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.
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.
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.
(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.
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.
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.
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.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.
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.
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.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.
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)
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.
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.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.
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?He was banned (https://forum.mrmoneymustache.com/off-topic/r-i-p-boarder42/).
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.
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.
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?
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.
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 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.
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...
I agree with this. I dont agree with posts that try to put positions on me I have never advocated.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 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 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.
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.
That is why I said “most, and not all” in my position above.
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.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.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 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.
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.
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?QuoteOnce 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.
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.QuoteAs 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.QuoteAnd 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
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.
@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).
I dont want to argue, so I will try to make this the last post in this thread.
@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 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.
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.
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.
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 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.
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.
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.
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.
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.
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 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.)
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.
[...] 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.
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.@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.@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.
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.
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?
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.QuoteBy 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?
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/
[...] 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.
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).
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.
[...] 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'.
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
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.
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.
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.
[...] 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
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.(I agree here with the sentiment about the RE industry.)
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!)
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.* ** *** **** *****(It's not as very, very rare as so many believe it to be.)
*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.
I'd like to thank b42 (and others)....(Another civilized comment, but the comment about facepunching for not paying PMI is absurd.)
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.
....
[...] 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.(I agree here with the sentiment about the RE industry.)
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!)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.* ** *** **** *****(It's not as very, very rare as so many believe it to be.)
*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.I'd like to thank b42 (and others)....(Another civilized comment, but the comment about facepunching for not paying PMI is absurd.)
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.
....
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.
@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.
[...] 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.(I agree here with the sentiment about the RE industry.)
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!)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.* ** *** **** *****(It's not as very, very rare as so many believe it to be.)
*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.I'd like to thank b42 (and others)....(Another civilized comment, but the comment about facepunching for not paying PMI is absurd.)
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.
....
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.
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.)
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.QuoteMaybe 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.
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 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.
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.
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.
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).
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!