Author Topic: Why Do you do ....... AND pay off your mortgage early?  (Read 63360 times)

boarder42

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Why Do you do ....... AND pay off your mortgage early?
« on: March 28, 2017, 10:47:17 AM »
I wanted to look at some of the things many mustachians do on the penny pinching side while they still make the huge mistake of paying down a mortgage early.

For the purposes of this we'll use a 200k mortgage at 4% interest on a 30 year note and a person with 12k extra per year to invest or pay down their mortgage with.  Your individual scenario may vary but its still likely a large difference. assumed worst 30 year market performance of 7% without inflation and not assuming any tax benefits from paying interest.

Additional invested over 30 years not paying down mortgage. 243k

Hang drying clothes - Dryer lifespan = 10 years - 3 dryers needed over 30 years 500/dryer - 1500.  Cost of energy - 3.3kwH per load - 12c per KWH .40c per load - 10 loads per week(really high) $208/year

Total Invested thru hang drying clothes over 30 years - assuming 1500 invested up front and 208/year in energy = 32k

Mowing your own lawn - 30 weekly * 30 weeks a year - 900/year.  and lets assume your mower is free and you pay nothing to maintain it.
 
Total invested thru mowing your own law over 30 years = 91k

Biking 10miles roundtrip to work

using federal govt 52.5c per mile reimbursement and 260 working days = 1365 per year

Total invested thru biking to work over 30 years = 138k

Bringing your lunch to work


assume 10 bucks per meal eaten out *260 working days = 2600/year

Total invested thru bringing your lunch to work over 30 years =262k.

can you play with the math and make some workout better than others yes of course you can but a few points. 
1. investing vs paying down mortgage doesnt cost personal time to add value its a simple choice
2. As much as we beat emotions out of buying shit and eating out and hang drying laundry and biking to work and mowing your own lawn.  We need to take more time to truly take emotion out of the lowest hanging fruit of all our mortgages.  its simple its easy its better than free.  and it actually will save you working time on a huge scale.  compared to bringing your lunch to work.

boarder42

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #1 on: March 28, 2017, 10:55:01 AM »
feel free to add others to the list. 

redbird

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #2 on: March 28, 2017, 10:55:22 AM »
There's 2 reasons for me to pay off a mortgage early:

1) It gets a monthly bill off the plate. That's just less stress and more peace of mind.
2) Cash flow reasons. Post-FIRE, I've been keeping myself at about a $2000/month budget. It's not a hard budget, as I could spend more. I just generally don't, nor need to. If I can take away the monthly housing cost, that is a large chunk of my monthly budget that is now available to spend on other things.

Also, for hanging drying clothes - I don't do it for energy cost saving reasons, though that helps. I do it because my clothes noticeably last longer if they hang dry vs dry in a dryer. Again, it's less of a money cost reason. I really hate clothes shopping because I am a woman and stores can't size things consistently, plus being short and thin most clothes end up being sized wrong for me in one way or another.

patchyfacialhair

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #3 on: March 28, 2017, 10:59:07 AM »
Agreed: cash is definitely king.

We have a 30yr at 4% even (just got the house a month ago). I don't plan on putting any extra to the mortgage. At the end of the day, I don't feel comfortable putting extra towards it because it's highly illiquid and most likely it will only keep up with inflation.

At least with liquid investments it allows options for real estate investing, paying college costs, and building the FIRE stash. It also allows more flexibility during emergencies. One of us loses a job? Oh wait, the bank doesn't care that you've paid extra to principal...

My initial goal is to save up to our FIRE amount (for expenses not including P&I), then saving an additional $X, which will equal how much is remaining on the mortgage. If at that point I want to pay it off, then I'll write a check, if not, I'll use that extra $X saved to pay the payments.

That being said, I don't plan on staying leveraged once it's paid off. I assume in my 50s onward I'll value simplicity more than anything.

Scortius

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #4 on: March 28, 2017, 11:08:11 AM »
Agreed: cash is definitely king.

We have a 30yr at 4% even (just got the house a month ago). I don't plan on putting any extra to the mortgage. At the end of the day, I don't feel comfortable putting extra towards it because it's highly illiquid and most likely it will only keep up with inflation.

At least with liquid investments it allows options for real estate investing, paying college costs, and building the FIRE stash. It also allows more flexibility during emergencies. One of us loses a job? Oh wait, the bank doesn't care that you've paid extra to principal...

My initial goal is to save up to our FIRE amount (for expenses not including P&I), then saving an additional $X, which will equal how much is remaining on the mortgage. If at that point I want to pay it off, then I'll write a check, if not, I'll use that extra $X saved to pay the payments.

That being said, I don't plan on staying leveraged once it's paid off. I assume in my 50s onward I'll value simplicity more than anything.

This sums up my philosophy as well.  And I also agree with Redbird about reasons to be frugal in other ways.  Often the payoff isn't just in the monetary savings.  Packing a lunch can be much more healthy, riding a bike to work as well.

That said, I also agree with the premise of this thread.  It's strange to see so many people actively discussing extreme fiscal responsibility, and then turning around and making a financial decision that costs them hundreds of thousands of dollars in the long run.  It's even more distressing to see people justify this decision by using terms like 'security' and 'cash flow', when the math very clearly demonstrates that the opposite is true.  I am not against anyone paying off their mortgage early, I am simply against people making a huge financial decision because they want 'X', and then doing something that actively hinders their ability to have exactly that.

boarder42

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #5 on: March 28, 2017, 11:12:46 AM »
Redbird again an excuse.  with no thought to financial cost ... we face punch the crap out of people for paying mowers or maids or not bringing their lunch.  Investing vs paying down a mortgage is 0 effort for amazing returns.  for anyone planning to use a SWR based on stock market returns its 100% face punch worthy to pay down your mortgage sooner and the fact that the paydown my mortgage thread isnt in the wall of shame and comedy is ridiculous IMO.  Youre not being a badass at all.

patchyfacialhair

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #6 on: March 28, 2017, 11:17:31 AM »
2) Cash flow reasons. Post-FIRE, I've been keeping myself at about a $2000/month budget. It's not a hard budget, as I could spend more. I just generally don't, nor need to. If I can take away the monthly housing cost, that is a large chunk of my monthly budget that is now available to spend on other things.

Snipping the relevant part: The mortgage is not a permanent part of your budget though. It goes away after a few years. By saving your FIRE amount and then saving an additional $X to match what's remaining on the mortgage, you'll have saved "enough" at that point.

Quick example:
$24k non-mortgage expenses=$600k FIRE Amount
$36k expenses including mortgage=$900k FIRE Amount?

If your mortgage principal remaining is only $100k when you FIRE, you really only need $700k. That extra time saving up that extra $200k is just extra safety margin at that point, which is another topic entirely. The extra $100k you've saved up should be more than enough, as long as it's invested, to continue to pay the payments.

Take all the above with a grain of salt: Personally, I'm far from this low level of spending and a am bastion of wastefulness at the moment.

ysette9

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #7 on: March 28, 2017, 11:20:06 AM »
We don't yet have a mortgage but we are talking about buying actively now, so I am thinking about this more. I have run my own simulations and see the clear results of paying off a mortgage early versus not and the concrete impact that has on when we FIRE. That said, at the same time I am getting pre-stressed at the idea of carrying this big sum of debt and can see the emotional appeal of throwing a bonus or vested RSUs at that balance. I conclude that it is purely an emotional thing and sometimes people who are otherwise very rational just don't find the numbers convincing enough in their own right.

Bruizer

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #8 on: March 28, 2017, 11:26:15 AM »
Redbird again an excuse.  with no thought to financial cost ... we face punch the crap out of people for paying mowers or maids or not bringing their lunch.  Investing vs paying down a mortgage is 0 effort for amazing returns.  for anyone planning to use a SWR based on stock market returns its 100% face punch worthy to pay down your mortgage sooner and the fact that the paydown my mortgage thread isnt in the wall of shame and comedy is ridiculous IMO.  Youre not being a badass at all.

You're being a little hard on her, don't you think?  Money is just a tool. The ultimate goals of peace of mind and contentment are more important than money. 

Cycling Stache

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #9 on: March 28, 2017, 11:29:11 AM »
Redbird again an excuse.  with no thought to financial cost ... we face punch the crap out of people for paying mowers or maids or not bringing their lunch.  Investing vs paying down a mortgage is 0 effort for amazing returns.  for anyone planning to use a SWR based on stock market returns its 100% face punch worthy to pay down your mortgage sooner and the fact that the paydown my mortgage thread isnt in the wall of shame and comedy is ridiculous IMO.  Youre not being a badass at all.

I know this debate has been beat to death, but since I saw another thread in investor alley about what happens when everyone indexes and the market never moves, I thought I would add.

Behavioral economics is a bitch.  We all want to be perfectly rational, and we all talk a good game, but when the market even hints at dropping, there are a series of posts about sell now, hold off investing cash, go to bonds, etc.   Human behavior is NOT to stay the course.

I paid off my mortgage to become a perfectly rational investor.  I knew that with x amount sitting in a portfolio that would be able to pay off the house, the fear of the market dropping by half would wear me down.  And even if I did not sell, I would think about it constantly.  That's irrational, but also likely--because I'm human.  When my portfolio lost 60% in 2009, I didn't sell, but I also didn't load ever extra dollar in, because of fear of the unknown.

So I eliminated all debt, and now automatically invest every extra dollar I make.  I do so even though the market feels artificially inflated, even though people post about CAPE and other acronyms on a daily basis, and even though 28 posts pop up each week advocating for staying in cash right now because the market seems overvalued, etc.

I also had the luxury of being able to pay off the house in a couple years, so I took it as a guaranteed 3% versus a volatile 7% over a short-term period.  Plus, paying it off quickly allowed me to start building new, available money quickly, so I didn't get stuck having all my extra money invested in the house and needing cash for something else.

That said, I understand the math.  If I were starting over with a 30-year mortgage, I would absolutely invest it.  I also get that the same 4% rule I intend to rely on logically extends to not paying off the mortgage early.

But for all the talk, I don't see too many people taking out all available loans at less than 7% to invest in the market, even though that's rational too.  I don't see many people constantly adding and drawing HELOCs to pull the additional principal out of their mortgage payments or rise in equity.  It's hard to be rational, because we're human.  So I took the steps that gave me security to be rational going forward, even though I did so at a significant cost.  Like I said, behavioral economics is a bitch. 

redbird

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #10 on: March 28, 2017, 11:31:09 AM »
Redbird again an excuse.  with no thought to financial cost ... we face punch the crap out of people for paying mowers or maids or not bringing their lunch.  Investing vs paying down a mortgage is 0 effort for amazing returns.  for anyone planning to use a SWR based on stock market returns its 100% face punch worthy to pay down your mortgage sooner and the fact that the paydown my mortgage thread isnt in the wall of shame and comedy is ridiculous IMO.  Youre not being a badass at all.

Uhh... OK. I said they were reasons. I didn't say I was doing it right now. I'm renting currently, so my monthly housing cost is what it is. Nor am I planning to with the house I'm working on buying right now. I got 2.875%. That's super low. I don't need to pay more than the minimum payment.

This house is temporary because I'm going to custom build a house. THAT house will not have a mortgage at all. I will fully fund the construction myself, not deal with banks, and plan to have $0 debt on the house at move-in. Why? Because I can.

Also, I don't really care if you think I'm badass or not. I'm in my early 30's and FIRE. Most people can't early retire until their 40's or later, even on the MMM forums. I think that's plenty badass.

2) Cash flow reasons. Post-FIRE, I've been keeping myself at about a $2000/month budget. It's not a hard budget, as I could spend more. I just generally don't, nor need to. If I can take away the monthly housing cost, that is a large chunk of my monthly budget that is now available to spend on other things.

Snipping the relevant part: The mortgage is not a permanent part of your budget though. It goes away after a few years. By saving your FIRE amount and then saving an additional $X to match what's remaining on the mortgage, you'll have saved "enough" at that point.

Quick example:
$24k non-mortgage expenses=$600k FIRE Amount
$36k expenses including mortgage=$900k FIRE Amount?

If your mortgage principal remaining is only $100k when you FIRE, you really only need $700k. That extra time saving up that extra $200k is just extra safety margin at that point, which is another topic entirely. The extra $100k you've saved up should be more than enough, as long as it's invested, to continue to pay the payments.

Take all the above with a grain of salt: Personally, I'm far from this low level of spending and a am bastion of wastefulness at the moment.

I'm already FIRE. And I actually have far more than $900k in my stash. I'm less than 4% withdrawal rate. Heck, I haven't even drawn down any, just grown it, since 2015. I am hitting some drawdown for the first time since quitting working - not because of my bills but because I had to sell to give the bank their house downpayment.

There gets to be a point where you have more than enough money for your lifestyle. Yes, there's things I could further optimize on. But I don't really need to. More money isn't going to get me more happiness.

patchyfacialhair

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #11 on: March 28, 2017, 11:36:04 AM »
Call it the Redbird caveat then: If I'm FIREd, eff all of you, I do what I want lol

In all seriousness, I'm glad your way has worked out. As I said in my first post in this thread, "I assume in my 50s onward I'll value simplicity more than anything," so we shall see.

teen persuasion

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #12 on: March 28, 2017, 11:40:26 AM »
I paid off the mortgage early since the rate was an ugly 9.75%.  Much better guaranteed return.  Of course, I was ratcheting up the retirement savings at the same time - the more I saved to retirement, the larger our refundable credits were (main source of mortgage pay down).  When mortgage was gone, redirected those payments to retirement, too.

redbird

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #13 on: March 28, 2017, 11:47:57 AM »
Call it the Redbird caveat then: If I'm FIREd, eff all of you, I do what I want lol

In all seriousness, I'm glad your way has worked out. As I said in my first post in this thread, "I assume in my 50s onward I'll value simplicity more than anything," so we shall see.

Thanks. :) And I hope things go great for you too!

But seriously though - there isn't just financial considerations sometimes. Yes, technically keeping my money in the stock market would be better than even my crazy plan of building that house in cash. But you know what? It is *HARD* to get a loan nowadays if you don't have active job income. You'd be surprised at how many banks don't want to talk to me despite me showing them statements proving my stash, despite them seeing my super credit score. The bank I got my mortgage from doesn't even do construction loans. And it was so hard to get my mortgage through as it was. They've added so many hurdles since the 2008 crash for a mortgage because they don't trust Joe Q. Public to be responsible with his money. And then there's crazy unusual people like me? HA!

I know I'm unusual. Even for the MMM forums, being early retired is being in the minority. I have different life circumstances than most people here. But I just wanted to show that what the math says is the right answer isn't always the answer you should go with.

boarder42

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #14 on: March 28, 2017, 11:57:14 AM »
My point is you can litterally make the "there arent just financial considerations" arguement with everything litterally everything talked about here.  be it mowing your own lawn or hang drying your clothing.  etc. but this is one area where it

1. requires no extra work
2. represents huge investment savings.

there are entire threads dedicated to face punching those who buy new cars or eat out for lunch every day where we rail and laugh at coworkers.  while we have 1 entire thread dedicated to one of the worst decisions someone trying to reach FIRE and use some form of stock market gains to live on can make and its on the badassity side, it doesnt add up ... no math you can do makes it add up.  So pull your emotion out of it accept the face punches ... b/c we need to start a revolution on this around here.  If only MMM were around during these times and held a mortgage now he would have declared them face punch worthy. but instead he wrote about how he paid his down b/c rates were high.  one solid article out of him could change the way over half the people around here are incorrectly managing where their extra money goes. 

BlueHouse

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #15 on: March 28, 2017, 12:04:02 PM »
I reuse my teabags on weekends.

I want my mortgage paid off by the time I FIRE so that my income stays under a threshold for tax purposes.  If I can keep my taxable income low enough when I'm pulling from my 401k, then I may even be able to avoid taxes on capital gains. 


aceyou

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #16 on: March 28, 2017, 12:10:52 PM »
consider me part of the guilty cohort:) 

I refinanced to a 15 year note, so will have my house paid off if 13 years now instead of 3 more years had I stuck to the 30 year fixed.  I just wanted the peace of mind of being done in 13 years when I pull the trigger. 

Also, I looked at it as slightly less incorrect because of variance reduction.  By having a longer note, I'm essentially leveraging the money from the house into the markets.  When I'm FIRE'd, I want to be as low variance as possible. 

For the same reason, I might consider things like solar energy for my home.  On one hand, it might make more sense to just keep the lump sum of the money and continue paying a monthly energy bill, but I'd like to reduce the energy variance and kill another monthly expense in FIRE.  Plus there's the fact that it's better for the environment. 

So Boarder, I agree that you are correct, but this is one area where I am going to choose to be wrong:)  Keep being awesome!!

Bruizer

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #17 on: March 28, 2017, 12:24:29 PM »
  If only MMM were around during these times and held a mortgage now he would have declared them face punch worthy. but instead he wrote about how he paid his down b/c rates were high.  one solid article out of him could change the way over half the people around here are incorrectly managing where their extra money goes.

He addresses it here: http://www.mrmoneymustache.com/2012/02/24/pay-down-the-mortgage-or-invest-more-a-winwin-question/ 

There are good reasons for either strategy.

GU

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #18 on: March 28, 2017, 12:28:46 PM »
As some have ably noted, the "don't pay your mortgage off and invest the difference strategy" relies on ironclad rational action over a 30-year period, which even very disciplined people can have a hard time following.  But I don't deny the rationality of the strategy, or the advantage of being liquid as opposed to having wealth trapped in your home equity.  Just remember that paying off your 4% mortgage early is a guaranteed return on an effectively inflation-protected asset, while the stock market might pay out a real 4% return over that period, or it might not. 

I think for a certain group of people, not many Mustachians, more like average American consumer-tards, it makes a great deal of sense to pay off one's mortgage early.  Because the difference won't be invested, it will be spent on stupid crap.  Paying off the mortgage early is a quasi-forced saving mechanism, kind of like income tax withholding that leaves you with a "refund" a year later. Many Americans rely on their tax "refunds" to purchase items that could just as easily be funded through normal saving (but most people simply cannot be bothered with saving).

boarder42

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #19 on: March 28, 2017, 12:38:31 PM »
  If only MMM were around during these times and held a mortgage now he would have declared them face punch worthy. but instead he wrote about how he paid his down b/c rates were high.  one solid article out of him could change the way over half the people around here are incorrectly managing where their extra money goes.

He addresses it here: http://www.mrmoneymustache.com/2012/02/24/pay-down-the-mortgage-or-invest-more-a-winwin-question/ 

There are good reasons for either strategy.

there arent good reasons for the paying it down ... that article was written as win win its clearly not.  it was written in 2012 in a slightly higher rate envirnoment than many are locked in at now. 

should probably also write a win win article for mowing and driving to work b/c of time savings and being able to enjoy life to that effect.  as i clearly showed above both are inferior means of saving money to having a mortgage and investing.

yay everything around here is win win... . eat out for lunch ... drive your car to work .... pay someone to maintain your lawn... its all win win... no real downside

stoaX

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #20 on: March 28, 2017, 12:40:40 PM »
I reuse my teabags on weekends.

I want my mortgage paid off by the time I FIRE so that my income stays under a threshold for tax purposes.  If I can keep my taxable income low enough when I'm pulling from my 401k, then I may even be able to avoid taxes on capital gains.

Thanks - just another consideration to plug into the FIRE calculus.

shawndoggy

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #21 on: March 28, 2017, 12:41:38 PM »
Liability hedge.  In my jurisdiction one can protect up to $550k in equity through the homestead exemption.  Assuming that you are maxing out other federally protected savings vehicles (401k, IRA, etc) and are still looking for a place to stash your cash where your creditors can't get to it, home equity has value here. 

The homestead exemption varies from state to state, and my state is on the high side (though not one of the handful of unlimited states).

So if you work in a field where the chance of getting sued is a possibility, owning your own home can be a way to hedge against risk.

Bruizer

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #22 on: March 28, 2017, 01:00:01 PM »
  If only MMM were around during these times and held a mortgage now he would have declared them face punch worthy. but instead he wrote about how he paid his down b/c rates were high.  one solid article out of him could change the way over half the people around here are incorrectly managing where their extra money goes.

He addresses it here: http://www.mrmoneymustache.com/2012/02/24/pay-down-the-mortgage-or-invest-more-a-winwin-question/ 

There are good reasons for either strategy.

there arent good reasons for the paying it down ... that article was written as win win its clearly not.  it was written in 2012 in a slightly higher rate envirnoment than many are locked in at now. 

should probably also write a win win article for mowing and driving to work b/c of time savings and being able to enjoy life to that effect.  as i clearly showed above both are inferior means of saving money to having a mortgage and investing.

yay everything around here is win win... . eat out for lunch ... drive your car to work .... pay someone to maintain your lawn... its all win win... no real downside

You know, for trying to convince people that all financial decisions should be devoid of emotion, you sure are getting worked up about this. I currently only pay the minimum towards my mortgage, and will continue to do so for the next 19 years I have left on it.  But for someone who has already achieved FI and has more than enough stash, it's no longer about maximizing your earnings.  Other considerations come into play.  The peace of mind of getting and staying debt free, for one. Being debt free will provide a large comfort level no matter what happens with the economy.

boarder42

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #23 on: March 28, 2017, 01:07:56 PM »
its just math and money...

you have someone hang drying clothes to save pennies over their lifetime who at the same time is paying down their mortgage... the comfort arguement ... the math behind the safety support, having and maintaining a mortgage wins... it loses slightly in sequence of returns risk.  which has a very very small chance of occuring.... so you're betting on the 10% chance of something vs the 90% chance of something.

if i walk in and tell you you have a 90% chance of surviving FIRE with option A and a 10% chance you're gonna have to work a bit in the early years or a 75% chance of surviving FIRE with a 25% chance you're going to have to work even pushing into the latter years.  by paying it off youre taking the larger chance of having to go back to work. and increasing the chance that thet may be later into FIRE. B/c option A is keeping the mortgage.  while the latter is paying it off.

not to mention the real point of this thread which is you're freaking hang drying your clothes and mowing your own lawn AND paying down a mortgage.  it just doesnt add up.   

BlueHouse

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #24 on: March 28, 2017, 01:08:39 PM »

there arent good reasons for the paying it down ...
boarder42, can you please explain why my reason above is not a good reason? 

boarder42

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #25 on: March 28, 2017, 01:14:47 PM »

there arent good reasons for the paying it down ...
boarder42, can you please explain why my reason above is not a good reason?

i've done maths around this and would very much like for you to show your exact situation where in this comes out as a mathmatical advantage with current tax code over the course of FIRE.  Mortgage size dictates this alot but you didnt lay down any math ... but i havent been able to come up with a way that actually makes this work and i've got a reasonably large mortgage for this site.

lamil

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #26 on: March 28, 2017, 01:29:26 PM »
Boarder,

Do you look at someone paying off the mortgage slowly over time with smaller extra payments and someone zeroing it out in one lump sum in the same light? (Please don't focus on where the money used for the lump sum payoff was sitting before being used to pay off the mortgage)

NathanP

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #27 on: March 28, 2017, 01:35:03 PM »

there arent good reasons for the paying it down ...
boarder42, can you please explain why my reason above is not a good reason?

i've done maths around this and would very much like for you to show your exact situation where in this comes out as a mathmatical advantage with current tax code over the course of FIRE.  Mortgage size dictates this alot but you didnt lay down any math ... but i havent been able to come up with a way that actually makes this work and i've got a reasonably large mortgage for this site.

For those living in the United States, health care subsidies might be a good reason to pay off one's mortgage before FIRE. If you are drawing funds via a Roth IRA ladder or SEP withdrawals, you might be forced to generate additional income that reduces your subsidy. The counter argument is that by not paying the mortgage sooner, you should have a sizable ROTH and taxable account balance that can be used to make the mortgage payment while keeping taxable income levels low. Something to consider, however; I am in favor of the long mortgage.

rantk81

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #28 on: March 28, 2017, 01:39:48 PM »
Just going to throw into the mix... yeah, historical math shows the market will on average, return more than the interest rate on a mortgage... That said, if you are already fabulously FIRE, and have enough capital to do it, AND markets are at/near all-time-highs like they are now, and you are pretty sure you like your home/neighborhood and are going to remain put.... I say why not?

hucktard

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #29 on: March 28, 2017, 01:40:23 PM »
Boarder42, you are correct of course. People are just being...emotional about it. And to take your viewpoint to the logical conclusion, it makes sense to cash out refinance your home occasionally and invest the money in the stock market. People freak out when you suggest such a thing, but anybody who has money in the stock market and also has a mortgage is essentially doing this.

For a hypothetical situation: Say Fred has a house worth $300K that he was able to buy with cash. He decides to cash out refinance to pull $150K of equity out and invest that in index funds. Most people on here would say that is a bad idea. However, if another person, Joe, bought a house with a mortgage and has $150K in equity on a $300K house, but also has $150K in index funds, nobody would bat an eyelid, totally normal. But they are the exact same situation.

I am not saying it always makes sense to borrow against your home to invest in stocks, sometimes it is ill-advised. But it is not at all crazy if you think carefully about it.

hucktard

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #30 on: March 28, 2017, 01:41:53 PM »
Just going to throw into the mix... yeah, historical math shows the market will on average, return more than the interest rate on a mortgage... That said, if you are already fabulously FIRE, and have enough capital to do it, AND markets are at/near all-time-highs like they are now, and you are pretty sure you like your home/neighborhood and are going to remain put.... I say why not?

Markets are almost always at/near all time highs. That's what happens when something continues to go up.

boarder42

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #31 on: March 28, 2017, 01:43:44 PM »
Boarder,

Do you look at someone paying off the mortgage slowly over time with smaller extra payments and someone zeroing it out in one lump sum in the same light? (Please don't focus on where the money used for the lump sum payoff was sitting before being used to pay off the mortgage)

the person making smaller extra payments is taking on lots of extra risk for little to no added value.  so its worse but paying it down either way including if that money was sitting dormant or not invested is pretty bad as well.

boarder42

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #32 on: March 28, 2017, 01:45:05 PM »
Just going to throw into the mix... yeah, historical math shows the market will on average, return more than the interest rate on a mortgage... That said, if you are already fabulously FIRE, and have enough capital to do it, AND markets are at/near all-time-highs like they are now, and you are pretty sure you like your home/neighborhood and are going to remain put.... I say why not?

Markets are almost always at/near all time highs. That's what happens when something continues to go up.

thanks exactly this.  also market timing and then tying that money up in an illiquid asset that cant come out when the markets are at whatever you perceive as the bottom.  also the market being flat the rest of this year with earnings maintaining would put us back at equilibrium in the shiller PE world esp b/c 2008 will come off the shiller and in 2019 2009 comes off and it gets even better.
« Last Edit: March 28, 2017, 01:49:12 PM by boarder42 »

MrMoneySaver

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #33 on: March 28, 2017, 02:02:59 PM »
Quote
Behavioral economics is a bitch.  We all want to be perfectly rational, and we all talk a good game, but when the market even hints at dropping, there are a series of posts about sell now, hold off investing cash, go to bonds, etc.   Human behavior is NOT to stay the course.
Exactly. Anybody can talk a good game while the market is up. The tone of the debate will change considerably, even on MMM, during a crash.

Historical stock charts are cold comfort when you've just watched 40% of more of your portfolio vanish into thin air. And yes there's the fact that it's supposed to come back, and then some -at some unknown future date. But at that moment in time, you don't KNOW that it will because ... the future. And I guaran-frigging-tee you'll wish you'd paid off the mortgage.

So yes, behavioral economics.

Mortgage paydown is probably best thought of as an option for the conservative portion of your portfolio.

Cranky

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #34 on: March 28, 2017, 02:05:53 PM »
We choose the life that makes us happy, and for us that's about living comfortably on a modest income, not about retiring early, so verily, verily - we are not truly Mustachians. We just do what we like and know that when we do retire we will have enough income to live comfortably.

I hang out my laundry and pack my lunch and mow my grass because I enjoy doing those things. I also enjoy knowing that my house and car are paid for.

I'm always interested in how many people seem to be convinced that they will somehow "downsize" into a much cheaper life at some point in the future than the one they are living now, and I admit that I wonder how often that really happens. I prefer to live the life that I can afford now and later, too.

Spork

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #35 on: March 28, 2017, 02:16:50 PM »
I reuse my teabags on weekends.

I want my mortgage paid off by the time I FIRE so that my income stays under a threshold for tax purposes.  If I can keep my taxable income low enough when I'm pulling from my 401k, then I may even be able to avoid taxes on capital gains.

Thanks - just another consideration to plug into the FIRE calculus.

But wait!  There's more!  The ACA cut off for 2017 is $64,100.   If you can keep your income under THAT number, this means (at the top end) about $6,216 subsidy dollars towards your health insurance.  If you can keep your spend level lower... more subsidy.  If you can get down to $40k spend rate, your subsidy goes up to $9,144 a year.

If you need an additional $15k in engineered income to cover a house payment, this can really start affecting subsidies (and how much money you have to spend in FIRE).

seemsright

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #36 on: March 28, 2017, 02:42:45 PM »
I got a instant 100K boost by paying off my mortgage based on calculations from our original loan.

You can tell me that I would have made all of the money in the world by investing the money instead of paying off my mortgage and I would have told you 'so what'

For us paying off the house was 100% mental.

I have a paid off house and we are on track to be FI in sub of 10 years. We are doing okay.

Cpa Cat

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #37 on: March 28, 2017, 02:43:17 PM »
We started paying our mortgage off early in three ways. First, we refinanced to a 10 year mortgage. Second, our mortgage company allowed us to split our mortgage payment into two installments per month, which shortens the mortgage period by reducing interest. Then recently, we chose to finish paying it off with a couple of lump sum installments by realizing some gains in our investment portfolio. We didn't want to rebalance into bonds, but we also feel that the market's exuberance about the current US administration was misguided and we felt that cashing in a bit while the market is high was a good move (Yep - market timing).

My husband and I are the scary nightmare FIRE story - we FIRE'd in 2007, and then were immediately hit by the Great Recession. We survived and came out better on the other end. But we did both agree that we'd have felt better without a mortgage and it would have made it easier to make great decisions in the downturn (we still made pretty good decisions, but we lost a little sleep...).

Since then, we've actually gone back and forth about whether it was the right financial choice. The 10 year mortgage and payment plan was our compromise. But this year, we decided to go a step further and pay it off completely.

I run these calculations on a regular basis for clients - Pay off mortgage or invest? Pay off mortgage or put money in retirement? Pay off mortgage or whatever? In almost every calculation, paying off the mortgage is the loser mathematically. But depending on their timeline, taxable income, and future plans, it does occasionally win. But my spreadsheets don't take into account the person's emotions, or the diversity of their portfolio.

My mortgage vs investment spreadsheet almost certainly would show that investing is better for me - but my invest in bonds vs invest in stocks spreadsheet would show stocks as being the clear winner - so why ever invest in bonds? Payoff mortgage (discounted for lack of liquidity) vs invest in some kind of comparable bond is more apt comparison.

I already have maxed out retirement accounts, and I already have a lot of equities, and I already have as many bonds as I want, but I don't have any real estate in my portfolio. It's just another place to diversify.

MisterTwoForty

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #38 on: March 28, 2017, 02:49:58 PM »
I have a 15 year fixed on 2.5% APR.  At this point, I am just making the normal monthly payment and all my excess monthly cash flow is being plugged into after tax mutual funds.  I already max out my 401k and a Roth IRA.  I could put my excess into the mortgage and have my house paid for in 7 years.  I have run calculations both ways, and for me, the after tax investing is the way to go.

Since I hope to be done working in 5 years (and sell the house) I'd rather take my changes that my mutual fund balance will outpace paying down my mortgage due to its lower interest rate.  When I quit working, I intend to travel for a year (or two) so that will necessitate selling the house and I may eventually settle down in a lower COL area.  I have quite a bit of equity in the house currently and plan to use that as well as my after tax investments to fund my early retirement until I can draw on my traditional retirement accounts.

For those choosing to pay off the mortgage early, I completely understand.  Eliminating that monthly payment takes out both the risk factor and allows for more monthly cash flow.  Lowers expenses means that you need less to retire.

BFGirl

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #39 on: March 28, 2017, 02:53:27 PM »
Yet another thread about how foolish it is to pay off your mortgage early.  It really is okay to consider other things than math in making decisions that affect your life. 

1.  I have lots of other investments, so I consider my paid off house as part of my diversification.
2.  My house is protected from being seized if I am sued.
3.  It was a tactical advantage in a divorce for me to pay for my house in cash.  Now that I don't have that consideration, the potential gains that I could make by leveraging the equity in my house is not enough to tempt me to endure the hassle and take the risk.  A bird in the hand is worth 2 in the bush.
4.  I hadn't even considered that not having a mortgage can keep me from taking more out of tax advantaged accounts in the future which may help me get ACA subsidies.
5.  It gives me peace of mind.  It really is okay for this to be a reason.


Cwadda

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #40 on: March 28, 2017, 03:15:30 PM »
I am buying a house with a 3.5% downpayment. Does it make sense to pay off the mortgage aggressively until PMI can be removed? The PMI will be $333/month.

moof

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #41 on: March 28, 2017, 03:24:35 PM »
I'll pick on biking for a minute.  On a strict dollar basis it is a loser.  My current bike has about $1600 into it from initial purchase through various repairs and add-ons (fenders, tires, sprockets, lube, lights, seat, wheel, shock rebuild, panniers, rack, etc, etc).  It also has about 4500 miles on it.  So I have saved $0.50-$0.36=$14 cents a mile, or $630 total.  It has also cost me a ton of time, about 20 minutes a day over 300 trips, or a 100 hours above what driving my car would have cost me.  At $50 a hour of personal time that is a net LOSS of $4370.  Holy cow!

But, I am in the best shape I have been in for a decade.  My resting heart rate is in the low 40's lately.  I went out for a run after a few months off (rainy weather sucks to run in) and was able to knock out a hilly 5.4 mile loop with no stopping just last week.  It took me over a month of training to work up to that same route last summer, so this was huge.  It has been quite a number of years since I felt this good and was in this kind of shape at the end of winter.

People spend tons on personal trainers to get these kinds of results, all I had to do was make a life choice to switch from 2 day a week commuting to 5 day a week commuting, and I am quite happy I made that choice.  I sleep better, feel better, objectively am more healthy than I was 8 months ago when I found MMM and took the biking post to heart.

So yeah, you have to balance money, time, health, and happiness.  You are free to make different choices than anyone else.  I choose to cook for myself >95% of the time, commute by bike, mow my lawn myself occasionally, etc, etc.  I hired out my roof, and will do the same for painting my house as that is where I value time with family more than what it will take to farm those out.

risky4me

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #42 on: March 28, 2017, 08:31:25 PM »
I feel a bit sorry for people that make all their life decisions based on peak financial performance.  Just like methods of investing, we each have comfort levels and feel differently about the value of being debt free.

 Wife and I refinanced a 30yr into a 15yr, paid double principle for a few years and ended being mortgage free after 11 years from purchasing our home. That made us completely debt free and it is hard to convey the happiness and pride we felt in accomplishing this major goal. Besides the joy we felt at being debt free, we then felt comfortable about retiring and did so years earlier than we might of if we still had that debt.

Maximum stash is great, but for us being debt free for these last several years 'priceless'.

BlueHouse

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #43 on: March 29, 2017, 12:41:39 AM »

there arent good reasons for the paying it down ...
boarder42, can you please explain why my reason above is not a good reason?

i've done maths around this and would very much like for you to show your exact situation where in this comes out as a mathmatical advantage with current tax code over the course of FIRE.  Mortgage size dictates this alot but you didnt lay down any math ... but i havent been able to come up with a way that actually makes this work and i've got a reasonably large mortgage for this site.
Without getting into specifics of MY situation, ANY additional taxable income after fire that breaks the threshold such that I have to pay capital gains tax on my post tax investments will be detrimental.  I am quite a bit older than boarder42 and will run into RMDs sooner, so I am already planning to take my yearly spend from a mix of 401k, Roth, and after-tax buckets to minimize taxes owed each year and to minimize my RMDs in my later years. To me, this is a careful balancing act with no one-size-fits-all solution. 
I have already paid down my mortgage substantially such that my required monthly payments are now sustainable even in a bad year while still maxing out all of my tax-advantaged saving space. if I hadn't done this and I hit a bad year (entirely possible and even expected in my line), thenI would have to divert money that is earmarked for pre-tax accounts into the higher mortgage payments and that is not ideal in my accumulation phase.
I hope you can follow what I've written. It's late, and I'm using thumbs to type, so not enirely sure that all of my concerns are covered here.

Dicey

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #44 on: March 29, 2017, 01:22:24 AM »
Redbird again an excuse.  with no thought to financial cost ... we face punch the crap out of people for paying mowers or maids or not bringing their lunch.  Investing vs paying down a mortgage is 0 effort for amazing returns.  for anyone planning to use a SWR based on stock market returns its 100% face punch worthy to pay down your mortgage sooner and the fact that the paydown my mortgage thread isnt in the wall of shame and comedy is ridiculous IMO.  Youre not being a badass at all.

You're being a little hard on her, don't you think?  Money is just a tool. The ultimate goals of peace of mind and contentment are more important than money.
The point is that b42's way will net you more tools than redbird's. I get that he's blunt, but he started this thread (and others) because he feels passionately about teaching this lesson. It really is more mustachian, if one can set aside their emotions aside long enough to understand the principles. The promise of "peace of mind and contentment" can be a false illusion. Believe me, a big ball o' money and then a paid-off house feels way, way better.  #askmehowiknow.

Lmoot

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #45 on: March 29, 2017, 02:58:20 AM »
There is minimal risk to paying down a mortgage if you have an emergency fund. There is also something called every cast which some lenders offer for free or for under 200 bucks.

 As someone did mention earlier, there are certain benefits to reducing cash flow requirements. Tax benefits being one of them, as well as requiring less income.

 Also, just because someone is paying down or paying off their mortgage, doesn't mean they aren't well diversified. If anything paying off her mortgage while investing, makes you more diversified.

I understand that there is a great chance you can get more from the market, but it is still a chance. Some people are more risk averse than others. Yes that may mean they miss out on certain opportunities, but it doesn't make them clueless emotional hunks of nonthinking meat.

 Finally,  some people just want to keep things as simple as possible, and are willing to pay the price for that. There's a certain freedom in being OK with making less for your choices, and being satisfied with what you can accomplish. Not everybody's goal is to chase as much money as possible. I know that may be the Mustachian way,, but not everyone here is a Mustachian.  Some come here, not to follow specific collective thinking, but to share ideas and participate in something we all are passionate about…living life above the status quo.  And believe it or not, some people enjoy the frugal life and all of the things it entails (have you ever slept on sun-dried sheets? Delicious. Just like there are people who don't live in the wilderness because they don't have any other options but chopping wood. Maybe they can live in a township, and work a job that allows them to afford central heat, but maybe they like chopping wood.

 Assuming you are.going to be here long enough to reap the benefits of future investments, is also emotional thinking. Being so wrapped up in the future, in a way, is luxuriously emotional.  Not to sound morbid, but by doing so you are incredibly married to the idea that past results will be your future...and that you won't get hit by a bus tomorrow. This is the same reason why I think working in a job until 70, JUST so you can collect more ss, is sad.

My point is, if people are happy with their decision, and it fits in with their plan and they can still retire when they want to, then why try to convince them they shouldn't be happy? You can only spend so much money, and others need even less of it, and enjoy not being beholden to it.  Believe it or not there are people out there who do not want to support an indiscriminate conglomerate of companies. It's a minority group, but they are out there; people who believe in only supporting companies who's goods or values they would feel comfortable supporting directly. They may contribute for retirement purposes, but look elsewhere to reduce their dependency on the almighty dollar.

Lmoot

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #46 on: March 29, 2017, 03:04:56 AM »
Sorry for all of the typos. Recently I have been unable to edit my posts. In the first paragraph and I'm referring to a mortgage "recast".

Cycling Stache

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #47 on: March 29, 2017, 04:15:03 AM »
My point is, if people are happy with their decision, and it fits in with their plan and they can still retire when they want to, then why try to convince them they shouldn't be happy?

This is Boarder's point.  The people he's directed his advice to are the ones posting on these forums and looking to retire early but have not yet made it.  Thus, they are not "happy" and "retiring when they want to," if they are trying to retire early and still have not accumulated sufficient wealth to do so.

If you rewrite your point as follows, you can see the flaw.  "If people are happy driving a brand new Mercedes SUV and drinking 3 Starbucks lattes a day, and it fits in with their plan and they can still retire when they want to, then why try to convince them they shouldn't be happy."

Mustachianism is about recognizing that you're not necessarily happy doing that, if it means you're working longer than you want to and the return on happiness from the car and the lattes isn't sufficient to make up for it.

Boarder's point is premised on the idea that not paying off your mortgage is free money, and (statistically) leads to earlier retirement at little real (rational) cost.   And for all those relying on the 4% rule, you're necessarily buying stocks and relying on the historical stock performance returns as a gage for the future.

Which is correct.  My concern stated above is that while everyone talks a good game, the ability to stay the course is not behaviorally accurate.  If you can do it, the advice is absolutely correct.  But this board has only been around during a period of an historic market run up, and even still, there have been hundreds of posts about holding off investing, selling, etc. because the market is down 10% or the market is at an all-time high. 

The test will come when there's a sustained drop. 

Khan

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #48 on: March 29, 2017, 04:23:09 AM »
Pretty much what Lmoot said.

Also, to anyone tripping over themselves to say Rah Rah only pay minimum on the mortgage, you ignore the most important thing, the one thing that Dave Ramsey's advice is actually worth listening to for.... humans are fleshy meatbags driven by emotions, not 100% rational actors. If paying off the mortgage is what gets your juices tingling, and if not having a mortgage hanging over your head brings you happiness, satisfaction, and reduces your stress?

Then you fucking do that. Paying off the mortgage isn't a stupid decision, it's merely a less-efficient one, historically, compared to other options, especially in the US with current interest rates and tax consequences.

We've had this discussion infinity times, and we have destroyed it every time, and we have become exceedingly efficient at it.
« Last Edit: March 29, 2017, 04:39:10 AM by Khanjar »

Khan

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Re: Why Do you do ....... AND pay off your mortgage early?
« Reply #49 on: March 29, 2017, 04:25:44 AM »
I am buying a house with a 3.5% downpayment. Does it make sense to pay off the mortgage aggressively until PMI can be removed? The PMI will be $333/month.

Calculate how much PMI increases your "interest" cost. You're probably over 4.5% including PMI(woops, interest % not accounted for in post, only downpayment)... maybe nearing 5%, thus your calculation is now a guarenteed "interest + PMI costs" gain vs. the historical investment returns.... I'd get PMI off my plate, ASAP.
« Last Edit: March 29, 2017, 04:36:23 AM by Khanjar »