Why do some people not classify mortgages as debt?

[tomsang]

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.

Some people on this board are trying to retire early.  Based on this statement you can go to Vegas to invest as you don't need the money in the first place.  With your scenario why would you not take on more risk as it has no impact on your retirement(not that having a mortgage is riskier).  You could leave it to charity or family.  If you don't need the money then why would you not go with the mathematically optimal investment policy.  I guess the hassle of setting up auto-pay or creating an asset management plan would be the only reasons.  I guess that is nice that you have set up your life so that you don't have to care about your investments.  Where is all of the retirement money coming from?  SS, Pension, military benefits, etc.

[boarder42]

go to Cfiresim.com

enter use the default 1MIL and 40k that come up . Change the how long it lasts year at the top to 2100

run the sim

Now go back to the main page input 1.2MM and leave the 40k alone

under additional spending enter 11457 and make it not inflation adjusted set the later date to 30 years after your retire date ... run it again 11457 is the mortgage payment on a 200k home at 4% over 30 years.

His site is down right now it looks like but you will see a 3-5% difference in the likelihood of success of the latter vs the former. 

[brooklynguy]

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?

Because we are looking at historical data about the capital markets and inflation rates in order to determine reasonable expectations about the future (the past is an imperfect tool for predicting the future, but it's the best tool we have).  Historical mortgage rates, on the other hand, are irrelevant to the question of what mortgage rate you can obtain today by taking out a mortgage now; it doesn't matter if the historical average mortgage rate was 17% (a number I just made up) -- if you can lock in a 3.5% rate today, that's going to be your rate for the next 30 years.  And the fact that that rate is so extraordinarily low by historical standards is the reason we are all clamoring from our soapboxes about how great it is to take out a 30 year mortgage today, invest the proceeds, and carry the loan to maturity.

EDIT: fixed typo

[MrFancypants]

Some people on this board are trying to retire early.  Based on this statement you can go to Vegas to invest as you don't need the money in the first place.  With your scenario why would you not take on more risk as it has no impact on your retirement.  You could leave it to charity or family.  If you don't need the money then why would you not go with the mathematically optimal investment policy.  I guess the hassle of setting up auto-pay or creating an asset management plan would be the only reasons.  I guess that is nice that you have set up your life so that you don't have to care about your investments.  Where is all of the retirement money coming from?  SS, Pension, military benefits, etc.

You know when they say "diversify your portfolio?"  I think the spirit of that saying goes beyond simply buying different kinds of stock, or throwing bonds into the mix.

My retirement will be a combination of pension, real estate holdings, and later on in life to be guaranteed by investment savings and Social Security.

Yeah, I can "optimize my growth" by throwing it all at the stock market, and then I'm one burst bubble away from having to modify my standard of living or delaying my retirement. 

Yeah boarder42, in 2100 if I ride out those ups and downs I'd have more money, but I'll be dead in 2100 so why should I care what your simulation numbers look like?

[boarder42]

Some people on this board are trying to retire early.  Based on this statement you can go to Vegas to invest as you don't need the money in the first place.  With your scenario why would you not take on more risk as it has no impact on your retirement.  You could leave it to charity or family.  If you don't need the money then why would you not go with the mathematically optimal investment policy.  I guess the hassle of setting up auto-pay or creating an asset management plan would be the only reasons.  I guess that is nice that you have set up your life so that you don't have to care about your investments.  Where is all of the retirement money coming from?  SS, Pension, military benefits, etc.

You know when they say "diversify your portfolio?"  I think the spirit of that saying goes beyond simply buying different kinds of stock, or throwing bonds into the mix.

My retirement will be a combination of pension, real estate holdings, and later on in life to be guaranteed by investment savings and Social Security.

Yeah, I can "optimize my growth" by throwing it all at the stock market, and then I'm one burst bubble away from having to modify my standard of living or delaying my retirement. 

Yeah boarder42, in 2100 if I ride out those ups and downs I'd have more money, but I'll be dead in 2100 so why should I care what your simulation numbers look like?

its a simulation that just shows how long money will last.  and we can all agree we will be dead by then.  you have done nothing to try to show data that says a mortgage is risky.  so until that comes up all the data us soap boxers are presenting that you just choose not to believe out of some feeling ... yeah just keep feeling that way b/c feelings make the world work

[boarder42]

ooo just thought of a great analogy. 

Flying vs driving. 

Basically everyone denying the logic behind why having a mortgage is better than having one paid off is akin to the irrational fear of flying when they will gladly get into a car everyday. 

Its a feeling not backed by facts and data.  so yes go ahead and have a paid off home vs investing but this is akin to being afraid to fly and still driving a car.   

[boarder42]

also in the event of this catostrophic stock market collapse that you speak of... IF that were to ever happen it would throw the world into some crazy state of anarchy.  Meaning really you should be stock piling guns and bullets b/c thats what you'll need then.  not real estate pensions and social security. 

[Bjorn]

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?

Because we are looking at historical data about the capital markets and inflation rates in order to determine reasonable expectations about the future (the past is an imperfect tool for predicting the future, but it's the best tool we have).  Historical mortgage rates, on the other hand, are irrelevant to the question of what mortgage rate you can obtain today by taking out a mortgage now; it doesn't matter if the historical average mortgage rate was 17% (a number I just made up) -- if you can lock in a 3.5% rate today, that's going to be your rate for the next 30 years.  And the fact that that rate is so extraordinarily low by historical standards is the reason we are all clamoring from our soapboxes about how great it is to take out a 30 year mortgage today, invest the proceeds, and carry the loan to maturity.

EDIT: fixed typo

Good point.

I didn't know you could fix the rate for 30 years. It seems like 10 years is the maximum of what banks are offering in my country.

I currently have a 1M house. Your advice for me would be to max the loan, fix the interest (currently at 3.3%) for 10 years and invest all spare cash instead of paying down the debt? What if 10 years from now the interest rates are at 8% and the RE market has crashed? Now I'm left with a high interest loan and a house that has dropped in value. Sounds risky to me.

My biggest fear when it comes to FIRE is being a debt slave and having to work just to clear debt. Without debt, that risk is zero. Yes, maybe there is a mathematically higher risk that the 4% SWR won't work without the mortage, but that is easily adjustable by spending less or making some more money. With debt you don't have as much control.

[Goldielocks]

ok - just playing a bit of devil's advocate here...

why isn't a monthly rent considered a debt? 

Sure, you pay for the current or previous month (depending on your lease) and each time you pay you are 'paid in full' much like using a credit card and paying off the balance in full each month.  And most people like to lump these as 'expenses' rather than 'debt'.  But from a philosophical standpoint it is money I owe to someone else in monthly installments, and if I don't pay it bad things happen.

For a broader question, why do we make such a distinction between monthly, reoccurring expenses (rent, insurance, utilities, etc) and monthly payments for a loan.

I always considered a mortgage as a "long term debt" -- until OP posted this and I started to think.

Like Nero, I asked myself:

Why is Rent not debt? but a mortgage is?
Why is Leasing a car not a debt, but a car loan is?


My Conclusion:

A true debt occurs where you can not sell the item in question (reasonable easily) to "make good" on the loan.

Therefore, mortgages, title loan, Pawn shops, and margin accounts (above water) are not truly debts, but financial arrangements.
Doesn't mean I want to continue to take on risks with my "financial arrangements" turning into debts, or that I will cease paying these off, though.

Jumping in a little late - and I have not read all the replies on the last pages yet... will do so now  :-).

[brooklynguy]

I didn't know you could fix the rate for 30 years. It seems like 10 years is the maximum of what banks are offering in my country.

I currently have a 1M house. Your advice for me would be to max the loan, fix the interest (currently at 3.3%) for 10 years and invest all spare cash instead of paying down the debt? What if 10 years from now the interest rates are at 8% and the RE market has crashed? Now I'm left with a high interest loan and a house that has dropped in value. Sounds risky to me.

My biggest fear when it comes to FIRE is being a debt slave and having to work just to clear debt. Without debt, that risk is zero. Yes, maybe there is a mathematically higher risk that the 4% SWR won't work without the mortage, but that is easily adjustable by spending less or making some more money. With debt you don't have as much control.

All this advocacy for exploiting low-interest mortgage debt and investing the proceeds is based on the US mortgage market, where you can obtain a 30-year, fixed rate loan with rates currently under 4%.  If you only have the ability to lock in a fixed rate of 3.3% for 10 years, that's less of a slam dunk, and I would share your hesitation in doing so (unless you can get some kind of guaranteed investment return in excess of 3.3% (like a bank CD or something) to arbitrage the difference).

[Goldielocks]

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?

+1 
I like the way you think!  5 year mortgages are the norm here, so using historical rates is needed if you run cFireSim per the previous suggestions.

[boarder42]

obviously this forum is 80% or greater american and all those posting on here are posting with american rates in mind ... you have very different situations in other countries.

[Bjorn]

I didn't know you could fix the rate for 30 years. It seems like 10 years is the maximum of what banks are offering in my country.

I currently have a 1M house. Your advice for me would be to max the loan, fix the interest (currently at 3.3%) for 10 years and invest all spare cash instead of paying down the debt? What if 10 years from now the interest rates are at 8% and the RE market has crashed? Now I'm left with a high interest loan and a house that has dropped in value. Sounds risky to me.

My biggest fear when it comes to FIRE is being a debt slave and having to work just to clear debt. Without debt, that risk is zero. Yes, maybe there is a mathematically higher risk that the 4% SWR won't work without the mortage, but that is easily adjustable by spending less or making some more money. With debt you don't have as much control.

All this advocacy for exploiting low-interest mortgage debt and investing the proceeds is based on the US mortgage market, where you can obtain a 30-year, fixed rate loan with rates currently under 4%.  If you only have the ability to lock in a fixed rate of 3.3% for 10 years, that's less of a slam dunk, and I would share your hesitation in doing so (unless you can get some kind of guaranteed investment return in excess of 3.3% (like a bank CD or something) to arbitrage the difference).

Now this makes a lot of sense. I have been basing all my reasoning on the fact that you can't fix the interest for 30 years. In Norway only about 10% of the people fix their rates, and you can only fix them for 3, 5 or 10 years.

[Cookie78]

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?

Because we are looking at historical data about the capital markets and inflation rates in order to determine reasonable expectations about the future (the past is an imperfect tool for predicting the future, but it's the best tool we have).  Historical mortgage rates, on the other hand, are irrelevant to the question of what mortgage rate you can obtain today by taking out a mortgage now; it doesn't matter if the historical average mortgage rate was 17% (a number I just made up) -- if you can lock in a 3.5% rate today, that's going to be your rate for the next 30 years.  And the fact that that rate is so extraordinarily low by historical standards is the reason we are all clamoring from our soapboxes about how great it is to take out a 30 year mortgage today, invest the proceeds, and carry the loan to maturity.

EDIT: fixed typo

Good point.

I didn't know you could fix the rate for 30 years. It seems like 10 years is the maximum of what banks are offering in my country.

I currently have a 1M house. Your advice for me would be to max the loan, fix the interest (currently at 3.3%) for 10 years and invest all spare cash instead of paying down the debt? What if 10 years from now the interest rates are at 8% and the RE market has crashed? Now I'm left with a high interest loan and a house that has dropped in value. Sounds risky to me.

My biggest fear when it comes to FIRE is being a debt slave and having to work just to clear debt. Without debt, that risk is zero. Yes, maybe there is a mathematically higher risk that the 4% SWR won't work without the mortage, but that is easily adjustable by spending less or making some more money. With debt you don't have as much control.

I am not an expert, just trying to understand because I am in a similar situation, with 5 year loans.

In your above scenario you are left with a high interest loan and a house that has dropped in value, but also a lot more in investments that you wouldn't have had otherwise, that you could use, if necessary, to pay towards the high interest loan at that time, right? And, in theory, more accumulated in investments than what you would have otherwise put towards your loan, due to higher interest rates in investments, than on your mortgage.

So WHILE mortgage rates are low it is still better to put the money in investments, ya? If they go up over time, switch strategies at that point (using your investments if you have to).

[brooklynguy]

I am not an expert, just trying to understand because I am in a similar situation, with 5 year loans.

In your above scenario you are left with a high interest loan and a house that has dropped in value, but also a lot more in investments that you wouldn't have had otherwise, that you could use, if necessary, to pay towards the high interest loan at that time, right? And, in theory, more accumulated in investments than what you would have otherwise put towards your loan, due to higher interest rates in investments, than on your mortgage.

So WHILE mortgage rates are low it is still better to put the money in investments, ya? If they go up over time, switch strategies at that point (using your investments if you have to).

If your time horizon is only 5 years, it only makes sense to bet on your investments outperforming your mortgage rate if the rate is low enough that some conservative, non-volatile investment will beat that rate.  Putting all the proceeds in the stock market and expecting them to outpace the mortgage rate during that short, 5-year period would be taking a pretty big gamble.

[MrFancypants]

its a simulation that just shows how long money will last.  and we can all agree we will be dead by then.  you have done nothing to try to show data that says a mortgage is risky.  so until that comes up all the data us soap boxers are presenting that you just choose not to believe out of some feeling ... yeah just keep feeling that way b/c feelings make the world work

Your claim is that paying cash for a house is MORE RISKY than having a mortgage.  YOU made that claim.  NOT me.

It is not up to me to prove you right.

*My* statement was that which way you go on this decision depends on your situation.  Are you so narrow minded in your approach to financial security that the only possible way to get to independence is through the 4% rule?

[Bjorn]

I am not an expert, just trying to understand because I am in a similar situation, with 5 year loans.

In your above scenario you are left with a high interest loan and a house that has dropped in value, but also a lot more in investments that you wouldn't have had otherwise, that you could use, if necessary, to pay towards the high interest loan at that time, right? And, in theory, more accumulated in investments than what you would have otherwise put towards your loan, due to higher interest rates in investments, than on your mortgage.

So WHILE mortgage rates are low it is still better to put the money in investments, ya? If they go up over time, switch strategies at that point (using your investments if you have to).

How sure can you be that your investments will have a higher value than what you started with? In such a short timespan as 10 years you might not get historical returns.

[boarder42]

its a simulation that just shows how long money will last.  and we can all agree we will be dead by then.  you have done nothing to try to show data that says a mortgage is risky.  so until that comes up all the data us soap boxers are presenting that you just choose not to believe out of some feeling ... yeah just keep feeling that way b/c feelings make the world work

Your claim is that paying cash for a house is MORE RISKY than having a mortgage.  YOU made that claim.  NOT me.

It is not up to me to prove you right.

*My* statement was that which way you go on this decision depends on your situation.  Are you so narrow minded in your approach to financial security that the only possible way to get to independence is through the 4% rule?

Yes and with the caveats i posted there isnt a time where it is less risky to have a paid off house vs a mortgage

assuming
Current US interest rates on 30 year home loans
Historical market returns which is the backbone of FIRE

We are all just saying that you are inherently creating more risk in your life ... can i be FI on an 8% SWR you know what there may be some time in history you could have made this work ... but 95 times out of 100 carrying a mortgage is less risky than owning your home outright in today's environment.  and the 4% SWR only has a 76% success rate over infinite time.  SOOOO... yeah you can be financially independent however you choose but why take on extra risk for no reason.  And owning a home does that.

[Goldielocks]

If you think of your personal financials as a "business" would, you need to consider the following:

Debt and Liabilities
Assets
Risk versus Return on your Investment, and
CASH FLOW

The thread so far has discussed the first three, but no one has mentioned CASH FLOW, which, as we know, is VITAL for most business' success.  Even if you are earning more on your investments than you pay on your mortgage, it means little, if it ties up your cash flow beyond a comfort point.

I expect that many of us who opt to paying off a mortgage while talking about lowering risk, are also thinking about the flexibilty of available cashflow, versus tied-up investment commitments that may take 1 month to 5 years to free up.   Obviously case by case dependent,  but think about it.  Sometimes cash flow and flexibilty is more important that absolute returns.

I would definitely agree with all the "invest" arguments, if the investment created fixed income or dividends at a rate higher than the mortgage, with similar risk as real estate.

[boarder42]

If you think of your personal financials as a "business" would, you need to consider the following:

Debt and Liabilities
Assets
Risk versus Return on your Investment, and
CASH FLOW

The thread so far has discussed the first three, but no one has mentioned CASH FLOW, which, as we know, is VITAL for most business' success.  Even if you are earning more on your investments than you pay on your mortgage, it means little, if it ties up your cash flow beyond a comfort point.

I expect that many of us who opt to paying off a mortgage while talking about lowering risk, are also thinking about the flexibilty of available cashflow, versus tied-up investment commitments that may take 1 month to 5 years to free up.   Obviously case by case dependent,  but think about it.  Sometimes cash flow and flexibilty is more important that absolute returns.

I would definitely agree with all the "invest" arguments, if the investment created fixed income or dividends at a rate higher than the mortgage, with similar risk as real estate.

Your house is about as unliquid an asset as you can get vs stocks that i can sell tomorrow.  so Cash flow is better in a world with the money invested. your cash flow arguement holds no water in this context as the alternative to being invested in stocks is invested in a building that you would have to sell and vacate. 

and dont even start the dividend arguement on here we dont need to get that going about how much you lose by trying to chase dividends.  they arent printed out of thin air.

Your not backing your less risk argument -  besides not having access to a 30 year 4% mortgage there hasnt been one argument that holds water.


Cash flow
 
Case A paid off house 200k in house.  i think we can all agree this is a concrete asset

Case B invested in VTSAX taxable account.  - 200k that can be taken out at any time and be in your bank in less than a week. 

[thd7t]

its a simulation that just shows how long money will last.  and we can all agree we will be dead by then.  you have done nothing to try to show data that says a mortgage is risky.  so until that comes up all the data us soap boxers are presenting that you just choose not to believe out of some feeling ... yeah just keep feeling that way b/c feelings make the world work

Your claim is that paying cash for a house is MORE RISKY than having a mortgage.  YOU made that claim.  NOT me.

It is not up to me to prove you right.

*My* statement was that which way you go on this decision depends on your situation.  Are you so narrow minded in your approach to financial security that the only possible way to get to independence is through the 4% rule?

Yes and with the caveats i posted there isnt a time where it is less risky to have a paid off house vs a mortgage

assuming
Current US interest rates on 30 year home loans
Historical market returns which is the backbone of FIRE

We are all just saying that you are inherently creating more risk in your life ... can i be FI on an 8% SWR you know what there may be some time in history you could have made this work ... but 95 times out of 100 carrying a mortgage is less risky than owning your home outright in today's environment.  and the 4% SWR only has a 76% success rate over infinite time.  SOOOO... yeah you can be financially independent however you choose but why take on extra risk for no reason.  And owning a home does that.

I have a question about this (I don't know if it impacts your numbers).  You keep saying that owning a house increases risk.  Do you mean buying/paying cash for a house?  Does it change things if a person already owns or is given a house?  I'm really interested in how that impacts risk.  I think that holding a mortgage is a form of diversification and its regular payment is increasing an illiquid asset, but what about an unmortgaged house?

[MrFancypants]

Yes and with the caveats i posted there isnt a time where it is less risky to have a paid off house vs a mortgage

assuming
Current US interest rates on 30 year home loans
Historical market returns which is the backbone of FIRE

We are all just saying that you are inherently creating more risk in your life ... can i be FI on an 8% SWR you know what there may be some time in history you could have made this work ... but 95 times out of 100 carrying a mortgage is less risky than owning your home outright in today's environment.  and the 4% SWR only has a 76% success rate over infinite time.  SOOOO... yeah you can be financially independent however you choose but why take on extra risk for no reason.  And owning a home does that.

The reason your approach doesn't work for me is timing.  The HUGE risk you're not accounting for are standard market fluctuations.  If another 1973, 1980, 1990, 2001, 1981, 1990, 2001, or 2008 (recessions) occurs within a year of my planned retirement I may not be able to afford to retire, because now my mortgage isn't covered unless I'm willing to take a monetary loss by drawing from a portfolio that has greatly diminished in value.

If I was waiting to retire at 65, your approach might suit me best, because I'd have decades to watch my holdings fluctuate.  But I'm not waiting to retire at 65.

With a paid off house it doesn't matter if 2008 happens again, because diminished real estate value doesn't change the fact that the house continues to function as my residence.

There's no adjustment in lifestyle, there's no panic over how the payment is going to be made, there's no slaving over spreadsheets to determine how to minimize damage to my portfolio while still making that payment, and there's no applying for a position at Wal-Mart to fill in the gaps.

[boarder42]

its a simulation that just shows how long money will last.  and we can all agree we will be dead by then.  you have done nothing to try to show data that says a mortgage is risky.  so until that comes up all the data us soap boxers are presenting that you just choose not to believe out of some feeling ... yeah just keep feeling that way b/c feelings make the world work

Your claim is that paying cash for a house is MORE RISKY than having a mortgage.  YOU made that claim.  NOT me.

It is not up to me to prove you right.

*My* statement was that which way you go on this decision depends on your situation.  Are you so narrow minded in your approach to financial security that the only possible way to get to independence is through the 4% rule?

Yes and with the caveats i posted there isnt a time where it is less risky to have a paid off house vs a mortgage

assuming
Current US interest rates on 30 year home loans
Historical market returns which is the backbone of FIRE

We are all just saying that you are inherently creating more risk in your life ... can i be FI on an 8% SWR you know what there may be some time in history you could have made this work ... but 95 times out of 100 carrying a mortgage is less risky than owning your home outright in today's environment.  and the 4% SWR only has a 76% success rate over infinite time.  SOOOO... yeah you can be financially independent however you choose but why take on extra risk for no reason.  And owning a home does that.

I have a question about this (I don't know if it impacts your numbers).  You keep saying that owning a house increases risk.  Do you mean buying/paying cash for a house?  Does it change things if a person already owns or is given a house?  I'm really interested in how that impacts risk.  I think that holding a mortgage is a form of diversification and its regular payment is increasing an illiquid asset, but what about an unmortgaged house?

The math works out the same whether you are buying a brand new home cash now or Refinancing the one you have owning a home with a mortgage on it(30 year US 4%) is more risk averse by the numbers than owning your home outright. 

Can you come up with a scenario where your SWR is so low that you see 100% chance of success in history yet.  but as you decrease towards not 100% the person with a mortgage will still be 100% successful while the person who owns outright will start to have lower chances of success. 

the only reasons i wont have a mortgage are

1. rates go up above 5% then i would probably have to run some numbers again to see what the risks were
2. Having a mortgage pushes me into the 25% tax bracket
3. I dont live in america where rates are locked in for 30 years


Mainly assuming those 3 things above the general rule of thumb for FIRE should be to pay minimum payments and to take out a mortgage for 30 years with a low rate vs paying cash for a house. 

When it comes to REFI you have to run a whole different set of numbers.  But it may make sense assuming equivalent or similarly low interest rates and how much the REFI costs. 

seriously i'm mad at myself for being on a 15 year right now b/c its costing me money over time.  I plan to move in the next few months and go back to a 30 year.  i used to think the other way too.

[boarder42]

Yes and with the caveats i posted there isnt a time where it is less risky to have a paid off house vs a mortgage

assuming
Current US interest rates on 30 year home loans
Historical market returns which is the backbone of FIRE

We are all just saying that you are inherently creating more risk in your life ... can i be FI on an 8% SWR you know what there may be some time in history you could have made this work ... but 95 times out of 100 carrying a mortgage is less risky than owning your home outright in today's environment.  and the 4% SWR only has a 76% success rate over infinite time.  SOOOO... yeah you can be financially independent however you choose but why take on extra risk for no reason.  And owning a home does that.

The reason your approach doesn't work for me is timing.  The HUGE risk you're not accounting for are standard market fluctuations.  If another 1973, 1980, 1990, 2001, 1981, 1990, 2001, or 2008 (recessions) occurs within a year of my planned retirement I may not be able to afford to retire, because now my mortgage isn't covered unless I'm willing to take a monetary loss by drawing from a portfolio that has greatly diminished in value.

If I was waiting to retire at 65, your approach might suit me best, because I'd have decades to watch my holdings fluctuate.  But I'm not waiting to retire at 65.

With a paid off house it doesn't matter if 2008 happens again, because diminished real estate value doesn't change the fact that the house continues to function as my residence.

There's no adjustment in lifestyle, there's no panic over how the payment is going to be made, there's no slaving over spreadsheets to determine how to minimize damage to my portfolio while still making that payment, and there's no applying for a position at Wal-Mart to fill in the gaps.

and by making all these payments now you're costing yourself the runup in 2013 and 2014 and future runups that are basically causing the risk you're trying to prevent

you can earlier by holding a mortgage vs paying it down.  so this extra year you may have to work due to a short fall would still be inside of the year you plan to retire now.  i'm 28 i'm gonna retire at 35 at the latest.  if i were to pay my mortgage down vs invest it pushes that out 2 years.  Youre not looking at the opportunity cost of you money. 

[boarder42]

Its a very similar concept to investing in Tax deferred accounts vs taxable. 

if i invest in taxable accounts i know i'm going to have access to every penny whenever i want it with out a SEPP 72t or a Roth ladder.  But i add 3-4 years to my working years by going this route.  for the chance that these may not be there. 

[MrFancypants]

and by making all these payments now you're costing yourself the runup in 2013 and 2014 and future runups that are basically causing the risk you're trying to prevent

you can earlier by holding a mortgage vs paying it down.  so this extra year you may have to work due to a short fall would still be inside of the year you plan to retire now.  i'm 28 i'm gonna retire at 35 at the latest.  if i were to pay my mortgage down vs invest it pushes that out 2 years.  Youre not looking at the opportunity cost of you money.

It must be nice to know the future.  If I had a crystal ball, like you, I might make different decisions.

[thd7t]

its a simulation that just shows how long money will last.  and we can all agree we will be dead by then.  you have done nothing to try to show data that says a mortgage is risky.  so until that comes up all the data us soap boxers are presenting that you just choose not to believe out of some feeling ... yeah just keep feeling that way b/c feelings make the world work

Your claim is that paying cash for a house is MORE RISKY than having a mortgage.  YOU made that claim.  NOT me.

It is not up to me to prove you right.

*My* statement was that which way you go on this decision depends on your situation.  Are you so narrow minded in your approach to financial security that the only possible way to get to independence is through the 4% rule?

Yes and with the caveats i posted there isnt a time where it is less risky to have a paid off house vs a mortgage

assuming
Current US interest rates on 30 year home loans
Historical market returns which is the backbone of FIRE

We are all just saying that you are inherently creating more risk in your life ... can i be FI on an 8% SWR you know what there may be some time in history you could have made this work ... but 95 times out of 100 carrying a mortgage is less risky than owning your home outright in today's environment.  and the 4% SWR only has a 76% success rate over infinite time.  SOOOO... yeah you can be financially independent however you choose but why take on extra risk for no reason.  And owning a home does that.

I have a question about this (I don't know if it impacts your numbers).  You keep saying that owning a house increases risk.  Do you mean buying/paying cash for a house?  Does it change things if a person already owns or is given a house?  I'm really interested in how that impacts risk.  I think that holding a mortgage is a form of diversification and its regular payment is increasing an illiquid asset, but what about an unmortgaged house?

The math works out the same whether you are buying a brand new home cash now or Refinancing the one you have owning a home with a mortgage on it(30 year US 4%) is more risk averse by the numbers than owning your home outright. 

Can you come up with a scenario where your SWR is so low that you see 100% chance of success in history yet.  but as you decrease towards not 100% the person with a mortgage will still be 100% successful while the person who owns outright will start to have lower chances of success. 

the only reasons i wont have a mortgage are

1. rates go up above 5% then i would probably have to run some numbers again to see what the risks were
2. Having a mortgage pushes me into the 25% tax bracket
3. I dont live in america where rates are locked in for 30 years


Mainly assuming those 3 things above the general rule of thumb for FIRE should be to pay minimum payments and to take out a mortgage for 30 years with a low rate vs paying cash for a house. 

When it comes to REFI you have to run a whole different set of numbers.  But it may make sense assuming equivalent or similarly low interest rates and how much the REFI costs. 

seriously i'm mad at myself for being on a 15 year right now b/c its costing me money over time.  I plan to move in the next few months and go back to a 30 year.  i used to think the other way too.

I have always figured that the tax advantage of not holding/paying a mortgage would be a substantial benefit during ER.  With the low interest rates that make this discussion interesting, the mortgage interest deduction is a much lower portion of the payment than principal, in my case.  Still, I think that you've been pretty clear that higher mortgage interest rates would change how the risk portion of this calculation works.

[boarder42]

its a simulation that just shows how long money will last.  and we can all agree we will be dead by then.  you have done nothing to try to show data that says a mortgage is risky.  so until that comes up all the data us soap boxers are presenting that you just choose not to believe out of some feeling ... yeah just keep feeling that way b/c feelings make the world work

Your claim is that paying cash for a house is MORE RISKY than having a mortgage.  YOU made that claim.  NOT me.

It is not up to me to prove you right.

*My* statement was that which way you go on this decision depends on your situation.  Are you so narrow minded in your approach to financial security that the only possible way to get to independence is through the 4% rule?

Yes and with the caveats i posted there isnt a time where it is less risky to have a paid off house vs a mortgage

assuming
Current US interest rates on 30 year home loans
Historical market returns which is the backbone of FIRE

We are all just saying that you are inherently creating more risk in your life ... can i be FI on an 8% SWR you know what there may be some time in history you could have made this work ... but 95 times out of 100 carrying a mortgage is less risky than owning your home outright in today's environment.  and the 4% SWR only has a 76% success rate over infinite time.  SOOOO... yeah you can be financially independent however you choose but why take on extra risk for no reason.  And owning a home does that.

I have a question about this (I don't know if it impacts your numbers).  You keep saying that owning a house increases risk.  Do you mean buying/paying cash for a house?  Does it change things if a person already owns or is given a house?  I'm really interested in how that impacts risk.  I think that holding a mortgage is a form of diversification and its regular payment is increasing an illiquid asset, but what about an unmortgaged house?

The math works out the same whether you are buying a brand new home cash now or Refinancing the one you have owning a home with a mortgage on it(30 year US 4%) is more risk averse by the numbers than owning your home outright. 

Can you come up with a scenario where your SWR is so low that you see 100% chance of success in history yet.  but as you decrease towards not 100% the person with a mortgage will still be 100% successful while the person who owns outright will start to have lower chances of success. 

the only reasons i wont have a mortgage are

1. rates go up above 5% then i would probably have to run some numbers again to see what the risks were
2. Having a mortgage pushes me into the 25% tax bracket
3. I dont live in america where rates are locked in for 30 years


Mainly assuming those 3 things above the general rule of thumb for FIRE should be to pay minimum payments and to take out a mortgage for 30 years with a low rate vs paying cash for a house. 

When it comes to REFI you have to run a whole different set of numbers.  But it may make sense assuming equivalent or similarly low interest rates and how much the REFI costs. 

seriously i'm mad at myself for being on a 15 year right now b/c its costing me money over time.  I plan to move in the next few months and go back to a 30 year.  i used to think the other way too.

I have always figured that the tax advantage of not holding/paying a mortgage would be a substantial benefit during ER.  With the low interest rates that make this discussion interesting, the mortgage interest deduction is a much lower portion of the payment than principal, in my case.  Still, I think that you've been pretty clear that higher mortgage interest rates would change how the risk portion of this calculation works.

well assuming your money that you're paying your mortgage with is in a taxable account and you're in the 15% bracket there is no tax burden paying your mortgage.  you're actually getting a tax benefit by the interest ... which inherently lowers your overall expenses. 

The one issue i've thought about but hadnt brought up b/c i figured maybe one of these people, who are super risk averse but yet choose the more risky option b/c they feel they are safer with no imperical data to back, would have brought up the Obamacare subsidies.  i havent done a calc to see how adding this into my spending in retirement would affect how much of a subsidy you could receive.  but if in a taxable account most of that money will be already taxed and you'll just be claiming the LTCG or QDs. 

i really just find it all super interesting that given data people choose to ignore it based on a feeling.  maybe thats why my wife thinks i'm a little cold and unemotional.  b/c facts override feelings for me.

[MrFancypants]

well assuming your money that you're paying your mortgage with is in a taxable account and you're in the 15% bracket there is no tax burden paying your mortgage.  you're actually getting a tax benefit by the interest ... which inherently lowers your overall expenses. 

The one issue i've thought about but hadnt brought up b/c i figured maybe one of these people, who are super risk averse but yet choose the more risky option b/c they feel they are safer with no imperical data to back, would have brought up the Obamacare subsidies.  i havent done a calc to see how adding this into my spending in retirement would affect how much of a subsidy you could receive.  but if in a taxable account most of that money will be already taxed and you'll just be claiming the LTCG or QDs. 

i really just find it all super interesting that given data people choose to ignore it based on a feeling.  maybe thats why my wife thinks i'm a little cold and unemotional.  b/c facts override feelings for me.

You never spelled out the exact reason why paying cash for a house is more risky than getting a mortgage.  You only supported the idea that you can make more money by carrying a mortgage and investing the money elsewhere, and nobody disputed that.

[brooklynguy]

The one issue i've thought about but hadnt brought up b/c i figured maybe one of these people, who are super risk averse but yet choose the more risky option b/c they feel they are safer with no imperical data to back, would have brought up the Obamacare subsidies.  i havent done a calc to see how adding this into my spending in retirement would affect how much of a subsidy you could receive.  but if in a taxable account most of that money will be already taxed and you'll just be claiming the LTCG or QDs. 

The consideration of ACA subsidies and other means-tested government benefits in the context of the mortgage vs payoff question has been discussed in the forum many times.  The short answer, in my view, is that the math still almost always favors carrying the mortgage even in light of those considerations.  I think this is the best thread on that specific topic:

http://forum.mrmoneymustache.com/ask-a-mustachian/should-i-pay-off-my-mortgage-early/

[brooklynguy]

You never spelled out the exact reason why paying cash for a house is more risky than getting a mortgage.  You only supported the idea that you can make more money by carrying a mortgage and investing the money elsewhere, and nobody disputed that.

It's less risky in the sense that getting the mortgage and investing the proceeds not only leaves you with more money, but reduces your chances of portfolio failure, unless your chances of portfolio failure are already 0% (in which case it doesn't matter which path you take -- either way you already have more than "enough").

My statement above is based on historical data, and you might say "but we don't know the future; it may not look like the past."  And that's true.  But the same caveat applies to everything we talk about in this forum as it pertains to retirement planning.  Are you planning to retire on an X% SWR-based stash because it provides an acceptable likelihood of success?  Well, that's based on history too.

[Goldielocks]

If you think of your personal financials as a "business" would, you need to consider the following:

Debt and Liabilities
Assets
Risk versus Return on your Investment, and
CASH FLOW

The thread so far has discussed the first three, but no one has mentioned CASH FLOW, which, as we know, is VITAL for most business' success.  Even if you are earning more on your investments than you pay on your mortgage, it means little, if it ties up your cash flow beyond a comfort point.

I expect that many of us who opt to paying off a mortgage while talking about lowering risk, are also thinking about the flexibilty of available cashflow, versus tied-up investment commitments that may take 1 month to 5 years to free up.   Obviously case by case dependent,  but think about it.  Sometimes cash flow and flexibilty is more important that absolute returns.

I would definitely agree with all the "invest" arguments, if the investment created fixed income or dividends at a rate higher than the mortgage, with similar risk as real estate.

Your house is about as unliquid an asset as you can get vs stocks that i can sell tomorrow.  so Cash flow is better in a world with the money invested. your cash flow arguement holds no water in this context as the alternative to being invested in stocks is invested in a building that you would have to sell and vacate. 

and dont even start the dividend arguement on here we dont need to get that going about how much you lose by trying to chase dividends.  they arent printed out of thin air.

Your not backing your less risk argument -  besides not having access to a 30 year 4% mortgage there hasnt been one argument that holds water.


Cash flow
 
Case A paid off house 200k in house.  i think we can all agree this is a concrete asset

Case B invested in VTSAX taxable account.  - 200k that can be taken out at any time and be in your bank in less than a week.

Agreed that a house is a sunk cost, for all intents and purposes...   but whether you have a mortgage or not, you are still committed to the same "sunk cost" of the house purchase, for the same duration.

Again, thinking like a business --

You can choose to carry a loan on your property versus buy it outright  -- this is done when you want to keep capital available for other investments (which may be more or less liquid, but with the intent to have a better rate of return)   -- this is essentially your argument about the bottom line value of keeping a mortgage to allow more investments.  This reduces your cash flow by increasing your monthly expenses, for a longer term gain.

OR

You can choose to eliminate / pay down mortgage, eliminating that monthly EXPENSE, and freeing up CASH FLOW, probably at the cost of reduced overall investment income (assuming you make good choices and don't have a bad year!).  This is the choice if you want available monthly cash flow, for items such as making payroll, or on a personal side, for club memberships.  --As most investments are rarely going to yield the same monthly / dividend income as eliminating the mortgage payment....   Over the long term it is less $$ to your balance sheet to pay off mortgage, but for some businesses, CASH FLOW is much more important, and I am willing to guess that there are personal situations where that holds true as well..

What's that you say -- why would you not just sell your investment a little every month to cover the cash flow --??   because some of the better investments don't do that well, cost a bit, or it is cumbersome / time delayed.


Just say'n -- Short term cashflow availability can be more important than overall returns, depending on the situation.

[MrFancypants]

It's less risky in the sense that getting the mortgage and investing the proceeds not only leaves you with more money, but reduces your chances of portfolio failure, unless your chances of portfolio failure are already 0% (in which case it doesn't matter which path you take -- either way you already have more than "enough").

My statement above is based on historical data, and you might say "but we don't know the future; it may not look like the past."  And that's true.  But the same caveat applies to everything we talk about in this forum as it pertains to retirement planning.  Are you planning to retire on an X% SWR-based stash because it provides an acceptable likelihood of success?  Well, that's based on history too.

What historical data shows that maintaining a mortgage reduces the chance that your stock holdings will fail?  I don't understand how those two variables are in any way related.

As I said before, I am not retiring on an X% SWR-based approach.  Going back to my very simple point that a few people somehow disagree with, for reasons I can't quite comprehend....  everyone's situation is different, and the decision to pay off their house or hold onto that debt is going to differ.

[tomsang]

What historical data shows that maintaining a mortgage reduces the chance that your stock holdings won't fail?   I don't understand how those two variables are in any way related.
As I said before, I am not retiring on an X% SWR-based approach.  Going back to my very simple point that a few people somehow disagree with, for reasons I can't quite comprehend....  everyone's situation is different, and the decision to pay off their house or hold onto that debt is going to differ.

It seems like you have not seen the data.  I think everyone has been pointing you to Cfiresim which is a good source for the data.  It appears to be down right now, http://www.firecalc.com/ is another source of the information.  All the data available from 1871 to present is tracked and shown in Cfiresim.  When Cfiresim is up you can see every 30 year period of time over the past 144 years and you will see that the stock market has never returned less than 4% over those 144 years.  If you believe that the stock market is going to deliver returns of less than 4% over the next 30 years, then you should not retire until your SWR is in the 1% range and if your retirement is on the longer side of things then you should be sub 1% as all the models are using what has historically happened 95% of the time over those 144 year.  By creating a scenarios as described above mimicking having a mortgage and investing that value vs. having no mortgage it was shown to be safer to have a mortgage at 4% and invest vs. being debt free.  A mortgage is a gift from the government to stimulate the economy.  It is a perfect hedge for inflation!  30 year fixed rate sub 4% mortgage is a huge asset to your balance sheet.  If you pay it off you are putting yourself in a riskier position. If the future brings us increased inflation then your risk for portfolio failure increases.  The 30 year fixed rate mortgage is a perfect hedge for inflation as the amounts are locked down for 30 years.  The greater the inflation the greater your safety if you have invested that into an investment portfolio.

[NoraLenderbee]

No one is arguing that mathematically, 3.25% return (paying off mortgage) is better than 7% return (historical stock market return). You don't have to shout "THE RETURN IS NOT BETTER." No one is saying it is. What some folks are saying--and which some other folks don't seem to be hearing--is that for them, maximizing the expected return is not the absolute #1 priority. There is more than one path to FI and to a happy life. If it were only about the money, then we'd all be living in our cars while slaving away at the highest-paying jobs we could find, and we'd borrow to the hilt so we could invest more. Does everyone here have the biggest mortgages they can afford? If not, why not, when the potential market return is so great?

Paying down a mortgage has benefits that Mykl and mefla and Bjorn have exhaustively described. The security and peace of mind--and low expenses--that come from being mortgage-free are worth more than an extra 3% to them, and to a lot of other people. Can we let it go already?

[MrFancypants]

It seems like you have not seen the data.  I think everyone has been pointing you to Cfiresim which is a good source for the data.  It appears to be down right now, http://www.firecalc.com/ is another source of the information.  All the data available from 1871 to present is tracked and shown in Cfiresim.  When Cfiresim is up you can see every 30 year period of time over the past 144 years and you will see that the stock market has never returned less than 4% over those 144 years.  If you believe that the stock market is going to deliver returns of less than 4% over the next 30 years, then you should not retire until your SWR is in the 1% range and if your retirement is on the longer side of things then you should be sub 1% as all the models are using what has historically happened 95% of the time over those 144 year.  By creating a scenarios as described above mimicking having a mortgage and investing that value vs. having no mortgage it was shown to be safer to have a mortgage at 4% and invest vs. being debt free.  A mortgage is a gift from the government to stimulate the economy.  It is a perfect hedge for inflation!  30 year fixed rate sub 4% mortgage is a huge asset to your balance sheet.  If you pay it off you are putting yourself in a riskier position. If the future brings us increased inflation then your risk for portfolio failure increases.  The 30 year fixed rate mortgage is a perfect hedge for inflation as the amounts are locked down for 30 years.  The greater the inflation the greater your safety if you have invested that into an investment portfolio.

What are you defining risk as?  In your equation, what is being risked by paying off the mortgage?

[tomsang]

It seems like you have not seen the data.  I think everyone has been pointing you to Cfiresim which is a good source for the data.  It appears to be down right now, http://www.firecalc.com/ is another source of the information.  All the data available from 1871 to present is tracked and shown in Cfiresim.  When Cfiresim is up you can see every 30 year period of time over the past 144 years and you will see that the stock market has never returned less than 4% over those 144 years.  If you believe that the stock market is going to deliver returns of less than 4% over the next 30 years, then you should not retire until your SWR is in the 1% range and if your retirement is on the longer side of things then you should be sub 1% as all the models are using what has historically happened 95% of the time over those 144 year.  By creating a scenarios as described above mimicking having a mortgage and investing that value vs. having no mortgage it was shown to be safer to have a mortgage at 4% and invest vs. being debt free.  A mortgage is a gift from the government to stimulate the economy.  It is a perfect hedge for inflation!  30 year fixed rate sub 4% mortgage is a huge asset to your balance sheet.  If you pay it off you are putting yourself in a riskier position. If the future brings us increased inflation then your risk for portfolio failure increases.  The 30 year fixed rate mortgage is a perfect hedge for inflation as the amounts are locked down for 30 years.  The greater the inflation the greater your safety if you have invested that into an investment portfolio.

What are you defining risk as?  In your equation, what is being risked by paying off the mortgage?

Running out of money before you die (Portfolio failure).  If you have paid off your mortgage you have taken money out of your portfolio.  With these mortgage terms you are safer with a larger portfolio and a mortgage payment per the various models.  Inflation is the number one cause of portfolio failure.  Having a larger portfolio and a fixed rate 30 year inflation hedge mortgage would help mitigate the risk of portfolio failure.  For those using a 4% SWR they are saying that investments will increase by 4% + inflation over a long period of time.  Those are using a 3% SWR or lower they are working significantly longer to get to that level.  They would speed up their retirement by keeping their mortgage and investing the difference at these rates. If our investments don't return greater than 4% then we are all screwed unless you are using a SWR of 1% or less.

[MrFancypants]

Running out of money before you die (Portfolio failure).  If you have paid off your mortgage you have taken money out of your portfolio.  With these mortgage terms you are safer with a larger portfolio and a mortgage payment per the various models.  Inflation is the number one cause of portfolio failure.  Having a larger portfolio and a fixed rate 30 year inflation hedge mortgage would help mitigate the risk of portfolio failure.  For those using a 4% SWR they are saying that investments will increase by 4% + inflation over a long period of time.  Those are using a 3% SWR or lower they are working significantly longer to get to that level.  They would speed up their retirement by keeping their mortgage and investing the difference at these rates. If our investments don't return greater than 4% then we are all screwed unless you are using a SWR of 1% or less.

So would you say that paying off a mortgage early or paying for a house in cash is not risky if you're not depending on a portfolio to retire?

A fourth time....  the decision to pay off or keep a mortgage depends on the situation.

[tomsang]

Running out of money before you die (Portfolio failure).  If you have paid off your mortgage you have taken money out of your portfolio.  With these mortgage terms you are safer with a larger portfolio and a mortgage payment per the various models.  Inflation is the number one cause of portfolio failure.  Having a larger portfolio and a fixed rate 30 year inflation hedge mortgage would help mitigate the risk of portfolio failure.  For those using a 4% SWR they are saying that investments will increase by 4% + inflation over a long period of time.  Those are using a 3% SWR or lower they are working significantly longer to get to that level.  They would speed up their retirement by keeping their mortgage and investing the difference at these rates. If our investments don't return greater than 4% then we are all screwed unless you are using a SWR of 1% or less.

So would you say that paying off a mortgage early or paying for a house in cash is NOT risky if you're NOT depending on a portfolio to retire?

A fourth time....  the decision to pay off or keep a mortgage depends on the situation.

I said that you could go to Vegas and blow every last penny if you don't need your portfolio to retire.  You most likely worked much longer than needed if you don't need your portfolio to retire or to fund your retirement, healthcare, children's education, etc.  So if you are in a situation that does not matter, you have no risk in buying bitcoins, tulips, investing in the stock market, etc.  Your financial situation would be much better off if you kept a mortgage and invested, but if you have money to burn then it does not matter.  Just like it does not matter if you invest, put your money under the mattress, give all of your portfolio away, burn the cash or anything else.  For those that need to fund our future with a portfolio then it is riskier to have a paid off house.  You are in a situation with zero risk either way.  Statistically speaking your heirs, charities, etc will be much happier if you keep your mortgage and invest the money in the stock market.   

[MrFancypants]

I said that you could go to Vegas and blow every last penny if you don't need your portfolio to retire.  You most likely worked much longer than needed if you don't need your portfolio to retire or to fund your retirement, healthcare, children's education, etc.  So if you are in a situation that does not matter, you have no risk in buying bitcoins, tulips, investing in the stock market, etc.  Your financial situation would be much better off if you kept a mortgage and invested, but if you have money to burn then it does not matter.  Just like it does not matter if you invest, put your money under the mattress, give all of your portfolio away, burn the cash or anything else.  For those that need to fund our future with a portfolio then it is riskier to have a paid off house.  You are in a situation with zero risk either way.  Statistically speaking your heirs, charities, etc will be much happier if you keep your mortgage and invest the money in the stock market.   

I'm not sure I see any difference between a portfolio worth $X amount and a life insurance check and real estate holdings worth a similar amount and the same life insurance check.

[boarder42]

No one is arguing that mathematically, 3.25% return (paying off mortgage) is better than 7% return (historical stock market return). You don't have to shout "THE RETURN IS NOT BETTER." No one is saying it is. What some folks are saying--and which some other folks don't seem to be hearing--is that for them, maximizing the expected return is not the absolute #1 priority. There is more than one path to FI and to a happy life. If it were only about the money, then we'd all be living in our cars while slaving away at the highest-paying jobs we could find, and we'd borrow to the hilt so we could invest more. Does everyone here have the biggest mortgages they can afford? If not, why not, when the potential market return is so great?

Paying down a mortgage has benefits that Mykl and mefla and Bjorn have exhaustively described. The security and peace of mind--and low expenses--that come from being mortgage-free are worth more than an extra 3% to them, and to a lot of other people. Can we let it go already?

Since you lose security by paying off a mortgage and since your piece of mind is only imaginary, no. For those outside the country without access to 30 year fixed rates I think we have been clear paying it down makes sense

[steveo]

Since you lose security by paying off a mortgage and since your piece of mind is only imaginary, no. For those outside the country without access to 30 year fixed rates I think we have been clear paying it down makes sense

The part about not getting a 30 year fixed rate makes sense but not the part about losing security by paying off a mortgage. How do you lose security ?

In Norway only about 10% of the people fix their rates, and you can only fix them for 3, 5 or 10 years.

In Australia the rate is currently 5.5% and you can only fix for I think 5 years tops. Plus that 5.5 % gives you no tax benefits so paying off your mortgage is pretty much the best financial option.

With a paid off house it doesn't matter if 2008 happens again, because diminished real estate value doesn't change the fact that the house continues to function as my residence.

There's no adjustment in lifestyle, there's no panic over how the payment is going to be made, there's no slaving over spreadsheets to determine how to minimize damage to my portfolio while still making that payment, and there's no applying for a position at Wal-Mart to fill in the gaps.

Even in America I think that this holds true. There may be significant advantages in terms of your overall portfolio to paying off the mortgage.

A fourth time....  the decision to pay off or keep a mortgage depends on the situation.

I think that this is obvious.

I also stated earlier that you do gain benefits from owning a house. The financial benefits are the cost of renting that house less any holding costs. This means you require this much less money for life. It should reduce your expenses significantly assuming you have bought a house that makes sense. It may also have additional benefits as that income is not taxed as it is not earned. Lastly it hedges housing costs for life. These aren't trivial little details that can be glossed over by stating that stocks historically have provided better returns.

[Gin1984]

Since you lose security by paying off a mortgage and since your piece of mind is only imaginary, no. For those outside the country without access to 30 year fixed rates I think we have been clear paying it down makes sense

The part about not getting a 30 year fixed rate makes sense but not the part about losing security by paying off a mortgage. How do you lose security ?

In Norway only about 10% of the people fix their rates, and you can only fix them for 3, 5 or 10 years.

In Australia the rate is currently 5.5% and you can only fix for I think 5 years tops. Plus that 5.5 % gives you no tax benefits so paying off your mortgage is pretty much the best financial option.

With a paid off house it doesn't matter if 2008 happens again, because diminished real estate value doesn't change the fact that the house continues to function as my residence.

There's no adjustment in lifestyle, there's no panic over how the payment is going to be made, there's no slaving over spreadsheets to determine how to minimize damage to my portfolio while still making that payment, and there's no applying for a position at Wal-Mart to fill in the gaps.

Even in America I think that this holds true. There may be significant advantages in terms of your overall portfolio to paying off the mortgage.

A fourth time....  the decision to pay off or keep a mortgage depends on the situation.

I think that this is obvious.

I also stated earlier that you do gain benefits from owning a house. The financial benefits are the cost of renting that house less any holding costs. This means you require this much less money for life. It should reduce your expenses significantly assuming you have bought a house that makes sense. It may also have additional benefits as that income is not taxed as it is not earned. Lastly it hedges housing costs for life. These aren't trivial little details that can be glossed over by stating that stocks historically have provided better returns.

Actually it does not.  Your insurance and property taxes go up, only the fixed part of your mortgage does not.  Having a fixed mortgage in the US at these rates, is better than paying down because that money can be earning you money.  If you pay it down, all it does is lower your costs. 

[boarder42]

Since you lose security by paying off a mortgage and since your piece of mind is only imaginary, no. For those outside the country without access to 30 year fixed rates I think we have been clear paying it down makes sense

The part about not getting a 30 year fixed rate makes sense but not the part about losing security by paying off a mortgage. How do you lose security ?

In Norway only about 10% of the people fix their rates, and you can only fix them for 3, 5 or 10 years.

In Australia the rate is currently 5.5% and you can only fix for I think 5 years tops. Plus that 5.5 % gives you no tax benefits so paying off your mortgage is pretty much the best financial option.

With a paid off house it doesn't matter if 2008 happens again, because diminished real estate value doesn't change the fact that the house continues to function as my residence.

There's no adjustment in lifestyle, there's no panic over how the payment is going to be made, there's no slaving over spreadsheets to determine how to minimize damage to my portfolio while still making that payment, and there's no applying for a position at Wal-Mart to fill in the gaps.

Even in America I think that this holds true. There may be significant advantages in terms of your overall portfolio to paying off the mortgage.

A fourth time....  the decision to pay off or keep a mortgage depends on the situation.

I think that this is obvious.

I also stated earlier that you do gain benefits from owning a house. The financial benefits are the cost of renting that house less any holding costs. This means you require this much less money for life. It should reduce your expenses significantly assuming you have bought a house that makes sense. It may also have additional benefits as that income is not taxed as it is not earned. Lastly it hedges housing costs for life. These aren't trivial little details that can be glossed over by stating that stocks historically have provided better returns.

There isnt have you paid attention to anything anyone has said?  i dont think you have.  if you have a 30 year fixed rate mortgage you lose the security ie increase risk of running out of money before you die.  its a plain and simple fact based on historic markets.  Doesnt F'n matter if 2008 happens right when you retire or not.  we are not preaching this b/c you can make more money in the market than in a house over time.  Its b/c a house payment is also inflation proof.  A by product of the market making you more money is increased security in the event of a down market.  You have more liquid capital.  etc. etc. 

And stop bringing up people who cant get 30 year fixed rates at low rates... we've already covered they are best paying it off. 

if you retired in 2008 with a 30 year mortgage at 4% vs retiring with your home paid off and the rest invested all things being equal the retiree with the mortgage will win. 

EVERY. SINGLE. TIME. 

its not a feeling its not a belief its not a false piece of mind or sense of security its actual security. 

[I'm a red panda]

Here's another question: Why does it matter if people classify it as debt or not?  Is it just so you can feel better than them that you are debt free since you rent?


My mortgage is at 3.2% for 30 years.  I'm not paying it off in less than 20.  Really, I shouldn't be paying extra on it at all, but I am also somewhat risk adverse and wary of the markets (which I need to stop being...) so I have to do something with the extra money. I already have too much sitting in savings/checking accounts- and those aren't earning more than the mortgage interest, so better to the mortgage than sitting in one of those.

[boarder42]

If "being Debt free" creates more risk and less security in my life i'll always choose the more secure side even if it involves carrying debt.  if someone were to say here is a one billion dollar loan i just want you to pay me 1 billion back plus the inflation and 4% interest in 30 years i'd take that every time.

[Faraday]

....
if you retired in 2008 with a 30 year mortgage at 4% vs retiring with your home paid off and the rest invested all things being equal the retiree with the mortgage will win. 

EVERY. SINGLE. TIME. 

its not a feeling its not a belief its not a false piece of mind or sense of security its actual security.

The question I keep asking, and getting no answer to, is: "What Investments?" What investments are reasonable enough that they can stack up as a risk you should take versus paying off the (admittedly amazingly low interest rate) mortgage?

We keep talking about "investment" like it's this giant cash machine where you'll never lose a dime.  Of course a reasonable answer is "diversification", but you can't diversify much if you don't already have a boatload of cash to invest.

I've had stocks go out from under me with alarming regularity. Specific examples I can give are SDRL and some Thermo- stocks. I wasn't a stockholder in the "Old" GM or Enron, but those come to mind as well.  I nearly bought petroleum stocks to get some of those delicious dividends, but where are those stocks now?

I even had a mutual fund managed by one large brokerage firm that crashed so hard back in the early-2000's that it took five years to return to where it was when I did the asset transfer into the fund. Everyone around me saying they only lost "30% and made that back quick", where mine lost 50% and sat there for years.

And the whole time I was taking it on the chin in that mutual fund, I still had to keep paying my mortgage...and back then, it was 6%, 30 year note. My credit union ate me alive on that one.

Now look: I'm not saying I don't invest. I do, but very differently than I used to: pre-tax and much more risk-averse. What I'll grant you is that we're in this very "interesting time" when we should take advantage of the opportunities available and use that 4% mortgage as the inflation hedge you so rightly claim it is...

But if I'm going to be "smarter guy" and come out richer, how do I do it? Is it as simple as going into Vanguard indexed funds or Betterment and let'er ride?

And, if  you prefer to simply direct me to threads here on MMM, that's fair. It's a huge forum and I've not been able to read even a fraction of the amazing knowledge here....

[Retire-Canada]

The question I keep asking, and getting no answer to, is: "What Investments?" What investments are reasonable enough that they can stack up as a risk you should take versus paying off the (admittedly amazingly low interest rate) mortgage?

We keep talking about "investment" like it's this giant cash machine where you'll never lose a dime.  Of course a reasonable answer is "diversification", but you can't diversify much if you don't already have a boatload of cash to invest.

You can invest in 3 ETFs:

- US total stock market
- International markets
- Bonds

There is no real minimum investment amount [my ETF cost/share is around $30-$40]. You are highly diversified through thousands of companies around the world plus the bond market.

My broker doesn't charge a fee to buy ETFs and the MERs are low. It's win-win-win.

-- Vik

[nereo]

The question I keep asking, and getting no answer to, is: "What Investments?" What investments are reasonable enough that they can stack up as a risk you should take versus paying off the (admittedly amazingly low interest rate) mortgage?

We keep talking about "investment" like it's this giant cash machine where you'll never lose a dime.  Of course a reasonable answer is "diversification", but you can't diversify much if you don't already have a boatload of cash to invest.
...
But if I'm going to be "smarter guy" and come out richer, how do I do it? Is it as simple as going into Vanguard indexed funds or Betterment and let'er ride?
...

Hi mefla

This conversation seems to have gotten a bit heated, so lately I've kept my distance (plus I've had a few RL emergencies to deal with).
A few thoughts:  The 4% WR was based on the trinity study which looked at all monthly historical periods of the SP500 plus US treasury bonds.  To paraphrase, it concluded that you can withdraw 4%/year regardless of market conditions and have a very low (but not 0%) probability of running out of money over any 30 year period.

The key word above is SP500.  In your earlier statement you asked about "diversification" - that's exactly what an SP500 index fund gives you.  You do not need "a boatload of cash to invest" to have diversification now-a-days... you only need $1,000 to put into Vanguards SP500, Total Market, or even blended index funds (which includes the SP500 + bonds).   Investing in individual stocks will inherently be more risky than investing in 500 of the largest companies, because as you've rightly stated, if one tanks your portfolio can take years (or decades) to recover.
EDIT: As Vikyb rightly pointed out, there are even cheaper ways of achieving broad diversification into US and international equities plus bond funds. You can achieve a level of diversity today with a few hundred $ that we couldn't dream of just 20 years ago.

Finally, regarding 'risk' - there's two sides to every risk equation.  The first side is what you stand to loose if you make an investment, and this is the side that people tend to focus on, mostly because it's easy to understand and fairly easy to calculate.  If I have $100k, and the market drops 20%, I "loose" $20k (but only on paper, unless I sell).  The other side of the 'risk' coin is what you loose by not making the investment.  This is largely ignored, harder to calculate and I think a source of the confusion here.  For example, let's say you have $100k again.  If you keep it in a safety-deposit box for 20 years (or in a 0% yield insured Money Market Account) you can be assured that you will have $100k in 20 years.  The risk of loss at first appears to be 0.  "That's as safe as you can get!" some people will say.
But we realize that isn't true.  In fact you lose out to inflation every year, so that $100k will be worth about $60.1k in 20 years (2.5% inflation).  But the real 'risk' is losing out on what you could have earned had you placed it in an SP500 fund.  This is admittedly hard to calculate/predict, but we can use history as a guide.  For 20 year periods, the SP500 has given an annual return of 0.7% to 13% after inflation.  That gives you a spread of $115k to $3.9M.  That's a huge range, but in all cases it's better than cash or a savings account (at current yields).  Since your mortgage is fixed (inflation hedge), the SP500 also beats out paying down a mortgage early. FYI the median return over 20 year periods would be $466k.
This is what boarder42 and others mean when they say that it's more 'risky' to pay off a mortgage at 3% - they are taking into account the loss you would incur if you had invested.

All of this of course assumes that the future will operate more-or-less the same as the recent past, which is another lively argument that comes up on these boards.

[boarder42]

I dont understand the What investments comment if you have read MMM at all he recommends VTSAX for US stock market exposure and the vanguard total stock market international fund.  All of these have ETFs associated with them that you can invest in with vangaurd for free with no trading fees.  VTI is VTSAX equivalent. and VXUS is the international stock market equivalent. 

its not magic its investing in the total market every thing i've said above was run against cfiresim with an estimated 75% Equity to 25% bond exposure. 

And if you are invested so conservative that you're mortgage at even 5% is less than you are making in the market then you will be working along long time b/c your SWR will be a max of 2% and probably closer to 1%.

and saying youre risk averse and choosing to keep your money not invested in the total market actually creates more risk for you unless your investment gains equal or exceed the market.  you're losing to inflation etc.

Yes the market may be more volatile over the short term you may have a 2008 but if you kept your money invested and added to it during that time you came out glowing by the end of 2013.  if you were retired already there are dozens of options available to you if you have to cut back to keep a good SWR.  but over time you're creating more risk by not holding these investments.  does that make sense.  every day/month/year that goes by you choose to put 500 extra towards your mortgage compounds and creates more risk.