do you agree with debt ? Would you have a car loan ? Would you have credit card debt. Then why in the heck would you have mortgage debt. Why be indebted to anyone period.

Because a mortgage, in the states, is a non-callable, fixed-rate, lien often spread out over 30 years. In some cases, it's even a non-recourse loan. Further, the length of this loan at 30 years is the same length examined in the Trinity Study, which establishes a 4% SWR over 30 years.

The more relevant question is: Do you believe in a 4% SWR?

and better yet how many dead horses would we like to beat today.  haha. - yay this 4% SWR is awesome and YAY i'm paying down my low fixed mortgage dont go hand in hand.

[dude]

Ah, the mortgage.  We bought in a high COL area in 2007. There was an urgency to buy for a couple reasons: (1) my employer would pay closing costs if purchase made within 2 years, (2) it was a near certainty prices would continue to rise in this area, and (3) our rental lease was up.  So we bought with only 5% down, took out an 80/15 first and second mortgage at 6% and 8% respectively.  Mortgage + taxes + condo fee was around $3,400.

Have since consolidated loans and refinanced 3 times down to 3.25%.  Mortgage + taxes + condo fee has dropped to around $2,200.

Property value has risen 30+%.

Our mortgage+taxes+condo fee+insurance is far, far lower than rental rates in our area (@$3,500 for our place), and we love where we are.  We have no plans to pay off the mortgage.  Our money is better saved, invested or spent elsewhere.

[doug111]

I'm sorry to (potentially) rehash the most over-debated topic in the financial blog universe but I have been struggling with making the decision to payoff my home mortgage early.  ...

I feel like many of the debates on this topic miss the following:

1.  Timeframe to payoff the mortgage and market timing

While I recognize nobody can predict the markets, we can make general assumptions toward where we are in the market cycle based on P/E ratios etc.  ......But is it a bad decision today?  Probably much less likely to be.

Comment:  The first sentence is self contradicting.  No one can predict the market sequence of returns, and anyone who claims that the market is over or under valued based on a simplistic metric like PE ratios of the overall market does not understand the market or is trying to fool you.  The market value is exactly what the world thinks stocks are currently worth in the quoted currency.  There is no such thing as a PE ratio average that points to a market being over valued historically.  History is not a constant, as various factors like the productivity and earning potential of the underlying companies make PE meaningless.  It is like looking at labor productivity pre cotton gin and after, then comparing.  It is in many ways apples and oranges across eras.  Look at Amazon's PE vs Citigroup vs GE and think about it. Dramatically different business models, potential, forces, etc.

Hence I would advise ignoring recent returns or market valuations in your decision.  You can not market time successfully.  Period.  It is up to your personal situation.

2.  The mental freedom associated with reducing expenses

I'm not talking about "We just paid off our mortgage and it feels great!"  I'm talking about, "We just paid off our mortgage, and feel much more secure, so we finally feel ready to pursue the following business ventures or personal goals...."  I feel as though having this large expense holds me back from jumping on good opportunities when the come along.  Anyone else agree?

Comment:  I can see your point, but I think the value of home equity and the value of stock equity should be equal in their mental empowerment potential.  I really can't see how 'my net worth is $100k, I should go for it' is any different if the net worth is 50k stock/50k equity, or 100% of either.  In fact, if you need to absorb negative cash flow for a while to make your dream job/business risk happen, owning an index fund allows you to dip into the equity more easily.

Both houses and stocks can fluctuate in value, so similar in my view.

My comments are above.  That said, I chose to pay of my mortgage once I had a healthy stash, partly as a 'percentage in bonds' volatility reduction.  Once you 'have won', it makes less sense to use leverage to earn more than you need at the risk of dipping below FIRE if a crash occurs.

I agree with you 1 Million % !!!!! Never invest with debt and risk the roof over your head for minuscule returns on someone else's money.

[The Owl and the Pussycat]

...  I'm looking for stories from people who have paid off their mortgage early, and used the financial freedom associated with this choice to pursue great/fun things...

Hi,

We have been over paying our mortgage for the last 11 years (about 2 more years to go before we have paid things off fully).  As our monthly payments are very low this is now enabling me to leave my paid emplyment in December and start to work as a feeelancer.  I have alway wanted to run my own business, but I could not be doing this if our monthly payments were too high.

Things are different here in the UK and at the moment we would struggle to earn more by investing the money we are using for the overpayments than it is costing us in mortgage interest payments every month.

[EnjoyIt]

My mortgage lender takes early payments and makes my due date for next payment later. Prepaying mortgage by a year or two may make some sense if the mortgage lender allows it.

All you are doing is paying a future payment now.  You aren't prepaying the principal and thus aren't reducing the interest cost at all.  You'd be ahead to put the payment into a savings account.

+1

I am pretty sure I am prepaying and also paying down my principal at the same time.  I can tell because the principal itself is down, interest is collected on the lower principal and my actual due date is and extra 1 month ahead of usual. Since my mortgage is 2.75% I have only thrown very small amounts of "extra" money towards the loan.

You aren't doing both, because that isn't how it works.  Set your mortgage up on an Excel spreadsheet and see for yourself.

I have ever since I owed the mortgage. Maybe I am just one month ahead and it doesn't appear like I'm prepaying. Very interesting.

I started paying my mortgage one month earlier than the first payment so I am curious now what my options really are. At 2.75% I have little interest in paying it off until I hit my number and even then I may ride it out slowly.

[doug111]

I am about a week from paying off mine. Its as simple as this. Ask yourself do you agree with debt ? Would you have a car loan ? Would you have credit card debt. Then why in the heck would you have mortgage debt. Why be indebted to anyone period.

By that logic, you should never have taken out the mortgage in the first place.

You are absolutely right I should have never taken out a mortgage in the beginning !!!! SERIOUSLY !!!!! Ive often questioned the things that I did when I was much younger. I encourage my kids to save up about 50% down on their house to get rid of the need for a mortgage and once they get the mortgage I say KNOCK IT OUT !!!!! GET RID OF IT !!!!! It will only make you happy !!!!! Less stress !!!! If your debt free less need to worry about chasing the almighty dollar !!!!!! When ever they have birth days or christmas I give them money towards getting out of debt. When I started paying off my house my kids would give me a 20 or a 50 and write in the card " well Dad we know where this will be going " lol  I would take all of that birthday and christmas money and knock out my mortgage.  If I could do it all over again I would have never leveraged PERIOD !!!!!  YEs I would have 3 houses probably instead of the 5 that I have now, but you know what I bet the 3 would be 100% paid off mortgage free.

[boarder42]

but being mortgage free isnt better financially as the end of your post just said. it only gives you mental freedom.  caring a mortgage is a lot larger step towards financial freedom.

[Jack]

I am about a week from paying off mine. Its as simple as this. Ask yourself do you agree with debt ? Would you have a car loan ? Would you have credit card debt. Then why in the heck would you have mortgage debt. Why be indebted to anyone period.

By that logic, you should never have taken out the mortgage in the first place.

You are absolutely right I should have never taken out a mortgage in the beginning !!!! SERIOUSLY !!!!! Ive often questioned the things that I did when I was much younger. I encourage my kids to save up about 50% down on their house to get rid of the need for a mortgage

FYI, to get rid of the need for a mortgage your down payment needs to be exactly 100%. Saying that a 50% down payment is good enough is contradicting yourself.

[doug111]

I am about a week from paying off mine. Its as simple as this. Ask yourself do you agree with debt ? Would you have a car loan ? Would you have credit card debt. Then why in the heck would you have mortgage debt. Why be indebted to anyone period.

Because a mortgage, in the states, is a non-callable, fixed-rate, lien often spread out over 30 years. In some cases, it's even a non-recourse loan. Further, the length of this loan at 30 years is the same length examined in the Trinity Study, which establishes a 4% SWR over 30 years.

The more relevant question is: Do you believe in a 4% SWR?
[/quote]Whats a 4% SWR ?

[Jack]

Because a mortgage, in the states, is a non-callable, fixed-rate, lien often spread out over 30 years. In some cases, it's even a non-recourse loan. Further, the length of this loan at 30 years is the same length examined in the Trinity Study, which establishes a 4% SWR over 30 years.

The more relevant question is: Do you believe in a 4% SWR?

Whats a 4% SWR ?

SWR stands for Safe Withdrawal Rate.

In other words, it's the assumption that the market will have a long-term (e.g. over 30 years) risk-adjusted return higher than 4%. If you believe that, then it also implies you believe it would outperform paying off a 30-year mortgage with a fixed rate of 4% or less.

[boarder42]

Because a mortgage, in the states, is a non-callable, fixed-rate, lien often spread out over 30 years. In some cases, it's even a non-recourse loan. Further, the length of this loan at 30 years is the same length examined in the Trinity Study, which establishes a 4% SWR over 30 years.

The more relevant question is: Do you believe in a 4% SWR?

Whats a 4% SWR ?

SWR stands for Safe Withdrawal Rate.

In other words, it's the assumption that the market will have a long-term (e.g. over 30 years) risk-adjusted return higher than 4%. If you believe that, then it also implies you believe it would outperform paying off a 30-year mortgage with a fixed rate of 4% or less.

the entire premise of what FIRE is based on for i'm gonna guess 80-90% of forum users here. with most of the rest being in an RE camp.

[Slee_stack]

I am about a week from paying off mine. Its as simple as this. Ask yourself do you agree with debt ?  If it benefits me financially, absolutely.   Would you have a car loan ? If it benefits me financially, absolutely.  Would you have credit card debt.  If it benefits me financially, absolutely. Then why in the heck would you have mortgage debt.  Because it benefits me financially.   Why be indebted to anyone period. Ive heard all the arguments out there that you can take that payoff money and invest it, but why would any logical person put the roof over their very head into a risk zone by investing it in the markets.  Ask yourself. Does Warren Buffet owe anyone anything period ? I'm pretty sure he doesn't. lol !!!!!  It is safe to assume that Warren Buffet could FIRE if he wants to.  Net worth is not likely his top goal these days.  Debt vs no debt is moot for a person like him.  It is far from moot for folks like us working towards FIRE.  Debt (via leverage) is an instrument that can accelerate a person's time to FIRE. But good luck to you in any decision that you make.

I'm not intending to sound like a smartalec in my red replies above, but always ask yourself if your financial outlay is the best choice for yourself over the long run.  If paying off a mortgage likely extends your time to FIRE, make sure you really are OK with that.

I actually have a third party used car loan at 1.99% because I'm comfortable I will get a better return on that money elsewhere.

While I don't carry CC debt, I would if it were a low promotional one w/o upfront fees.  I play the heck out of the travel hack game with CCs though.  I'll throw annual fee money out the window upfront if my return in airfare, hotels, etc rewards me appropriately.

'Losing' a roof over your head sounds serious, but again, its just another 'thing'.  If the mean 'ol bank came and repo'd your house, would your net worth be higher or lower when it happened?  Still owning the house but with a lower net worth would be extremely painful to me.  It would mean I chose poorly.  I can buy or rent another place to live.  If you are EMOTIONALLY attached to the house then just recognize that its a cost for your 'peace of mind'.

[doug111]

but being mortgage free isnt better financially as the end of your post just said. it only gives you mental freedom.  caring a mortgage is a lot larger step towards financial freedom.

Why is carrying a mortgage more of a step towards financial freedom ?

[doug111]

I am about a week from paying off mine. Its as simple as this. Ask yourself do you agree with debt ?  If it benefits me financially, absolutely.   Would you have a car loan ? If it benefits me financially, absolutely.  Would you have credit card debt.  If it benefits me financially, absolutely. Then why in the heck would you have mortgage debt.  Because it benefits me financially.   Why be indebted to anyone period. Ive heard all the arguments out there that you can take that payoff money and invest it, but why would any logical person put the roof over their very head into a risk zone by investing it in the markets.  Ask yourself. Does Warren Buffet owe anyone anything period ? I'm pretty sure he doesn't. lol !!!!!  It is safe to assume that Warren Buffet could FIRE if he wants to.  Net worth is not likely his top goal these days.  Debt vs no debt is moot for a person like him.  It is far from moot for folks like us working towards FIRE.  Debt (via leverage) is an instrument that can accelerate a person's time to FIRE. But good luck to you in any decision that you make.

I'm not intending to sound like a smartalec in my red replies above, but always ask yourself if your financial outlay is the best choice for yourself over the long run.  If paying off a mortgage likely extends your time to FIRE, make sure you really are OK with that.

I actually have a third party used car loan at 1.99% because I'm comfortable I will get a better return on that money elsewhere.

While I don't carry CC debt, I would if it were a low promotional one w/o upfront fees.  I play the heck out of the travel hack game with CCs though.  I'll throw annual fee money out the window upfront if my return in airfare, hotels, etc rewards me appropriately.

'Losing' a roof over your head sounds serious, but again, its just another 'thing'.  If the mean 'ol bank came and repo'd your house, would your net worth be higher or lower when it happened?  Still owning the house but with a lower net worth would be extremely painful to me.  It would mean I chose poorly.  I can buy or rent another place to live.  If you are EMOTIONALLY attached to the house then just recognize that its a cost for your 'peace of mind'.

I had a lot of fun reading your RED HIGHLIGHTS !!!! LOL !!!! Im a huge credit card churner also. Ive probably had maybe about 500 cards between my wife and I no exaggeration over the last 20 years. We are extremely anti-debt. No car payments, no credit card debt and if you have the cash to pay off the card in 2 seconds while churning it, is fine as long as what your doing with the credit card money is 100% risk free. I used  to have a 5.5% CD about 10 years ago locked for 5 years and I borrowed 250k at O% and was making about $800 a month on average. By the way if you churn the card fast enough and hurry up and close it they always give you the annual fee back. Im wondering if they have to by law because you had the card for such a short period.

[boarder42]

but being mortgage free isnt better financially as the end of your post just said. it only gives you mental freedom.  caring a mortgage is a lot larger step towards financial freedom.

Why is carrying a mortgage more of a step towards financial freedom ?

Assuming you're going to own a house either way and removing the renting option from the equation. 

At today's low fixed rates there has never been a period in the us stock market history where carrying a 30 year mortgage to term was more financially efficient than paying it down. The market avgs over 7% real returns on 30 year time horizons.

Basically if you have a 200k mortgage at 3.5% and you choose to take 200k and pay that down vs where I choose to invest that 200k assuming historical stock market returns at the end of the 30 year term I have 1.5MM you investing the mortgage payment over 30 years have 1MM at the end of 30 years.

It's also safer to fire with one bc its an inflation hedge since its a fixed payment and price from the past that effectively gets cheaper every year. If you retire on a 4% swr and 1MM in the bank with a paid off 200k house cfiresim gives you a 92% chance of success.  If I retire on the same 4% swr on 1.2MM in the bank and a 200k mortgage I have a 94% chance of success. Why bc that extra 200k while at the begining I'm taking out closer to the 4% swr on it gradually decreases with inflation over time.

There are monster threads on this topic and having a mortgage even as a real estate investor is more optimal than not. at today's rates.  (a good real estate investor lives in the land of leverage its where all the profit is)

and all of the above doesnt even consider the fact that some are paying down their mortgage before maxing out tax advantaged accounts increasing time to FIRE even more. 

above you asked what the 4% rule is.  you should probably go read up on what it is b/c its a fundamental component to many around here.  Coming in to a site with an open mind financially will help you greatly.  i used to be on that side but when the math is presented its quite black and white.  some here like to say they have a financial reason for doing it but those are few and far between its mostly emotional

[Jack]

At today's low fixed rates there has never been a period in the us stock market history where carrying a 30 year mortgage to term was more financially efficient than paying it down. The market avgs over 7% real returns on 30 year time horizons.

You may want to re-write that, because I think you wrote the opposite of what you meant:

"At today's low fixed rates there has never been a period in the us stock market history where carrying a 30 year mortgage to term has exceeded the efficiency of paying it down by a wider margin."

It's also safer to fire with one bc its an inflation hedge since its a fixed payment and price from the past that effectively gets cheaper every year. If you retire on a 4% swr and 1MM in the bank with a paid off 200k house cfiresim gives you a 92% chance of success.  If I retire on the same 4% swr on 1.2MM in the bank and a 200k mortgage I have a 94% chance of success. Why bc that extra 200k while at the begining I'm taking out closer to the 4% swr on it gradually decreases with inflation over time.

There's another reason it's safer on top of all that: saving 25x expenses with the assumption that your expenses include a mortgage payment results in larger total assets than saving 25x expenses without a mortgage plus having a paid-off house. In other worse, if you pay off your house, your assets equal the house price. If you save enough to make the mortgage payments, you'd need to save enough assets to equal the house price plus the mortgage interest.

In fact, if you start out intending to carry a mortgage after FIRE, reach your 25x expenses and then change your mind, you'll find that you could pay off the mortgage in a lump sum from your assets and suddenly have more than 25x of your (proportionally-lower) expenses afterward.

[boarder42]

At today's low fixed rates there has never been a period in the us stock market history where carrying a 30 year mortgage to term was more financially efficient than paying it down. The market avgs over 7% real returns on 30 year time horizons.

You may want to re-write that, because I think you wrote the opposite of what you meant:

"At today's low fixed rates there has never been a period in the us stock market history where carrying a 30 year mortgage to term has exceeded the efficiency of paying it down by a wider margin."

It's also safer to fire with one bc its an inflation hedge since its a fixed payment and price from the past that effectively gets cheaper every year. If you retire on a 4% swr and 1MM in the bank with a paid off 200k house cfiresim gives you a 92% chance of success.  If I retire on the same 4% swr on 1.2MM in the bank and a 200k mortgage I have a 94% chance of success. Why bc that extra 200k while at the begining I'm taking out closer to the 4% swr on it gradually decreases with inflation over time.

There's another reason it's safer on top of all that: saving 25x expenses with the assumption that your expenses include a mortgage payment results in larger total assets than saving 25x expenses without a mortgage plus having a paid-off house. In other worse, if you pay off your house, your assets equal the house price. If you save enough to make the mortgage payments, you'd need to save enough assets to equal the house price plus the mortgage interest.

In fact, if you start out intending to carry a mortgage after FIRE, reach your 25x expenses and then change your mind, you'll find that you could pay off the mortgage in a lump sum from your assets and suddenly have more than 25x of your (proportionally-lower) expenses afterward.

i dont calculate it this way.  i take 25x expenses including TI and then the rest is based on mortgage balance remaining.  ie i have 1MM in the bank and 200k left on my mortgage. i want a 4% SWR on 40k spending i need 1.2MM no reason to save to 25x expenses including PI b/c then you're just saving extra you dont need and are effectively just lowering your wr when you could have FIREd sooner. 

[EnjoyIt]

Another way to think about it:
A $200k, 30 year mortgage at 3.5% is $898/month or $10,776 a year.

If we all subscribe to the 4% SWR rule, then in retirment we would need an extra $269,400 to be able to safely keep up with the monthly payments.  Therefor if you have the $200K you are much better off paying the mortgage than to needing to work longer and raise the extra $69,400 before you can retire.

I'm all for having a mortgage while working, but paying it off when I retire.

[mtn]

Another way to think about it:
A $200k, 30 year mortgage at 3.5% is $898/month or $10,776 a year.

If we all subscribe to the 4% SWR rule, then in retirment we would need an extra $269,400 to be able to safely keep up with the monthly payments.  Therefor if you have the $200K you are much better off paying the mortgage than to needing to work longer and raise the extra $69,400 before you can retire.

... but you wouldn't be taking on the mortgage when you're ready to retire. You'd be taking it on during the growing years. So that $200k and $269k isn't quite right.

Note that I see a house as somewhat of a one-time purchase. I don't plan on upgrading our house all that much--maybe only $50k to $100k if we stay in the same town--which would allow us to either go for a shorter mortgage, or a longer mortgage with much less financed. If we move areas completely, the equity would probably cover quite a bit if not all of the purchase. (Currently in HCOL area)

[boarder42]

Another way to think about it:
A $200k, 30 year mortgage at 3.5% is $898/month or $10,776 a year.

If we all subscribe to the 4% SWR rule, then in retirment we would need an extra $269,400 to be able to safely keep up with the monthly payments.  Therefor if you have the $200K you are much better off paying the mortgage than to needing to work longer and raise the extra $69,400 before you can retire.

I'm all for having a mortgage while working, but paying it off when I retire.

you're missing a big part of said equation and not doing math the correct way.  biggest part is inflation ... so lets do an actual scenario so you can see how this works in reality.

take out your mortgage FIRE after 10 years. 
you owe 154k on your house and your mortgage payments are the equivalent of 8018 per month. 
now you dont need 25x 8018 in the bank to make those payments monthly you just need 154k in the bank b/c your mortgage only has 20 more years left AND doesnt increase with inflation. 

so if you've got it just pay it off right? b/c then you wont have the payment? wrong you will have lowered your chances of success in retirement b/c that 154k is growing annually and your mortgage is decreasing at the rate of current inflation.

you have to seperate your mortgage from your withdrawal rate.

since the mortgage is an inflation hedge we can use 10% returns on that 154k making it make you 15.4k per year or 7k more than your mortgage annually.

[EnjoyIt]

My math is accurate based on the specific example. Of choosing to retire with a new mortgage. I think that is a poor decision.

In your example above, you are correct that you need less cash to pay off that mortgage but you are forgetting to add interest since keeping the cash in just the bank does not cover the interest accrued on the house.

Either way if your goal is to have enough cash to pay your bills every year with a 4% withdrawal rate, the math is accurate. If you want to have a second basket of cash that is your mortgage fund then in affect you are really just increasing your withdrawal rate till the mortgage is paid.

I am sure we can all agree that the only time the 4% Rate fails is early in retirment if the market tanks right when you retire. Increasing your withdrawal rate to 4.5% because of your mortgage only compounds the risk.

[boarder42]

My math is accurate based on the specific example. Of choosing to retire with a new mortgage. I think that is a poor decision.

In your example above, you are correct that you need less cash to pay off that mortgage but you are forgetting to add interest since keeping the cash in just the bank does not cover the interest accrued on the house.

Either way if your goal is to have enough cash to pay your bills every year with a 4% withdrawal rate, the math is accurate. If you want to have a second basket of cash that is your mortgage fund then in affect you are really just increasing your withdrawal rate till the mortgage is paid.

I am sure we can all agree that the only time the 4% Rate fails is early in retirment if the market tanks right when you retire. Increasing your withdrawal rate to 4.5% because of your mortgage only compounds the risk.

This is entirely incorrect. Just use cfiresim with the scenario of 1MM and spending 40k. And 1.2MM and a new mortgage with paying 10776 per year not inflation adjusted.

Scenario 1 had a 92% success rate scenario 2 a 94%. You're thinking about it incorrectly.  It increases your success for two reasons inflation hedge and the exact scenario you just proposed. While my draw down in the beginning may be slightly higher with a mortgage the extra invested capital is still compounding in recovery years

If you believe in the 4% swr and use historical data keeping a mortgage or better yet taking out a new one at 3.5% makes you safer and more likely to succeed

[ender]

Historically, if you have a net worth of $1.2M and a $200k mortgage vs $1M/$0 mortgage, you are better off having the mortgage.

Naturally, if you have $1.2M and no mortgage you are better off than either scenario.

I suspect by the time we are FI we will have closer to the later scenario than the former. But I don't pretend for a moment that it is more optimal historically.

[Much Fishing to Do]

I think like most "should I do X or Y with my extra money", the importance of the answer pales in comparison to taking the action to come up with another dollar of extra money by not spending it.
This includes on the house.  So its much more important that the house you choose is not one that is too expensive, whether you have a mortgage on it or not.  The ability to mortgage does give one more ability to buy a house that is more expensive, whether in absolute (b/c one doesnt have that much savings to pay it off) or in appearance (to pay off house would wipe out most savings), so though the decision to maintain a mortgage on a particular house may be financially beneficial the way in which it tends to disguise the burden of the home expense likely hurt many.

That aside, I myself paid off my mortgage and look at it as the conservative part of my investments.  Given I dont like the look of bonds right now and cash is paying nothing, this serves as something to diversify from equities that is less volatile than commodities and pays more than cash sitting in a bank.  Given my house value represents about 18% of my net worth, I feel this is about the right amount.  If that money was invested it would likely make more over time, but we could say the same thing about bonds or cash, but we still hold them to some degree to diversify and reduce risk.  If my house represented over 50% of my net worth and I was a lot farther from retiring, I would think paying off the mortgage would be an overly conservative move the math shows me is the wrong one.

[EnjoyIt]

My math is accurate based on the specific example. Of choosing to retire with a new mortgage. I think that is a poor decision.

In your example above, you are correct that you need less cash to pay off that mortgage but you are forgetting to add interest since keeping the cash in just the bank does not cover the interest accrued on the house.

Either way if your goal is to have enough cash to pay your bills every year with a 4% withdrawal rate, the math is accurate. If you want to have a second basket of cash that is your mortgage fund then in affect you are really just increasing your withdrawal rate till the mortgage is paid.

I am sure we can all agree that the only time the 4% Rate fails is early in retirment if the market tanks right when you retire. Increasing your withdrawal rate to 4.5% because of your mortgage only compounds the risk.

This is entirely incorrect. Just use cfiresim with the scenario of 1MM and spending 40k. And 1.2MM and a new mortgage with paying 10776 per year not inflation adjusted.

Scenario 1 had a 92% success rate scenario 2 a 94%. You're thinking about it incorrectly.  It increases your success for two reasons inflation hedge and the exact scenario you just proposed. While my draw down in the beginning may be slightly higher with a mortgage the extra invested capital is still compounding in recovery years

If you believe in the 4% swr and use historical data keeping a mortgage or better yet taking out a new one at 3.5% makes you safer and more likely to succeed

2 points that don't change no matter how you spin them.

1) the risk of failure in retirment with a constant withdrawal rate is highest in the first few years.
You are correct if you pass those few years holding a 3.5% mortgage will increase your success.

2) you still have to cash flow that mortgage for the next 20 years based on the example above. That cash must come from our investments which means we will need a larger investment account to stick with the 4%. Keeping the mortgage increases you expenses by more than what you are permitting yourself to spend if using the 4% withdrawal rate.

Point 2 is the interesting part. If you stick with the 4% rule then you are spending less in other areas of your life. What makes firesims look so attractive is that once the mortgage is paid off your withdrawal rate drops considerably making your success rate look very good. But remember that is 20 years from now. 

Keeping a mortgage in retirment is great if you have plenty of cash and looking to build wealth for your heirs. But if you are retiring on a very tight fixed budget then this is a risky mistake.

[boarder42]

Your take is factually incorrect based on the historical data. If you're assuming that some series of events that has never happened before happens ok but the simple fact remains on a fixed 4% swr you're safer having the mortgage.

Show me one historic scenario where carrying a 30 year mortgage in the way i described was less effective than not. You can't because there isn't one.

[contra80]

The right answer for this depends on several variables and your weighing out individual circumstances.  In short I don't believe there is a "right answer" either way.   I put more weight on the emotional side of the argument, and decided the "financial" impact for that decision was a cost I was willing to pay for choosing to pay off my mortgage. 

My factors were more around (1) philosophical feelings about having debt (I don't want to owe anyone anything)  (2) The sense of freedom and mindset shift.  I'm much less worried about losing a job, etc.. My attitude about work completely change post-payoff (in fact my willingness to speak my mind and be more frank at work without fear of repercussions as resulted in a major promotion, funny how that works..).  (3) Increasing the fire hose of cash available each month towards savings mentally feels good and is very motivating to keep driving towards FIRE.  (4) I find that making a fundamental decision not to use debt and pay cash for everything keeps my life in check (less temptation to massively up-size in house, etc..)  I could buy a house 3x the size I'm in now, but I remain grounded in that I don't want that amount of  my invest-able cash tied up in a house.

[Slee_stack]

That aside, I myself paid off my mortgage and look at it as the conservative part of my investments.  Given I dont like the look of bonds right now and cash is paying nothing, this serves as something to diversify from equities that is less volatile than commodities and pays more than cash sitting in a bank.

Not having a mortgage also erases an itemized tax deduction.  That should be factored in as well.  For some with very low balances, the deduction may be zero or inconsequential, but for others a high value, paid-for house is a significant hit to one's income stream.  At the same time, folks would need to account for the higher capital gains made as a result of NOT paying off the house.  Still, carrying a mortgage should net most the better net income over the long haul.

As an aside, I think the homeowner tax deduction is ridiculous and should be abolished, but that's a whole other topic of debate.