Why Do you do ....... AND pay off your mortgage early?

[BlueHouse]

This is the same reason why I think working in a job until 70, JUST so you can collect more ss, is sad.
.

This is an interesting post and one we don't explore often on this forum. I've been playing with my numbers and taking SS at 62 seems to let me retire earliest with little risk of depleting funds later. This goes against all advice to wait for age 70 to collect the biggest return. But the point for me isn't the MOST money. It's enough to let me do what I want. Not sure where my sweet spot is yet, but I've been spending some time working those numbers.

And yes, if I take SS at 62, then I want to reduce taxable income even more while still taking enough out to keep a fairly even withdrawal rate (from 401k) through end of life.

[boarder42]

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.

even at 4.5-5% i wouldnt be paying it down any faster.  no reason to.

[runewell]

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

A simple internet search suggests a dryer's lifespan is in the range of 10-14 years, not 10 years.  Even then it depends on usage.  Much better chance you only go through 2 dryers in that time period.  Ours is 11 years old and shows no signs of stopping. 
Total cost for TWO dryers and all that electricity in today's dollars: $7,240.

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

Ah but mowers are not free.  You might need two lawnmowers ($800) over that time period, plus a lot of gas.  Also, what is your time worth, that is a very important consideration. 

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

Nobody is going to reimburse you that ridiculous 52.5 cents per mile just for driving to work.  156,000 miles of total commuting is not even the lifetime of a single car.  Figure $20K for the car, $11k for the gas, another $5K for maintenance & registration, so maybe $36K.  But let's not forget that biking takes a lot longer so it eats into your personal time.   Also commuting on a bike is a lot more dangerous.

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.

You forgot to net out the cost of buying groceries and the time and effort involved with preparing the lunches.

Mustachian math can get pretty bogus sometimes.

[Cwadda]

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.

even at 4.5-5% i wouldnt be paying it down any faster.  no reason to.

If the base interest rate is 4% and PMI is another 1.15 points, the effective interest rate is 5.15%. The issue is that PMI on this loan is for life. You'd have to refinance, unlike a conventional where it just goes away. I suppose the logic is to attempt to pay down principle ASAP and refinance while interest rates are still on the lower side. I don't want to be stuck with PMI for life, although this particular investment property covers the mortgage payment fully.

[LalsConstant]

What about someone like me who has spent years fighting personality defects, for whom debt adversity is necessary practice to actively cultivate to prevent a relapse?

I fear if I were to have a mortgage at all it would cause such cognitive dissonance that I would hate it so much my stress would be through the roof.  The weight gain and high blood pressure would have tangible financial costs.  I think the accelerated mortgage pay down would do me a world of good in actual dollar terms.

[brooklynguy]

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).

Keeping a mortgage loan instead of paying it off does not require you to generate income to cover the mortgage payments on dollar-for-dollar basis.  If your annual required mortgage payments are $15k, choosing to retain the mortgage instead of paying it off will generally translate into additional income of only a small fraction of $15k.  To repeat another post I recently made on exactly the same point:

When comparing the "mortgage" and "no mortgage" alternatives, many times people are under the mistaken impression that the "mortgage" alternative necessarily requires you to have additional income in an amount equal to the required mortgage payments.  But that's not true.  If your required mortgage payments (principal + interest) total, say, $20K per year, that does not necessarily mean that keeping the mortgage requires you to have an extra $20K of income beyond what you would need if you paid off the mortgage.  In the "mortgage" alternative, as long as your investments generate some portion of their returns through capital appreciation, then when you sell those assets to service the mortgage payments, part of the proceeds will represent return of principal (and not capital gains/income).  If your investments generate their returns primarily through capital appreciation (as stock index funds do), then, in the early years of your retirement, most of the proceeds of the investment asset sales are likely to represent return of principal (not income), so your income will probably be only slightly higher under the "mortgage" alternative.  Over time, your income will drift up as your overall cost basis in the investments decreases, but that could happen slowly enough to keep the scales titled in favor of retaining the mortgage loan, even though you straddle the 15% tax bracket.

[Khan]

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.

even at 4.5-5% i wouldnt be paying it down any faster.  no reason to.

Stock market/investment gains are historically based, and show up with the highest confidence on longer term periods(20, 30, 50 years). If the choice is between ~4.5% or greater guaranteed return(killing PMI), vs. the historical investment returns, I'm going with the guarenteed return on this one, paying down equity and refinancing or getting a new appraisal soon.

Personally, I'm at 3.25% for a 30 year mortgage, and I won't pay a dollar more on it -ever-, but with PMI in the mix and a possible higher interest rate starting point, calculation changes. At <4%, I know of dozens of stocks that just on dividends alone exceed my interest rate.

If you're happy with paying interest + PMI up into the 5% region or greater, because of the expected stock market/investment returns(which are not guarenteed, and are on average only ~2% more), more power to you, but at that guaranteed return, I know where I'm putting some of my money. Not all of it mind, avoid being house rich and cash poor, but that rises definitely above filling my taxable investment account.

[runewell]

The issue is that PMI on this loan is for life.

Really?  When I had PMI 20 years ago it went away in a few years once my house had appreciated.  All I had to do was pay for an appraisal to show that I now had 20% equity in the value of my home.

[boarder42]

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

A simple internet search suggests a dryer's lifespan is in the range of 10-14 years, not 10 years.  Even then it depends on usage.  Much better chance you only go through 2 dryers in that time period.  Ours is 11 years old and shows no signs of stopping. 
Total cost for TWO dryers and all that electricity in today's dollars: $7,240.

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

Ah but mowers are not free.  You might need two lawnmowers ($800) over that time period, plus a lot of gas.  Also, what is your time worth, that is a very important consideration. 

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

Nobody is going to reimburse you that ridiculous 52.5 cents per mile just for driving to work.  156,000 miles of total commuting is not even the lifetime of a single car.  Figure $20K for the car, $11k for the gas, another $5K for maintenance & registration, so maybe $36K.  But let's not forget that biking takes a lot longer so it eats into your personal time.   Also commuting on a bike is a lot more dangerous.

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.

You forgot to net out the cost of buying groceries and the time and effort involved with preparing the lunches.

Mustachian math can get pretty bogus sometimes.

all great points i was trying to be ultra conservative to show the ridiculousness of what some people choose to do to save a few dollars and eat a lot of their time up vs something thats a simple foundational change in how you view your money and your mortgage that could save you tons.

[boarder42]

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).

Keeping a mortgage loan instead of paying it off does not require you to generate income to cover the mortgage payments on dollar-for-dollar basis.  If your annual required mortgage payments are $15k, choosing to retain the mortgage instead of paying it off will generally translate into additional income of only a small fraction of $15k.  To repeat another post I recently made on exactly the same point:

When comparing the "mortgage" and "no mortgage" alternatives, many times people are under the mistaken impression that the "mortgage" alternative necessarily requires you to have additional income in an amount equal to the required mortgage payments.  But that's not true.  If your required mortgage payments (principal + interest) total, say, $20K per year, that does not necessarily mean that keeping the mortgage requires you to have an extra $20K of income beyond what you would need if you paid off the mortgage.  In the "mortgage" alternative, as long as your investments generate some portion of their returns through capital appreciation, then when you sell those assets to service the mortgage payments, part of the proceeds will represent return of principal (and not capital gains/income).  If your investments generate their returns primarily through capital appreciation (as stock index funds do), then, in the early years of your retirement, most of the proceeds of the investment asset sales are likely to represent return of principal (not income), so your income will probably be only slightly higher under the "mortgage" alternative.  Over time, your income will drift up as your overall cost basis in the investments decreases, but that could happen slowly enough to keep the scales titled in favor of retaining the mortgage loan, even though you straddle the 15% tax bracket.

exactly this.  This post is why i dispute BlueHouse's statement.  I ran math like this and it just doesnt work out in your favor b/c not all money is taxed coming from a taxable account only the gains are. To your point BlueHouse i used to think the way you did til i ran my own numbers.  That being said and extremely large mortgage may off set it the other way slightly or get close enough to a wash that you just dont want to hassle with it.  But i think that number is very large.

[rantk81]

Some of the "personal fiance talking heads" mention in their talks/shows that making yourself feel empowered and feel good about yourself goes a very long way toward helping you be successful and building wealth.  It has all kinds of benefits like being able to ask for more responsibilities at work, feel empowered to ask for a higher salary at work, willingness to try a new role at a new company for higher compensation, building personal confidence, etc etc...... (I think Suze Orman has said things in line with this before...)

If paying off your mortgage makes you feel that way, there are intangible benefits that may even lead to higher financial rewards than simply being in the market for more years.  You can't account for that in a spreadsheet.

[Spork]

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).

Keeping a mortgage loan instead of paying it off does not require you to generate income to cover the mortgage payments on dollar-for-dollar basis.  If your annual required mortgage payments are $15k, choosing to retain the mortgage instead of paying it off will generally translate into additional income of only a small fraction of $15k.  To repeat another post I recently made on exactly the same point:

When comparing the "mortgage" and "no mortgage" alternatives, many times people are under the mistaken impression that the "mortgage" alternative necessarily requires you to have additional income in an amount equal to the required mortgage payments.  But that's not true.  If your required mortgage payments (principal + interest) total, say, $20K per year, that does not necessarily mean that keeping the mortgage requires you to have an extra $20K of income beyond what you would need if you paid off the mortgage.  In the "mortgage" alternative, as long as your investments generate some portion of their returns through capital appreciation, then when you sell those assets to service the mortgage payments, part of the proceeds will represent return of principal (and not capital gains/income).  If your investments generate their returns primarily through capital appreciation (as stock index funds do), then, in the early years of your retirement, most of the proceeds of the investment asset sales are likely to represent return of principal (not income), so your income will probably be only slightly higher under the "mortgage" alternative.  Over time, your income will drift up as your overall cost basis in the investments decreases, but that could happen slowly enough to keep the scales titled in favor of retaining the mortgage loan, even though you straddle the 15% tax bracket.

exactly this.  This post is why i dispute BlueHouse's statement.  I ran math like this and it just doesnt work out in your favor b/c not all money is taxed coming from a taxable account only the gains are. To your point BlueHouse i used to think the way you did til i ran my own numbers.  That being said and extremely large mortgage may off set it the other way slightly or get close enough to a wash that you just dont want to hassle with it.  But i think that number is very large.

Ok.  I see your point.  It isn't the full $15k.  But there definitely is some additional income generated.  For some of us juggling RMDs against ACA... any additional income becomes our first world problem.

And personally: modeling an ever-changing income stream vs an ever-changing set of tax/health care laws is challenging enough for me without adding one more variable in there.  There is a real value here for me for more simplicity/predictability.

[brooklynguy]

That being said and extremely large mortgage may off set it the other way slightly or get close enough to a wash that you just dont want to hassle with it.  But i think that number is very large.

If your mortgage loan is high enough to cause the extra income from the invested proceeds to push you over a tax cliff, it is also likely to be high enough to cause the returns on the invested proceeds to be high enough to outweigh the resulting tax consequences (and, as we discussed in the other linked thread, you could always maintain a cash reserve on hand to be tapped if necessary to avoid being forced to realize income that would push you over the tax cliff).  If the "keep mortgage" vs. "pay off mortgage" cost-benefit analysis otherwise favors keeping the mortgage over paying it off, it's very hard to imagine a scenario where the fact that you straddle a tax cliff will tip the scales back in favor of paying it off (as long as you're using investments that generate their returns primarily through capital appreciation (as stock index funds do)).

[boarder42]

That being said and extremely large mortgage may off set it the other way slightly or get close enough to a wash that you just dont want to hassle with it.  But i think that number is very large.

If your mortgage loan is high enough to cause the extra income from the invested proceeds to push you over a tax cliff, it is also likely to be high enough to cause the returns on the invested proceeds to be high enough to outweigh the resulting tax consequences (and, as we discussed in the other linked thread, you could always maintain a cash reserve on hand to be tapped if necessary to avoid being forced to realize income that would push you over the tax cliff).  If the "keep mortgage" vs. "pay off mortgage" cost-benefit analysis otherwise favors keeping the mortgage over paying it off, it's very hard to imagine a scenario where the fact that you straddle a tax cliff will tip the scales back in favor of paying it off (as long as you're using investments that generate their returns primarily through capital appreciation (as stock index funds do)).

likely a great point i havent done the math to that level.

[boarder42]

Pizza Steve the point is that you're cutting off your nose to spite your face.  really you should be doing all of those things including not paying a mortgage down. you should evaluate all your life choices and figure out a way to be happy with a mortgage vs the opposite.  You SHOULD be faced punched at this site for choosing not to keep a mortgage the same way we face punch people for choosing to pay someone to mow their lawn or for eating lunch out at work.  they are all lifestyle decisions and choices but as FrozenBits pointed out in another thread it took a decent beating to get him to come around and if it were spoken in the context of everything else face punch worthy then we would be helping many more people understand and not feel like its OK b/c its an emotional choice i made.

[Khan]

Pizza Steve the point is that you're cutting off your nose to spite your face.  really you should be doing all of those things including not paying a mortgage down. you should evaluate all your life choices and figure out a way to be happy with a mortgage vs the opposite.  You SHOULD be faced punched at this site for choosing to keep a mortgage the same way we face punch people for choosing to pay someone to mow their lawn or for eating lunch out at work.  they are all lifestyle decisions and choices but as FrozenBits pointed out in another thread it took a decent beating to get him to come around and if it were spoken in the context of everything else face punch worthy then we would be helping many more people understand and not feel like its OK b/c its an emotional choice i made.

Disagree. The point is finding your own personal happy point, and testing yourself reasonably often to find if lower levels of spending are not detrimental to your personal health/life satisfaction. The point isn't for us all to be AT MMM's or ERE's point in life, but to really consider where we are and our choices.

But, that's why we're all voluntary members of the cult of mustache.

[Cwadda]

The issue is that PMI on this loan is for life.

Really?  When I had PMI 20 years ago it went away in a few years once my house had appreciated.  All I had to do was pay for an appraisal to show that I now had 20% equity in the value of my home.

For this FHA-secured loan it is. I can ask for the appraisal and such but the PMI wouldn't go away in the same loan, I'd have to get a new separate one.

[boarder42]

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.

so apply that satisfaction to anything.  Someone here may get extreme satisfaction and lower stress from watching a neighborhood kid mow there lawn ... but they are face punched.  Someone may get extreme satisfaction and lower stress to the same level you did suboptimally paying down a mortgage by watching a japanese chef cook dinner in front of them every night - face punch worthy. 

The simple point is WHY? Out of everything we talk about does this one item get singled out as OK if it makes you feel better and up for debate.  Its not up for debate it shouldnt be ... it should be face punch worthy.

The ONLY inherent reason people seem to try to push is "stock market returns arent guaranteed" well neither is the fact that the govt wont declare imminent domain and take your home but those 2 are backed up by so much data that they both fall into the highly unlikely side of things.  And those stock market returns are also what many i would wager to say greater than 80% of this forum based their retirement on. 

[runewell]

Focusing in math is not getting it.

Eating, maintaining your home space,  deciding when to buy capital items is life.  Being thoughtful about choices is the essence of living.

Time spent buying groceries is not 'a lost opportunuty to make money,' it is time spent being thoughtful about your food choices,  creative about designing a family meal,  and can be fun.  I personally enjoy visiting farmers markets, taking to the growers and understanding what i eat.

I pity those who prefer to live in a pre-packaged assembly line food world, devoid of meaning. 

So if i spend an hour or two to read a cook book to get advice from one of the worlds top chefs, of i get local produce that actually tastes like food; if i chop, mix the ingredients while chatting with my wife (while preparing and later eating my meal), i am wasting time? 

Someone who is eats cheap, packaged meals thinking they are being smart, or who feels it is a waste to bike to work, dismissing the chance to see the world, feel the wind and pump their own legs to get somewhere, or who does not understand the impact of washing machines/dryer on quality clothes, is not a wise person IMHO.  I will assume youth will learn from experience.  That is my hope at least.  The slow movement is really in our own best interests as a society.  I would assert that the rush to FIRE can be improved with a bit of thoughtfulness.  Maybe getting there a bit slower, like by paying off debt,  results in measurable mental health benefits, like these other strategies? 

This thread is a bit disrespectful to those who thoughtfully chose the past best for their health, life and well being.  Money and speed are not everything.

I don't completely disagree with what you've said, but you've changed the subject. 
The comparison was saving money bringing your lunch to work vs eating out.  Nothing wrong with appreciating good food, that can be part of a packed lunch or a dining experience as well.  I wasn't saying anything about buying packaged meals, you introduced that.

You like biking and the exercise it provides.  You talk about "seeing the world" but we're talking about a commute.  You would see the same world over and over again trying not to get hit by cars and you'd be a sweaty mess when you got there. 

The conversation you're having is different than the conversation we're having.  Or the points or different.  That doesn't make your conversation invalid, but it doesn't help an essentially monetary comparison. 

[boarder42]

Pizza Steve the point is that you're cutting off your nose to spite your face.  really you should be doing all of those things including not paying a mortgage down. you should evaluate all your life choices and figure out a way to be happy with a mortgage vs the opposite.  You SHOULD be faced punched at this site for choosing to keep a mortgage the same way we face punch people for choosing to pay someone to mow their lawn or for eating lunch out at work.  they are all lifestyle decisions and choices but as FrozenBits pointed out in another thread it took a decent beating to get him to come around and if it were spoken in the context of everything else face punch worthy then we would be helping many more people understand and not feel like its OK b/c its an emotional choice i made.

Disagree. The point is finding your own personal happy point, and testing yourself reasonably often to find if lower levels of spending are not detrimental to your personal health/life satisfaction. The point isn't for us all to be AT MMM's or ERE's point in life, but to really consider where we are and our choices.

But, that's why we're all voluntary members of the cult of mustache.

THIS IS THE LOWEST HANGING FRUIT FOR ANYONE WITH A MORTGAGE THAT TAKES 0 EFFORT TO ACCOMPLISH.

more people need to be helped and pushed into the realm of understanding how bad a decision they are making. 

[Khan]

Pizza Steve the point is that you're cutting off your nose to spite your face.  really you should be doing all of those things including not paying a mortgage down. you should evaluate all your life choices and figure out a way to be happy with a mortgage vs the opposite.  You SHOULD be faced punched at this site for choosing to keep a mortgage the same way we face punch people for choosing to pay someone to mow their lawn or for eating lunch out at work.  they are all lifestyle decisions and choices but as FrozenBits pointed out in another thread it took a decent beating to get him to come around and if it were spoken in the context of everything else face punch worthy then we would be helping many more people understand and not feel like its OK b/c its an emotional choice i made.

Disagree. The point is finding your own personal happy point, and testing yourself reasonably often to find if lower levels of spending are not detrimental to your personal health/life satisfaction. The point isn't for us all to be AT MMM's or ERE's point in life, but to really consider where we are and our choices.

But, that's why we're all voluntary members of the cult of mustache.

THIS IS THE LOWEST HANGING FRUIT FOR ANYONE WITH A MORTGAGE THAT TAKES 0 EFFORT TO ACCOMPLISH.

more people need to be helped and pushed into the realm of understanding how bad a decision they are making.

Less efficient =/= Bad.

[Cwadda]

The simple point is WHY? Out of everything we talk about does this one item get singled out as OK if it makes you feel better and up for debate.  Its not up for debate it shouldnt be ... it should be face punch worthy.

Because financially speaking, you're largely comparing apples to apples but emotionally speaking, you're apples and oranges. The satisfaction one receives by purchasing Hibachi dinners every night does not equate to the marginal utility of paying off one's mortgage early. They're simply not the same.

Which isn't to say you haven't raised extremely good points. I've been conflicted about my mortgage structure; this topic definitely helps iron some things out for my situation.

[brian313313]

Reason #1 - I could not qualify for a mortgage. Good credit but FNMA guidelines wouldn't let me count 90% of my income. I saved most of the closing costs and it made the transaction very easy though.
Reason #2 - Wife told me to :). Part of her definition of success is having a paid off home. Emotional rather than financial.
Reason #3 - Not having an extra bill every month is nice. Emotional/convenience rather than financial.
Reason #4 - For retirement only, volatility costs money. If you must pull on the capital to pay a mortgage, it takes more of that capital during down years to make a fixed payment.

[boarder42]

The simple point is WHY? Out of everything we talk about does this one item get singled out as OK if it makes you feel better and up for debate.  Its not up for debate it shouldnt be ... it should be face punch worthy.

Because financially speaking, you're largely comparing apples to apples but emotionally speaking, you're apples and oranges. The satisfaction one receives by purchasing Hibachi dinners every night does not equate to the marginal utility of paying off one's mortgage early. They're simply not the same.

Which isn't to say you haven't raised extremely good points. I've been conflicted about my mortgage structure; this topic definitely helps iron some things out for my situation.

Humans arent born to have a feeling about good debt such as a mortgage one way or the other.  its a learned trait which can be relearned in a better more beneficial way.  You're acting as if this emotion is 100% unchangable.  but infact it is changable.  i used to be on the other side of this.  many people have come across the fence once the reality of what they were doing was presented to them etc. 

The point of this post is to present the choices people are making in a different way so that hopefully some come here and go WTF am i doing not keeping my mortgage i'm spending all this time hang drying clothes and i could hang dry for 30 years and still not beat the simple change of keeping my mortgage. or better i could do both and double save b/c the act of keeping a mortgage is not a time based activity in which you're sacraficing something else you could be doing its just changing something thats been beat into your head by your parents or dave ramsey or who knows where but its not really the right way to look at things esp. in a forum about FIRE. 

People should relearn why they should be OK keeping a mortgage.  And if you struggle to understand why you should keep a mortgage you definitely should be re evaluating your entire FIRE plan as there are lots more complicated methods and systems to withdraw money and take advantage of taxes in FIRE than the simple benefit one gains from keeping a mortgage.

[Landlady]

I'm guilty of wanting to pay down a mortgage early for a few reasons. 1. PMI sucks and I have it on one rental property I own. 2. Once I pay off my lowest mortgage the monthly expense numbers work to FIRE sooner than if I were to use the 4% rule for the stock market.

[Spork]

This is a sort of off-topic side question for boarder42 (and everyone in his mortgage club):  Is your plan to continually refinance forever?  In other words, once you pay off your mortgage, will you pull the equity back out, re-invest and refinance? 

And... at what interest rate do you consider it a wash?  Assuming 7% returns from investments, would you continually refinance until mortgage rates + origination fees were < 7%?  Or is there some number where the risk/reward makes you think it isn't worth it?

[Scortius]

I totally see Boarder's point here.  This isn't a Dave Ramsey site on how to get out of debt.  This isn't some USA Today advice column discussing the evils of carrying a credit card balance.  This is MMM where we discuss how to aggressively work towards Financial Independence.

Here we discuss topics such as how to insulate your house to save money on utility bills.

We discuss how to shop for older reliable cars to save money on transportation.

We acknowledge our desires for fun consumable items such as fancy cars, big TVs, new espresso machines, and the newest iPhone, and then we laugh at ourselves and learn to not give in to these foolish desires that will not make us more happy.

We teach ourselves the tax code so we know how to optimize our savings and investments.

We religiously watch the drama surrounding Obamacare to ensure we maximize the efficiency our health coverage.

We discuss using reward credit cards to generate extra income, and how to 'travel hack' to allow for extra trips within our budget.

We laugh in the face of convenience and comfort because we know it will slow us down on the road to independence.

And then we turn around and justify a financial decision that will cost people hundreds of thousands of dollars because "it feels good", and because "humans are irrational creatures who can't be trusted".

We justify paying off a mortgage early because it gives us more financial security, when it's clear that it does exactly the opposite.

We justify it because it eventually lowers our monthly payments so we have more money to invest and save, when it's clear that it does exactly the opposite.

We justify it because "the stock market is unpredictable", even though one of the major tenants here is to invest intelligently and aggressively in low cost index funds.

And then after paying off the mortgage early at the cost of hundreds of thousands of dollars for our peace of mind, we head over to a thread where someone is thinking of buying a new car at the cost of tens of thousands of dollars and rail at them like they're insane.

There ARE legitimate reasons to pay off a mortgage early.  But, in reading these threads the theme I see over and over are people presenting arguments that are either flat out wrong, or are contradictory to the entire spirit of this site.  It's very confusing to be honest.

[boarder42]

This is a sort of off-topic side question for boarder42 (and everyone in his mortgage club):  Is your plan to continually refinance forever?  In other words, once you pay off your mortgage, will you pull the equity back out, re-invest and refinance? 

And... at what interest rate do you consider it a wash?  Assuming 7% returns from investments, would you continually refinance until mortgage rates + origination fees were < 7%?  Or is there some number where the risk/reward makes you think it isn't worth it?

i'm at such an incredibly low rate and so short into my mortgage right now it doesnt really pay for me to do this math yet.  Part of this will greatly depend on what is available at the time i could REFI or consider it worth the increase in rate.  you dont get 3.25% on 30 year mortgages very often.  But as rates have gone down i have consistently REFI'd and pulled money out each time on my previous home.  and i even pulled a little equity out of our new home when we REFId 6 months after purchase. 

So to answer your first question yes i do that i've done it.  Its easy to do and figure out as rates go down.  lower rate no real math to do. 

Your second question i've yet to need to figure out where that point resides that I would go down the path.  Once FIREd as mentioned many times it is hard to REFI at all.  And so my SWAG on when i'll likely re evaluate this is in 4-5 years just before i FIRE.  right now i just dont have the equity unless house prices sky rocket, to increase my interest rate by 3/4s or more of a percent just to pull out a few grand.

[Slee_stack]

This is a sort of off-topic side question for boarder42 (and everyone in his mortgage club):  Is your plan to continually refinance forever?  In other words, once you pay off your mortgage, will you pull the equity back out, re-invest and refinance? 

And... at what interest rate do you consider it a wash?  Assuming 7% returns from investments, would you continually refinance until mortgage rates + origination fees were < 7%?  Or is there some number where the risk/reward makes you think it isn't worth it?

If given the option (a bank may not choose to lend to me at some point) and the numbers add up...YES. 

I've actually refinanced one property 3X even though I could have just bought it outright with after tax funds.  Every time I've asked myself WHY do I need to pay this loan off, the answer has never came.

Its not a complete no-brainer though.  I'm very sensitive to the transaction costs and there is risk in paying more than needed if I decide to get out quicker than anticipated (for a better 'replacement' RE investment perhaps).  I also want buffer in the interest rates to cover the (presumed) higher volatility of stocks/other investments inside whatever time frame I'm speculating.


As an aside, I've seen this question posed a number of times and always wonder about the point of it.  Its like people are trying to obtain some kind of 'gotcha!' if someone says 'No'.

As with some points above, there may come a time I don't need the complication of a refinance (or a new one) because I've already exceeded my goals.  At that point, NO I won't refinance.

I'm not at my goals today though.

[runewell]

Portfolio theory teaches that different people have different levels of risk tolerance.  Therefore, it is not always going to be possible for one idea about finances to apply to every person at every age.  When my mortgage is paid off at age 57 I likely won't have the risk appetite to leverage up and get more stock market returns.  But to hear of people trying to extinguish their mortgage by age 40 suggests they are going to lose a lot of wealth in doing so.

Getting rid of PMI is probably a good goal.  The question there is, how long will it take me to have 20% equity in my home.  If you have a $150K house and owe $140, the PMI's not coming off unless: (1) you can write a check for $20K or (2) the house goes up $25K in value, or (3) some combination of the two.  PMI is pretty expensive, so there is a good chance that paying down the mortgage in this scenario is a good investment in order to get the PMI monkey off your back, after which time you should probably return to investing rather than paying down.

[brooklynguy]

In other words, once you pay off your mortgage, will you pull the equity back out, re-invest and refinance? 

Yes, if then-prevailing mortgage rates are still low enough to justify that decision.  The reason leveraged-investing-via-mortgage is so attractive in the current environment is the historically low interest rates currently available.  One way to evaluate whether rates are low enough to justify leveraged-investing-via-mortgage is to do the same type of historical analysis used in safe withdrawal rate methodology:  e.g., run two parallel cFIREsim scenarios with and without the mortgage to determine, based on historical performance, how likely (and by how much) you are to come out ahead by choosing the mortgage.  If you run that test now, using today's rates, the "success" likelihood will be greater than that of a standard 4% spending plan (on which most people around here are happy to rely for early retirement planning purposes).

[MrMoneySaver]

Is holding bonds in your portfolio facepunch-worthy? I can show mathematically that over any given 30-year period, equities are likely to generate a far better return.

[Scortius]

Is holding bonds in your portfolio facepunch-worthy? I can show mathematically that over any given 30-year period, equities are likely to generate a far better return.

A balanced portfolio is always a good thing, and it's easy to see that a paid off mortgage can be thought of as a safe and stable investment to offset some risk.

The problem is that the people who are often focusing on aggressively paying off a 30 year mortgage are precisely those who are younger and should be looking to build a more aggressive portfolio.  If you just took out a 30 year mortgage, chances are you have at least a 30 year horizon.  Dumping all that extra money into an illiquid asset that basically follows inflation once paid off is generally not the best choice for someone in the early stages of their career.

On the other hand, by the time the mortgage is paid off, 30 years have passed and it is likely that the person is now in a stage in life where he or she will want a safer portfolio.  At that point it would likely make sense to not take out a new mortgage and rather forgo the possible gains (assuming interest rates were still super-low).

[shawndoggy]

The ONLY inherent reason people seem to try to push is "stock market returns arent guaranteed" well neither is the fact that the govt wont declare imminent domain and take your home but those 2 are backed up by so much data that they both fall into the highly unlikely side of things.  And those stock market returns are also what many i would wager to say greater than 80% of this forum based their retirement on.

NO, that's just the only reason you are willing to acknowledge.  I and at least two others in this thread have posited that home equity, depending on where you live, may also be off limits to your creditors.  Home equity can be a liability hedge in a way that an after-tax brokerage account will never be.  (just because I'm paranoid doesn't mean someone isn't out to get me).

Further, if the government does take your home through the power of eminent domain, you will be paid the fair market value of said home.  So you might lose the intangible unique quality of that particular home, but you won't lose the market value of the asset.

[boarder42]

The ONLY inherent reason people seem to try to push is "stock market returns arent guaranteed" well neither is the fact that the govt wont declare imminent domain and take your home but those 2 are backed up by so much data that they both fall into the highly unlikely side of things.  And those stock market returns are also what many i would wager to say greater than 80% of this forum based their retirement on.

NO, that's just the only reason you are willing to acknowledge.  I and at least two others in this thread have posited that home equity, depending on where you live, may also be off limits to your creditors.  Home equity can be a liability hedge in a way that an after-tax brokerage account will never be.  (just because I'm paranoid doesn't mean someone isn't out to get me).

Further, if the government does take your home through the power of eminent domain, you will be paid the fair market value of said home.  So you might lose the intangible unique quality of that particular home, but you won't lose the market value of the asset.

Wouldn't a simple cheap umbrella policy protect your house in the same light as the homestead issue. And as you said this applies to maybe 2-3 states I'm the us I'm pretty sure

[Cwadda]

Portfolio theory teaches that different people have different levels of risk tolerance.  Therefore, it is not always going to be possible for one idea about finances to apply to every person at every age.  When my mortgage is paid off at age 57 I likely won't have the risk appetite to leverage up and get more stock market returns.  But to hear of people trying to extinguish their mortgage by age 40 suggests they are going to lose a lot of wealth in doing so.

Getting rid of PMI is probably a good goal.  The question there is, how long will it take me to have 20% equity in my home.  If you have a $150K house and owe $140, the PMI's not coming off unless: (1) you can write a check for $20K or (2) the house goes up $25K in value, or (3) some combination of the two.  PMI is pretty expensive, so there is a good chance that paying down the mortgage in this scenario is a good investment in order to get the PMI monkey off your back, after which time you should probably return to investing rather than paying down.

I'm starting a loan this June and it would take me 8 years to get to 20% equity, with minimum payments. Who knows what interest rates will be like years from now. It makes sense to pay extra on principle in the near future to get to that 20% equity threshold and do the refinance while interest rates are still low.

If I were to put down an extra $1000/month on principal I'd be eligible for a refinance 5 years sooner. This is $20k saved in just PMI alone.

For anyone who wanted a mortgage calculator, this is a great one. http://usmortgagecalculator.org

[shawndoggy]

The ONLY inherent reason people seem to try to push is "stock market returns arent guaranteed" well neither is the fact that the govt wont declare imminent domain and take your home but those 2 are backed up by so much data that they both fall into the highly unlikely side of things.  And those stock market returns are also what many i would wager to say greater than 80% of this forum based their retirement on.

NO, that's just the only reason you are willing to acknowledge.  I and at least two others in this thread have posited that home equity, depending on where you live, may also be off limits to your creditors.  Home equity can be a liability hedge in a way that an after-tax brokerage account will never be.  (just because I'm paranoid doesn't mean someone isn't out to get me).

Further, if the government does take your home through the power of eminent domain, you will be paid the fair market value of said home.  So you might lose the intangible unique quality of that particular home, but you won't lose the market value of the asset.

Wouldn't a simple cheap umbrella policy protect your house in the same light as the homestead issue. And as you said this applies to maybe 2-3 states I'm the us I'm pretty sure

Depends what you do.  Umbrella won't shield you from professional liability, for instance (doc, lawyer, accountant, engineer).

The homestead exemption does vary from state to state.  Pays to do your homework.

[boarder42]

Portfolio theory teaches that different people have different levels of risk tolerance.  Therefore, it is not always going to be possible for one idea about finances to apply to every person at every age.  When my mortgage is paid off at age 57 I likely won't have the risk appetite to leverage up and get more stock market returns.  But to hear of people trying to extinguish their mortgage by age 40 suggests they are going to lose a lot of wealth in doing so.

Getting rid of PMI is probably a good goal.  The question there is, how long will it take me to have 20% equity in my home.  If you have a $150K house and owe $140, the PMI's not coming off unless: (1) you can write a check for $20K or (2) the house goes up $25K in value, or (3) some combination of the two.  PMI is pretty expensive, so there is a good chance that paying down the mortgage in this scenario is a good investment in order to get the PMI monkey off your back, after which time you should probably return to investing rather than paying down.

I'm starting a loan this June and it would take me 8 years to get to 20% equity, with minimum payments. Who knows what interest rates will be like years from now. It makes sense to pay extra on principle in the near future to get to that 20% equity threshold and do the refinance while interest rates are still low.

If I were to put down an extra $1000/month on principal I'd be eligible for a refinance 5 years sooner. This is $20k saved in just PMI alone.

For anyone who wanted a mortgage calculator, this is a great one. http://usmortgagecalculator.org

Rather than pay it down faster why not invest it. See where rates are in 5 years. They could be higher than you're at with PMI. If they aren't you can choose to sell it and refi

[Spork]

As an aside, I've seen this question posed a number of times and always wonder about the point of it.  Its like people are trying to obtain some kind of 'gotcha!' if someone says 'No'.

As with some points above, there may come a time I don't need the complication of a refinance (or a new one) because I've already exceeded my goals.  At that point, NO I won't refinance.

I'm not at my goals today though.

No gotcha.  I just like to try to fully understand another point of view.  I'm at the point where I think I've exceeded my goals... and pretty sure I'd have trouble financing post FIRE (but haven't really tried).

[shawndoggy]

umbrella also won't shield you from contractual liability.  Let's say you are a sole proprietor and you sign on (or personally guaranty) a business obligation and your business fails.  In a state with a high homestead exemption, that equity (along with your federally protected retirement accounts) would be off limits from that creditor.  Your brokerage account on the other hand...

[MrMoneySaver]

Very true about the liability. Some states hardly protect any equity at all, while others protect up to 100 percent. That's a much sturdier protection than an umbrella policy could ever be.

Apart from the homestead exemption, the fact that you hold the property with your spouse can offer great protection in some states -- the ones that have "tenancy by the entirety," I believe. The house would be more or less off-limits if only one member of the couple were sued. Someone would have to win a lawsuit against both of you in order to get at it.

A taxable brokerage account is a sitting duck for creditors and litigious parties.

[BFGirl]

If all those who have paid off their mortgages should be facepunched, then logically, I guess anyone who doesn't leverage as much as they can (at less than 7% interest) to invest in the market should also be facepunched.  After all, it has been shown that the market will go up over time.  Wouldn't this truly be the most efficient way of building wealth?  What's to lose?

 /end sarcasm

Something a friend of mine says comes to mind, "He knows the price of everything, but the value of nothing." 

[boarder42]

If all those who have paid off their mortgages should be facepunched, then logically, I guess anyone who doesn't leverage as much as they can (at less than 7% interest) to invest in the market should also be facepunched.  After all, it has been shown that the market will go up over time.  Wouldn't this truly be the most efficient way of building wealth?  What's to lose?

 /end sarcasm

Something a friend of mine says comes to mind, "He knows the price of everything, but the value of nothing."

if you showed me somewhere i could take out non callable sub 7% loans with no collateral in any amount with fixed interest for 30 years.  I'd go start an LLC leverage the F*ck out of it and FIRE today.

[runewell]

NO, that's just the only reason you are willing to acknowledge.  I and at least two others in this thread have posited that home equity, depending on where you live, may also be off limits to your creditors.  Home equity can be a liability hedge in a way that an after-tax brokerage account will never be.  (just because I'm paranoid doesn't mean someone isn't out to get me).

Further, if the government does take your home through the power of eminent domain, you will be paid the fair market value of said home.  So you might lose the intangible unique quality of that particular home, but you won't lose the market value of the asset.

Those are pretty lame excuses.   

[BFGirl]

Whether to pay down your mortgage or not depends upon more than a mathematical hypothetical.  Although the trend has been for the stock market to go up over the long term, that doesn't mean that it always will and that doesn't mean that there won't be down periods on the march upwards.  There is risk in investing in anything, whether it be your house, stocks, bonds, etc. 

What if I become mentally disabled?  What if a caregiver is able to exploit me and gain access to my accounts and drain them? It is very hard to recover those assets unless you can somehow pin it on the financial institution as negligence.   Although it can be done, it is a lot harder for them to successfully get my house.  Even if they make me sign a deed, it can be invalidated if I didn't have the capacity to know what I was signing.  Then at least one of my assets would be available for my future needs. 

If someone's goal is to accumulate the most wealth possible in the shortest time possible and they are willing to take any steps to do that, then perhaps a facepunch for being unwilling to consider investing instead of paying down a mortgage is warranted.  However, for most people, there are other considerations and values than just the accumulation of wealth quickly.

OP, I don't disagree with the theoretical logic of your argument.  However, for people who are out of debt, saving and investing, I hardly think that because they choose to diversify their assets differently from you that they should be "facepunched."

[shawndoggy]

Those are pretty lame excuses.

That's a pretty compelling rebuttal.

[Scortius]

Whether to pay down your mortgage or not depends upon more than a mathematical hypothetical.  Although the trend has been for the stock market to go up over the long term, that doesn't mean that it always will and that doesn't mean that there won't be down periods on the march upwards.  There is risk in investing in anything, whether it be your house, stocks, bonds, etc. 

What if I become mentally disabled?  What if a caregiver is able to exploit me and gain access to my accounts and drain them? It is very hard to recover those assets unless you can somehow pin it on the financial institution as negligence.   Although it can be done, it is a lot harder for them to successfully get my house.  Even if they make me sign a deed, it can be invalidated if I didn't have the capacity to know what I was signing.  Then at least one of my assets would be available for my future needs. 

If someone's goal is to accumulate the most wealth possible in the shortest time possible and they are willing to take any steps to do that, then perhaps a facepunch for being unwilling to consider investing instead of paying down a mortgage is warranted.  However, for most people, there are other considerations and values than just the accumulation of wealth quickly.

OP, I don't disagree with the theoretical logic of your argument.  However, for people who are out of debt, saving and investing, I hardly think that because they choose to diversify their assets differently from you that they should be "facepunched."

The whole path to FI involves investing in the stock market.  If you're not going to accept that the stock market is an optimal investment over a term of 30 years, then I don't know what to say.

I'm sure you can set up a legal document to dictate how your assets should be handled if you lose the cognitive ability to manage them yourself.  You would likely have a spouse who can handle those decisions for you.

The goal is not to accumulate the most wealth as quickly as possible.  The goal is to accumulate the most wealth very slowly over the course of a lifetime.  Accumulating that wealth to achieve FI is the whole reason we're here.

No one is saying that paying off the mortgage early as a form of diversification is inherently wrong.  People are saying that too often other people justify the aggressive paying off of a mortgage for reasons that are factually incorrect.

[NorthernBlitz]

Didn't read the whole thread, but I thought I'd share our reasons for buying our house in cash after moving from Canada to the US in 2013. I scrolled through the previous pages for "stay at home" and didn't find it, so our second reason may not have been discussed already.

(1) We just moved from Canada and didn't have any credit. We felt buying cash was the best way for us to buy as there were few lenders that would offer a mortgage based only on our Canadian history and the rates were inflated.

(2) Our improved monthly cash flow from not paying a mortgage made it easier / less stressful for my wife to stay home with our kids. We used our strong financial position to buy her some freedom while saving significant child care costs and reducing our stress. I think that makes sense, since the point of being frugal is to use money to buy freedom and piece of mind.

Short version: We are trying to use our money to optimize our happiness, not to maximize our net worth (or minimize my retirement date).

[JLee]

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?

I really don't like the "markets are at an all time high" reasoning. If markets were not frequently at "all time highs," investments would be silly.

[CmFtns]

Boarder42 I really can't understand why you are so passionate about this issue... I've seen you post so many times about this in all kinda of threads and I think you just need to chill out on this argument it's been beaten to death. Almost everyone out there including you makes decisions that don't fall into the realm of "perfectly efficient" and "mustacian" because that is what is important to them.

just for the record I AGREE... I do not pay off my mortgage and send everything to 100% equities but what is with the witch hunt man... let the mortgage payoffers be who they be