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General Discussion => Welcome and General Discussion => Topic started by: MikeTheSalesman on November 03, 2018, 08:34:28 PM

Title: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: MikeTheSalesman on November 03, 2018, 08:34:28 PM
So I just found the blog and the forum today after the WSJ article about FIRE.  Perfect timing too, as I recently changed jobs and my wife and I had been digging deep into our budgeting because my former company is asking for $10K back for tuition reimbursement. (I didn't give my committed 2 years after MBA graduation). Really enjoying reading the blog posts and forums so far!

My plan was originally to try and pay off my mortgage ASAP. I've already paid some small-medium extra chunks with past bonus checks. We originally put 5% down and we currently have about 40% equity or so based on extra payments and appreciation - which also allowed us to dump PMI.  I want to make sure I'm thinking about my math correctly here, because I'm now thinking I may be better off investing the extra money and only making the scheduled P&I payment.

(Disclaimer: I've read through a few early payoff debates, so I'm not trying to get a pros/cons list.  Just want to make sure I'm thinking about my math correctly here.  I already max out my allowed 401K contributions, company 401K match, my Roth IRA and my wife's Roth IRA)

So I currently have a 3.75% loan, owe $279K more in principal, and my monthly P&I payment is $1,407.  As scheduled, I'd pay it off 23.5 years from now.  If I want to pay it off in 10 years, I'd pay $1,304 extra per month. This would save $88,700 in interest over the life of the loan.  However, if I invested this $1,304 monthly over the next 120 months, it would gain $49,773 if I assumed 6% average annual returns.  After the 10 years my investment would have a total cash value of $206,253, and if I use the same 6% annual average return over the next 13.5 years and just let that money sit, I'd theoretically end up with $439,922 which is approx a $284K gain from that $1,304 monthly I invested in years 1-10 instead of paying extra on the loan. ($241K if I apply a 15% LT Capital Gains tax.)

Am I thinking about this math soundly?  Am I leaving any important factors out just front a quantitative perspective?  Like I mentioned, not necessarily looking to drum up a philosophical debate on paying off early vs not, I just want to make sure there isn't a glaring error in how I'm approaching these numbers, (which there very well could be - I'm not a finance guy. :-) )
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: RWD on November 03, 2018, 09:04:16 PM
I don't see any obvious flaws in your math, though I didn't double check all your numbers. Your scenario to 10 years looks correct. Though if you want to go out to the full 23.5 years you should factor in investing the payments that would have gone towards the mortgage (freed up cash flow from paying it off) and also continue investing the extra $1,304 per month on both sides.

For these sorts of comparison I like to plot out each path in a spreadsheet then calculate the final net value of each approach for a given time frame (invested assets - remaining loan balance). Just make sure you're putting the same amount of dollars into each side for the whole time period.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: MikeTheSalesman on November 03, 2018, 10:55:48 PM
Thanks for the advice!  I extended both scenarios out to 23.5 years and 33.5 years.  For the early payoff scenario, I calculated investing the entire mortgage amount plus the 1304 after the mortgage was paid off.  Through 23.5 years the investing scenario was about $67K stronger, even after including the difference interest. Through 33.5 years (10 years after the natural payoff) the investing scenario was about $138K stronger.

I didn't take the extra 13.5 years of being able to write off mortgage interest on my taxes which would have made the gap even wider.  Certainly seems like at this interest rate that investing the extra money instead of putting it towards the mortgage is the better option.  Also considering splitting the difference and putting in $500 extra per month towards the mortgage and investing $500-$700 so I can hedge between both.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: PizzaSteve on November 04, 2018, 01:02:00 AM
I would recommend a few scenarios based on sequence of returns from various eras, to create bands of results.

For example, as a simple exercise, try your spreadsheet with markets return 2%, and markets return 10% (or even better, use actual numbers from a series of historic periods to create a chart with "performance bands" of possible results).  There are threads where folks have done this, so you can see "break even points" for what markets need to do to beat various loan rates. Once you are comfortable with the idea that I can make X, Y or lose Z, depending on sequence of returns variations, then make the decision.  You will get only one result, but your actual one may be better, average or worse than average.  Once you are comfortable with that concept, go for it.

Too many discussions assume average returns and just multiply a higher rate than their cost of capital ( times number of years) to show a win only analysis, since they assume a very long time period will average out at 7% or some assumed number, but the markets dont always work like a CD rate of return. The risk is often worth it, but should be taken knowing it is a risk.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: MDM on November 04, 2018, 01:13:50 AM
Am I thinking about this math soundly?
Start by ensuring apples vs. apples: if you hold bonds, compare your mortgage vs. bonds.  If you don't hold bonds, then go ahead with mortgage vs. stocks.

The math boils down to something very simple: put your money toward whichever use, mortgage payment or the applicable investment, you believe has the higher after-tax return.

If a spreadsheet shows otherwise, there is something wrong with the spreadsheet.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: TomTX on November 04, 2018, 04:28:44 AM
Also considering splitting the difference and putting in $500 extra per month towards the mortgage and investing $500-$700 so I can hedge between both.

How partially paying off your mortgage a reasonable "hedge"?

If you need a larger emergency fund (or an index fund held outside a retirement vehicle) to sleep better - sure. More equity in a house with a mortgage doesn't give you a lot of options other than a HELOC, which may  be difficult to get in a deep recession/market crash.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: tralfamadorian on November 04, 2018, 06:03:57 AM
Also considering splitting the difference and putting in $500 extra per month towards the mortgage and investing $500-$700 so I can hedge between both.

How partially paying off your mortgage a reasonable "hedge"?

If you need a larger emergency fund (or an index fund held outside a retirement vehicle) to sleep better - sure. More equity in a house with a mortgage doesn't give you a lot of options other than a HELOC, which may  be difficult to get in a deep recession/market crash.

+1

Making extra payments is the riskiest choice you can make. If you wish to pay off the mortgage early, do so all at one time when you’re ready. Home equity is difficult to access during tough economic times and the lien holder will not care that you’ve paid off a portion of the loan early if you have a personal financial catastrophe and cannot make your payments.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: RWD on November 04, 2018, 06:27:05 AM
(or even better, use actual numbers from a series of historic periods to create a chart with "performance bands" of possible results)
There is a good calculator for historical returns of the SP500 here: https://dqydj.com/sp-500-historical-return-calculator/. Just be sure to uncheck the "Adjust for Inflation" box if you're comparing to your mortgage interest rate.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: MikeTheSalesman on November 04, 2018, 07:08:32 AM
Also considering splitting the difference and putting in $500 extra per month towards the mortgage and investing $500-$700 so I can hedge between both.

How partially paying off your mortgage a reasonable "hedge"?

If you need a larger emergency fund (or an index fund held outside a retirement vehicle) to sleep better - sure. More equity in a house with a mortgage doesn't give you a lot of options other than a HELOC, which may  be difficult to get in a deep recession/market crash.

Thanks - I guess I was thinking of it as a "hedge" in the sense that it's guaranteed interest savings that I won't pay back to the back.  My thinking is that interest not paid is just as good as interest earned. 

Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: SwordGuy on November 04, 2018, 08:09:22 AM
Also considering splitting the difference and putting in $500 extra per month towards the mortgage and investing $500-$700 so I can hedge between both.

How partially paying off your mortgage a reasonable "hedge"?

If you need a larger emergency fund (or an index fund held outside a retirement vehicle) to sleep better - sure. More equity in a house with a mortgage doesn't give you a lot of options other than a HELOC, which may  be difficult to get in a deep recession/market crash.

Thanks - I guess I was thinking of it as a "hedge" in the sense that it's guaranteed interest savings that I won't pay back to the back.  My thinking is that interest not paid is just as good as interest earned.


Interest not paid is not quite as good as MORE interest earned. Fixed that for you. :)


PARTIALLY pre-paying the mortgage just makes it easier for the bank to sell your home in foreclosure without THEM losing money.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: Boofinator on November 04, 2018, 08:21:10 AM
I don't see it mentioned: How much liquidity do you have? If you lost your job, would you be able to pay the bills (including the mortgage) for a long period of time if necessary? If you don't have a comfortable amount of liquidity, and given your mortgage rate, you reduce risk and increase expected returns by investing in equity. It is a no-brainer, in my opinion. Now if you are getting close to FIRE (meaning you have a whole lot of equity), the expected returns are still higher for equity, but the risk reverses, and it becomes riskier to hold the mortgage.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: TomTX on November 04, 2018, 08:29:22 AM
Also considering splitting the difference and putting in $500 extra per month towards the mortgage and investing $500-$700 so I can hedge between both.

How partially paying off your mortgage a reasonable "hedge"?

If you need a larger emergency fund (or an index fund held outside a retirement vehicle) to sleep better - sure. More equity in a house with a mortgage doesn't give you a lot of options other than a HELOC, which may  be difficult to get in a deep recession/market crash.

Thanks - I guess I was thinking of it as a "hedge" in the sense that it's guaranteed interest savings that I won't pay back to the back.  My thinking is that interest not paid is just as good as interest earned.


Interest not paid is not quite as good as MORE interest earned. Fixed that for you. :)


PARTIALLY pre-paying the mortgage just makes it easier for the bank to sell your home in foreclosure without THEM losing money.
Stock funds do not pay "more interest."  If you think this, you need to hit the books again and read up on stock returns over time.

He is thinking correctly and I get super annoyed when people parrot the old B52 missinformation that paying down a mortgage is the "riskiest thing to do" because of some wild scenario where mustashians with huge stock portfolios and emergency funds suddenly run out of money, but cant sell any investments to live off of.    It is less risky to pay down a mortgage than to leverage debt to invest more.  It may pay better to hold stocks, but taking market risk is a risk.  Holding risk is the very reason you earn more in the long term with stock.  This is so basic.  Why this site loves to pervert established rules of finamce by attempting to redefine risk in this odd way, I just dont get.  It is a cult like response by those who chose to use leverage `on faith in markets' I expect.

Ah, yes, PizzaSteve still trying to fight with a poster who isn't on the site anymore.

You still confuse volatility risk with overall risk (inflation risk, etc)
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: Boofinator on November 04, 2018, 08:40:53 AM
Also considering splitting the difference and putting in $500 extra per month towards the mortgage and investing $500-$700 so I can hedge between both.

How partially paying off your mortgage a reasonable "hedge"?

If you need a larger emergency fund (or an index fund held outside a retirement vehicle) to sleep better - sure. More equity in a house with a mortgage doesn't give you a lot of options other than a HELOC, which may  be difficult to get in a deep recession/market crash.

Thanks - I guess I was thinking of it as a "hedge" in the sense that it's guaranteed interest savings that I won't pay back to the back.  My thinking is that interest not paid is just as good as interest earned.


Interest not paid is not quite as good as MORE interest earned. Fixed that for you. :)


PARTIALLY pre-paying the mortgage just makes it easier for the bank to sell your home in foreclosure without THEM losing money.
Stock funds do not pay "more interest."  If you think this, you need to hit the books again and read up on stock returns over time.

He is thinking correctly and I get super annoyed when people parrot the old B52 missinformation that paying down a mortgage is the "riskiest thing to do" because of some wild scenario where mustashians with huge stock portfolios and emergency funds suddenly run out of money, but cant sell any investments to live off of.    It is less risky to pay down a mortgage than to leverage debt to invest more.  It may pay better to hold stocks, but taking market risk is a risk.  Holding risk is the very reason you earn more in the long term with stock.  This is so basic.  Why this site loves to pervert established rules of finamce by attempting to redefine risk in this odd way, I just dont get.  It is a cult like response by those who chose to use leverage `on faith in markets' I expect.

Ah, yes, PizzaSteve still trying to fight with a poster who isn't on the site anymore.

You still confuse volatility risk with overall risk (inflation risk, etc)

He isn't fighting B42, he's fighting the brainwashed masses repeating B42's "wisdom". Don't get me wrong, B42 had some valuable insights, but the lingering stench of his dogmatic approach has pushed this website to the cult of equities over basic common sense. Stocks are riskier in many cases than a mortgage, even at current interest rates, but it is easier to just parrot the broken record.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: PizzaSteve on November 04, 2018, 08:52:49 AM
Ive got to stop trying to correct the odd, non traditional ways of looking at risk, capital and returns on this site.  My 30+ years in corporate finance and business degrees dont mean much to enthusiastic kids who have never seen a bear market during their lifetime, but believe in leveraged investing with all their hearts.  Note:  I am not confusing definitions of risk, I am sticking to established ways to perform a financial analysis to avoid confusing apples and oranges comparisons of returns, as any good analysis should.  In fact, corporations use risk adjustment factors when comparing investment alternatives, but these methods are probably a bit advanced for this site. A risk premium, such as stocks demand, is a well understood phenomenon.  Again, calling leveraged stocks less risky than a guaranteed return hugely perverts established definitions of risk that professionals use. It is like calling white darker than black, because, you know black is the new white.

I pray it works out for them because I am set for life, and have no real skin in the game (could skate through a long bear market fine, and an extended bull just means I donate more to charity).  Folks dont respect experience much here, which is fine.  My 40+ years of mustacian living work fine for me with or without forum posting (knew what to do and how to do it long before any blogs existed, bought vanguard funds in mid 80s).

Good luck OP.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: EnjoyIt on November 04, 2018, 11:16:31 AM
Ive got to stop trying to correct the odd, non traditional ways of looking at risk, capital and returns on this site.  My 30+ years in corporate finance and business degrees dont mean much to enthusiastic kids who have never seen a bear market during their lifetime, but believe in leveraged investing with all their hearts.  Note:  I am not confusing definitions of risk, I am sticking to established ways to perform a financial analysis to avoid confusing apples and oranges comparisons of returns, as any good analysis should.  In fact, corporations use risk adjustment factors when comparing investment alternatives, but these methods are probably a bit advanced for this site. A risk premium, such as stocks demand, is a well understood phenomenon.  Again, calling leveraged stocks less risky than a guaranteed return hugely perverts established definitions of risk that professionals use. It is like calling white darker than black, because, you know black is the new white.

I pray it works out for them because I am set for life, and have no real skin in the game (could skate through a long bear market fine, and an extended bull just means I donate more to charity).  Folks dont respect experience much here, which is fine.  My 40+ years of mustacian living work fine for me with or without forum posting (knew what to do and how to do it long before any blogs existed, bought vanguard funds in mid 80s).

Good luck OP.

I am curious what this forum will look like when the next recession hits. I am positive most, not all of those brave high equity position souls will be shitting in their pants. A good exercise for anyone is to go to bogleheads and read some of those old posts. There was some serious fear back then. And this if from people who should know better. The reality is that when everyone around you is talking doom and gloom it starts to become very difficult to stay the course despite the fear mongering.

Personally I do not believe there is a decrease in risk by prepaying a mortgage. The decrease only happens once you make that final payment and not a day sooner.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: EnjoyIt on November 04, 2018, 11:19:27 AM
Also considering splitting the difference and putting in $500 extra per month towards the mortgage and investing $500-$700 so I can hedge between both.

How partially paying off your mortgage a reasonable "hedge"?

If you need a larger emergency fund (or an index fund held outside a retirement vehicle) to sleep better - sure. More equity in a house with a mortgage doesn't give you a lot of options other than a HELOC, which may  be difficult to get in a deep recession/market crash.

Thanks - I guess I was thinking of it as a "hedge" in the sense that it's guaranteed interest savings that I won't pay back to the back.  My thinking is that interest not paid is just as good as interest earned.


Interest not paid is not quite as good as MORE interest earned. Fixed that for you. :)


PARTIALLY pre-paying the mortgage just makes it easier for the bank to sell your home in foreclosure without THEM losing money.
Stock funds do not pay "more interest."  If you think this, you need to hit the books again and read up on stock returns over time.

He is thinking correctly and I get super annoyed when people parrot the old B52 missinformation that paying down a mortgage is the "riskiest thing to do" because of some wild scenario where mustashians with huge stock portfolios and emergency funds suddenly run out of money, but cant sell any investments to live off of.    It is less risky to pay down a mortgage than to leverage debt to invest more.  It may pay better to hold stocks, but taking market risk is a risk.  Holding risk is the very reason you earn more in the long term with stock.  This is so basic.  Why this site loves to pervert established rules of finamce by attempting to redefine risk in this odd way, I just dont get.  It is a cult like response by those who chose to use leverage `on faith in markets' I expect.

Ah, yes, PizzaSteve still trying to fight with a poster who isn't on the site anymore.

You still confuse volatility risk with overall risk (inflation risk, etc)

Did b42 leave? What happened?
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: RWD on November 04, 2018, 11:23:27 AM
Did b42 leave? What happened?
He was banned (https://forum.mrmoneymustache.com/off-topic/r-i-p-boarder42/).
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: TomTX on November 04, 2018, 11:27:11 AM
I am curious what this forum will look like when the next recession hits. I am positive most, not all of those brave high equity position souls will be shitting in their pants. A good exercise for anyone is to go to bogleheads and read some of those old posts. There was some serious fear back then. And this if from people who should know better. The reality is that when everyone around you is talking doom and gloom it starts to become very difficult to stay the course despite the fear mongering.

Nah, I'll just keep my 100% equity position. Been through it before more than once at 100% equities, will go through it again.

Such fearmongering. Or is is shit-mongering? Shit-posting?
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: TomTX on November 04, 2018, 11:31:08 AM
Ive got to stop trying to correct the odd, non traditional ways of looking at risk, capital and returns on this site.  My 30+ years in corporate finance and business degrees dont mean much to enthusiastic kids who have never seen a bear market during their lifetime, but believe in leveraged investing with all their hearts.  Note:  I am not confusing definitions of risk, I am sticking to established ways to perform a financial analysis to avoid confusing apples and oranges comparisons of returns, as any good analysis should.  In fact, corporations use risk adjustment factors when comparing investment alternatives, but these methods are probably a bit advanced for this site. A risk premium, such as stocks demand, is a well understood phenomenon.  Again, calling leveraged stocks less risky than a guaranteed return hugely perverts established definitions of risk that professionals use. It is like calling white darker than black, because, you know black is the new white.

Well, I guess none of your denigration of other positions applies to me. As I just posted - been through plenty of bear markets and your "black is white" analogy is just pointless.

Again, your definition of risk is overly narrow for the context of this site. Those who pay down a (fixed, reasonable rate, 20+ year remaining duration) mortgage faster trade lowered volatility risk against a higher risk of delayed FIRE.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: maizefolk on November 04, 2018, 11:37:47 AM
However, if I invested this $1,304 monthly over the next 120 months, it would gain $49,773 if I assumed 6% average annual returns.  After the 10 years my investment would have a total cash value of $206,253, and if I use the same 6% annual average return over the next 13.5 years and just let that money sit, I'd theoretically end up with $439,922 which is approx a $284K gain from that $1,304 monthly I invested in years 1-10 instead of paying extra on the loan. ($241K if I apply a 15% LT Capital Gains tax.)

Am I thinking about this math soundly?  Am I leaving any important factors out just front a quantitative perspective?

The only point I'd add is to ask what you used to derive the 6% annual average return?

If you're assuming you'd be investing in the stock market, 6-7% gets thrown around as the long term expected return, but that is after correcting for inflation. For most purposes it's easier to just correct everything for inflation and then just not worry about it.

However, since the cost of your mortgage payments won't increase with inflation, the CAGR of stock market return without correcting for inflation might be more appropriate for your comparison calculations (~9%/year).

However, if you just picked 6% to be a bit more conservative, nothing wrong with that.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: maizefolk on November 04, 2018, 11:49:42 AM
Again, your definition of risk is overly narrow for the context of this site. Those who pay down a (fixed, reasonable rate, 20+ year remaining duration) mortgage faster trade lowered volatility risk against a higher risk of delayed FIRE.

Yup, this is the key distinction to make. Risk and volatility are quite similar when you're working at an investment bank or hedge fund where a higher return means you keep your job and make a nice bonus and a lower job means all your investors pull their funds over to other banks that made different bets. In that context, there is no such thing as having enough money, more money is always better and less money is always worse.

In the context of FIRE the goal is precisely to have enough money to meet our needs, with additional money beyond that point not being nearly as valuable. For a person contemplating early retirement, a low volatility investment mix which usually doesn't provide enough return to keep up with both spending needs and inflation 50% of the time can be much riskier than a high volatility strategy which provides more money than you need for the rest of your life 95% of the time.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: LetItGrow on November 04, 2018, 12:40:11 PM
I am curious what this forum will look like when the next recession hits. I am positive most, not all of those brave high equity position souls will be shitting in their pants. A good exercise for anyone is to go to bogleheads and read some of those old posts. There was some serious fear back then. And this if from people who should know better. The reality is that when everyone around you is talking doom and gloom it starts to become very difficult to stay the course despite the fear mongering.

Nah, I'll just keep my 100% equity position. Been through it before more than once at 100% equities, will go through it again.

Such fearmongering. Or is is shit-mongering? Shit-posting?

I think idea of spending some time reading those old threads could be useful. I am also heavily weighted equities, same as I have been since around 95, but seeing how others reacted should at least be interesting. Especially if you know some of the people and how they are in the real good times.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: TomTX on November 04, 2018, 12:45:50 PM
I am curious what this forum will look like when the next recession hits. I am positive most, not all of those brave high equity position souls will be shitting in their pants. A good exercise for anyone is to go to bogleheads and read some of those old posts. There was some serious fear back then. And this if from people who should know better. The reality is that when everyone around you is talking doom and gloom it starts to become very difficult to stay the course despite the fear mongering.

Nah, I'll just keep my 100% equity position. Been through it before more than once at 100% equities, will go through it again.

Such fearmongering. Or is is shit-mongering? Shit-posting?

I think idea of spending some time reading those old threads could be useful. I am also heavily weighted equities, same as I have been since around 95, but seeing how others reacted should at least be interesting. Especially if you know some of the people and how they are in the real good times.

Oh, sure - well worth reading, especially for those who have gotten seriously into the market in the past 10 years. Lots of people here have never been tested by a real equities market drop.

My last paragraph was in reference to the "brave high equity position souls will be shitting in their pants" hyperbole.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: LoanShark on November 04, 2018, 04:07:50 PM
Totally a philosophical question in my mind. For me, the opportunity cost is worth the peace of mind to know I don’t owe anyone any money...
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: TomTX on November 04, 2018, 05:24:10 PM
Totally a philosophical question in my mind. For me, the opportunity cost is worth the peace of mind to know I don’t owe anyone any money...

Sure, I get that.

I have an awfully big property tax bill every year anyway, whether it's paid off or not.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: PizzaSteve on November 04, 2018, 05:46:03 PM
Again, your definition of risk is overly narrow for the context of this site. Those who pay down a (fixed, reasonable rate, 20+ year remaining duration) mortgage faster trade lowered volatility risk against a higher risk of delayed FIRE.

Yup, this is the key distinction to make. Risk and volatility are quite similar when you're working at an investment bank or hedge fund where a higher return means you keep your job and make a nice bonus and a lower job means all your investors pull their funds over to other banks that made different bets. In that context, there is no such thing as having enough money, more money is always better and less money is always worse.

In the context of FIRE the goal is precisely to have enough money to meet our needs, with additional money beyond that point not being nearly as valuable. For a person contemplating early retirement, a low volatility investment mix which usually doesn't provide enough return to keep up with both spending needs and inflation 50% of the time can be much riskier than a high volatility strategy which provides more money than you need for the rest of your life 95% of the time.
I agree with this.  I dont agree with posts that try to put positions on me I have never advocated.

Leverage is great if your goal is optimization for accumulation as quickly as possible.  Ive never said it isnt.

Less leverage is great if you have less need to optimize returns and wish for a more certain outcome. 

This is the only point I have advocated.

Where I object is when posters try to use historic back testing of market returns to suggest it is less risky long term than a fixed rate of return asset class.  This type of statement is dangerous because it warps estimates the true risk of equities by overrelying on a very limited data set.  Information about investments and the nature of value and markets goes back thousands of years.  Modern stock markets havent seen crashes, like Roman grain or Chinese Tea prices, over time, but we have histories to study.

Again, I am not advocating not taking risk, not trying to dampen enthusiasm for the best asset class we have.  We just should try to define our variables properly and understand we are planning against unknowns in one case and knowns in another.

An example.  Assume your are super lucky and have a 500k salary and a 50k spending lifestyle.  Investing in a poor performing asset class is not at all risky to your fire plans.  You have so much money coming in, it really doesnt matter if you take a guaranteed 3% or a riskier 6%.  If I were asked, I would advise such a person to focus on saving up to a 2% withdraw rate, invest how they are comfortable (in something not junk) work 1 extra year and call it a career.  It doesnt matter if they leverage their 200k mortgage.  This exampke is meant to illustrate that saying 'holding a mortgage always reduces 'risk' of an unsuccessful FIRE,' is just not always useful or accurate.  Sure, it might help in some scenarios to shorten time to hit a wealth target, assuming that is the goal.

What is established and useful is comparing the financial risks of the actual financial asset classes available, like real estate, CDs, bonds, etc.  Stocks have a non 0 chance of not returning what you need, so they are 'riskier.', financially speaking, just as are rental properties.  Are they worth it, sure....This is not volatility, as has been implied above.  It is the risk premium stocks earn.  More likely one can lose money, hence investors demand returns.  The risk premium is not volatility, so please stop saying I am confused or just talking sequence of returns. 

I recommend that everyone fully read a prospectus of a company stock, mutual fund and a bond.  I have and it is a useful exercise.

Anyway, I am not trying to criticize anyone, just to create a safe space for folks to feel ok about a common sense decision about whether to hold debt or not hold debt, in the context of stock market risks, with both decisions being ok for FIRE, assuming one understands the implications.

PS.  I respect everyone here who is posting.  The desire to help others is admirable.  No offences meant or taken.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: MikeTheSalesman on November 04, 2018, 06:12:30 PM
I certainly appreciate the help everyone!! Certainly has given me a lot to think about!  Glad to be a part of the community!
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: EnjoyIt on November 04, 2018, 08:48:35 PM
I am curious what this forum will look like when the next recession hits. I am positive most, not all of those brave high equity position souls will be shitting in their pants. A good exercise for anyone is to go to bogleheads and read some of those old posts. There was some serious fear back then. And this if from people who should know better. The reality is that when everyone around you is talking doom and gloom it starts to become very difficult to stay the course despite the fear mongering.

Nah, I'll just keep my 100% equity position. Been through it before more than once at 100% equities, will go through it again.

Such fearmongering. Or is is shit-mongering? Shit-posting?

That is why I said “most, and not all” in my position above.

I was 100% equities in 2001 with a low 5 figure portfolio. I was 100% equities in 2009 with a low 6 figure portfolio. Historically I was ok with 100% equities and very likely would be ok for the next recession. Now that I am semi-retired I am at 70/30. I don’t want to and don’t need to take on the additional risk.  I know more than likely equities will rebound eventually. I don’t want to take the risk of me panicking and working more than I want to. I also want to decrease my risk if markets staying depressed much longer than recent averages.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: Telecaster on November 04, 2018, 11:09:59 PM

I am curious what this forum will look like when the next recession hits. I am positive most, not all of those brave high equity position souls will be shitting in their pants. A good exercise for anyone is to go to bogleheads and read some of those old posts. There was some serious fear back then. And this if from people who should know better. The reality is that when everyone around you is talking doom and gloom it starts to become very difficult to stay the course despite the fear mongering.

Possibly.  I'm a hair older than most here, I believe.  I've been through the Russian currency crisis (remember that one? Almost no one does.  It was huge at the time), the Asian Contagion (same thing), dot.com bust, and the housing bubble.

My first observation is that if you have the balls and guts to ignore the fear mongering you will become wealthy before you ever thought you would.

My second observation is that  a 4%-ish 30-year mortgage is literally the deal of a life time.  As in, you only get deals like that once in a life time.  You should get as many of those as is comfortable, safe, and prudent, and never pay them off.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: TomTX on November 05, 2018, 03:59:50 AM
What is established and useful is comparing the financial risks of the actual financial asset classes available, like real estate, CDs, bonds, etc.  Stocks have a non 0 chance of not returning what you need, so they are 'riskier.', financially speaking, just as are rental properties.  Are they worth it, sure....This is not volatility, as has been implied above.  It is the risk premium stocks earn.  More likely one can lose money, hence investors demand returns.  The risk premium is not volatility, so please stop saying I am confused or just talking sequence of returns. 

Sure, you reduce volatility* risk in exchange for the guarantee that you will work longer.

Absent people in your (extremely rare) example of earning $500k and living on $50k, for the vast majority of people investing primarily in things like CDs and bonds adds quite a few years to the first plausible FI date.

*Volatility: Wider value swings. Common for stocks and real estate.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: TomTX on November 05, 2018, 04:01:24 AM

That is why I said “most, and not all” in my position above.

My apologies. I misread it as the more common expression "most, if not all"
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: PizzaSteve on November 05, 2018, 08:48:49 AM
What is established and useful is comparing the financial risks of the actual financial asset classes available, like real estate, CDs, bonds, etc.  Stocks have a non 0 chance of not returning what you need, so they are 'riskier.', financially speaking, just as are rental properties.  Are they worth it, sure....This is not volatility, as has been implied above.  It is the risk premium stocks earn.  More likely one can lose money, hence investors demand returns.  The risk premium is not volatility, so please stop saying I am confused or just talking sequence of returns. 

Sure, you reduce volatility* risk in exchange for the guarantee that you will work longer.

Absent people in your (extremely rare) example of earning $500k and living on $50k, for the vast majority of people investing primarily in things like CDs and bonds adds quite a few years to the first plausible FI date.

*Volatility: Wider value swings. Common for stocks and real estate.
I dont want to argue, so I will try to make this the last post in this thread.  Again, the chance that you may lose money is not volatility.  I think this is the fundamental disconnect. 

You seem to believe there is zero chance that a portfolio of Stocks is worth less 30 years from now than a stream of dollars created by avoiding debt payments. I do not agree with this belief and since I think it is wrong, I respond.*

*  My position is largely based on studying the fundamentals of economics, finance and markets as taught in business school and from working with large companies on strategies and plans around the world.  I've seen deep inside corporate income statements and balance sheets.  While I am optimistic about the future and the worlds business leaders are not fools, I also know how fragile the world's economy can be, so I hedge a bit.  I also lived in Japan in 1992, at a time when most smartJapanese investors believed in their markets as much as you believe in the US market.

In terms of practical advice, I think we are probably on the same page.  I just dont think it is wise to over sell the long term likelihood stocks perform.  I would rather emphasize they are the best option for free capital, but would also advise some diversification of capital and mental energy.  I want FIRE folks to take in stride the unlikely outcome of a long term bear, like Japan had, because they knew it was a possible outcome.  Mentally, I want people prepared, not in shock because they assumed stocks always go up 7% and are crushed if that doesnt happen because their life plan relied upon it.

A final note.  While my example was exaggerated, I do not think that having a high income or having saved successfully to a large stash, before being ready to quit working is an extremely rare phenomenon.  It is not at all uncommon among posts I read on this site.  We live near the tech center of the US and many people earn way more than they need, while still wanting to work ( because they enjoy it).  These people really dont need leverage to win the game.  Yes some people may need to take that chance, but some dont.  Many people on this forum chose to pay the debt off because they have had success investing and saving.  Their stock portfolio is large,  so they are now ready to take some stock risk off the table.  This is because their FIRE failure liklihood now is so low.  This group buys bonds and pays off debt.

We are an example, and if you polled actual retirees on this site as opposed to early accumulators I bet a majority has no debt and owns fixed income. We are not continuing to use leverage into retirement.  Any leverage based extra wealth generated is just excess money.  It is true I could mortgage my house (which has gone up a lot) or sell it, but why?  We want to live in it.  Why would we use leverage when we already have an almost zero chance of income failure (owning real estate, a large 401k, have a pension, SS coming)?   Why would we take on excess risk to earn money we dont need.   Do you advocate we increase consumption?

Once you have surplus wealth, it is obvious there is no need for leverage, unless one is greedy like our current president. If you are in the retirement phase, some reduction in volatility of returns is also helpful, as pointed out below.  Anyway, these are the reasons for my comments and I hope you can understand and respect them, even if we disagree.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: Boofinator on November 05, 2018, 09:04:40 AM
What is established and useful is comparing the financial risks of the actual financial asset classes available, like real estate, CDs, bonds, etc.  Stocks have a non 0 chance of not returning what you need, so they are 'riskier.', financially speaking, just as are rental properties.  Are they worth it, sure....This is not volatility, as has been implied above.  It is the risk premium stocks earn.  More likely one can lose money, hence investors demand returns.  The risk premium is not volatility, so please stop saying I am confused or just talking sequence of returns. 

Sure, you reduce volatility* risk in exchange for the guarantee that you will work longer.

Absent people in your (extremely rare) example of earning $500k and living on $50k, for the vast majority of people investing primarily in things like CDs and bonds adds quite a few years to the first plausible FI date.

*Volatility: Wider value swings. Common for stocks and real estate.
It seems you want to keep arguing, so this will be the last post.  Again, the chance that you may lose money is not volatility.  Imthink this is the fundamental disconnect.  You seem to believe there is zero chance that a portfolio of Stocks is worth less 30 years from now than a stream of dollars created by avoiding debt payments.

I do not agree with this belief. 

*  My position is largely based on studying the fundamentals of economics, finance and markets as taught in business school and my 30 year career working with large companies on strategies and plans on how to generate superior returns around the world.  I've seen deep inside the income statements and balance sheets of the worlds largest companies with their CEOs and CFOs.  While I am optimistic about the future, and the worlds business leaders are largely not fools, I also know how fragile the world's economy is.  Ive seen and advised about the governance of these entities and so I hedge a bit. 

In terms of practical advice, I think we are probably on the same page.  I just dont think it is wise to over sell the long term likelihood stocks perform.  I woukd rather emphasize they are the best option for free capital, but would also advise some diversification of capital and mental energy.  I want FIRE folks to take in stride the unlikely outcome of a long term bear, like Japan had, because they knew it was a possible outcome.  Mentally, I want people prepared, not in shick because they assumed stocks always go up 7% and are crushed if that doesnt happen because their life plan relied upon it.

The other false assumption, from posters always reminding us this is a FIRE site, is that individuals will be earning money for 30 years during the term of the mortgage to buffer the volatility swings. Once someone enters FIRE, the calculus of the decision changes considerably, and sequence of returns risk pushes the optimal decision considerably toward preservation of capital (and hence paying off the mortgage). The link below is to three plots I made from cFIREsim historical data showing that a new retiree is almost guaranteed to have a higher chance of success by paying off the mortgage early.

Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: maizefolk on November 05, 2018, 09:20:47 AM
The other false assumption, from posters always reminding us this is a FIRE site, is that individuals will be earning money for 30 years during the term of the mortgage to buffer the volatility swings.

Who has (implicitly or explicitly) made that assumption?

Quote
Once someone enters FIRE, the calculus of the decision changes considerably, and sequence of returns risk pushes the optimal decision considerably toward preservation of capital (and hence paying off the mortgage). The link below is to three plots I made from cFIREsim historical data showing that a new retiree is almost guaranteed to have a higher chance of success by paying off the mortgage early.


Oh come on now. I was really appreciating the new insight you provided about mortgages that are more than half payed down already. But even looking at all three graphs, a 30 year mortgage at the start of FIRE at 4% increases the maximum SWR in all cases rather than decreasing it. That observation, from your own calculations, not mine is not at all consistent with your statement in bold.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: EnjoyIt on November 05, 2018, 09:29:05 AM

I dont want to argue, so I will try to make this the last post in this thread.  Again, the chance that you may lose money is not volatility.  I think this is the fundamental disconnect. 

I see the same mistake happen on bogglehads where people confuse volatility with risk.  Sure Volatility has the risk of making an emotional mistake.  But there is also risk of a prolonged recession which can spoil many retiree plans if they relied, neigh expected a market to recover in under 3 years.  There is a chance that those 3 years could turn into 20.  That is some real risk which although low is not insignificant.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: Boofinator on November 05, 2018, 11:21:35 AM
The other false assumption, from posters always reminding us this is a FIRE site, is that individuals will be earning money for 30 years during the term of the mortgage to buffer the volatility swings.

Who has (implicitly or explicitly) made that assumption?

Quote
Once someone enters FIRE, the calculus of the decision changes considerably, and sequence of returns risk pushes the optimal decision considerably toward preservation of capital (and hence paying off the mortgage). The link below is to three plots I made from cFIREsim historical data showing that a new retiree is almost guaranteed to have a higher chance of success by paying off the mortgage early.


Oh come on now. I was really appreciating the new insight you provided about mortgages that are more than half payed down already. But even looking at all three graphs, a 30 year mortgage at the start of FIRE at 4% increases the maximum SWR in all cases rather than decreasing it. That observation, from your own calculations, not mine is not at all consistent with your statement in bold.

The assumption is implicitly made every time someone says that you should invest your mortgage into equities, because equities win over 30 years. The only way that statement is correct is if you aren't pulling down on your savings (or if you are using expected returns in your calculations).

As to your second paragraph: Exactly. How many people still have 30 years left on their mortgage at the start of retirement? Certainly some, but I'd argue the vast majority have at least ten years already paid down. And of course 4% 30-year mortgages are not possible to find these days (I very recently looked); current rates are close to 5%. And finally, you cannot discount PizzaSteve's comments on risks not accounted for in cFIREsim's model.

To make it clear, I don't think it is necessarily bad to not pay off your mortgage and invest in stocks (I've been doing so), but the math isn't as clear cut as many posters put it out there to be, and it is highly dependent on the stage of life.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: maizefolk on November 05, 2018, 11:38:01 AM
The assumption is implicitly made every time someone says that you should invest your mortgage into equities, because equities win over 30 years. The only way that statement is correct is if you aren't pulling down on your savings (or if you are using expected returns in your calculations).

This is incorrect. When I make that statement it is based on historical data analysis which looks at average outcomes and failure rates for FIREing with either more money and still paying down a mortgage or less money but no mortgage.

Quote
As to your second paragraph: Exactly. How many people still have 30 years left on their mortgage at the start of retirement? Certainly some, but I'd argue the vast majority have at least ten years already paid down. And of course 4% 30-year mortgages are not possible to find these days (I very recently looked); current rates are close to 5%.

Fair enough, but my statement is still true based on your data at mortgage interest rates of 4.5%, which would be achievable by any person entering FIRE today if they refinanced their current balance back to a new 30 year loan.

And many of the people asking the same question here on the forums have mortgages that are 3-5 years old (based on the reported interest rates which tend to be the the 4% to 4.25% range), which would put them at 25-27 years remaining, which again, based on your own results would be a set of circumstances where they getting better success rates/higher safe withdrawal rates with the mortgage than from paying it off.

I'm not trying to discount your insight that a person with less than half of the term remaining on their mortgage is not well served by carrying it into FIRE without modification. But you are dramatically exaggerating the number of people it applies to by saying that people are almost guaranteed to get better results from paying off their mortgage. In addition you are discounting a key consequence of the insight that if longer remaining term mortgages help FIRE success rates and shorter term mortgages hurt them: that the solution (at today's interest rates anyway) is to ensure that you have a mortgage with a long remaining payment turn before pushing the big read button and FIREing. 

Quote
And finally, you cannot discount PizzaSteve's comments on risks not accounted for in cFIREsim's model.

I tried to have a discussion about this once. There are risks not accounted for on both sides (stock market and paying off your home).

Boring backstory that is not particularly interesting even to the participants behind the spoiler tag (why I'm choosing not to discuss this point further).

Spoiler: show

PizzaSteve thinks I am an unethical person because I, for example, would not feel morally obligated to continue paying my mortgage after my home was destroyed in a nuclear attack (not covered under most home insurance policies) in a non-recourse state.

Given this irreconcilable difference in world views, now the two of us don't speak, which appears to be better for all involved.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: Boofinator on November 05, 2018, 12:04:07 PM
The assumption is implicitly made every time someone says that you should invest your mortgage into equities, because equities win over 30 years. The only way that statement is correct is if you aren't pulling down on your savings (or if you are using expected returns in your calculations).

This is incorrect. When I make that statement it is based on historical data analysis which looks at average outcomes and failure rates for FIREing with either more money and still paying down a mortgage or less money but no mortgage.

Quote
As to your second paragraph: Exactly. How many people still have 30 years left on their mortgage at the start of retirement? Certainly some, but I'd argue the vast majority have at least ten years already paid down. And of course 4% 30-year mortgages are not possible to find these days (I very recently looked); current rates are close to 5%.

Fair enough, but my statement is still true based on your data at mortgage interest rates of 4.5%, which would be achievable by any person entering FIRE today if they refinanced their current balance back to a new 30 year loan.

And many of the people asking the same question here on the forums have mortgages that are 3-5 years old (based on the reported interest rates which tend to be the the 4% to 4.25% range), which would put them at 25-27 years remaining, which again, based on your own results would be a set of circumstances where they getting better success rates/higher safe withdrawal rates with the mortgage than from paying it off.

I'm not trying to discount your insight that a person with less than half of the term remaining on their mortgage is not well served by carrying it into FIRE without modification. But you are dramatically exaggerating the number of people it applies to by saying that people are almost guaranteed to get better results from paying off their mortgage. In addition you are discounting a key consequence of the insight that if longer remaining term mortgages help FIRE success rates and shorter term mortgages hurt them: that the solution (at today's interest rates anyway) is to ensure that you have a mortgage with a long remaining payment turn before pushing the big read button and FIREing. 

Quote
And finally, you cannot discount PizzaSteve's comments on risks not accounted for in cFIREsim's model.

I tried to have a discussion about this once. There are risks not accounted for on both sides (stock market and paying off your home).

Boring backstory that is not particularly interesting even to the participants behind the spoiler tag (why I'm choosing not to discuss this point further).

Spoiler: show

PizzaSteve thinks I am an unethical person because I, for example, would not feel morally obligated to continue paying my mortgage after my home was destroyed in a nuclear attack (not covered under most home insurance policies) in a non-recourse state.

Given this irreconcilable difference in world views, now the two of us don't speak, which appears to be better for all involved.


maizeman, you are not one of the posters I'm preaching to. You have generally been rational in your posts and willing to see other arguments. I am also not preaching to those who have drunk the B42 Kool-Aid and consider anyone not investing in stocks with their mortgage in need of a facepunch. I am preaching to people like OP, who are seeking advice for the best way to invest their surplus. And the answer isn't one-size-fits-all, as so many on here tend to suggest. To illustrate, earlier in the thread I asked OP about his amount of liquidity, and mentioned that it really only might make sense to pay off the mortgage if he was close to retirement. Otherwise, I said it was "a no-brainer" to invest in equities. Given his interest rate, I don't think I'd pay it off in any case, as even intermediate bonds are likely to beat the interest rate if he wanted a low-risk investment.

Given a nuclear attack, I would expect the government would allow for debt forgiveness to those most affected, paying for it through government debt; they would also probably reimburse the banks for the mortgages. It would still fuck everyone with lots of equity in their homes. Good example of pay off the mortgage risk.

EDIT: Confused this OP with the one with a 2.5% mortgage. Given OP's interest rate of 3.75%, I might consider paying it off if I was retiring or had a desire to be FI imminently (and of course the duration resulted in a higher probability of success).
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: bognish on November 05, 2018, 12:30:28 PM
Warning Non theoretical example ahead:
I have been 100% equities since 1998. Yes 2008 was stressful and not fun seeing gains disappear. Yes October 2018 was a bad month. Since I had no idea if the bottom had hit or not I did not sell. Since I was working I did keep buying on the way down. It was a bummer to buy and find out the next day it wasn't the bottom. Since I never sold things worked out pretty well from 2008 to 2018.
I currently have 10 years left on a mortgage. My feeling is that I would rather have index funds that are easy to liquidate than more equity in a house. Last week I got laid off. I didn't see it coming at all. Once the severance is used up it will be pretty easy to cash out some index funds and keep paying the bills. It would be much harder to cash out an extra mortgage payment.
There is plenty of math to tell you whether to invest or early payoff. My advice is to make sure that enough of your savings are accessible if an emergency come knocking.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: maizefolk on November 05, 2018, 12:39:13 PM
Warning Non theoretical example ahead:
I have been 100% equities since 1998. Yes 2008 was stressful and not fun seeing gains disappear. Yes October 2018 was a bad month. Since I had no idea if the bottom had hit or not I did not sell. Since I was working I did keep buying on the way down. It was a bummer to buy and find out the next day it wasn't the bottom. Since I never sold things worked out pretty well from 2008 to 2018.
I currently have 10 years left on a mortgage. My feeling is that I would rather have index funds that are easy to liquidate than more equity in a house. Last week I got laid off. I didn't see it coming at all. Once the severance is used up it will be pretty easy to cash out some index funds and keep paying the bills. It would be much harder to cash out an extra mortgage payment.
There is plenty of math to tell you whether to invest or early payoff. My advice is to make sure that enough of your savings are accessible if an emergency come knocking.

I'm sorry to hear you got hit with the unexpected layoff bognish. Hopefully you're able to find something else as good or better soon... super low unemployment should be good for something.

I definitely agree with you that that expected cases like that are one of the cases where it is really nice to have that extra safety buffer of lots of liquid investments and I'm glad you've got the liquidity in easy accessible forms to ride this out.

I'm going to guess the folks arguing for paying off mortgages of this would agree that this is a very good reason not to pay down your mortgage if you cannot pay it off completely: missing mortgage payments when you have 60% equity in your house gets you in just as much trouble as missing a payment when you have 20% equity.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: PizzaSteve on November 05, 2018, 03:24:57 PM
@maizeman Please post a quote where I said not paying off a mortgage was unethical.  I think you are confusing me with someone else.  Your other comments are thoughtful, so I wonder why you feel I am arguing for paying down a mortage (as opposed to clearly defining the risks, if one chooses to do it for leveraged stock investing, without much of a safety net).

I also resent being put on a 'side.'  I have never once said keeping a mortgage is wrong or bad, just not ALWAYS BETTER, regardless of the future. No member of this forum I can recall has ever advised someone to only pay down a mortgage and hold zero other investment assets.  Almost everyone has retirement funds, stocks, emergency funds, etc.  Nearly everyone says leverage is usually good during accumulation.

What we have are straightforward choices with well defined risks and possible outcomes to chose between.  There are not 'sides', there is just information to share.

@Boofinator I think all of us are actually on the same side in terms of options for OP.  I certainly dont enjoy back and forth debates.  But I dont want individuals shouted down for advising less aggressive approaches or being accused of stating positions they didnt post.  For me, mortgaging my home to make money I dont need would be a poor decision (because we are already below 3% WR and retired).  There is absolutely zero benefit, and non zero risk.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: maizefolk on November 05, 2018, 04:00:59 PM
@maizeman Please post a quote where I said not paying off a mortgage was unethical.  You are confusing me with someone else and that odd spoiler thing is just, well odd.  Please edit your comment or prove it.  Your other comments are thoughtful, so I wonder why you feel I am arguing for paying down a mortage (as opposed to clearly defining the risks, if one chooses to do it for leveraged stock investing, without much of a safety net).

Unfortunately, you had the odd habit of deleting many of your comments retroactively, so no I cannot link to your specific statement. It occurred in this thread:
https://forum.mrmoneymustache.com/welcome-to-the-forum/mr-math-and-paying-off-your-mortgage/50/ in which quotations of portions of many your posts from other users will demonstrate that you were posting frequently and actively, however almost none of your original posts remain.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: TomTX on November 05, 2018, 05:45:46 PM

I dont want to argue, so I will try to make this the last post in this thread. 

Yes, PS frequently wants to be able to freely preach without anyone arguing with him - just accept his wisdom.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: TomTX on November 05, 2018, 05:47:55 PM
@maizeman Please post a quote where I said not paying off a mortgage was unethical.  You are confusing me with someone else and that odd spoiler thing is just, well odd.  Please edit your comment or prove it.  Your other comments are thoughtful, so I wonder why you feel I am arguing for paying down a mortage (as opposed to clearly defining the risks, if one chooses to do it for leveraged stock investing, without much of a safety net).

Unfortunately, you had the odd habit of deleting many of your comments retroactively, so no I cannot link to your specific statement. It occurred in this thread:
https://forum.mrmoneymustache.com/welcome-to-the-forum/mr-math-and-paying-off-your-mortgage/50/ in which quotations of portions of many your posts from other users will demonstrate that you were posting frequently and actively, however almost none of your original posts remain.

I remember the post. PizzaSteve is unethical for deleting it.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: TomTX on November 05, 2018, 05:49:34 PM

I also resent being put on a 'side.'  I have never once said keeping a mortgage is wrong or bad, just not ALWAYS BETTER, regardless of the future.

And you set up a strawman to argue against.

Who exactly is saying a mortgage is "ALWAYS BETTER, regardless of the future. "?

Nobody.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: Boofinator on November 06, 2018, 07:19:24 AM

I also resent being put on a 'side.'  I have never once said keeping a mortgage is wrong or bad, just not ALWAYS BETTER, regardless of the future.

And you set up a strawman to argue against.

Who exactly is saying a mortgage is "ALWAYS BETTER, regardless of the future. "?

Nobody.

I'll disagree with you here. Several posters, most notably the dearly departed B42, have argued vehemently that investing is superior to paying the mortgage under all circumstances (given today's rates). They even encouraged PMI, for Christ's sake. Perhaps PizzaSteve didn't choose the best wording, but I understand what he is trying to say.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: NorthernBlitz on November 06, 2018, 07:28:25 AM
Ive got to stop trying to correct the odd, non traditional ways of looking at risk, capital and returns on this site.  My 30+ years in corporate finance and business degrees dont mean much to enthusiastic kids who have never seen a bear market during their lifetime, but believe in leveraged investing with all their hearts.  Note:  I am not confusing definitions of risk, I am sticking to established ways to perform a financial analysis to avoid confusing apples and oranges comparisons of returns, as any good analysis should.  In fact, corporations use risk adjustment factors when comparing investment alternatives, but these methods are probably a bit advanced for this site. A risk premium, such as stocks demand, is a well understood phenomenon.  Again, calling leveraged stocks less risky than a guaranteed return hugely perverts established definitions of risk that professionals use. It is like calling white darker than black, because, you know black is the new white.

I pray it works out for them because I am set for life, and have no real skin in the game (could skate through a long bear market fine, and an extended bull just means I donate more to charity).  Folks dont respect experience much here, which is fine.  My 40+ years of mustacian living work fine for me with or without forum posting (knew what to do and how to do it long before any blogs existed, bought vanguard funds in mid 80s).

Good luck OP.

I am curious what this forum will look like when the next recession hits. I am positive most, not all of those brave high equity position souls will be shitting in their pants. A good exercise for anyone is to go to bogleheads and read some of those old posts. There was some serious fear back then. And this if from people who should know better. The reality is that when everyone around you is talking doom and gloom it starts to become very difficult to stay the course despite the fear mongering.

Personally I do not believe there is a decrease in risk by prepaying a mortgage. The decrease only happens once you make that final payment and not a day sooner.

While I don't want a recession / market crash, I think I would benefit from it so I could see how it feels when I have moderate six figures invested instead of waiting until I'm closer to having a second comma.

I haven't really experienced a large correction while having an appreciable amount invested because of this awesome bull run. I think I'll be able to keep my asset allocation (90% equities / 10% bonds), but thinking it is different than living through it. It's easy to think I'll be rational about it...
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: maizefolk on November 06, 2018, 07:49:18 AM
I haven't really experienced a large correction while having an appreciable amount invested because of this awesome bull run. I think I'll be able to keep my asset allocation (90% equities / 10% bonds), but thinking it is different than living through it. It's easy to think I'll be rational about it...

I'm in a similar boat as you. Went through 2007/8 but without significant invested assets. I'm at about 75% stocks if you look at total net worth and at close to 100% if you look at invested assets. Will be interesting to observe my own reactions the next time a serious decline hits the stock market. I'm less pessimistic than EnjoyIt, but it's certainly possible I could be proven wrong. We'll see.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: RWD on November 06, 2018, 07:56:03 AM
I also resent being put on a 'side.'  I have never once said keeping a mortgage is wrong or bad, just not ALWAYS BETTER, regardless of the future.

And you set up a strawman to argue against.

Who exactly is saying a mortgage is "ALWAYS BETTER, regardless of the future. "?

Nobody.

I'll disagree with you here. Several posters, most notably the dearly departed B42, have argued vehemently that investing is superior to paying the mortgage under all circumstances (given today's rates). They even encouraged PMI, for Christ's sake. Perhaps PizzaSteve didn't choose the best wording, but I understand what he is trying to say.

For someone that registered on the forum the day before boarder42 was banned you sure claim to know a lot about what he posted over the course of over four years. Even boarder42 didn't assert that investing is superior under all circumstances.

there are extremely rare circumstances where the math makes sense to pay off a mortgage.
I've also never said it's good for everyone all the time I've frequently said if it doesn't make math sense then someone shouldn't do it.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: maizefolk on November 06, 2018, 08:20:18 AM
Once someone enters FIRE, the calculus of the decision changes considerably, and sequence of returns risk pushes the optimal decision considerably toward preservation of capital (and hence paying off the mortgage). The link below is to three plots I made from cFIREsim historical data showing that a new retiree is almost guaranteed to have a higher chance of success by paying off the mortgage early.

I am preaching to people like OP, who are seeking advice for the best way to invest their surplus. And the answer isn't one-size-fits-all, as so many on here tend to suggest.

Boofinator, given your big investment in the boarder42 story, combined with the timelines RWD points out, there may be some backstory here that I am not grasping.

However, I did want to point out what I see as an inherent contradiction between these two posts of yours, particularly given your (retroactive?) reading of boarder42 as advocating that not paying down a mortgage under all circumstances, despite the level of nuance present in his posts, which is at least equivalent to the level of nuance in your own bolded statement above.

The key distinction being that your statement is based on an analysis of essentially 15 year or shorter mortgages where the potential FIREee didn't choose to get a new 30 year mortgage prior to FIRE* and boarder42's was based on 30 year mortgages.**  We can certainly argue back and forth about how common people with 25-30 years left on their mortgages vs people with < 15 years left on their mortgages are on this forum.

However, given that the median american household has lived in their home for only 10 years (source (https://www.statista.com/statistics/825416/median-home-tenure-of-sellers-usa/)), and people tend to move less as they get older, I am confident that your statement that "a new retiree is almost guaranteed [emphasis mine] to have a higher chance of success by paying off the mortgage early" does not apply to at least a significant fraction and likely a majority of posters on this forum.

Be careful that, in arguing against a poster you apparently don't like (despite barely overlapping with that poster at all on this forum), you don't become the mirror image of the characteristics you dislike about that poster.

*But you don't make any mention of this caveat in your posts, which will mislead people who don't follow your link and read your analysis.

**Which generally was stated explicitly, although I will certainly grant you people weren't thinking about the implications of people who bought a house early enough in the accumulation phase and stayed in the same house long enough to get through half the term of their mortgage before they started FIRE.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: Boofinator on November 06, 2018, 08:37:59 AM
I also resent being put on a 'side.'  I have never once said keeping a mortgage is wrong or bad, just not ALWAYS BETTER, regardless of the future.

And you set up a strawman to argue against.

Who exactly is saying a mortgage is "ALWAYS BETTER, regardless of the future. "?

Nobody.

I'll disagree with you here. Several posters, most notably the dearly departed B42, have argued vehemently that investing is superior to paying the mortgage under all circumstances (given today's rates). They even encouraged PMI, for Christ's sake. Perhaps PizzaSteve didn't choose the best wording, but I understand what he is trying to say.

For someone that registered on the forum the day before boarder42 was banned you sure claim to know a lot about what he posted over the course of over four years. Even boarder42 didn't assert that investing is superior under all circumstances.

there are extremely rare circumstances where the math makes sense to pay off a mortgage.
I've also never said it's good for everyone all the time I've frequently said if it doesn't make math sense then someone shouldn't do it.

Boarder had over 7,000 posts. I did not read every one. And I've stated he had some valuable insights and contributions. But he was generally dogmatic, and it was precisely his comments that encouraged me to join. I assure you, I had nothing to do with his banning, and I genuinely miss him because I missed the opportunity to debate him (not that I could ever change his mind, but so that others wouldn't be overcome by the DPOYM bombardment in to believing it to be true), but fortunately his legion of followers are still around.

To prove my point, I disagree with the assertion that the circumstances are "extremely rare" when one should pay off the mortgage. I'll let you choose your probability for the "extremely rare" category, but if we did a poll I'm sure the geometric average would be far less than 1%. In reality, it depends on quite a few factors, and a significant number of Mustachians would benefit with the reduction of risk that comes from paying off the mortgage. (And by benefit, I mean in the sense of future probabilities, not in the sense that thirty years from now they look back and realize the optimal solution in hindsight.)
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: Boofinator on November 06, 2018, 09:29:26 AM
Once someone enters FIRE, the calculus of the decision changes considerably, and sequence of returns risk pushes the optimal decision considerably toward preservation of capital (and hence paying off the mortgage). The link below is to three plots I made from cFIREsim historical data showing that a new retiree is almost guaranteed to have a higher chance of success by paying off the mortgage early.

I am preaching to people like OP, who are seeking advice for the best way to invest their surplus. And the answer isn't one-size-fits-all, as so many on here tend to suggest.

Boofinator, given your big investment in the boarder42 story, combined with the timelines RWD points out, there may be some backstory here that I am not grasping.

However, I did want to point out what I see as an inherent contradiction between these two posts of yours, particularly given your (retroactive?) reading of boarder42 as advocating that not paying down a mortgage under all circumstances, despite the level of nuance present in his posts, which is at least equivalent to the level of nuance in your own bolded statement above.

The key distinction being that your statement is based on an analysis of essentially 15 year or shorter mortgages where the potential FIREee didn't choose to get a new 30 year mortgage prior to FIRE* and boarder42's was based on 30 year mortgages.**  We can certainly argue back and forth about how common people with 25-30 years left on their mortgages vs people with < 15 years left on their mortgages are on this forum.

However, given that the median american household has lived in their home for only 10 years (source (https://www.statista.com/statistics/825416/median-home-tenure-of-sellers-usa/)), and people tend to move less as they get older, I am confident that your statement that "a new retiree is almost guaranteed [emphasis mine] to have a higher chance of success by paying off the mortgage early" does not apply to at least a significant fraction and likely a majority of posters on this forum.

Be careful that, in arguing against a poster you apparently don't like (despite barely overlapping with that poster at all on this forum), you don't become the mirror image of the characteristics you dislike about that poster.

*But you don't make any mention of this caveat in your posts, which will mislead people who don't follow your link and read your analysis.

**Which generally was stated explicitly, although I will certainly grant you people weren't thinking about the implications of people who bought a house early enough in the accumulation phase and stayed in the same house long enough to get through half the term of their mortgage before they started FIRE.

I admit, to some small extant I have exaggerated my position, but only to counteract the exaggerated positions of others. Any slight exaggeration on my part is dwarfed by B42. Let me quote some of what I was reading when I decided I had enough and couldn't sit back any more. (I hope when he rejoins he considers King Ad Hominem for his username.)

For everyone including me trying to talk numbers to one he doesn't understand doesn't care to understand and just trolls this shit he's done it a few times. As Ron white would say you can't fix stupid.
Sounds good but have you paid off your mortgage yet?

No because I'm not an idiot.
To put it another way. When is the most optimal time to buy a new truck. Well that's at the end of the season when they are trying to get rid of...... No fuck no there is never an optimal time to buy a new truck. Same shit applies to trying to be optimal about your mortgage paydown window. Could you get lucky and hit a Ford truck plant fire in a bottle and sell your raptor for more than you paid yes. But is it likely. Hell no. Then why bet on it.
There is inflation. I could have applied 1% to the 4% mortgage bc it doesn't index to inflation and used 7% if you don't expect those returns you're going to need a really low withdrawal rate. And if you're betting to win on sorr with paying down a mortgage first you're trying to find a needle in a haystack.

Using 10% with no consideration of SORR over 30 years is not realistic IMO.  As for long-term market returns, your guess is as good as mine, and both are worthless.

The snark about "math is hard" is unnecessary.  I think we all understand compounding.  I'm also well aware of historical stock market performance over longer timelines.  It's one of the reasons why we chose our payoff over a relatively short timeline (10 years).

The time frame you pay it off is irrelevant. And to be clear I give two fucks what you do it's the other people's lives your negativity effecting promoting this bull shit. Bc clearly you don't know the math.
just like you can build wealth and eat out our buying monster trucks you can build wealth while doing anything as long as youre saving something it doesnt mean that should be promoted.

Sorry, but the false equivalence between eating out/buying trucks (subtracting from your net wealth) and paying down mortgage (adding to your net wealth -- but likely more slowly than index investing) is just ridiculous.

It's not ridiculous when you look at the math both would be better habits for you than paying down your mortgage.

I could go on for what feels like forever....

By the way, even if it is optimal at the beginning of FIRE to hold your mortgage because it still has thirty years, after some period of time there will be a crossover for pretty much everyone. I'm not saying its the only solution (one might wish to maximize returns, risk be damned), but it is optimal to maximizing success.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: maizefolk on November 06, 2018, 09:45:44 AM
I admit, to some small extant I have exaggerated my position, but only to counteract the exaggerated positions of others. Any slight exaggeration on my part is dwarfed by B42. Let me quote some of what I was reading when I decided I had enough and couldn't sit back any more. (I hope when he rejoins he considers King Ad Hominem for his username.)

Well that's disappointing. So it appears you adhere to the moral code that as long as there is at least one person you disagree with who is doing a bad thing (or at least a thing you think is bad), you believe you are justified in doing the same bad thing? Personally, I do try to hold myself to a higher standard of honesty than the people I disagree with. YMMV.

Quote
By the way, even if it is optimal at the beginning of FIRE to hold your mortgage because it still has thirty years, after some period of time there will be a crossover for pretty much everyone. I'm not saying its the only solution (one might wish to maximize returns, risk be damned), but it is optimal to maximizing success.

I'm not convinced this is the case, but it's certainly a valid hypothesis. Will try to run the simulations tomorrow as tonight I'll be watching the elections. Just to clarify your statement (so we don't get in a debate over whether or not it has been tested or not later), would you agree that a comparison of success rates looking at a potential FIREee who starts with a 30 year mortgage (which your work shows increasing overall success rates) and then pays off the remaining principle after 1, 2, 3, ... 29, or 30 years would be a fair test?
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: RWD on November 06, 2018, 10:10:26 AM
[...] but fortunately his legion of followers are still around.
Who is still here that argues inflexibly for not paying down mortgages?

Any slight exaggeration on my part is dwarfed by B42.
It's been over a month since boarder42 was banned. It's only you now arguing against no one.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: PizzaSteve on November 06, 2018, 01:14:24 PM
@maizeman Please post a quote where I said not paying off a mortgage was unethical.  You are confusing me with someone else and that odd spoiler thing is just, well odd.  Please edit your comment or prove it.  Your other comments are thoughtful, so I wonder why you feel I am arguing for paying down a mortage (as opposed to clearly defining the risks, if one chooses to do it for leveraged stock investing, without much of a safety net).

Unfortunately, you had the odd habit of deleting many of your comments retroactively, so no I cannot link to your specific statement. It occurred in this thread:
https://forum.mrmoneymustache.com/welcome-to-the-forum/mr-math-and-paying-off-your-mortgage/50/ in which quotations of portions of many your posts from other users will demonstrate that you were posting frequently and actively, however almost none of your original posts remain.
It is not odd to delete back and forth posts that add no value to the forum, or which contain too much personal information.  That poster seemed crazy enough to track down someone and act in their beliefs in a physical way.  I took stuff off out of a bit of fear I was dealing with an unstable person, who might take action in real life.  The volume of posts alone smacked of a FIRE obsession that was boardering on unhealthy.

Also, I never once said, nor do I think not paying a mortgage is unethical.  I am certain you are confusing me with someone elso who may have been more strongly in favor or eliminating debt.  A lot of people objected to that guys over the top rhetoric, and I have loads of PMs from others I advised to not respond to him when he was being dogmatic and rude.

In every thread I have been active on this topic I have been consistent.

1) I always say levergage is fine, as long as one understands and accepts the risks.  Those who accuse me of arguing in favor of paying off debt during early accumulation are not carefully reading what I post and likely just want to argue. 

2) I always oppose over the top rhetoric about how stocks are certain to increase in value over a certain rate, if enough time passes.  I believe this is what people object to, because there are models that show stock produce reliable earnings over time.  This data is good data, largely because it is very likely well managed economies will grow.  I assume this will continue, but it is not CERTAIN.

Thats it.

These are the two topics I have been consistent about, other than responding to personal attacks, which certain people do seem to do `in defense' of other posters they seem to like, or are so frequently responding in the same way that I suspect they are actually puppet accounts of the same person.

Anyway, you seem to ignore positive comments and focus on something like accusing me of a random view I actually dont hold.  It is perfectly fine to stiff a bank.  Ive had family members do it.

PS.  Regarding trolls with multiple accounts, many set up false identities, some reasonable, some crazy.  Perhaps someone read the Ender's Game series of books and fancies themselves the character who debates himself on the web to influence policy.  That character had a right wing and left wing persona that debated, with the goal of setting up one to look good by skewering the other.  Anyway, a lot of posturing with limited value I agree.  That is why I delete the posts.  No one benefits from 10 posts explaining to B42 why it might be resonable to not want debt.

@maizeman you raise a good point, in that if you, a seemingly reasonable person, are accusing me of posting something I didnt say so passionately then the value of participating in this forum is not exceeding the cost of time spent.  My goal was to help other FIRE with good information and I do not enjoy arguing.  My FIRE is done, so I understand if I change my email to a nonesense email my account is effectively deleted.  Off I go to do that.

Cheers and good like everyone.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: maizefolk on November 06, 2018, 02:05:04 PM
To be clear, my specific position is that PizzaSteve stated it would be unethical for me to fail to pay off my mortgage, even in a non-recourse state, even if the house was first destroyed in a nuclear attack.

Given PizzaSteve's propensity to delete their prior posts -- which I have provided direct evidence of, and which the poster admits to in the post above, for as long as that post remains -- we're unfortunately left in the position where absence of evidence is not evidence of absence and it boils down to two people's word against the the denial of one other (like any spoken conversation for the past hundreds if not thousands of years). In the end, it doesn't really matter one way or the other, and I'm somewhat sorry I made the mistake of reengaging with this poster, however obliquely.

Quoting the above post in its entirely below, because PizzaSteve has said they were going to delete they account for one reason or another, and yet eventually the posts claiming the account was to be deleted disappear and the account remains active. I'm not sure if the reference to Peter and Valentine playing Locke and Demosthenes in Ender's Game is an accusation that I'm actually the same person as boarder42? Can anyone else make sense of that part?

LlamaPineappleBatteryStaple <-- unique phrase in case I ever need to use google find this post again in the future.

@maizeman Please post a quote where I said not paying off a mortgage was unethical.  You are confusing me with someone else and that odd spoiler thing is just, well odd.  Please edit your comment or prove it.  Your other comments are thoughtful, so I wonder why you feel I am arguing for paying down a mortage (as opposed to clearly defining the risks, if one chooses to do it for leveraged stock investing, without much of a safety net).

Unfortunately, you had the odd habit of deleting many of your comments retroactively, so no I cannot link to your specific statement. It occurred in this thread:
https://forum.mrmoneymustache.com/welcome-to-the-forum/mr-math-and-paying-off-your-mortgage/50/ in which quotations of portions of many your posts from other users will demonstrate that you were posting frequently and actively, however almost none of your original posts remain.
It is not odd to delete back and forth posts that add no value to the forum, or which contain too much personal information.  That poster seemed crazy enough to track down someone and act in their beliefs in a physical way.  I took stuff off out of a bit of fear I was dealing with an unstable person, who might take action in real life.  The volume of posts alone smacked of a FIRE obsession that was boardering on unhealthy.

Also, I never once said, nor do I think not paying a mortgage is unethical.  I am certain you are confusing me with someone elso who may have been more strongly in favor or eliminating debt.  A lot of people objected to that guys over the top rhetoric, and I have loads of PMs from others I advised to not respond to him when he was being dogmatic and rude.

In every thread I have been active on this topic I have been consistent.

1) I always say levergage is fine, as long as one understands and accepts the risks.  Those who accuse me of arguing in favor of paying off debt during early accumulation are not carefully reading what I post and likely just want to argue. 

2) I always oppose over the top rhetoric about how stocks are certain to increase in value over a certain rate, if enough time passes.  I believe this is what people object to, because there are models that show stock produce reliable earnings over time.  This data is good data, largely because it is very likely well managed economies will grow.  I assume this will continue, but it is not CERTAIN.

Thats it.

These are the two topics I have been consistent about, other than responding to personal attacks, which certain people do seem to do `in defense' of other posters they seem to like, or are so frequently responding in the same way that I suspect they are actually puppet accounts of the same person.

Anyway, you seem to ignore positive comments and focus on something like accusing me of a random view I actually dont hold.  It is perfectly fine to stiff a bank.  Ive had family members do it.

PS.  Regarding trolls with multiple accounts, many set up false identities, some reasonable, some crazy.  Perhaps someone read the Ender's Game series of books and fancies themselves the character who debates himself on the web to influence policy.  That character had a right wing and left wing persona that debated, with the goal of setting up one to look good by skewering the other.  Anyway, a lot of posturing with limited value I agree.  That is why I delete the posts.  No one benefits from 10 posts explaining to B42 why it might be resonable to not want debt.

@maizeman you raise a good point, in that if you, a seemingly reasonable person, are accusing me of posting something I didnt say so passionately then the value of participating in this forum is not exceeding the cost of time spent.  My goal was to help other FIRE with good information and I do not enjoy arguing.  My FIRE is done, so I understand if I change my email to a nonesense email my account is effectively deleted.  Off I go to do that.

Cheers and good like everyone.

Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: RWD on November 06, 2018, 02:23:56 PM
I'm not sure if the reference to Peter and Valentine playing Locke and Demosthenes in Ender's Game is an accusation that I'm actually the same person as boarder42? Can anyone else make sense of that part?
I am confused too. I was wondering if it might be directed at me too. But who knows?

LlamaPineappleBatteryStaple <-- unique phrase in case I ever need to use google find this post again in the future.
xkcd inspired?
https://xkcd.com/936/
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: Boofinator on November 06, 2018, 02:45:51 PM
I admit, to some small extant I have exaggerated my position, but only to counteract the exaggerated positions of others. Any slight exaggeration on my part is dwarfed by B42. Let me quote some of what I was reading when I decided I had enough and couldn't sit back any more. (I hope when he rejoins he considers King Ad Hominem for his username.)

Well that's disappointing. So it appears you adhere to the moral code that as long as there is at least one person you disagree with who is doing a bad thing (or at least a thing you think is bad), you believe you are justified in doing the same bad thing? Personally, I do try to hold myself to a higher standard of honesty than the people I disagree with. YMMV.

Quote
By the way, even if it is optimal at the beginning of FIRE to hold your mortgage because it still has thirty years, after some period of time there will be a crossover for pretty much everyone. I'm not saying its the only solution (one might wish to maximize returns, risk be damned), but it is optimal to maximizing success.

I'm not convinced this is the case, but it's certainly a valid hypothesis. Will try to run the simulations tomorrow as tonight I'll be watching the elections. Just to clarify your statement (so we don't get in a debate over whether or not it has been tested or not later), would you agree that a comparison of success rates looking at a potential FIREee who starts with a 30 year mortgage (which your work shows increasing overall success rates) and then pays off the remaining principle after 1, 2, 3, ... 29, or 30 years would be a fair test?

Exaggeration ≠ Moral Shortcomings. If that is the case, you should have been all over B42 (or MMM for that matter). It does become an issue of morals if it strays to the area of purposeful misleading. I'll let you be the judge of me on that (for the record, I don't believe either B42 or MMM have been purposely misleading).

As to the situation you mention: as I've tried to stress, it depends on a number of factors and your definition of success. But to use one example: On the plots I posted, take the situation that most favors investing over paying the mortgage (4.6% increase in SWR): 30 years remaining on the mortgage, a 15% Mortgage-to-Portfolio ratio at the start, a 3% mortgage interest rate, 100% stocks, and success defined as maximum inflation-adjusted withdrawals that show a 95% success rate over thirty years in cFIREsim.

The result was a general utter failure for paying off the mortgage. If you started paying off the mortgage, you're better keeping the mortgage for the duration, if you ignore the changes in the loan-to-portfolio value. This is the first plot.

Note the qualifier at the end, because it makes a huge difference. If the market drops at the beginning of FIRE, your loan-to-portfolio value will skyrocket, and you would be committing FIRE suicide by pulling money out of the market at that time to pay down the mortgage. If instead you run the numbers and evaluate the scenario based on the loan-to-value at the decision point, POTM wins hugely. The second plot is essentially the same problem, but with a 15% loan-to-mortgage value at the actual decision point.

I feel the second case more accurately depicts the question, as someone shouldn't be making huge decisions for some point in the future based solely on data from today.

EDIT: Realized I had a typo in the first plot; reposted the plot.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: maizefolk on November 06, 2018, 02:51:49 PM
I'm not sure if the reference to Peter and Valentine playing Locke and Demosthenes in Ender's Game is an accusation that I'm actually the same person as boarder42? Can anyone else make sense of that part?
I am confused too. I was wondering if it might be directed at me too. But who knows?

LlamaPineappleBatteryStaple <-- unique phrase in case I ever need to use google find this post again in the future.
xkcd inspired?
https://xkcd.com/936/

Hahaha, yes I am something of an XKCD addict. Also the human brain is remarkably bad at actually coming up with a random series of words (or numbers). Hopefully the first two are enough to retain google-uniqueness.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: Boofinator on November 06, 2018, 03:10:21 PM
[...] but fortunately his legion of followers are still around.
Who is still here that argues inflexibly for not paying down mortgages?

Any slight exaggeration on my part is dwarfed by B42.
It's been over a month since boarder42 was banned. It's only you now arguing against no one.

Wrong, because you are still arguing with me about B42. If you have no dog in the fight please just let it die. Nobody else is as big a dick as B42 about it, but if you go through the POTM and DPOYM threads you will find plenty of posters repeating his 'wisdom'.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: maizefolk on November 06, 2018, 03:23:16 PM
Exaggeration ≠ Moral Shortcomings. If that is the case, you should have been all over B42 (or MMM for that matter). It does become an issue of morals if it strays to the area of purposeful misleading. I'll let you be the judge of me on that (for the record, I don't believe either B42 or MMM have been purposely misleading).

Sadly, I think summarizing your finding that, if your mortgage has less than 15 years to run on the clock makes more sense to refinance to 30 years or pay off than to carry into FIRE, while keeping a mortgage with 30 years to run almost always increases success given current interest rates as: "a new retiree is almost guaranteed to have a higher chance of success by paying off the mortgage early" is either willfully misleading the people reading your posts, or results from a fundamental misunderstanding of your own result.

It's really too bad, because the truth was (and is) a cool concept and an important point for people planning to FIRE to be aware of, and it isn't one I've seen anyone else talk about before. I don't know what it is about the topic of mortgages that brings out the worst in people.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: EnjoyIt on November 06, 2018, 03:43:19 PM
BTW, interest rates have been on the rise and it is not too uncommon to find a mortgage rate of 5% for a 30 year loan.
In my personal opinion 5% is starting to be in the realm of pay off mortgage early camp. 

If someone today gave me an option to purchase an investment with 5% guaranteed return I would jump all over it.

My mortgage is 2.75% and I am ridding it out right to the end.  Maybe when I'm down to just a couple of payments I might put it out of its misery a little early.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: Boofinator on November 06, 2018, 03:50:03 PM
Exaggeration ≠ Moral Shortcomings. If that is the case, you should have been all over B42 (or MMM for that matter). It does become an issue of morals if it strays to the area of purposeful misleading. I'll let you be the judge of me on that (for the record, I don't believe either B42 or MMM have been purposely misleading).

Sadly, I think summarizing your finding that, if your mortgage has less than 15 years to run on the clock makes more sense to refinance to 30 years or pay off than to carry into FIRE, while keeping a mortgage with 30 years to run almost always increases success given current interest rates as: "a new retiree is almost guaranteed to have a higher chance of success by paying off the mortgage early" is either willfully misleading the people reading your posts, or results from a fundamental misunderstanding of your own result.

It's really too bad, because the truth was (and is) a cool concept and an important point for people planning to FIRE to be aware of, and it isn't one I've seen anyone else talk about before. I don't know what it is about the topic of mortgages that brings out the worst in people.

This is an internet forum, right? Because I didn't realize that a small exaggeration, coupled with not bringing up an option that nobody else was bringing up at the time, would signal (1) liar or (2) incompetent. I am not sending these posts to a panel for review, or saving them and thinking about them for a day before posting. And I stand by my original statement, even though in retrospect the words could have been chosen more wisely. Maybe you could have added to the discussion at the time by recommending refinancing the mortgage right before FIRE rather than assume I was willfully misleading.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: RWD on November 06, 2018, 04:10:12 PM
[...] but fortunately his legion of followers are still around.
Who is still here that argues inflexibly for not paying down mortgages?

Nobody else is as big a dick as B42 about it, but if you go through the POTM and DPOYM threads you will find plenty of posters repeating his 'wisdom'.

I've read the entire DPOYM thread and don't recall anyone asserting that not paying off your mortgage is always the better choice. I've tried reading the POTM thread but it's nauseating. If you have some specific posts you can link me to I would appreciate it. Otherwise I'm sticking with my position that there isn't anyone here with the opinion you are railing against.


Wrong, because you are still arguing with me about B42. If you have no dog in the fight please just let it die.
こっちの台詞だ
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: maizefolk on November 06, 2018, 04:29:33 PM
This is an internet forum, right? Because I didn't realize that a small exaggeration, coupled with not bringing up an option that nobody else was bringing up at the time, would signal (1) liar or (2) incompetent. I am not sending these posts to a panel for review, or saving them and thinking about them for a day before posting. And I stand by my original statement, even though in retrospect the words could have been chosen more wisely.

In order for the statement "a new retiree is almost guaranteed to have a higher chance of success by paying off the mortgage early" to be only a small exaggeration, I'd still expect the to apply in a significant majority of cases. Given current interest rates, that would mean the median time remaining on a mortgage at FIRE would need to be greater than 15 years, rather than only 10 years reported for the overall population (as cited above).

And FWIW, I certainly make plenty of mistakes in assumptions or logic or even facts when I'm posting to this forum. The difference is that, when someone points them out to me and explains why I'm wrong or points me to sources that show I misunderstood or misremembered a key fact, I don't say "I am not sending these posts to a panel for review, or saving them and thinking about them for a day before posting" I instead say "oh you're right, sorry about that" and I don't continue to repeat and defend the same false statement.

Quote
Maybe you could have added to the discussion at the time by recommending refinancing the mortgage right before FIRE rather than assume I was willfully misleading.

Yes, you're right, suggesting that would have been adding to the discussion. And that's exactly what I did when you started talking about your new idea on Nov 3rd (https://forum.mrmoneymustache.com/welcome-to-the-forum/pay-off-mortgage-early/msg2190603/#msg2190603) in what I thought was an extremely positive post on the first thread where you brought up the point about mortgages that were more than halfway done when a person hit FIRE.

Then, when two days later on Nov 5th, when you brought up the same idea without any modification after the first time we talked about refinancing to a 30 year fixed rate mortgage right before FIRE and this time with the extremely misleading statement that "a new retiree is almost guaranteed to have a higher chance of success by paying off the mortgage early" I again brought up the point about the potential the refinance into a new 30 year mortgage right before FIRE (https://forum.mrmoneymustache.com/welcome-to-the-forum/trying-to-calculate-early-mortgage-payoff-vs-investing-extra/msg2191836/#msg2191836) in a post that, I will be the first to admit, was somewhat more frustrated than the first.

So yes, it's a shame I didn't contribute to the discussion by bringing up this issue with your reasoning for the 3rd time on Nov 6th.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: TomTX on November 06, 2018, 05:38:49 PM

I also resent being put on a 'side.'  I have never once said keeping a mortgage is wrong or bad, just not ALWAYS BETTER, regardless of the future.

And you set up a strawman to argue against.

Who exactly is saying a mortgage is "ALWAYS BETTER, regardless of the future. "?

Nobody.

I'll disagree with you here. Several posters, most notably the dearly departed B42, have argued vehemently that investing is superior to paying the mortgage under all circumstances (given today's rates). They even encouraged PMI, for Christ's sake. Perhaps PizzaSteve didn't choose the best wording, but I understand what he is trying to say.

Again, the anti-mortgage side is arguing against posters who aren't in the thread or even on the site anymore.

Kudos on the strawman.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: Boofinator on November 07, 2018, 06:47:36 AM

I also resent being put on a 'side.'  I have never once said keeping a mortgage is wrong or bad, just not ALWAYS BETTER, regardless of the future.

And you set up a strawman to argue against.

Who exactly is saying a mortgage is "ALWAYS BETTER, regardless of the future. "?

Nobody.

I'll disagree with you here. Several posters, most notably the dearly departed B42, have argued vehemently that investing is superior to paying the mortgage under all circumstances (given today's rates). They even encouraged PMI, for Christ's sake. Perhaps PizzaSteve didn't choose the best wording, but I understand what he is trying to say.

Again, the anti-mortgage side is arguing against posters who aren't in the thread or even on the site anymore.

Kudos on the strawman.

Kudos on misunderstanding logic.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: Boofinator on November 07, 2018, 11:15:28 AM
[...] but fortunately his legion of followers are still around.
Who is still here that argues inflexibly for not paying down mortgages?

Nobody else is as big a dick as B42 about it, but if you go through the POTM and DPOYM threads you will find plenty of posters repeating his 'wisdom'.

I've read the entire DPOYM thread and don't recall anyone asserting that not paying off your mortgage is always the better choice. I've tried reading the POTM thread but it's nauseating. If you have some specific posts you can link me to I would appreciate it. Otherwise I'm sticking with my position that there isn't anyone here with the opinion you are railing against.


Wrong, because you are still arguing with me about B42. If you have no dog in the fight please just let it die.
こっちの台詞だ

Did I log into the Japanese MMM site? J/k

Here's a few quotes. Note that, as I have said, B42 was the most vociferous, but he attracted many followers. I'm not attacking B42, I'm attacking his ideas, which still persist to a large extent on this forum (given today's interest rates, do not pay down the mortgage (some even recommend PMI!!)).  And as to why I bring up B42 so much: if it weren't for him I would have never joined the forum. I would have been content to chuckle and shake my head occasionally, and move on to the next topic. But B42 was a condescending prick to anyone suggesting paying off the mortgage was a wise thing to do, and rather than be ostracized for it, other posters (not all) praised his wisdom.

Note: As I have mentioned, none of these quotes have the same level of condescension as B42, but they are suggesting the same idea in a near-universal fashion.

I object to calling paying off ones mortgage 'conservative'.  A conservative approach is one that takes the least amount of perceived or anticipated risk.  If there's a common thread between points made by B42, myself and many others its that paying down a fixed low rate mortgage aggressively is more risky than putting that money into investments, preferably those of the tax-advantaged variety.

For all the scare-stories of recessions and investors losing money in the market, there are even more instances of homes decreasing in value, or being damaged and underinsured, or tying their owners to that spot because it was a soft market and they couldn't sell.

One can certainly pay off their mortgage aggressively and certainly there are situations where that is not a bad financial decision to make, but it isn't the 'conservative' play, despite the drum-beat from everyone from the RE insdustry (it's the best investment you'll ever make!) to Steve Ramsey (no one will ever be able to kick you out of a home you've paid cash for, and that's security!)
(I agree here with the sentiment about the RE industry.)
Also, people with 2 to 3 year EM Funds need facepunching too, unless they are already FIRE and do not include the cash in there 4% rule calcs.  But even still, early paydown on a low fixed-rate mortgage is worse...  thats how bad it is.
(TexasRunner has a load of quotes, was hard to pick one. Several advocate for keeping PMI(!!), indicating it adds about 0.5% to the loan, which is a huge underestimation.)
IT's NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
It is not mathematically correct to pay off your mortgage early.* ** *** **** *****

*In today's interest rate environment.
**Assuming it's a fixed, low interest rate mortgage.
***Assuming you will invest the money you would use to pay it down early into something that returns more than the mortgage rate.
****Assuming you won't sell said investment low, or anything like that
*****etc. etc. etc.

If the title of the thread was "Stop saying 'It is not correct to pay off your mortgage early.' " I'd agree.  Sometimes it IS correct to pay off the mortgage early.

But it's very, very rarely mathematically correct to do so, in the current environment.
(It's not as very, very rare as so many believe it to be.)

I'd like to thank b42 (and others)....

I just bought my first house 4 months ago, and unfortunately I discovered the world of FIRE after I had already put down enough to avoid PMI (face punch!), but fortunately, since then I've learned enough on this forum to scrap my plan of paying down my mortgage at lightning speed.
....
(Another civilized comment, but the comment about facepunching for not paying PMI is absurd.)
I could waste more time, needless to say, trying to convince you and others that there is a huge contingent at MMM who have swung way too far toward investing in equities over paying off debt (especially high debt like PMI). And in many cases, I have agreed, and want to continue encouraging those who are earlier in the accumulation phase to use this strategy. But there are a large number of scenarios where reducing debt improves FIRE success over investing that money in equities, and the general chatter is either (1) paying the mortgage is mathematically incorrect (except with high interest rates) or (2) I paid off the mortgage for the happy feeling.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: nereo on November 07, 2018, 11:24:22 AM
@Boofinator - you cannot truthfully say you are not attacking B42 and then call him "a condescending prick" in the same paragraph.

I value your opinion here, but please stop with the personal attacks, particularly against individuals who are incapable of responding.

Stick to debating the issue and avoid name-calling, please.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: RWD on November 07, 2018, 11:37:42 AM
[...] but fortunately his legion of followers are still around.
Who is still here that argues inflexibly for not paying down mortgages?

Nobody else is as big a dick as B42 about it, but if you go through the POTM and DPOYM threads you will find plenty of posters repeating his 'wisdom'.

I've read the entire DPOYM thread and don't recall anyone asserting that not paying off your mortgage is always the better choice. I've tried reading the POTM thread but it's nauseating. If you have some specific posts you can link me to I would appreciate it. Otherwise I'm sticking with my position that there isn't anyone here with the opinion you are railing against.


Wrong, because you are still arguing with me about B42. If you have no dog in the fight please just let it die.
こっちの台詞だ

Did I log into the Japanese MMM site? J/k

Here's a few quotes. Note that, as I have said, B42 was the most vociferous, but he attracted many followers. I'm not attacking B42, I'm attacking his ideas, which still persist to a large extent on this forum (given today's interest rates, do not pay down the mortgage (some even recommend PMI!!)).  And as to why I bring up B42 so much: if it weren't for him I would have never joined the forum. I would have been content to chuckle and shake my head occasionally, and move on to the next topic. But B42 was a condescending prick to anyone suggesting paying off the mortgage was a wise thing to do, and rather than be ostracized for it, other posters (not all) praised his wisdom.

Note: As I have mentioned, none of these quotes have the same level of condescension as B42, but they are suggesting the same idea in a near-universal fashion.

I object to calling paying off ones mortgage 'conservative'.  A conservative approach is one that takes the least amount of perceived or anticipated risk.  If there's a common thread between points made by B42, myself and many others its that paying down a fixed low rate mortgage aggressively is more risky than putting that money into investments, preferably those of the tax-advantaged variety.

For all the scare-stories of recessions and investors losing money in the market, there are even more instances of homes decreasing in value, or being damaged and underinsured, or tying their owners to that spot because it was a soft market and they couldn't sell.

One can certainly pay off their mortgage aggressively and certainly there are situations where that is not a bad financial decision to make, but it isn't the 'conservative' play, despite the drum-beat from everyone from the RE insdustry (it's the best investment you'll ever make!) to Steve Ramsey (no one will ever be able to kick you out of a home you've paid cash for, and that's security!)
(I agree here with the sentiment about the RE industry.)
Also, people with 2 to 3 year EM Funds need facepunching too, unless they are already FIRE and do not include the cash in there 4% rule calcs.  But even still, early paydown on a low fixed-rate mortgage is worse...  thats how bad it is.
(TexasRunner has a load of quotes, was hard to pick one. Several advocate for keeping PMI(!!), indicating it adds about 0.5% to the loan, which is a huge underestimation.)
IT's NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
It is not mathematically correct to pay off your mortgage early.* ** *** **** *****

*In today's interest rate environment.
**Assuming it's a fixed, low interest rate mortgage.
***Assuming you will invest the money you would use to pay it down early into something that returns more than the mortgage rate.
****Assuming you won't sell said investment low, or anything like that
*****etc. etc. etc.

If the title of the thread was "Stop saying 'It is not correct to pay off your mortgage early.' " I'd agree.  Sometimes it IS correct to pay off the mortgage early.

But it's very, very rarely mathematically correct to do so, in the current environment.
(It's not as very, very rare as so many believe it to be.)

I'd like to thank b42 (and others)....

I just bought my first house 4 months ago, and unfortunately I discovered the world of FIRE after I had already put down enough to avoid PMI (face punch!), but fortunately, since then I've learned enough on this forum to scrap my plan of paying down my mortgage at lightning speed.
....
(Another civilized comment, but the comment about facepunching for not paying PMI is absurd.)
I could waste more time, needless to say, trying to convince you and others that there is a huge contingent at MMM who have swung way too far toward investing in equities over paying off debt (especially high debt like PMI). And in many cases, I have agreed, and want to continue encouraging those who are earlier in the accumulation phase to use this strategy. But there are a large number of scenarios where reducing debt improves FIRE success over investing that money in equities, and the general chatter is either (1) paying the mortgage is mathematically incorrect (except with high interest rates) or (2) I paid off the mortgage for the happy feeling.

I appreciate you finding some actual quotes. Let's take a look at them one at a time:

Yes, there are a lot of people on this forum that believe paying down fixed low rate mortgages is suboptimal. But I still don't see the ones that blindly insist that it is always the inferior decision. If you are instead shifting your position to say that these posters are just taking it too far anyway then that is a matter of opinion on degree and I don't completely disagree. I would like to see more neutral discussion on a case by case basis. Every person's financial situation is unique and we can't prescribe an absolute solution (even though most of the time the answer is the same, invest more).

We have a great post on investment order (https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153) which includes guidelines for when to make extra payments on debt. This is generally what I follow but there can always be exceptions for special circumstances.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: Boofinator on November 07, 2018, 11:41:09 AM
@Boofinator - you cannot truthfully say you are not attacking B42 and then call him "a condescending prick" in the same paragraph.

I value your opinion here, but please stop with the personal attacks, particularly against individuals who are incapable of responding.

Stick to debating the issue and avoid name-calling, please.

True. Apologies for being a hypocrite there.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: Boofinator on November 07, 2018, 11:52:35 AM
[...] but fortunately his legion of followers are still around.
Who is still here that argues inflexibly for not paying down mortgages?

Nobody else is as big a dick as B42 about it, but if you go through the POTM and DPOYM threads you will find plenty of posters repeating his 'wisdom'.

I've read the entire DPOYM thread and don't recall anyone asserting that not paying off your mortgage is always the better choice. I've tried reading the POTM thread but it's nauseating. If you have some specific posts you can link me to I would appreciate it. Otherwise I'm sticking with my position that there isn't anyone here with the opinion you are railing against.


Wrong, because you are still arguing with me about B42. If you have no dog in the fight please just let it die.
こっちの台詞だ

Did I log into the Japanese MMM site? J/k

Here's a few quotes. Note that, as I have said, B42 was the most vociferous, but he attracted many followers. I'm not attacking B42, I'm attacking his ideas, which still persist to a large extent on this forum (given today's interest rates, do not pay down the mortgage (some even recommend PMI!!)).  And as to why I bring up B42 so much: if it weren't for him I would have never joined the forum. I would have been content to chuckle and shake my head occasionally, and move on to the next topic. But B42 was a condescending prick to anyone suggesting paying off the mortgage was a wise thing to do, and rather than be ostracized for it, other posters (not all) praised his wisdom.

Note: As I have mentioned, none of these quotes have the same level of condescension as B42, but they are suggesting the same idea in a near-universal fashion.

I object to calling paying off ones mortgage 'conservative'.  A conservative approach is one that takes the least amount of perceived or anticipated risk.  If there's a common thread between points made by B42, myself and many others its that paying down a fixed low rate mortgage aggressively is more risky than putting that money into investments, preferably those of the tax-advantaged variety.

For all the scare-stories of recessions and investors losing money in the market, there are even more instances of homes decreasing in value, or being damaged and underinsured, or tying their owners to that spot because it was a soft market and they couldn't sell.

One can certainly pay off their mortgage aggressively and certainly there are situations where that is not a bad financial decision to make, but it isn't the 'conservative' play, despite the drum-beat from everyone from the RE insdustry (it's the best investment you'll ever make!) to Steve Ramsey (no one will ever be able to kick you out of a home you've paid cash for, and that's security!)
(I agree here with the sentiment about the RE industry.)
Also, people with 2 to 3 year EM Funds need facepunching too, unless they are already FIRE and do not include the cash in there 4% rule calcs.  But even still, early paydown on a low fixed-rate mortgage is worse...  thats how bad it is.
(TexasRunner has a load of quotes, was hard to pick one. Several advocate for keeping PMI(!!), indicating it adds about 0.5% to the loan, which is a huge underestimation.)
IT's NOT MATHEMATICALLY CORRECT TO PAY OFF YOUR MORTGAGE EARLY!
It is not mathematically correct to pay off your mortgage early.* ** *** **** *****

*In today's interest rate environment.
**Assuming it's a fixed, low interest rate mortgage.
***Assuming you will invest the money you would use to pay it down early into something that returns more than the mortgage rate.
****Assuming you won't sell said investment low, or anything like that
*****etc. etc. etc.

If the title of the thread was "Stop saying 'It is not correct to pay off your mortgage early.' " I'd agree.  Sometimes it IS correct to pay off the mortgage early.

But it's very, very rarely mathematically correct to do so, in the current environment.
(It's not as very, very rare as so many believe it to be.)

I'd like to thank b42 (and others)....

I just bought my first house 4 months ago, and unfortunately I discovered the world of FIRE after I had already put down enough to avoid PMI (face punch!), but fortunately, since then I've learned enough on this forum to scrap my plan of paying down my mortgage at lightning speed.
....
(Another civilized comment, but the comment about facepunching for not paying PMI is absurd.)
I could waste more time, needless to say, trying to convince you and others that there is a huge contingent at MMM who have swung way too far toward investing in equities over paying off debt (especially high debt like PMI). And in many cases, I have agreed, and want to continue encouraging those who are earlier in the accumulation phase to use this strategy. But there are a large number of scenarios where reducing debt improves FIRE success over investing that money in equities, and the general chatter is either (1) paying the mortgage is mathematically incorrect (except with high interest rates) or (2) I paid off the mortgage for the happy feeling.

I appreciate you finding some actual quotes. Let's take a look at them one at a time:
  • nereo in that post acknowledges that there are situations where paying down the mortgage is the correct course of action.
  • TexasRunner is specifically referring to low fixed rate mortgages, so again not a blanket statement.
  • 2Birds1Stone's post was clearly a joke by being contrarian in response to the ALL CAPS thread title.
  • I assume you're not using arebelspy's post as an example? There are so many caveats in that post and he even says "Sometimes it IS correct to pay off the mortgage early."
  • I agree that I-Ranger's self face punch with regards to avoiding PMI is weird. But he's referring to his own personal case and again not generalizing to everyone with a mortgage.

Yes, there are a lot of people on this forum that believe paying down fixed low rate mortgages is suboptimal. But I still don't see the ones that blindly insist that it is always the inferior decision. If you are instead shifting your position to say that these posters are just taking it too far anyway then that is a matter of opinion on degree and I don't completely disagree. I would like to see more neutral discussion on a case by case basis. Every person's financial situation is unique and we can't prescribe an absolute solution (even though most of the time the answer is the same, invest more).

We have a great post on investment order (https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153) which includes guidelines for when to make extra payments on debt. This is generally what I follow but there can always be exceptions for special circumstances.

Please refer to the caveat at the beginning of my post (edited punctuation for clarity): "I'm not attacking B42, I'm attacking his ideas, which still persist to a large extent on this forum: given today's interest rates, do not pay down the mortgage." I think this idea was universal in all of the quotes provided. (Yes, I debated whether 2Birds1Stone was being facetious or not, could have probably found a better example.)
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: RWD on November 07, 2018, 12:03:19 PM
Several posters, most notably the dearly departed B42, have argued vehemently that investing is superior to paying the mortgage under all circumstances (given today's rates).
Please refer to the caveat at the beginning of my post (edited punctuation for clarity): "I'm not attacking B42, I'm attacking his ideas, which still persist to a large extent on this forum: given today's interest rates, do not pay down the mortgage." I think this idea was universal in all of the quotes provided. (Yes, I debated whether 2Birds1Stone was being facetious or not, could have probably found a better example.)

Included original quote, for posterity.

None of the quotes you included mentioned "today's rates" except for arebelspy's which is almost two years old (when rates were much better). For context, arebelspy retired at age 30 on a sub-$100k household income by focusing on real estate. There is no way he would have accomplished that by paying down his mortgages faster.

I-Ranger's post could be implied to be referring to today's rates, but again he is talking about his personal circumstances and not generalizing it for everyone. He's also a new member with only 13 posts so you can't really say he's contributed significantly to the anti-mortgage payoff voice.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: Boofinator on November 07, 2018, 12:12:57 PM
This is an internet forum, right? Because I didn't realize that a small exaggeration, coupled with not bringing up an option that nobody else was bringing up at the time, would signal (1) liar or (2) incompetent. I am not sending these posts to a panel for review, or saving them and thinking about them for a day before posting. And I stand by my original statement, even though in retrospect the words could have been chosen more wisely.

In order for the statement "a new retiree is almost guaranteed to have a higher chance of success by paying off the mortgage early" to be only a small exaggeration, I'd still expect the to apply in a significant majority of cases. Given current interest rates, that would mean the median time remaining on a mortgage at FIRE would need to be greater than 15 years, rather than only 10 years reported for the overall population (as cited above).

And FWIW, I certainly make plenty of mistakes in assumptions or logic or even facts when I'm posting to this forum. The difference is that, when someone points them out to me and explains why I'm wrong or points me to sources that show I misunderstood or misremembered a key fact, I don't say "I am not sending these posts to a panel for review, or saving them and thinking about them for a day before posting" I instead say "oh you're right, sorry about that" and I don't continue to repeat and defend the same false statement.

Quote
Maybe you could have added to the discussion at the time by recommending refinancing the mortgage right before FIRE rather than assume I was willfully misleading.

Yes, you're right, suggesting that would have been adding to the discussion. And that's exactly what I did when you started talking about your new idea on Nov 3rd (https://forum.mrmoneymustache.com/welcome-to-the-forum/pay-off-mortgage-early/msg2190603/#msg2190603) in what I thought was an extremely positive post on the first thread where you brought up the point about mortgages that were more than halfway done when a person hit FIRE.

Then, when two days later on Nov 5th, when you brought up the same idea without any modification after the first time we talked about refinancing to a 30 year fixed rate mortgage right before FIRE and this time with the extremely misleading statement that "a new retiree is almost guaranteed to have a higher chance of success by paying off the mortgage early" I again brought up the point about the potential the refinance into a new 30 year mortgage right before FIRE (https://forum.mrmoneymustache.com/welcome-to-the-forum/trying-to-calculate-early-mortgage-payoff-vs-investing-extra/msg2191836/#msg2191836) in a post that, I will be the first to admit, was somewhat more frustrated than the first.

So yes, it's a shame I didn't contribute to the discussion by bringing up this issue with your reasoning for the 3rd time on Nov 6th.

Apologies, I remember reading it somewhere by someone and didn't realize the timeline or poster, and to be honest didn't enter my mind my mind when I made the statement. Regardless, I agree with you, refinancing right before FIRE into a low-interest mortgage can often be an optimal decision.

Back to the statement. Since it was an exaggeration, I'll revise it: "A new retiree is likely to have a higher chance of success by paying off the mortgage early at interest rates of 3%+." Not necessarily at the beginning, but if they monitor the various parameters throughout retirement, it is likely (guesstimating 67-75%) that cFIREsim will show an improvement to SWR at some point by paying off the mortgage. The exception would be if the retiree had a major dip in stocks relatively early in retirement, which occurs less than half the time (historically). Needless to say, the exact timing depends on many factors, but if one goes based off the math and cFIREsim, it is the logical conclusion.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: Boofinator on November 07, 2018, 12:15:25 PM
Several posters, most notably the dearly departed B42, have argued vehemently that investing is superior to paying the mortgage under all circumstances (given today's rates).
Please refer to the caveat at the beginning of my post (edited punctuation for clarity): "I'm not attacking B42, I'm attacking his ideas, which still persist to a large extent on this forum: given today's interest rates, do not pay down the mortgage." I think this idea was universal in all of the quotes provided. (Yes, I debated whether 2Birds1Stone was being facetious or not, could have probably found a better example.)

Included original quote, for posterity.

None of the quotes you included mentioned "today's rates" except for arebelspy's which is almost two years old (when rates were much better). For context, arebelspy retired at age 30 on a sub-$100k household income by focusing on real estate. There is no way he would have accomplished that by paying down his mortgages faster.

I-Ranger's post could be implied to be referring to today's rates, but again he is talking about his personal circumstances and not generalizing it for everyone. He's also a new member with only 13 posts so you can't really say he's contributed significantly to the anti-mortgage payoff voice.

I 100% agree that investing while holding a relatively low interest rate mortgage is an optimal decision during accumulation (except perhaps toward the very end).
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: nereo on November 07, 2018, 12:17:42 PM
Since my name has been evoked here among others...

For the record I do not believe that it is universally better to invest rather than pay down one's mortgage.

I do believe that most people would be better served to prioritize filling their tax-advantaged accounts and ensuring they have substantial and easily assessable funds before aggressively paying down a low-rate fixed mortgage.

It's not universal (i.e. it is not the answer for everyone), but applicable for most.  There are certainly exceptions, and as we've discussed in other threads the less time it takes to pay down one's mortgage the less difference it makes in the long run. Mortgage rates, tax situations, sources of income, inflation, time horizons and even psychology play into the decision.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: Scortius on November 07, 2018, 12:48:54 PM
Also, FYI - there was some really good analysis earlier in a different thread regarding the effect PMI has on a true mortgage rate. It often works out to be surprisingly low.

In my case we ended up taking a 90/10 at 4.125% with PMI. We could have pretty easily gone to 85/15 and cut PMI by about 1/3. It would have been uncomfortable to go to 80/20, and I don't think in either of those cases we would have been able to get a lower rate.

It so happens that we had very good credit which resulted in pretty reasonable PMI penalties. When doing the math it adds about an effective 1/8 to 1/4% to our APR. Thus, we have no intention of paying it off early and instead have focused entirely on investments. It will go away automatically at 22% down. It also helps that I have access to a mega-backdoor so our tax-advantaged space is ginormous. But, even were it not available I would still rather put the money into an after-tax account than pay off the mortgage early. I especially like keeping it as an inflation hedge. Even better, if there ever is another recession and rates drop again, I can probably refinance to an even lower rate! Not to say you couldn't do that with a paid off home, which would also be a great financial move if we ever return to the mid- to low-3%s.

I don't see anyone, even Boarder advocating for keeping mortgages that are short term and/or above 5-6%. At that point you're definitely pushing it. Even Boarder has made it clear from time to time that he specifically means 30 year low-rate fixed mortgages. If he doesn't include that in every single post, that doesn't mean it's not implicit in his statements.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: Telecaster on November 07, 2018, 01:58:28 PM
I don't see anyone, even Boarder advocating for keeping mortgages that are short term and/or above 5-6%. At that point you're definitely pushing it. Even Boarder has made it clear from time to time that he specifically means 30 year low-rate fixed mortgages. If he doesn't include that in every single post, that doesn't mean it's not implicit in his statements.

It is fairly maddening that caveat has to be repeated so frequently. 
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: Boofinator on November 07, 2018, 02:16:16 PM
Also, FYI - there was some really good analysis earlier in a different thread regarding the effect PMI has on a true mortgage rate. It often works out to be surprisingly low.

In my case we ended up taking a 90/10 at 4.125% with PMI. We could have pretty easily gone to 85/15 and cut PMI by about 1/3. It would have been uncomfortable to go to 80/20, and I don't think in either of those cases we would have been able to get a lower rate.

It so happens that we had very good credit which resulted in pretty reasonable PMI penalties. When doing the math it adds about an effective 1/8 to 1/4% to our APR. Thus, we have no intention of paying it off early and instead have focused entirely on investments. It will go away automatically at 22% down. It also helps that I have access to a mega-backdoor so our tax-advantaged space is ginormous. But, even were it not available I would still rather put the money into an after-tax account than pay off the mortgage early. I especially like keeping it as an inflation hedge. Even better, if there ever is another recession and rates drop again, I can probably refinance to an even lower rate! Not to say you couldn't do that with a paid off home, which would also be a great financial move if we ever return to the mid- to low-3%s.

I don't see anyone, even Boarder advocating for keeping mortgages that are short term and/or above 5-6%. At that point you're definitely pushing it. Even Boarder has made it clear from time to time that he specifically means 30 year low-rate fixed mortgages. If he doesn't include that in every single post, that doesn't mean it's not implicit in his statements.

If I understand correctly, your mortgage rate is 4.125%; what's your PMI rate? I'll assume for the sake of math 0.5% PMI, but feel free to correct me. So for this exercise, until you get rid of PMI you're paying 4.625%.

Let's assume for the sake of easy numbers a $100k house purchase. To borrow that extra $10k, you need to pay both 4.125% on that $10k, but also 0.5% on the full $90k. This is an effective interest rate of 8.625% on the first dollar paid. And as the payments decrease, the effective interest rates continue to increase: at $80k remaining you will be paying an effective interest rate (since you say you need to get down to $78k for it to be canceled) of 26.625%. Only once you drop PMI does your effective rate fall again to 4.125%.

If you run the two scenarios through an amortization schedule over the life of the loan, in order to come out ahead, you would need a fixed return of about 6.7% annually for 30 years (so 0.5% PMI added an effective 2.575% to your interest rate). Of course stock returns aren't fixed but come with sequence of return risk, so if stocks do poorly at the beginning you would need a much bigger CAGR to break even (and vice versa if stocks do great at the beginning).

You may be ok with those odds. If you're not, you're kind of screwed unless you refinance: now that you're committed to the path, paying off PMI early only hurts you more (when you're in the accumulation stage).
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: Boofinator on November 07, 2018, 02:21:29 PM
I don't see anyone, even Boarder advocating for keeping mortgages that are short term and/or above 5-6%. At that point you're definitely pushing it. Even Boarder has made it clear from time to time that he specifically means 30 year low-rate fixed mortgages. If he doesn't include that in every single post, that doesn't mean it's not implicit in his statements.

It is fairly maddening that caveat has to be repeated so frequently.

I too have been talking about fixed-rate, low-interest, 30-year mortgages. We're on the same page here.
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: Scortius on November 07, 2018, 02:47:23 PM
Also, FYI - there was some really good analysis earlier in a different thread regarding the effect PMI has on a true mortgage rate. It often works out to be surprisingly low.

In my case we ended up taking a 90/10 at 4.125% with PMI. We could have pretty easily gone to 85/15 and cut PMI by about 1/3. It would have been uncomfortable to go to 80/20, and I don't think in either of those cases we would have been able to get a lower rate.

It so happens that we had very good credit which resulted in pretty reasonable PMI penalties. When doing the math it adds about an effective 1/8 to 1/4% to our APR. Thus, we have no intention of paying it off early and instead have focused entirely on investments. It will go away automatically at 22% down. It also helps that I have access to a mega-backdoor so our tax-advantaged space is ginormous. But, even were it not available I would still rather put the money into an after-tax account than pay off the mortgage early. I especially like keeping it as an inflation hedge. Even better, if there ever is another recession and rates drop again, I can probably refinance to an even lower rate! Not to say you couldn't do that with a paid off home, which would also be a great financial move if we ever return to the mid- to low-3%s.

I don't see anyone, even Boarder advocating for keeping mortgages that are short term and/or above 5-6%. At that point you're definitely pushing it. Even Boarder has made it clear from time to time that he specifically means 30 year low-rate fixed mortgages. If he doesn't include that in every single post, that doesn't mean it's not implicit in his statements.

If I understand correctly, your mortgage rate is 4.125%; what's your PMI rate? I'll assume for the sake of math 0.5% PMI, but feel free to correct me. So for this exercise, until you get rid of PMI you're paying 4.625%.

Let's assume for the sake of easy numbers a $100k house purchase. To borrow that extra $10k, you need to pay both 4.125% on that $10k, but also 0.5% on the full $90k. This is an effective interest rate of 8.625% on the first dollar paid. And as the payments decrease, the effective interest rates continue to increase: at $80k remaining you will be paying an effective interest rate (since you say you need to get down to $78k for it to be canceled) of 26.625%. Only once you drop PMI does your effective rate fall again to 4.125%.

If you run the two scenarios through an amortization schedule over the life of the loan, in order to come out ahead, you would need a fixed return of about 6.7% annually for 30 years (so 0.5% PMI added an effective 2.575% to your interest rate). Of course stock returns aren't fixed but come with sequence of return risk, so if stocks do poorly at the beginning you would need a much bigger CAGR to break even (and vice versa if stocks do great at the beginning).

You may be ok with those odds. If you're not, you're kind of screwed unless you refinance: now that you're committed to the path, paying off PMI early only hurts you more (when you're in the accumulation stage).

I encourage others to share links to the PMI discussions and calculations. I don't have them handy. My PMI is a bit lower, using your example of $10,000 remaining to get to 20%, my monthly PMI is approximately $22, or about $265 per year. That does translate to 2.65% of that 10k. And yes, it will effectively go up as we get closer so it may be worth paying off when we get closer to 17% principal or so. But, the trade-off of going to 20% was also potentially sacrificing tax-advantaged space for that year we built up our down-payment, so maybe my example isn't the best as it's not a true trade-off between mortgage and after-tax. Still, you've given me something to think about!
Title: Re: Trying to Calculate Early Mortgage Payoff vs Investing Extra
Post by: Boofinator on November 07, 2018, 03:09:45 PM
Also, FYI - there was some really good analysis earlier in a different thread regarding the effect PMI has on a true mortgage rate. It often works out to be surprisingly low.

In my case we ended up taking a 90/10 at 4.125% with PMI. We could have pretty easily gone to 85/15 and cut PMI by about 1/3. It would have been uncomfortable to go to 80/20, and I don't think in either of those cases we would have been able to get a lower rate.

It so happens that we had very good credit which resulted in pretty reasonable PMI penalties. When doing the math it adds about an effective 1/8 to 1/4% to our APR. Thus, we have no intention of paying it off early and instead have focused entirely on investments. It will go away automatically at 22% down. It also helps that I have access to a mega-backdoor so our tax-advantaged space is ginormous. But, even were it not available I would still rather put the money into an after-tax account than pay off the mortgage early. I especially like keeping it as an inflation hedge. Even better, if there ever is another recession and rates drop again, I can probably refinance to an even lower rate! Not to say you couldn't do that with a paid off home, which would also be a great financial move if we ever return to the mid- to low-3%s.

I don't see anyone, even Boarder advocating for keeping mortgages that are short term and/or above 5-6%. At that point you're definitely pushing it. Even Boarder has made it clear from time to time that he specifically means 30 year low-rate fixed mortgages. If he doesn't include that in every single post, that doesn't mean it's not implicit in his statements.

If I understand correctly, your mortgage rate is 4.125%; what's your PMI rate? I'll assume for the sake of math 0.5% PMI, but feel free to correct me. So for this exercise, until you get rid of PMI you're paying 4.625%.

Let's assume for the sake of easy numbers a $100k house purchase. To borrow that extra $10k, you need to pay both 4.125% on that $10k, but also 0.5% on the full $90k. This is an effective interest rate of 8.625% on the first dollar paid. And as the payments decrease, the effective interest rates continue to increase: at $80k remaining you will be paying an effective interest rate (since you say you need to get down to $78k for it to be canceled) of 26.625%. Only once you drop PMI does your effective rate fall again to 4.125%.

If you run the two scenarios through an amortization schedule over the life of the loan, in order to come out ahead, you would need a fixed return of about 6.7% annually for 30 years (so 0.5% PMI added an effective 2.575% to your interest rate). Of course stock returns aren't fixed but come with sequence of return risk, so if stocks do poorly at the beginning you would need a much bigger CAGR to break even (and vice versa if stocks do great at the beginning).

You may be ok with those odds. If you're not, you're kind of screwed unless you refinance: now that you're committed to the path, paying off PMI early only hurts you more (when you're in the accumulation stage).

I encourage others to share links to the PMI discussions and calculations. I don't have them handy. My PMI is a bit lower, using your example of $10,000 remaining to get to 20%, my monthly PMI is approximately $22, or about $265 per year. That does translate to 2.65% of that 10k. And yes, it will effectively go up as we get closer so it may be worth paying off when we get closer to 17% principal or so. But, the trade-off of going to 20% was also potentially sacrificing tax-advantaged space for that year we built up our down-payment, so maybe my example isn't the best as it's not a true trade-off between mortgage and after-tax. Still, you've given me something to think about!

I think the best way to think of it is as an 'equivalent' mortgage rate (not quite equivalent since your payments are higher at the beginning). This equivalent rate would be the interest your money has to earn from a fixed-return investment. In your case, using 0.294% PMI, I calculate an effective mortgage rate of roughly 5.55%.

As mentioned, once you start paying it makes more sense to keep paying and investing the difference, because you're losing opportunity cost on the loan (assuming you're in the accumulation stage). And once you agree to PMI, it becomes intertwined with mortgage rate and you are essentially paying roughly 4.5% per month.

I know this sounds confusing as all hell, but all I can recommend is run the numbers yourself to get a feel for it with an amortization schedule.