5) Remember, mortgages are paid with post-tax dollars. If I could wipe out that expense and push that same money to my 401k pre-tax, then i'm saving another 18-20% that's not going to Uncle Sam.
I don't follow this. You could be taking advantage of all the tax-deferral options *now* instead of diverting extra funds towards prepaying the mortgage.
I have precisely ONE pre-tax or tax-deferred savings option, my company-sponsored 401k, and I have max'ed that out (15% + $5k catch-up).
You all talk about these amazing, ultra-high-yield investment options that I'm passing up in favor of paying off my "measly low interest rate" mortgage that's costing me over $330/month every month.
Everyone's acting like I've got some huge sum of money that I can pre-capitalize an investment with that's going to beat the heck out of paying off the mortgage.
I've even tried the Betterment experiment about the same time MMM did and it's earning 3.6%. Percentagewise, that "looks better" than what I'm earning on my mortgage, but my mortgage is compounded DAILY and capitalized up-front. My wimpy little Betterment's "3.6%" is bogus because I'm funding it with post-tax money and I'll be taxed on the earnings whenever I realize those earnings.
I'll never be taxed on the "earnings" from paying off my mortgage.
I've never, ever, ever had an investment that's earned me over $300/month no matter how much money I've thrown at it. But that's definitely what I'm paying up-front on my mortgage, every month. Have I borrowed money from a company that's some kind of crazy loan-sharking deal? What's the dollar amount per month all you "don't pay off the mortgage" people are paying to borrow your jumbo $300k home loans?
So pony up peeps. I'm getting tired of the abstract blah blah blah. You keep talking interest rates like that's all that matters. No one seems to talk about daily compounding vs. what most investments can provide. I'm paying attention to actual dollar cost and monthly cash flow. The interest rate on the mortgage is the last, biggest cash flow sink I have to attack on my way down to frugal living and 4% SWR.
All of you seem as insane to me as I seem to you. How are we gonna be able to break this logjam? Do I start a case study on my mortgage vs. savings options?
Hi Mefla
I see these forums as a place for people to express their ideas and learn from one another, so I'm happy to try to illustrate the points I and others are making a bit more clearly, and also try to understand your counter-arguments a bit better. If you can give a few numbers (mortgage rate, home value/equity/amount owed, monthly applied to mortgage) I'd be happy to present a few scenarios that I think could illustrate why I believe paying down the mortgage is sub-optimal under almost every condition (job loss, post-retirement, recession, etc).
For now, here's a very simplistic scenario that still illustrates the point. Imagine you have $100k mortgage (3.5%, monthly fixed payment of $449($291 interest)) and you receive $100k post-tax from an bonus, inheritance, etc. You could either 1) pay off your mortgage or 2) put the $100k into a low-cost index fund like Vanguards SP500 (VFINX). For accounting simplicity many people choose to have a dedicated 'home-equity' fund.
scenario 1 you have no mortage, but you have no money left over. It's easy to understand and this is why it appeals to a lot of people.
Scenario 2 you still carry the $100k mortgage, but you have $100k in the index fund. Following the 4% rule, you can safely withdraw $4,000/year ($333/month) from this fund, forever, with very little chance it will run out. In fact, in 20 years no historical period would have failed to pay out 4%/year,
increasing with inflation. Odds are, after 20 years you will have substantially more money in that fund than you started with.
IMO there's a few key points to why this scenario is so much more powerful
i) from day 1 your investment will pay out more than the interest you pay on your mortgage. Instant win. Plus, ever month it gets better.
ii) your mortgage is fixed in today's dollars. That means your monthly payments are eaten away by inflation. In just 5 years your $449 payment will be the equivalent of just $395 in today's dollars (given 2.5% inflation). In ten years it will be $349.
iii) in contrast, the 4% rule adjusts for inflation. This means in just 5 years you will be withdrawing $4,525. In ten years it will be $5,120.
iv) you can claim the mortgage interest deduction on your taxes. This may not help you now when you are still working, but can be a powerful (and annual) deduction in retirement.
But wait, for you it gets even better. we've shown how, by using the 4% rule and investing it you will be able to withdraw more on day 1 than you will pay on interest, and because the mortgage is fixed in today's dollars (and the 4% WR increases with inflation) your total payment will very quickly be covered by the investment. Because your goal is to increase your assets and not pay off the mortgage early you will get to draw increasingly less from this investment (the WR will go down). This practically guarantees that the fund will never be depleted. After 30 years, the mortgage will be paid off. At this point you will have an investment that's worth several time more than when you started.