Author Topic: Why do some people not classify mortgages as debt?  (Read 41791 times)

Retire-Canada

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Re: Why do some people not classify mortgages as debt?
« Reply #50 on: March 19, 2015, 09:39:06 AM »
Because rent isn't debt.

A lease is a contract. A contract can have unavoidable financial liabilities attached and those liabilities are essentially debt that is not realized until the appropriate circumstances outline in the contract occur.

Walking away from a contract does not mean you aren't going to have to pay the attached liabilities. The specific wording of the lease, your local laws and the desire of the property owner to pursue their legals remedies will determine what happens.

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bacchi

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Re: Why do some people not classify mortgages as debt?
« Reply #51 on: March 19, 2015, 09:49:18 AM »
With a mortgaged house, if you stop paying the mortgage, they come after you for the full balance of the mortgage, regardless if the home equity is sufficient to repay the mortgage.  Equity is $18,000 short?  You still owe all the money including the $18,000.

Not in a non-recourse state. The shortfall risk is held by the lender, not by the mortgagee. The borrower can walk and owe nothing.

http://www.nolo.com/legal-encyclopedia/whats-the-difference-between-recourse-nonrecourse-loan.html

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Nonrecourse Loans

With a nonrecourse mortgage loan, the lender cannot do anything other than foreclose on the property. The lender may not obtain a deficiency judgment even if the sale proceeds do not repay the total debt owed on the loan.

Since the lender can't come after you for what is owed, is it still debt? :)

Sid Hoffman

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Re: Why do some people not classify mortgages as debt?
« Reply #52 on: March 19, 2015, 11:57:06 AM »
So what we've learned in this thread is that EVERYTHING is debt including rent and your property taxes (see previous page) and that NOTHING is debt, so long as you have a way to avoid paying it back.  Apparently this thread is schrödinger's accounting.

Aminul

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Re: Why do some people not classify mortgages as debt?
« Reply #53 on: March 19, 2015, 12:14:42 PM »
"Debt free, except for next month's rent!"

Faraday

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Re: Why do some people not classify mortgages as debt?
« Reply #54 on: March 20, 2015, 01:13:18 PM »
So I'm working hard to pay off the mortgage ahead of time. Because:
- I don't want to pay mortgage debt with money I've saved. It's a fractional drain on the earned compounded interest.
- If I suddenly can't pay my mortgage at some point, as some have already said, I lose the house and everything I put into paying for it
- If you default on a mortgage, it's highly unlikely you'll get another at any reasonable interest rate.
- If you pay off a mortgage, it gives you influence with lenders that may allow you to restructure burdensome future debt.
- If I were to lose my job, I wouldn't easily be able to liquidate the asset and downsize because no one's going to loan me money to buy anything at that point, even if I have money for FIRE
- If my home is paid off and I can divert that income elsewhere, it gives me a huge chunk of money out of every paycheck to push to pre-and post-tax savings like 401k, IRAs and HSAs.  If my home were paid off, I could cut my time to FIRE in half!

So there's this element of risk with a mortgage no one seems to talk about, and carrying one while you begin to incur higher risk in other areas of life (health and career) seems to me as foolish a gamble as not saving at all.

So, for me, paying the mortgage off is a very high priority right next to the high savings rate for FIRE.

Now: the fly in my ointment (which I've not mentioned so far) is that while I own and pay for a modest home, it would have been possible to go far more modest - into a double-wide or a single-wide trailer, or even join in on the tiny house movement. But none of those (wonderful) alternatives are available to me so I push on with the choice I have.

nereo

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Re: Why do some people not classify mortgages as debt?
« Reply #55 on: March 20, 2015, 02:30:32 PM »
So I'm working hard to pay off the mortgage ahead of time. Because:
- I don't want to pay mortgage debt with money I've saved. It's a fractional drain on the earned compounded interest.
It is a fractional drain on the earned compound interest, but if you invest the money instead of paying off the mortgage you will have a larger principle to earn interest from.  This is why, from an economic standpoint it's typically better not to pay of a mortgage earlier, especially if it's at <4%. Your logic here is backwards.

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- If I suddenly can't pay my mortgage at some point, as some have already said, I lose the house and everything I put into paying for it
No... you are still entitled to the equity in your home based on it's resale value.  If your house is worth $200k and you owe the bank $50k more (i.e. you have $150k in equity), and then you loose your job and can't pay the mortgage, you don't loose everything.   The bank takes over your house, sells it, takes what they are still owed and you get the rest.  Sure, it's not the best scenario since the bank has no vested interest in getting the absolute best price it can for the home (since they will get what they are owed regardless) - but it's an oft-repeated fallacy that if you miss your final mortgage payment you loose everything forever. 

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- If you default on a mortgage, it's highly unlikely you'll get another at any reasonable interest rate.
[
True.  Sort-of.  For a several years, but certainly not forever.

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- If you pay off a mortgage, it gives you influence with lenders that may allow you to restructure burdensome future debt.
[
Um... if you don't have a mortgage you aren't dealing with a lender.  If you DO have a mortgage then you can restructure future debt.  This is strange logic to me... "only by not having a debt can you have influence when thinking about having a debt".

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- If I were to lose my job, I wouldn't easily be able to liquidate the asset and downsize because no one's going to loan me money to buy anything at that point, even if I have money for FIRE
[
I agree.  But this like an argument for renting.  The ability to sell a house is fairly independent of whether you have a mortgage or if you own it in full (with the exception of being underwater, but this is rare for mustachians willing to put up a reasonable down-payment)

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- If my home is paid off and I can divert that income elsewhere, it gives me a huge chunk of money out of every paycheck to push to pre-and post-tax savings like 401k, IRAs and HSAs.  If my home were paid off, I could cut my time to FIRE in half![
BUt... to pay off your mortgage early you have to divert money AWAY from savings,  particularly to fund things like 401(k), IRAs, HSAs.  In fact, this is one of the biggest reasons I can see why you should NOT accelerate mortgage payments.  Funding your tax-advantaged accounts now instead of 5, 10 years down the road is far preferable, and gives you the double-advantage of better tax efficiency and more time for those savings to compound.  Again, the assumption is that over decades+ you will earn more in your investments than you will pay at 3.x%

If paying off your mortgage gives you some great satisfaction and sense of personal accomplishment, go ahead and do it!  Some people prefer to be in the "less-money/less debt" camp.  But every one of your argument seems to support not making advanced payments.

BlueHouse

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Re: Why do some people not classify mortgages as debt?
« Reply #56 on: March 20, 2015, 02:37:10 PM »
So I'm working hard to pay off the mortgage ahead of time. Because:
- I don't want to pay mortgage debt with money I've saved. It's a fractional drain on the earned compounded interest.
- If I suddenly can't pay my mortgage at some point, as some have already said, I lose the house and everything I put into paying for it
- If you default on a mortgage, it's highly unlikely you'll get another at any reasonable interest rate.
- If you pay off a mortgage, it gives you influence with lenders that may allow you to restructure burdensome future debt.
- If I were to lose my job, I wouldn't easily be able to liquidate the asset and downsize because no one's going to loan me money to buy anything at that point, even if I have money for FIRE
- If my home is paid off and I can divert that income elsewhere, it gives me a huge chunk of money out of every paycheck to push to pre-and post-tax savings like 401k, IRAs and HSAs.  If my home were paid off, I could cut my time to FIRE in half!

So there's this element of risk with a mortgage no one seems to talk about, and carrying one while you begin to incur higher risk in other areas of life (health and career) seems to me as foolish a gamble as not saving at all.

So, for me, paying the mortgage off is a very high priority right next to the high savings rate for FIRE.

Now: the fly in my ointment (which I've not mentioned so far) is that while I own and pay for a modest home, it would have been possible to go far more modest - into a double-wide or a single-wide trailer, or even join in on the tiny house movement. But none of those (wonderful) alternatives are available to me so I push on with the choice I have.

Don't numbers 2 & 5 promote the idea that you should save UNTIL you can pay it all off? 
#2.- If I suddenly can't pay my mortgage at some point, as some have already said, I lose the house and everything I put into paying for it
#5.-If I were to lose my job, I wouldn't easily be able to liquidate the asset and downsize because no one's going to loan me money to buy anything at that point, even if I have money for FIRE.
These are the two that keep me up at night.  So I'm building a "sinking fund" to pay off the mortgage.  I may reach a stage where I consider making a lump sum payment if my bank will allow me to recast for free.

dunhamjr

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Re: Why do some people not classify mortgages as debt?
« Reply #57 on: March 20, 2015, 03:50:37 PM »
Apparently this thread is schrödinger's accounting.

:D

mm1970

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Re: Why do some people not classify mortgages as debt?
« Reply #58 on: March 20, 2015, 03:54:27 PM »
I've seen this trend over and over and now I'm really curious.  A mortgage is clearly a debt, so why differentiate it from other debts?

Is it because it's a relatively long term? 

not judging just trying to understand.
I consider mortgage to be debt.

I just happen to have enough money to pay it off.  Meaning I have a positive net worth.

tomsang

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Re: Why do some people not classify mortgages as debt?
« Reply #59 on: March 20, 2015, 04:21:15 PM »
Mortgages are debt.  No question about that.  I would never prepay a 30 year fixed rate mortgage sub 4%.  If you want to know why visit the 6 pages of fun. http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/

I believe that people get hung up on rules of thumbs, old wives tales, and many other sources of bad information that impacts their financial independence and their net worth.  Debt is one of those areas.  Debt is a huge blessing if used properly.  A 30 year fixed rate sub 4% loan is a blessing from the United States Government.  Like saying, Lotto is for people that are mathematically challenged or Lotto is a tax on those that are mathematically challenged, I would say paying off a 30 year fixed rate sub 4% loan is the same as someone who is mathematically challenged.  Sure buying a Lotto ticket makes you feel good inside by having the opportunity to win millions.  Just like paying off a 30 year fixed rate sub 4% mortgage.  People feel like they are doing amazing by saving 4% by getting rid of the evil debt.  When they are actually pissing away a huge gift that the government has given those in the US to stimulate the economy.  Let's go back to the basics.  Paying off a 4% fixed rate loan instead of investing in a diverse portfolio that pays out 7%+ over thirty years and has never paid out less than 4% in the history of the stock market is a bad idea.

So instead of asking why do some people not classify mortgages as debt you should be asking why do people pay off their 30 year fixed rate loans? or why don't people proudly state their 30 year fixed rate loans and interest rate?  Having low interest mortgage debt is something to be proud of, we should flaunt it.

BlueHouse

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Re: Why do some people not classify mortgages as debt?
« Reply #60 on: March 21, 2015, 09:48:08 PM »
Mortgages are debt.  No question about that.  I would never prepay a 30 year fixed rate mortgage sub 4%. 
Okay, when people say this, do they really mean never, or do they mean at this point in their life?  My plan is to have my mortgage paid off by the time I retire so that my expenses are low and so I don't have to make such large withdrawals from my accounts that can create more taxable income. Do I understand the RE game wrong?   It's important to note that early retirement for me is not really early so I won't have the choice to just go get another job if the market tanks for a few years.  so I'm prepaying my mortgage to a point that it will be paid off when I'm 60 vs when I'm 74. Am I doing it wrong? 

Faraday

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Re: Why do some people not classify mortgages as debt?
« Reply #61 on: March 21, 2015, 10:25:11 PM »
Mortgages are debt.  No question about that.  I would never prepay a 30 year fixed rate mortgage sub 4%. 
Okay, when people say this, do they really mean never, or do they mean at this point in their life?  My plan is to have my mortgage paid off by the time I retire so that my expenses are low and so I don't have to make such large withdrawals from my accounts that can create more taxable income. Do I understand the RE game wrong?   It's important to note that early retirement for me is not really early so I won't have the choice to just go get another job if the market tanks for a few years.  so I'm prepaying my mortgage to a point that it will be paid off when I'm 60 vs when I'm 74. Am I doing it wrong?

I'm betting with you and going for a blended approach. The game changes as we age and have less access to compounded returns. Here's my points:

1) I cannot FIRE with a mortgage or a rent payment. I'll never make a 4% SWR.

2) My mortgage is 3x all my other expenses, combined. On the day I pay off the mortgage, I achieve 4% SWR while still living my "extravagant" lifestyle, even with my clown car habit!

3) If my pool of investment money goes to zero when I die, I win.

4) My wife is not a strict mustachian and may never be. The mortgage is therefore the expense I'm targeting. She can certainly understand the power of paying that off, not some mystic argument for compounding.

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.

My plan is to pay off the mortgage in less than 4 years while executing a 50% savings rate. I expect, soon, to make 60% savings rate while still paying the mortgage off on the same timetable.

I need to FIRE by 2020. I'm 53 now, 58 in 2020. I'll not see those awesome compounded returns you people speak reverently about before I FIRE. I'll be dead before that happens. I am too late to the game. My key is to make large savings contributions (dropping into as low a tax bracket as possible) and cutting my cash outflow as much as I possibly can.  Low expenses = "virtual rich lifestyle".

Job loss is my biggest risk. If I lose my job via layoff and can't replace the income, paying the mortgage off in 2-4 years will have served me well. I could be a stock boy at a big-box store just for the bennies, eat lunch every day at Bojangles and still keep my current standard of living.

Why does no one seem to notice that MMM has no mortgage?!??!
« Last Edit: March 21, 2015, 11:01:42 PM by mefla »

steveo

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Re: Why do some people not classify mortgages as debt?
« Reply #62 on: March 22, 2015, 12:09:23 AM »
A 30 year fixed rate sub 4% loan is a blessing from the United States Government. 

Yep. It doesn't happen anywhere else in the world because its crazy. If I lived in the US I would save all my money into investments because you are basically being charged the rate of inflation.

The US government and of course the people living there will pay for it but hey you had better be on the right side of the trade than the wrong side.

brooklynguy

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Re: Why do some people not classify mortgages as debt?
« Reply #63 on: March 22, 2015, 08:04:58 AM »
1) I cannot FIRE with a mortgage or a rent payment. I'll never make a 4% SWR.

If you can save up enough to pay off your mortgage plus enough to service your other expenses (which is what you are proposing to do), then you can also FIRE while carrying a mortgage (or having a rent payment).  Think of it this way:  the portion of your stash that you would be using to pay off your mortgage will instead stay invested and be used to service the mortgage (or, if you sold your house, pay your rent).

If the remaining life to maturity of your mortgage is not very long, this would not make sense to do.  But for anyone with anything close to 30 years left (and a low interest rate), it makes very much sense.  (And anyone with an existing mortgage with a short remaining life to maturity who wishes to put themselves in that situation can do so by refinancing today.)

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2) My mortgage is 3x all my other expenses, combined. On the day I pay off the mortgage, I achieve 4% SWR while still living my "extravagant" lifestyle, even with my clown car habit!

See response to #1 - paying off the mortgage isn't necessary to achieve this result.

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3) If my pool of investment money goes to zero when I die, I win.

Ok, don't see how this works in favor of paying off the mortgage.  If your point is that you might be leaving money on the table by prepaying a mortgage, then I agree, and that's the entire point being made by the "invest instead of prepay" camp.

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4) My wife is not a strict mustachian and may never be. The mortgage is therefore the expense I'm targeting. She can certainly understand the power of paying that off, not some mystic argument for compounding.

Ok, this may be a non-mathematical reason that you should prepay your mortgage.  Other valid reasons exist, like the psychological benefit you may obtain by owning your home free and clear.  But math is not one of those reasons.

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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.

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Job loss is my biggest risk. If I lose my job via layoff and can't replace the income, paying the mortgage off in 2-4 years will have served me well. I could be a stock boy at a big-box store just for the bennies, eat lunch every day at Bojangles and still keep my current standard of living.

In my view, if you are worried about job loss, then *not* prepaying the mortgage is a better strategy.  Because prepayments don't reduce your amortization until the entire mortgage is paid off, they do not help you if you lose your job before the mortgage is paid off in full (if you lose your job, you're still going to have to keep sending in that same monthly mortgage check every month, regardless of whether you've been prepaying up the wazoo).  And once you've accumulated enough that you *can* pay the mortgage off in full, you don't have to worry about loss of employment income to service the mortgage, because you now have a big pile of investments to do it for you.

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Why does no one seem to notice that MMM has no mortgage?!??!

I think most people do notice.  Prepaying and investing in lieu of prepaying are both valid options.  Pick the one that makes the most sense to you because it makes the most sense to you, not because it's the one our cult leader opted for.

boarder42

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Re: Why do some people not classify mortgages as debt?
« Reply #64 on: March 22, 2015, 08:28:42 AM »
I have enough income we max all tax adv accounts and have to go taxable. I do not pay more on my mortgage its 3% rate is far lower than the avg market gains. And it would push out FIRE 3-4 years if I paid it down then invested. Assuming your jobs are stable there is little to no reason to pay off a low interest loan of any kind including a house as this while still being debt is very good debt.

Faraday

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Re: Why do some people not classify mortgages as debt?
« Reply #65 on: March 22, 2015, 11:19:10 AM »
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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?
« Last Edit: March 22, 2015, 11:24:02 AM by mefla »

Cathy

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Re: Why do some people not classify mortgages as debt?
« Reply #66 on: March 22, 2015, 11:29:49 AM »
Other valid reasons exist, like the psychological benefit you may obtain by owning your home free and clear.

The quoted reason often appears in these threads, but I don't think it makes sense.

In countries like the USA and Canada, it is impossible to own land free and clear. The government owns the land. You merely own title to an estate in the land.

The government can reclaim "your" land at any time (if authorised according to legislative and constitutional considerations (such as the takings clause)). State agents can also enter your land, subject again to the law. In addition, even your interest in the structure on the land (i.e. the house) is not unrestricted, and is subject to many laws and regulations (such as building codes). Your interest in the soil under the land is also heavily regulated (for example, you can't just remove any gas pipelines that might be under there). Your interest in the air above the land is also limited.

Furthermore, the general criminal law applies on "your" land, including (in the US) regulating what substances you can inject into your body, and what plants you can cultivate. Moreover, activities on "your" land may constitute tortious conduct, or be otherwise actionable in the civil courts.

I'm not saying that there is anything wrong with the above. But it's very clear that you cannot own land free and clear in western countries.

Paying off the mortgage may remove the bank's interest in the land, but it does not cause you to own the land "free and clear". Given that it's not possible to own the land free and clear, I do not understand why a desire to achieve this impossible objective is something that motivates people to make financially suboptimal decisions. The existence of property tax means that even after obtaining clear fee simple title, you still have to pay a form of rent to the government!
« Last Edit: March 22, 2015, 12:08:03 PM by Cathy »

bacchi

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Re: Why do some people not classify mortgages as debt?
« Reply #67 on: March 22, 2015, 12:19:16 PM »
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.

Compounding works for investments too. If you believe in a 4% SWR, and your mortgage is <4%, you're delaying your FI date by prepaying the mortgage.

There's already a thread on the math involved. The math is clear.

brooklynguy

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Re: Why do some people not classify mortgages as debt?
« Reply #68 on: March 22, 2015, 12:29:10 PM »
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?

You are misunderstanding the math behind mortgage loans.  Daily compounding doesn't matter, and back-loaded amortization of principal doesn't matter.  If the annual percentage rate on your mortgage is 4%, and you can earn a 4.1% on investments, then you are better off investing than prepaying your mortgage (this ignores tax considerations, which usually work in favor of investing over prepaying to make prepaying an even more suboptimal choice).  And if you're not able to earn a return on investment north of 4% over a 30 year time span, then we're all in a lot of trouble because our retirement plans are not going to work.

You don't need a huge sum of money to do better by investing than prepaying.  Every dollar that you deploy towards prepaying the mortgage can instead be deployed towards investments.  If the investments outperform the mortgage rate over the life of the mortgage, you're better off investing.  It's as simple as that.  But, according to your own plan, you will have a huge sum of money that you can invest instead of prepaying--the same huge sum of money that you're planning to use to pay off your mortgage in full.

What's your mortgage interest rate and remaining life to maturity?  It's easy to plug the numbers into cfiresim and see how much money you may be leaving on the table based on historical data.

The quoted reason often appears in these threads, but I don't think it makes sense.

I share your sentiment, but I can understand why some people derive psychological pleasure from owning their home free and clear of the bank's security interest in the property.  As long as they recognize the economic price they may be paying for that pleasure and do so with their eyes open, I have no problem with it.

boarder42

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Re: Why do some people not classify mortgages as debt?
« Reply #69 on: March 23, 2015, 05:38:11 AM »
^^^^ Brooklynguy hit the nail on the head.  I don't understand how the members of this forum are comfortable with the whole concept behind retiring early the 4% SWR but yet still pay down mortgages early with interest rates sub 5%.  the 4% SWR only works if your investments avg 4% that you are with drawing plus the inflation from that year.  So not even counting tax breaks it seems many are comfortable assuming paying down a mortgage at 5% is better than getting the 7% inflation adjusted avg gains. 

As MMM said in one post its not a bad problem to have. and neither choice is BAD... but one is mathmatically worse, based on history.  Which is what all of this entire theory is based on the HISTORY of the market.  So dont go saying I dont have a crystal ball and can't see the future.  You're right no one can but the whole premise behind retiring early is based on historical market returns that beat all current mortgage rates assuming you have good credit. 

But the simple fact is as long as your job is steady and you dont have a risk of losing that then you're going to come out way behind by paying your low interest loans down vs investing that money.

RetiredAt63

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Re: Why do some people not classify mortgages as debt?
« Reply #70 on: March 23, 2015, 06:10:18 AM »
This has been an interesting discussion.  Here is another perspective - remember I live in Canada (no income tax deductions for mortgage interest, no long-term fixed interest rates).

I am retired.  I have a mortgage.  I chose to put available funds into paying down higher interest debt, and am working my way to no debt other than the mortgage (why I have this debt is a whole other story, let's just remember that it was not from crazy consumer spending).  The money that is going to other debt right now will go to the mortgage when that debt is gone.   I have a major asset that I hope to sell this year that will also go to the mortgage.  I have enough income that paying the mortgage and other associated house costs is not a problem.

I have investments that I could sell that would pay off the mortgage.  Why don't I do that? Because the income from them more than pays the mortgage, and if I sold them I would be paying major capital gains that year on my income taxes.  Net loss.  Plus the investments are such that I am only using the income they generate, I am not selling them as part of my income, so their market value is not a major concern to me.  I could easily die (in 30 years) with the same investments in place.

For me, doing the arithmetic means that I have a mortgage.  What works in some circumstances won't work in others.  And yes, I have been mortgage free (for 2 of the 4 houses I have owned over my life) and it is a lovely feeling.  But having enough income to cover all expenses and then a bit extra is also a lovely feeling.

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Re: Why do some people not classify mortgages as debt?
« Reply #71 on: March 23, 2015, 07:18:47 AM »
Every dollar that you deploy towards prepaying the mortgage can instead be deployed towards investments.

I'm dealing with this choice right now as I am about to sign a new 5yr mortgage [Canada]. Part of me would like to knock the mortgage down very fast to get rid of my only debt and my biggest annual living cost, but the opportunity cost of not being invested is just too high.

My mortgage is a bit over 2% [variable rate]. So it's not hard to see the benefit of being in the market. That rate can climb higher, but I would be surprised if it doubles over the next 5yrs.

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Re: Why do some people not classify mortgages as debt?
« Reply #72 on: March 23, 2015, 08:08:52 AM »

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 know what point you are trying to make:

If you are already maxing your 401k there is no benefit to paying off your mortgage.
Those post tax dollars do much better in taxable accounts than they do getting rid of minimal interest. 

If you aren't already maxing your 401k. Do that. Don't wait until the mortgage is paid.


Now, if you have a high interest rate where your rate of return in the market is likely to be lower than the mortgage, then pre-pay it.  But sub 4? It makes no sense.
« Last Edit: March 23, 2015, 08:11:45 AM by iowajes »

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Re: Why do some people not classify mortgages as debt?
« Reply #73 on: March 23, 2015, 08:27:04 AM »

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 know what point you are trying to make:

If you are already maxing your 401k there is no benefit to paying off your mortgage.
Those post tax dollars do much better in taxable accounts than they do getting rid of minimal interest. 

If you aren't already maxing your 401k. Do that. Don't wait until the mortgage is paid.


Now, if you have a high interest rate where your rate of return in the market is likely to be lower than the mortgage, then pre-pay it.  But sub 4? It makes no sense.

Yes so if you're not maxing your 401k lets say you have an extra 5k you're putting towards your mortgage.  you could be maxing your 401k with that 5k making it instantly 18-20% more valuable than going to your mortgage not even accounting for gains. 

Some people.

Plus your 401k has a max... you cant make up for all those missed fundings b/c you were paying down your mortgage vs maxing it.

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Re: Why do some people not classify mortgages as debt?
« Reply #74 on: March 23, 2015, 08:28:24 AM »
Quote
Quote
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. 

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Re: Why do some people not classify mortgages as debt?
« Reply #75 on: March 23, 2015, 10:53:53 AM »
Hey nereo

There are a few points I have which might counter with what you wrote in your post. I will try express myself clearly. I am also giving some general comments not necessarily related to your post but to the things discussed in the thread in general.

1. If you had no money and no debt, would you lend money to put them in stocks/funds?
My personal answer to this is no. Stocks/funds come with a risk and I would not be willing to lend money to invest, even if the interest is as low as 2-3%. There is no guarantee I would beat that rate in the stock market, so I would rather prefer to use pure savings for investments. Hence, I would rather pay down my debts rather than postpone those payments in order to invest in stocks.
There is no right or wrong here. You need to figure out what is right for you. We all have different risk thresholds.

2. Your home is not an asset. It is a liability.
An asset is something that pays you, just like an apple tree growing apples or a stock paying dividends. A liability is something that costs money. Even if mortage free, your house still needs maintenance, property tax, electricity etc. Therefore it is a liability. A house becomes an asset if you can make a profit from renting it out.
A home becomes an asset if you can sell it and have no need to get a new home (liability).
Does it also become an asset if you can make money on changing homes (e.g. downsizing or timing the market)? I'm not quite sure, because changing homes still leaves you with liabilities and the future is only predictable in the short term.

3. Debt is a liability, because it costs money
Debt is a liability because it must be paid back. Debt in itself is not the cost. The interest is the cost. If you took out a $100k mortage to buy a $100k rental unit, and every year you clear $10k on the mortage, this is not a cost to you. It is transferring money from your bank account into your asset (rental unit). The cost is whatever interest you have to pay in addition to the downpayments. Once you get rid of the debt there is no liability, just a debt-free asset.
If you take out a mortage to buy yourself a home, you just doubled up on your liabilities. The debt comes with interest costs. The home also comes with costs. Both the debt and the home are liabilities. Both those liabilities need to be taken into account when comparing whats more efficient between buying and renting.

4. Rent is a liability, but not necessarily debt
Why is it not debt? Because it is assumably a liability that you can get rid of at any time by moving home to your parents, become a homeless or live in the wilderness. The only scenario I would agree rent = debt is when you sign a 1-2-3 year lease AND there is no escape from paying that whole lease. The only debt in the case of renting is what it will cost you to escape from the lease; usually 3 months worth of rent or so.

5. Are liabilities debt?
The reason I ask is because it seems some of you haven't thought about the difference between debt, liabilities and assets.
I also ask because people put different meaning behind those words, just like the difference between expense and cost.

A liability is something that costs you money. If you have a phone, it is going to cost you money. If you eat at a restaurant it is going to cost you money. Is it therefore a debt? I'd say: Any reoccurring liabilities that takes considerable time to get rid of is a form of debt, and the debt is then measured in the sum of all those liabilities.
Rent is therefore by definition a debt, but only measured by the total sum of liabilities you have, which is usually 3 months worth of rent. Because of the insignificance of 3 months worth of rent I don't consider it a debt personally.

Thought experiment:
You need food and food costs money. Is food a liability? A quick estimate suggests I will spend $200k worth of food for the remainder of my life. Would it therefore be correct to say I have a (food-related) debt of $200k because that is the sum of all liabilities in this category? I say no, because food is a need that cannot be escaped unless I choose to die. Housing as a liability is a need that theoretically can be escaped. The liability of having children, caring for your elderly parents, paying for shoes and clothes can also be considered escapable for the less civilized. :) Therefore, those liabilities are not debt.


This is just my line of thinking that I am presenting to you. Maybe it will serve as a supplement to Meflas points and help you and others understand them better. Related to mortage/housing, I know the housing market has a tendency to go upwards and make home owners more wealthy. I know we have something called inflation which reduces the value of debt over time. These things work well together for people who know how to take advantage of it and I have no problem seing the logic behind your points as well.

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Re: Why do some people not classify mortgages as debt?
« Reply #76 on: March 23, 2015, 01:19:55 PM »
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Sure, you get super shady deals like Rent-A-Center where they claim they're renting appliances to people but it's functionally an illegally high interest rate loan.

And there's the distinction.  Most if not all debts come with an interest rate.  The difference between renting, a cell phone contract, and a mortgage is the first two are known fixed amounts.  A mortgage, car loan, and credit cards actually cost more the longer it takes you to pay them off.  With a cell phone you could do a number of things to reduce the size of your bill and still maintain the obligation to be on contract.  The question of ownership is also a factor.  If you break the contract on the phone you'll owe a penalty, but that'll be the end of it. AT&T won't come to confiscate your phone while the bank or Rent A Center will take your house, car, or furniture if you still owe them money.

The interest is baked in to your payment.  It's just not called interest as a line item.  But it's margin either way.

If we didn't place value judgments on debt, then none of this would matter.  I'd rather owe $10,000 on my mortgage than debt-free with a $800/mon car lease over 5 years.


brooklynguy

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Re: Why do some people not classify mortgages as debt?
« Reply #77 on: March 23, 2015, 02:01:01 PM »
1. If you had no money and no debt, would you lend money to put them in stocks/funds?
My personal answer to this is no. Stocks/funds come with a risk and I would not be willing to lend money to invest, even if the interest is as low as 2-3%. There is no guarantee I would beat that rate in the stock market, so I would rather prefer to use pure savings for investments. Hence, I would rather pay down my debts rather than postpone those payments in order to invest in stocks.
There is no right or wrong here. You need to figure out what is right for you. We all have different risk thresholds.

The idea that investing in lieu of prepaying cheap, long-term, fixed rate debt is "risky" focuses (myopically, in my view) on only one of many "risks."

Yes, it is true that there is no "guarantee" that your investments will outperform the loan rate, no matter how low the interest rate.  By prepaying the loan, you lock in returns equal to the loan rate and completely avoid the risk of coming out behind by investing instead of prepaying.

However, by doing this, you are taking on different risks, the risks of experiencing one or more of a host of related bad outcomes:  working longer than necessary, running out of money, being forced to find supplemental income and/or cut expenses, etc. etc. etc.

Historically, with mortgage rates like those available today, the risk of coming out behind by investing in lieu of prepaying is less than 5%, while the risk of coming out behind by prepaying in lieu of investing is greater than 95% (in each case, generally speaking, and depending on your specific variables such as asset allocation).

It never ceases to amaze me that the same people on these boards who parade MMM through the town square for revealing the "shockingly simple math behind early retirement" and gleefully plan their own early retirements in reliance on the 4% rule reject the idea of investing in lieu of prepaying cheap, long-term, fixed rate date as "overly risky," even though it relies on the very same underlying assumptions.  If you believe in the validity of a 4% SWR, then you should necessarily believe in the optimality of investing instead of prepaying mortgage with rates like those available today.

Bjorn, you say you would not choose to carry debt even with an interest rate as low as 2% because it is too risky.  I would argue that, unless you have already accumulated more than enough assets to support your expenses for the rest of your life by any reasonable standard, it is riskier to prepay cheap, long-term, fixed rate debt with today's sub-4% rates (let alone 2%) than it is to invest the loan proceeds, primarily because by doing so you are assuming the risk of being eaten alive by inflation without the mitigating inflation hedge provided by carrying the debt.

boarder42

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Re: Why do some people not classify mortgages as debt?
« Reply #78 on: March 23, 2015, 02:49:27 PM »
on a different post a member mentioned using CfireSim trying to prove that in his situation paying cash for a house in retirement was less risky than carrying a mortgage.  which was easily debuncted upon entering the information correctly. So in retirement lets take this scenario

Person A & B both retire with a networth of 1.2MM

Person A 1MM in investments 0.2MM in house
Person B 1.2MM in investments has 0.2MM mortgage on a house worth 0.2MM

Person A has a 93.0% success rate at 4% SWR
Person B has a 93.9% success rate at 4% SWR with a 30 year mortgage payment of 11457 annually.

ITS LESS RISKY SO STOP USING THE ARGUMENT THAT PAYING OFF LOW INTEREST DEBT IS LESS RISKY ... IT ISNT!!

Bjorn

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Re: Why do some people not classify mortgages as debt?
« Reply #79 on: March 23, 2015, 04:53:20 PM »
You are both right and I agree in theory, because you can't argue with historical returns and statistics, especially when assuming a 4% SWR would last forever. But in practice, being frugal and retiring early is all about reducing your expenses because that is what is easier to influence. Reducing debt reduces your immediate expenses and therefore has an everlasting positive effect on cash flow. I see being debt free as an essential part of feeling free and financially independent.

boarder42, how would the following scenario turn out:

Person A invests 1.2MM.
Person B takes a loan of 4.8MM and invests the whole sum of 6MM.

I'm not saying person A is more likely to succeed with a 4% SWR. But I'd say person B is taking on quite a lot of risk and I'd feel more free and independent if I was in person A's shoes. If the investments go to hell, person A could work part time to support his lifestyle, while person B would probably have to work full time many years to clear the debt. Person A could "start over" and make a new nest egg if desireable, while Person B would be a debt slave for the rest of his life.

Even in your scenario I would rather be in person A's shoes. I don't have any theory to tell you what's best, I just know it would be best for me.

steveo

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Re: Why do some people not classify mortgages as debt?
« Reply #80 on: March 23, 2015, 05:37:59 PM »
2. Your home is not an asset. It is a liability.
An asset is something that pays you

My opinion is that this belief is incorrect. How much would you pay to rent if you didn't own your house ? So rent saved less holding costs equals the financial benefit of owning your house in an income versus expenses breakdown. It could be therefore an asset in an ingoing and outgoing fashion simply because the cost of renting is the amount that your house pays you.

Note that this excludes any appreciation of your house.

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Re: Why do some people not classify mortgages as debt?
« Reply #81 on: March 24, 2015, 02:43:28 AM »
I disagree, because thats like saying "I am saving x amount of $ from living in this smaller house instead of that huge one, hence it is an asset". It isn't. You're still paying for it. Its a liability, albeit a smaller one and yes you are saving money versus renting but it is still a liability because there is no one paying you for owning that house. It is you who is paying to own it and live there.

I guess we disagree on what an asset really is:)

steveo

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Re: Why do some people not classify mortgages as debt?
« Reply #82 on: March 24, 2015, 04:05:22 AM »
I disagree, because thats like saying "I am saving x amount of $ from living in this smaller house instead of that huge one, hence it is an asset". It isn't. You're still paying for it. Its a liability, albeit a smaller one and yes you are saving money versus renting but it is still a liability because there is no one paying you for owning that house. It is you who is paying to own it and live there.

This is nothing at all like what I was stating.

I guess we disagree on what an asset really is:)

I don't think that this is the issue at all. I also think you contradicted yourself here.

yes you are saving money versus renting

Economically you are receiving a financial benefit equivalent to the rent on the house.

If you own a house the financial benefit every week is equal to the amount of rent you would pay less any holding costs. That is the only statement that makes economic sense. You could flip the situation pretty easily so that its makes sense. If you owned the house and rented it to someone what would it be worth to you - the answer has to be the amount of rent you are paid less any holding costs.
« Last Edit: March 24, 2015, 04:07:41 AM by steveo »

boarder42

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Re: Why do some people not classify mortgages as debt?
« Reply #83 on: March 24, 2015, 05:17:14 AM »
You are both right and I agree in theory, because you can't argue with historical returns and statistics, especially when assuming a 4% SWR would last forever. But in practice, being frugal and retiring early is all about reducing your expenses because that is what is easier to influence. Reducing debt reduces your immediate expenses and therefore has an everlasting positive effect on cash flow. I see being debt free as an essential part of feeling free and financially independent.

boarder42, how would the following scenario turn out:

Person A invests 1.2MM.
Person B takes a loan of 4.8MM and invests the whole sum of 6MM.

I'm not saying person A is more likely to succeed with a 4% SWR. But I'd say person B is taking on quite a lot of risk and I'd feel more free and independent if I was in person A's shoes. If the investments go to hell, person A could work part time to support his lifestyle, while person B would probably have to work full time many years to clear the debt. Person A could "start over" and make a new nest egg if desireable, while Person B would be a debt slave for the rest of his life.

Even in your scenario I would rather be in person A's shoes. I don't have any theory to tell you what's best, I just know it would be best for me.

This situation is not possible at the interest rate you will receive on a house therefore can't and should not be considered. 

Your expenses are the same if you pay 200k this year for a house vs 200k over 30 years for a house from the 200k standpoint your expenses over 30 years are the same... BUT technically you have just reduced your expenses thru taxes by paying the 200k over 30 years while investing that balance.  So in theory your expenses over 30 years are lower if you go with a 30 year mortgage the day you retire vs a lump sum cash purchase of a house. ie (you can and should refi your house the day you retire to a 30 year loan assuming rates are still what they are AND get the cash out to invest.)  Your net expenses over those 30 years will be lower than having that 200k tied up in a house. 

So what have we learned. 

1. assuming a 4% SWR works, at today's rates don't pay off your home in fact you should take out a larger loan at retirement to maximize your likelihood of success
2. Mortgages are inherently less risky than cash purchases of homes. (eye opener for many)
3. This only works if your mortgage payment keeps you in the 15% bracket, if it doesn't then you may come out behind due to LTCG and QD taxes
4. this assumes a 75/25 stock to bond split
5. An understanding that your house even if paid off is technically an expense costing you money each year by having money tied up in it. 

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Re: Why do some people not classify mortgages as debt?
« Reply #84 on: March 24, 2015, 07:09:54 AM »
I disagree, because thats like saying "I am saving x amount of $ from living in this smaller house instead of that huge one, hence it is an asset". It isn't. You're still paying for it. Its a liability, albeit a smaller one and yes you are saving money versus renting but it is still a liability because there is no one paying you for owning that house. It is you who is paying to own it and live there.

I guess we disagree on what an asset really is:)
Bjorn, I'd say that you're using "asset" where I'd use "investment".  Cash doesn't bring money in (which you've said is your definition of an asset, several times), but you'd be hard pressed to find anyone who wouldn't call it an asset.  Cash is not an investment.  Similarly, there are many depreciating assets.  An asset just represents the positive side of a balance sheet.  Liabilities are debts (including mortgages).  I'd classify mortgage as a debt, but a house is an asset that backs that debt.  So a home is an asset and a mortgage is a liability.

MrFancypants

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Re: Why do some people not classify mortgages as debt?
« Reply #85 on: March 24, 2015, 08:41:41 AM »
Because if someone says "I'm debt free" you have to be a pedantic asshole to respond with "nah uh, you have to pay rent next month" or "what about your mortgage?"

I don't think many people dispute that a mortgage is a debt/liability/whatever.  But the context in which most people say "I'm debt free" excludes this specific kind of debt.

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Re: Why do some people not classify mortgages as debt?
« Reply #86 on: March 24, 2015, 08:47:11 AM »
2. Mortgages are inherently less risky than cash purchases of homes. (eye opener for many)

Why?

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Re: Why do some people not classify mortgages as debt?
« Reply #87 on: March 24, 2015, 08:53:24 AM »
I don't think many people dispute that a mortgage is a debt/liability/whatever.  But the context in which most people say "I'm debt free" excludes this specific kind of debt.
oh goody - this should take us right back to the beginning of this thread.  If you have a mortgage, and especially if it's a particularly large one with many years remaining, it's hard for me to think "oh certainly, this person is debt free!" Compound this with the now-common practice of 'mortgage refinancement' to pay for other things (tuition, renovation projects, even vacations).
An example: My parents are retired, have lived in the same home for 36 years, and have a mortgage.   The only reason they still have a mortgage is because they refinanced to help pay for tuition for their children (which I am eternally grateful for) and to raise capitol so that my father could take over his partner's practice when he wanted to leave.  My father would be the first to admit that he's both retired and carries a lot of debt (over $200k at 3.x%).

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Re: Why do some people not classify mortgages as debt?
« Reply #88 on: March 24, 2015, 08:57:25 AM »
2. Mortgages are inherently less risky than cash purchases of homes. (eye opener for many)

Why?
Because, with today's super-low mortgage rates (currently 3.25% fixed 15yr) you are in essence 'locking in' a rate of return of just 3.25% for that money, *and* paying it all in today's dollars vs. utilizing inflation.  That's a very low bar to overcome.

MrFancypants

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Re: Why do some people not classify mortgages as debt?
« Reply #89 on: March 24, 2015, 09:08:58 AM »
2. Mortgages are inherently less risky than cash purchases of homes. (eye opener for many)

Why?
Because, with today's super-low mortgage rates (currently 3.25% fixed 15yr) you are in essence 'locking in' a rate of return of just 3.25% for that money, *and* paying it all in today's dollars vs. utilizing inflation.  That's a very low bar to overcome.

Gotcha, I was think of "risk" in the incorrect context.

I guess the decision of which way to go with your mortgage comes down to what your situation is.  For my situation and goals, taking the safe bet (paying off the mortgage as quickly as possible) is going to get me where I want to be faster than if I were to invest it elsewhere.

boarder42

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Re: Why do some people not classify mortgages as debt?
« Reply #90 on: March 24, 2015, 09:13:12 AM »
2. Mortgages are inherently less risky than cash purchases of homes. (eye opener for many)

Why?
Because, with today's super-low mortgage rates (currently 3.25% fixed 15yr) you are in essence 'locking in' a rate of return of just 3.25% for that money, *and* paying it all in today's dollars vs. utilizing inflation.  That's a very low bar to overcome.

Gotcha, I was think of "risk" in the incorrect context.

I guess the decision of which way to go with your mortgage comes down to what your situation is.  For my situation and goals, taking the safe bet (paying off the mortgage as quickly as possible) is going to get me where I want to be faster than if I were to invest it elsewhere.

This is 100% incorrect.  the only situation where this benefits you assuming you plan to FIRE is if a mortgage pushes you into the 25% tax bracket with spending... if it does not it is similar to putting your money in taxable accounts vs tax deferred.  You THINK you're doing it better and being less risky but you are in fact not.  I would love for you to describe your situation if it doesnt meet one of these criteria works.

boarder42

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Re: Why do some people not classify mortgages as debt?
« Reply #91 on: March 24, 2015, 09:15:55 AM »
ITs so funny people think they are being safe paying off their mortgage when in fact they are doing the opposite. 

assuming youre in the US with a low interest mortgage

YOU ARE BEING LESS SAFE

Bjorn

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Re: Why do some people not classify mortgages as debt?
« Reply #92 on: March 24, 2015, 09:19:01 AM »
Why do people keep using 2-3% interest rates on mortage as a benchmark at the same time as using historical returns on stocks and inflation? Wouldn't it be more sensible to use historical mortage rates? Todays situation is quite unique: we have historicalle low mortage rates, and as a consequence stock markets and asset classes are inflated. In light of this discussion, should we always assume there will be inflation?

If you "believe" in a 4% SWR, wouldn't it be sensible to assume historical debt rates and plan from that?

MrFancypants

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Re: Why do some people not classify mortgages as debt?
« Reply #93 on: March 24, 2015, 09:21:03 AM »
This is 100% incorrect.  the only situation where this benefits you assuming you plan to FIRE is if a mortgage pushes you into the 25% tax bracket with spending... if it does not it is similar to putting your money in taxable accounts vs tax deferred.  You THINK you're doing it better and being less risky but you are in fact not.  I would love for you to describe your situation if it doesnt meet one of these criteria works.

How can you say that I'm wrong when you don't know any of the details?

I would love to describe my situation to you but I'm pretty sure you're more interested in being right than you are in offering actual advice.

How is it "less safe" to pay off your mortgage when your other choice is to invest in the stock market?

boarder42

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Re: Why do some people not classify mortgages as debt?
« Reply #94 on: March 24, 2015, 09:27:29 AM »
This is 100% incorrect.  the only situation where this benefits you assuming you plan to FIRE is if a mortgage pushes you into the 25% tax bracket with spending... if it does not it is similar to putting your money in taxable accounts vs tax deferred.  You THINK you're doing it better and being less risky but you are in fact not.  I would love for you to describe your situation if it doesnt meet one of these criteria works.

How can you say that I'm wrong when you don't know any of the details?

I would love to describe my situation to you but I'm pretty sure you're more interested in being right than you are in offering actual advice.

How is it "less safe" to pay off your mortgage when your other choice is to invest in the stock market?

The same way everyone here expects to retire with a 3.5% to 4% SWR.  If you believe that works then its smarter to keeper more captial liquid.  It gives you much more flexibiity than putting all that money into one asset that just keeps up with inflation.   and not in theory not IMO ... based on historical data the act of paying down a low interest rate mortgage in the US exposes you to more risk than investing the money.  which is the same data the whole concept of FIRE is based on

tomsang

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Re: Why do some people not classify mortgages as debt?
« Reply #95 on: March 24, 2015, 09:28:00 AM »
This is 100% incorrect.  the only situation where this benefits you assuming you plan to FIRE is if a mortgage pushes you into the 25% tax bracket with spending... if it does not it is similar to putting your money in taxable accounts vs tax deferred.  You THINK you're doing it better and being less risky but you are in fact not.  I would love for you to describe your situation if it doesnt meet one of these criteria works.

How can you say that I'm wrong when you don't know any of the details?

I would love to describe my situation to you but I'm pretty sure you're more interested in being right than you are in offering actual advice.

How is it "less safe" to pay off your mortgage when your other choice is to invest in the stock market?


If you or anyone else is paying off their mortgage to be safe please do not retire until your SWR is 1% or less.  The 4% rule and all other derivatives is based on the performance of the stock market since we have data.  Mathematically, paying off a sub 4% fixed rate mortgage is going to create a scenario where you are less safe.  You would be better off 95% of the time.  The times that you would not be better off your 4% portfolio would fail as well.  Inflation will kill you in retirement faster than stock market returns.  Your 30 year fixed rate mortgage is a perfect hedge against inflation.  Stocks also tend to do well with inflation.  The scenarios where keeping a mortgage would be poor is if we had long term deflation.  At that point you are worse off owning a home, stocks and other assets.     

MrFancypants

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Re: Why do some people not classify mortgages as debt?
« Reply #96 on: March 24, 2015, 09:30:53 AM »
If you or anyone else is paying off their mortgage to be safe please do not retire until your SWR is 1% or less.  The 4% rule and all other derivatives is based on the performance of the stock market since we have data.  Mathematically, paying off a sub 4% fixed rate mortgage is going to create a scenario where you are less safe.  You would be better off 95% of the time.  The times that you would not be better off your 4% portfolio would fail as well.  Inflation will kill you in retirement faster than stock market returns.  Your 30 year fixed rate mortgage is a perfect hedge against inflation.  Stocks also tend to do well with inflation.  The scenarios where keeping a mortgage would be poor is if we had long term deflation.  At that point you are worse off owning a home, stocks and other assets.   

My retirement will not be based directly on the performance of the stock market; I will not have to draw a single penny from my investment portfolio when I choose to retire.

boarder42

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Re: Why do some people not classify mortgages as debt?
« Reply #97 on: March 24, 2015, 09:34:05 AM »
If you or anyone else is paying off their mortgage to be safe please do not retire until your SWR is 1% or less.  The 4% rule and all other derivatives is based on the performance of the stock market since we have data.  Mathematically, paying off a sub 4% fixed rate mortgage is going to create a scenario where you are less safe.  You would be better off 95% of the time.  The times that you would not be better off your 4% portfolio would fail as well.  Inflation will kill you in retirement faster than stock market returns.  Your 30 year fixed rate mortgage is a perfect hedge against inflation.  Stocks also tend to do well with inflation.  The scenarios where keeping a mortgage would be poor is if we had long term deflation.  At that point you are worse off owning a home, stocks and other assets.   

My retirement will not be based directly on the performance of the stock market; I will not have to draw a single penny from my investment portfolio when I choose to retire.

IT DOESNT MATTER YOU"RE STILL EXPOSING YOURSELF TO MORE RISK BY OUT RIGHT OWNING YOUR RESIDENCE.  if that money were invested and you had a mortgage you would have less risk believe it or not its a plain and simple fact based on historical data.  it doesnt matter where the rest of your retirement funding comes from. 

boarder42

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Re: Why do some people not classify mortgages as debt?
« Reply #98 on: March 24, 2015, 09:35:18 AM »
if you had any data that showed how owning your home statistically comes out ahead please display it ... my guess is it will be in the 5% tomsang mentions above

MrFancypants

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Re: Why do some people not classify mortgages as debt?
« Reply #99 on: March 24, 2015, 09:36:27 AM »
IT DOESNT MATTER YOU"RE STILL EXPOSING YOURSELF TO MORE RISK BY OUT RIGHT OWNING YOUR RESIDENCE.  if that money were invested and you had a mortgage you would have less risk believe it or not its a plain and simple fact based on historical data.  it doesnt matter where the rest of your retirement funding comes from.

I'm going to need more information than "believe it or not" in order to "believe it."

Also, TYPING THE SAME THING OVER AND OVER AGAIN IN ALL CAPS DOESN'T MAKE YOU RIGHT, IT ONLY MAKES YOU ANNOYING.

Please explain to me: exactly why is it MORE RISK to pay off a house early than it is to keep a mortgage and invest in the stock market?
« Last Edit: March 24, 2015, 09:39:10 AM by Mykl »