Why I want to pay my mortgage off early

[The Money Monk]

There was a recent thread asking why some mustachians engage in a lot of relatively low-impact penny-pinching tactics (like hand drying clothes) to save a few bucks here and there, but then pay off their low-interest mortgages early, thus missing out on the arbitrage of the mathematical difference between the rate of the mortgage and the average rate of return in the markets over 30 years.

There were like 300 replies in that thread so instead of just replying I decided to start my own thread to explain my thoughts on the situation. I have done it MANY times here but people are still asking this question, so I will try one more time to explain it.

Start with these thought experiments:

- If your boss said he would pay you to work 100 hours a week if you wanted the hours, would you do it? Why not? The math is clear, you would have SIGNIFICANTLY more money at the end of a 30 year period.

- Do you plan on working until you are forced to stop for health reasons, or do you plan on retiring at some (any) point before then?
Why? The math is clear - If you worked for as long as possible, you would have significantly more money over your working life time.

The answer to both of these questions is also the answer to the why some people want to pay off their low interest mortgage early:

"because my goal is NOT to simply make as much money as possible over my lifetime; it is to maximize my personal happiness. That involves a fair amount of frugality and a lot of trying to make as much money as possible, but many decisions are made to maximize my PERSONAL utility, not to maximize my mathematical earnings over a certain time period. "

It's hilarious that on a forum of people mostly dedicated to retiring very early (and thus choosing to give up decades of potential earnings) that some of us constantly have to explain another decision that is similarly done to make us happy, not to maximize our bank accounts.

I get it, you don't care if you have a liability on your house. I don't care. I do. Some people don't mind working at all, and don't understand why somebody would bother being frugal and giving up certain things just to not have to have a job.

I love the idea of having my housing needs all but completely taken care of, no matter what happens in the markets, with a job, or anything like that.

And there are a host of other reasons people may have for preferring it.

But the bottom line is, it is simply choosing to maximizing personal happiness at the expense of an increase in possible wealth - EXACTLY like retiring early.

[Firehazard]

Our mortgage payment is the only thing standing between us and retirement today.  So, it has to go.  will be done by 12/31/18.

[boarder42]

Both of your questions require extra work or life energy to achieve. A mortgage not being paid down with extra payments and instead investing those requires no extra time and in fact shortens the time to the point you don't have e to work any longer.

That's why those points aren't valid IMO.

0 effort for maximum results.

Paying down mortgage lengthens time to fire. So if your goal is to fire you're inhibiting your own goal thru not doing something that takes no extra effort. Just optimization of green soldiers.

This isn't a forum for those who don't mind working and don't understand being frugal or why youd do any number of things we do around here. This is a forum where we do exactly the opposite of that statement.

[boarder42]

Our mortgage payment is the only thing standing between us and retirement today.  So, it has to go.  will be done by 12/31/18.

How?

[retired?]

The OPs definition of 'maximum results' is different than yours.

He/she values not having a mortgage. You can probably phrase it in terms of utility theory and certainty equivalents but basically the OP places non-monetary value on having no mortgage. It's that simple.

A sells a donkey to B for $100. Why?  Because A finds $100 to be worth more than the donkey and B feels the donkeys utility is worth at least $100. It's what makes markets baby!

[semiretired31]

I'm here because becoming FI gives me more options and that flexibility ultimately takes a lot of pressure off. I can absolutely understand how freeing oneself from a mortgage can do that too. I guess I don't understand how why we have to dictate what makes someone comfortable/happy. Cause in the end, someone who has paid off their mortgage is infinitely more badass than most of the nation.

[The Money Monk]

Both of your questions require extra work or life energy to achieve. A mortgage not being paid down with extra payments and instead investing those requires no extra time and in fact shortens the time to the point you don't have e to work any longer.

That's why those points aren't valid IMO.

That is irrelevant. the issue is that whatever arbitrary point where you decide working more for more money isn't 'worth it' you are making a decision based on your personal values, not based on what gives you more money.

You see the mortgage issues as being two equal choices where one will most likely end up with you having more money. But that is only because you don't have any value attached to not having a mortgage. Many people do value not having a mortgage.

Let me put it this way, there are lots of jobs that people could get that would require the same amount of work, and pay more. But they don't do them because the work would be miserable for them. Its the same amount of work, it might even be physically easier - and they would end up with more money. But based on their personal values they are willing to give up the extra earnings to enjoy their day to day life. It is the same thing here.

Paying down mortgage lengthens time to fire. So if your goal is to fire you're inhibiting your own goal thru not doing something that takes no extra effort. Just optimization of green soldiers.

It wouldn't necessarily lengthen it. And like I said, my goal is not FIRE in and of itself - it is to maximize my long term happiness.

This isn't a forum for those who don't mind working and don't understand being frugal or why youd do any number of things we do around here. This is a forum where we do exactly the opposite of that statement.

No shit. I said as much in my post. 

[The Money Monk]

The OPs definition of 'maximum results' is different than yours.

He/she values not having a mortgage. You can probably phrase it in terms of utility theory and certainty equivalents but basically the OP places non-monetary value on having no mortgage. It's that simple.

A sells a donkey to B for $100. Why?  Because A finds $100 to be worth more than the donkey and B feels the donkeys utility is worth at least $100. It's what makes markets baby!

Exactly. It is about personal utility.

[The Money Monk]

I'm here because becoming FI gives me more options and that flexibility ultimately takes a lot of pressure off. I can absolutely understand how freeing oneself from a mortgage can do that too. I guess I don't understand how why we have to dictate what makes someone comfortable/happy. Cause in the end, someone who has paid off their mortgage is infinitely more badass than most of the nation.

Correct, that is why it is baffling to me. There just seem to be a certain % of the people here who really are kept up at night by the idea of missing out on the extra couple percent return they will (theoretically) get from keeping their mortgage and investing, instead of paying it off.

[semiretired31]

I'm not even arguing one side or the other. I just don't think it should be a right or wrong argument.

[trashmanz]

Your post is about paying your mortgage off early but it could be just the same about how driving a gas guzzler makes you happy therefore you are ok with spending more time working to keep it, or a boat, or a summer/winter home etc.  The reason people want to face punch for statements like that is because yes everyone has their vices, but to speak of them publicly takes away from the goal of living a frugal and efficient lifestyle.  You are free to practice your nonsensical spending vices behind closed doors, just don't voice them publicly when its NOT the most mathematically sound way to be FI.  :P   (tongue firmly in cheek)

[The Money Monk]

Your post is about paying your mortgage off early but it could be just the same about how driving a gas guzzler makes you happy therefore you are ok with spending more time working to keep it, or a boat, or a summer/winter home etc.  The reason people want to face punch for statements like that is because yes everyone has their vices, but to speak of them publicly takes away from the goal of living a frugal and efficient lifestyle.  You are free to practice your nonsensical spending vices behind closed doors, just don't voice them publicly when its NOT the most mathematically sound way to be FI.  :P

that is a stupid comparison. choosing to put your money in something with lower (but positive) returns because it gives you higher personal utility is hardly the same as spending it on something that gives you no returns.

But since you mentioned it,  I don't have any problem with people spending their money on cars or anything else as long as it is a conscious decision. If you have the savings rate you want, what does it matter what you are spending it on? Mathematically it doesn't. MM could have easily found a house hundreds of thousands of dollars cheaper if he wanted to. Why don't you go face-punch him?  EVERY spending decision extends time to fire. There are just many that are considered mustachian sacred cows, such as pets and travel, that aren't questioned. But if you get more personal utility from having a motorcycle or bass boat you get "faced punched" even if you are spending the same amount every month as the lady with 4 dogs.

[retired?]

Even if you are saying that in jest, it is not nonsensical. People are not robots / automaton.

I think aside from personal preferences there are a few bug factors:

Time horizon

Family situation - not married no kids, less likely to pay off bc no big repurcussions to having to sell due to loss of income

And general level of risk aversion.

Talk to some people whose time horizon corresponded w needing money in late 2008.

[semiretired31]

Your post is about paying your mortgage off early but it could be just the same about how driving a gas guzzler makes you happy therefore you are ok with spending more time working to keep it, or a boat, or a summer/winter home etc.  The reason people want to face punch for statements like that is because yes everyone has their vices, but to speak of them publicly takes away from the goal of living a frugal and efficient lifestyle.  You are free to practice your nonsensical spending vices behind closed doors, just don't voice them publicly when its NOT the most mathematically sound way to be FI.  :P

that is a stupid comparison. choosing to put your money in something with lower (but positive) returns because it gives you higher personal utility is hardly the same as spending it on something that gives you no returns.

But since you mentioned it,  I don't have any problem with people spending their money on cars or anything else as long as it is a conscious decision. If you have the savings rate you want, what does it matter what you are spending it on? Mathematically it doesn't. MM could have easily found a house hundreds of thousands of dollars cheaper if he wanted to. Why don't you go face-punch him?  EVERY spending decision extends time to fire. There are just many that are considered mustachian sacred cows, such as pets and travel, that aren't questioned. But if you get more personal utility from having a motorcycle or bass boat you get "faced punched" even if you are spending the same amount every month as the lady with 4 dogs.

Slow clap.

[retired?]

Ha!  Your 'mathematically sound' comment gave me a chuckle. Finance isn't a science as much as we try to 'mathematize' it. There's uncertainty in the uncertainty. Or as former secretary of defense put it "the unknown unknowns".

[retired?]

Reading this forum often reminds me of a twist on the theme to The Facts of Life. In the words of Tootie, Blair and Rizzo.....you take the good you LEAVE the bad.....

Take the good tips of which there are many and forget the bs. Lots of righteousness goes on here. I don't think it was intended to be a contest.

[trashmanz]

Your post is about paying your mortgage off early but it could be just the same about how driving a gas guzzler makes you happy therefore you are ok with spending more time working to keep it, or a boat, or a summer/winter home etc.  The reason people want to face punch for statements like that is because yes everyone has their vices, but to speak of them publicly takes away from the goal of living a frugal and efficient lifestyle.  You are free to practice your nonsensical spending vices behind closed doors, just don't voice them publicly when its NOT the most mathematically sound way to be FI.  :P

that is a stupid comparison. choosing to put your money in something with lower (but positive) returns because it gives you higher personal utility is hardly the same as spending it on something that gives you no returns.

But since you mentioned it,  I don't have any problem with people spending their money on cars or anything else as long as it is a conscious decision. If you have the savings rate you want, what does it matter what you are spending it on? Mathematically it doesn't. MM could have easily found a house hundreds of thousands of dollars cheaper if he wanted to. Why don't you go face-punch him?  EVERY spending decision extends time to fire. There are just many that are considered mustachian sacred cows, such as pets and travel, that aren't questioned. But if you get more personal utility from having a motorcycle or bass boat you get "faced punched" even if you are spending the same amount every month as the lady with 4 dogs.

1st of all, if my boat gives me more personal utility than my 401K, just like your home, don't belittle me for it.  That is what you say right?

2nd, my boat may be a better investment than your home, I don't know your home and you don't know my boat. 

So we can go back and forth on whether my boat is better than your home, maybe maybe not, either case, generally both may be relatively bad ideas compared to investing the surplus if both are made for emotional reasons alone. 

[Khan]

I dislike how cult like and angry the topic of mortgages is becoming.

Some people despise debt, or have theological or personal reasons for not wanting it. Good on them for finding their own path in life, you're not responsible for choosing their life decisions for them, and thank god for that.

[The Money Monk]

1st of all, if my boat gives me more personal utility than my 401K, just like your home, don't belittle me for it.  That is what you say right?

That is what I say. There is nothing "wrong" with working til you die and spending every penny of it. I just know that life would stress me out and not make me happy. I don't care if anybody else does it though, as long as it is a conscious decision and they know there are other options.

2nd, my boat may be a better investment than your home, I don't know your home and you don't know my boat. 

I didn't say otherwise.

So we can go back and forth on whether my boat is better than your home, maybe maybe not, either case, generally both may be relatively bad ideas compared to investing the surplus if both are made for emotional reasons alone.

Saying anything is "better" than anything else is a value statement. Which is the entire point of my post. It's only 'better' or worse based on your personal goals. If your goal is to water ski, yes a boat is better. If your goal is to live debt free, a paid off house is better than a mortgage. It's not that complicated of an idea.

Any choice of what to do with your money (including to invest) is made for emotional reasons. It just might be different emotions. Every choice has opportunity costs. As long as the decision is made consciously with full knowledge of what those costs are, then who cares?

[The Money Monk]

I dislike how cult like and angry the topic of mortgages is becoming.

Some people despise debt, or have theological or personal reasons for not wanting it. Good on them for finding their own path in life, you're not responsible for choosing their life decisions for them, and thank god for that.

yes it is bizarre. holding a low interest mortgage and investing the difference is like a religious experience for some people, ordained by God as the correct path in life. Strange.

[retired?]

I think the use of 'face punch' shows a herd mentality. Drink the punch....er kook aid.

MMM using it....fine. He coined it. But I guarantee those that use it are more likely to be die hards.

I also think that as the forum has grown that it has attracted a good bit of nasty people. Or at least people acting in a way they wouldn't act in person.

Used to be all info. Now there are arguments everywhere and not in the sense of debate.

It's why I only visit once a month or less.

[Khan]

We each have our own value system and life goals, our own pathologies to work through.

Mortgages are one of them. On paper, historically, compared to other options, yes it's better to have low interest debt and use the difference, and it's hard to find any period of time for 20-30 years where that didn't end up outperforming having paid off the mortgage. Great for the math, but that ignores human factors, which, last I checked, we all are. I can distance myself from the thought of having a paid off mortgage for now quite easily. Honestly don't think I'm really going to care when I'm in FIRE territory one way or the other. You know what else? If I'm in FIRE territory.... it doesn't matter.

You know what also is terrible on paper? Having a boat, usually. Better, and cheaper ways of getting most of those thrills abound. I'm not attacking anyone's joy of having a boat, but there are other options for 90% of the use cases, including renting(then you don't have to store it), camping and bringing beer, etc.

Having lived in Hawaii for years, lemme tell you that I got 90% or more of the enjoyment of scuba diving from just snorkeling, didn't stop me from going scuba diving as well.

You know what else is terrible on paper? Having a new car. Guilty(2016, $23.5k), you know what though? I tried having a used(2003, 130k miles) vehicle, and I couldn't get past the mental issues I had with it. Just because I bought new, doesn't mean I can't run it into the ground, and the quality of my life and freedom I feel has improved because of it.(I looked at used and the discount was marginal)

I know how to blow $500 in a single day and enjoy every second of it, and not regret it, and I actually plan on doing that probably once every 6 months, or at least doing it again within the next 6 months. Worth it.

I also have individual stocks as well, we all know what the research on that shows.

Some of us desire FIRE above and beyond anything else in this life, some of us don't. For some the math is important, and trying to eke out that last 1% of savings rate gets our juices pumped, for others... not at all.

IMO the thing that unites us is our understanding that money can operate as an exponential function, and our desire for conscious spending and for efficiency. People with mortgages that are choosing to defy your will are consciously prioritizing their values, and understand the mathematical loss they are taking. It's not about that.

[The Money Monk]

We each have our own value system and life goals, our own pathologies to work through.

Mortgages are one of them. On paper, historically, compared to other options, yes it's better to have low interest debt and use the difference, and it's hard to find any period of time for 20-30 years where that didn't end up outperforming having paid off the mortgage. Great for the math, but that ignores human factors, which, last I checked, we all are. I can distance myself from the thought of having a paid off mortgage for now quite easily. Honestly don't think I'm really going to care when I'm in FIRE territory one way or the other. You know what else? If I'm in FIRE territory.... it doesn't matter.

You know what also is terrible on paper? Having a boat, usually. Better, and cheaper ways of getting most of those thrills abound. I'm not attacking anyone's joy of having a boat, but there are other options for 90% of the use cases, including renting(then you don't have to store it), camping and bringing beer, etc.

Having lived in Hawaii for years, lemme tell you that I got 90% or more of the enjoyment of scuba diving from just snorkeling, didn't stop me from going scuba diving as well.

You know what else is terrible on paper? Having a new car. Guilty(2016, $23.5k), you know what though? I tried having a used(2003, 130k miles) vehicle, and I couldn't get past the mental issues I had with it. Just because I bought new, doesn't mean I can't run it into the ground, and the quality of my life and freedom I feel has improved because of it.(I looked at used and the discount was marginal)

I know how to blow $500 in a single day and enjoy every second of it, and not regret it, and I actually plan on doing that probably once every 6 months, or at least doing it again within the next 6 months. Worth it.

I also have individual stocks as well, we all know what the research on that shows.

Some of us desire FIRE above and beyond anything else in this life, some of us don't. For some the math is important, and trying to eke out that last 1% of savings rate gets our juices pumped, for others... not at all.

IMO the thing that unites us is our understanding that money can operate as an exponential function, and our desire for conscious spending and for efficiency. People with mortgages that are choosing to defy your will are consciously prioritizing their values, and understand the mathematical loss they are taking. It's not about that.

Very well put. Thanks for the comment.

[EscapeVelocity2020]

We each have our own value system and life goals, our own pathologies to work through.

Mortgages are one of them. On paper, historically, compared to other options, yes it's better to have low interest debt and use the difference, and it's hard to find any period of time for 20-30 years where that didn't end up outperforming having paid off the mortgage. Great for the math, but that ignores human factors, which, last I checked, we all are. I can distance myself from the thought of having a paid off mortgage for now quite easily. Honestly don't think I'm really going to care when I'm in FIRE territory one way or the other. You know what else? If I'm in FIRE territory.... it doesn't matter.

You know what also is terrible on paper? Having a boat, usually. Better, and cheaper ways of getting most of those thrills abound. I'm not attacking anyone's joy of having a boat, but there are other options for 90% of the use cases, including renting(then you don't have to store it), camping and bringing beer, etc.

Having lived in Hawaii for years, lemme tell you that I got 90% or more of the enjoyment of scuba diving from just snorkeling, didn't stop me from going scuba diving as well.

You know what else is terrible on paper? Having a new car. Guilty(2016, $23.5k), you know what though? I tried having a used(2003, 130k miles) vehicle, and I couldn't get past the mental issues I had with it. Just because I bought new, doesn't mean I can't run it into the ground, and the quality of my life and freedom I feel has improved because of it.(I looked at used and the discount was marginal)

I know how to blow $500 in a single day and enjoy every second of it, and not regret it, and I actually plan on doing that probably once every 6 months, or at least doing it again within the next 6 months. Worth it.

I also have individual stocks as well, we all know what the research on that shows.

Some of us desire FIRE above and beyond anything else in this life, some of us don't. For some the math is important, and trying to eke out that last 1% of savings rate gets our juices pumped, for others... not at all.

IMO the thing that unites us is our understanding that money can operate as an exponential function, and our desire for conscious spending and for efficiency. People with mortgages that are choosing to defy your will are consciously prioritizing their values, and understand the mathematical loss they are taking. It's not about that.

Very well put. Thanks for the comment.

Interesting to see how the power of anecdotes and opinions are more powerful than general truth and facts.  What is great for one person (most likely because they did not compare against all the alternatives), and a persuasive, charismatic argument beats the opposed boring and harder idea of optimizing continually (with index funds and renting as opposed to buying).  Pay off your low interest rate tax deductible loan on an appreciating asset at the expense at having more index funds that compensate in (yes, ugh, taxable) dividends and (tax deffer-able) appreciation.  Well, at least I hope you'd agree to rent the boat.  Make only half of this guy's sub-optimal choices (mistakes) your own.

But I'll agree, after FI, you can be sub-optimal, and that seems to be where this guy was coming from.

[The Money Monk]

We each have our own value system and life goals, our own pathologies to work through.

Mortgages are one of them. On paper, historically, compared to other options, yes it's better to have low interest debt and use the difference, and it's hard to find any period of time for 20-30 years where that didn't end up outperforming having paid off the mortgage. Great for the math, but that ignores human factors, which, last I checked, we all are. I can distance myself from the thought of having a paid off mortgage for now quite easily. Honestly don't think I'm really going to care when I'm in FIRE territory one way or the other. You know what else? If I'm in FIRE territory.... it doesn't matter.

You know what also is terrible on paper? Having a boat, usually. Better, and cheaper ways of getting most of those thrills abound. I'm not attacking anyone's joy of having a boat, but there are other options for 90% of the use cases, including renting(then you don't have to store it), camping and bringing beer, etc.

Having lived in Hawaii for years, lemme tell you that I got 90% or more of the enjoyment of scuba diving from just snorkeling, didn't stop me from going scuba diving as well.

You know what else is terrible on paper? Having a new car. Guilty(2016, $23.5k), you know what though? I tried having a used(2003, 130k miles) vehicle, and I couldn't get past the mental issues I had with it. Just because I bought new, doesn't mean I can't run it into the ground, and the quality of my life and freedom I feel has improved because of it.(I looked at used and the discount was marginal)

I know how to blow $500 in a single day and enjoy every second of it, and not regret it, and I actually plan on doing that probably once every 6 months, or at least doing it again within the next 6 months. Worth it.

I also have individual stocks as well, we all know what the research on that shows.

Some of us desire FIRE above and beyond anything else in this life, some of us don't. For some the math is important, and trying to eke out that last 1% of savings rate gets our juices pumped, for others... not at all.

IMO the thing that unites us is our understanding that money can operate as an exponential function, and our desire for conscious spending and for efficiency. People with mortgages that are choosing to defy your will are consciously prioritizing their values, and understand the mathematical loss they are taking. It's not about that.

Very well put. Thanks for the comment.

Interesting to see how the power of anecdotes and opinions are more powerful than general truth and facts.  What is great for one person (most likely because they did not compare against all the alternatives), and a persuasive, charismatic argument beats the opposed boring and harder idea of optimizing continually (with index funds and renting as opposed to buying).  Pay off your low interest rate tax deductible loan on an appreciating asset at the expense at having more index funds that compensate in (yes, ugh, taxable) dividends and (tax deffer-able) appreciation.  Well, at least I hope you'd agree to rent the boat.  Make only half of this guy's sub-optimal choices (mistakes) your own.

But I'll agree, after FI, you can be sub-optimal, and that seems to be where this guy was coming from.

You got triggered and completely missed the point. Take a deep breath and try to understand this concept:   "optimizing" is a subjective standard based on your value system. And BTW a home isn't an appreciating asset, its a durable consumer good.

A doctor choosing a field of study that he is interested in but doesn't pay as much isn't "optimizing" solely with respect to his financial situation either. So what? Most people aren't operating with that being their singular goal. you're just going to have to get over it, I don't know what else to tell you.

[EscapeVelocity2020]

Funny, my 13 yo son uses the word 'triggered' to justify many overly emotional responses.  I'm actually feeling quite cool right now that you said I was 'triggered', but I'd have to spend a lot of time on a lot of drivel to figure out the rest of your singular subjective response.

I'm still not sure what will be useful on the internet - the one off 'special snowflake' post or the 'this is useful to the masses' post.  So far, both are viable, which worries me that this is an even worse (and addictive) distraction than radio and TV.

[The Money Monk]

Funny, my 13 yo son uses the word 'triggered' to justify many overly emotional responses.  I'm actually feeling quite cool right now that you said I was 'triggered', but I'd have to spend a lot of time on a lot of drivel to figure out the rest of your singular subjective response.

I'm still not sure what will be useful on the internet - the one off 'special snowflake' post or the 'this is useful to the masses' post.  So far, both are viable, which worries me that this is an even worse (and addictive) distraction than radio and TV.

Well it sounds like you have a lot to think about. If you start getting triggered again you can calm yourself by thinking about the nominal % return you are getting between your debts and the markets.

[Dora the Homebody]

Since joining MMM I have realized how paying my mortgage early isn't the best decision for me.

Luckily, I've been paying it early in the first 5 years, so at least the principal got reduced at the best possible time.  Now I'm at a point where even if interest rates do go up, I would be ok to make larger payments.  THAT was the worry of mine before -- that interest rates would go up and the payment would be too much.

(I'm in Canada and we don't lock in the same rate for 30 years.  I renewed early to keep the rate at 2.83% for the next 5 year term because I'm worried rates won't stay so low forever).

[boarder42]

your point that people understand the mathmatical loss they are taking is very incorrect.  i dont have time to go thru and find the numerous flawed mathematical comments that come up every time this question is raised but like clock work you will get some guy saying

1. look at all that interest you save!
2. you'll get someone trying to say the interest saved should be again deducted from a formula that already has it accounted for
3. youll get someone claiming that paying down a mortgage is lower risk than investing - newsflash its not
4. you'll get someone claiming the 4% Rule assumption of 7% isnt correct while at the same time planning to use some form of equities and the 4% rule to support them in FIRE.
5. you'll get someone claiming its like a bond allocation when its not liquid and cannot be rebalanced. - no a HELOC is not the same as a low interest fixed mortgage they are typically callable and variable rate.

for everyone who screams i get the math i'm doing it anyway ... awesome good for you ... but many dont.  Should we also have posts around here promoting hiring a gardener b/c its in my values to not mow my lawn and trim my bushes?  or promoting gas guzzling SUVs b/c its in my value system to support big oil. 

This is  FIRE forum yes you can do what makes you happy but we should promote the optimized methods for FIRE and everything else should be white noise.

[runewell]

thus missing out on the arbitrage of the mathematical difference between the rate of the mortgage and the average rate of return in the markets over 30 years.

Arbitrage means you can buy and sell essentially the same thing and lock in a profit.  The average rate of return of the market for the next 30 years is unknown and so you are locking in uncertainty, hence it is not arbitrage.

[mizzourah2006]

There was a recent thread asking why some mustachians engage in a lot of relatively low-impact penny-pinching tactics (like hand drying clothes) to save a few bucks here and there, but then pay off their low-interest mortgages early, thus missing out on the arbitrage of the mathematical difference between the rate of the mortgage and the average rate of return in the markets over 30 years.

I specifically wanted to call out the bolded. I think you can be more specific with this. Missing out on the arbitrage that you are basing your entire safe withdrawal rate on. If you have a 3.5% mortgage and you are planning to retire on a 4% SWR you are betting that the market will return at least an inflation adjusted CAGR of 4%. So, why would you pay anything lower than that off faster than you have to? Unless you are in a position where you are waiting until your SWR is lower than your mortgage interest rate it's a little more specific than 'the difference of the average rate of return in the markets over 30 years', you're betting your entire early retirement on that number.

[Davids]

I'll keep it simple. The psychological factor of having a paid off house may be worth more than having a <4% rate mortgage. The math may say keeping the mortgage is better but I will never fault anyone who wants to pay it off early as the psychological factor of no mortgage may be priceless.

[mizzourah2006]

See I consider this similar to all the facepunching that goes on when people start talking about building dividend portfolios or investing in a dividend index fund instead of the S&P or Vanguard Total Stock Market. It's essentially the exact same thing, but there is very little 'do what you think is best for you' when those topics come up.

[zhelud]

Since we paid off our mortgage early about 5 years ago, not a day has gone by when I don't think "We own this house free and clear! We are not paying interest to that awful Bank of America anymore!  Yippee!"

That is 365 days/year of getting a little giddy for about 10 minutes at a time per day. About 60 hours/year of extra happiness. YMMV.

[Clean Shaven]

Despite the math argument to the contrary, I don't regret for one second paying off the mortgage last January. 3.5% fixed 30 year. We originally put down $300K as a down payment, which - mathematically - was also a bad idea. Don't regret that either.

Looking to FIRE early next year, in our paid off house, with $1.4-1.5 MM investments. It could have been higher if we wanted to leverage debt via the mortgage, but we didn't and still don't.

[mr_orange]

It is somewhat disheartening to see that others feel the same way I do and fail to post on this forum because of the vitriol.  Most of the posters that do this really fail to understand finance or that it is a behavioral science and not strictly mathematical.  Many in this thread have posted accounts of people bypassing potentially lucrative careers in favor of something more attuned to their values and situation.  This really is a great parallel to these mortgage prepayment threads. 

One thing that is noticeably missing from these threads is that you can simply find an ARM with a good fully-indexed rate and have the prepayment reduce your monthly outlay.   This materially changes the discussion because it buys one extra flexibility during an extended layoff and reduces debt service periodically. 

For most situations prepaying a mortgage is sub-optimal, but it seems silly to me to scold people for doing so.  We execute ALL of the things people on this forum say you should do like max 401(k), HSA, etc.  We are fortunate enough to still have money to do more and we're splitting the extra money between prepaying a really low rate 3.875% fixed mortgage on a 20-year note and funding our kids' HSA. 

Guess what?  I can probably make in excess of 25% IRR on real estate projects or a really good rate on hard money loans.  Why contribute extra money to prepayment?  Because it feels like the right thing to do and it hedges my bets some.  It feels good to be executing on multiple goals.  It also feels good to not work so much and make every decision in life with the intent to maximize our accumulated capital.  I also invest money in training and education not because it is optimal financially; it is because it educates me and allows me to do more meaningful work long term. 

[spots]

The financial comparison between paying down your mortgage and investing in the stock market bothers me.  This is comparing apples to oranges.  By paying down your mortgage, you are essentially making an investment in a risk-free financial instrument.  That is, you have a guaranteed return equal to the interest rate of the mortgage.  The appropriate comparison to this investment vehicle is a treasury note of equal duration to your remaining years on the mortgage at the time you make a prepayment, NOT a broad index fund.  For example, if you are prepaying a mortgage that you have 20 years left on, you should compare to the interest rate you could otherwise receive on a treasury instrument with a 20 year maturity.  If your mortgage interest rate exceeds the best-paying risk free financial instrument, it is a financially rationale decision to prepay your mortgage. That is not to say that it is irrational to invest in the stock market instead of paying down your mortgage.  But by investing in the stock market instead of prepaying the mortgage, you are essentially investing in the stock market on margin, at a margin rate equivalent to your mortgage.  Again, not necessarily a bad thing, but it is important to frame the decision in this way.

[Zinsch]

3. youll get someone claiming that paying down a mortgage is lower risk than investing - newsflash its not

If I have 0 debt and 0 assets, then I have 0 risk. If I have 100k debt and 100k assets, then my future net worth is risky.

[mizzourah2006]

3. youll get someone claiming that paying down a mortgage is lower risk than investing - newsflash its not

If I have 0 debt and 0 assets, then I have 0 risk. If I have 100k debt and 100k assets, then my future net worth is risky.

So are you planning your SWR around the 30 yr treasury coupon?

[Zinsch]

Let's say my FIRE number is 500k.
If I have 500k in assets and 0 debt, then my chances of a successful retirement are greater than if I have 1.5M in assets and 1M in debt.
(I haven't actually done the math, but I'd be surprised if that weren't the case)

[boarder42]

Let's say my FIRE number is 500k.
If I have 500k in assets and 0 debt, then my chances of a successful retirement are greater than if I have 1.5M in assets and 1M in debt.
(I haven't actually done the math, but I'd be surprised if that weren't the case)

Thats why you do the math B/c

thats exactly where you went wrong b/c doing the actual math would surprise you b/c 1MM invested in 80/20 stock to bonds at a fixed price interest of 4% over 30 years when you FIRE takes you from

CFIREsim over 40 years

500k invested at 80/20 with 4% SWR = 89.72% success rate

1.5MM with a 1MM dollar mortgage at 4% for 30 years invested at 80/20 with the same 20k spending plus mortgage on top =  97.2% success rate.

[mizzourah2006]

Let's say my FIRE number is 500k.
If I have 500k in assets and 0 debt, then my chances of a successful retirement are greater than if I have 1.5M in assets and 1M in debt.
(I haven't actually done the math, but I'd be surprised if that weren't the case)

Thats why you do the math B/c

thats exactly where you went wrong b/c doing the actual math would surprise you b/c 1MM invested in 80/20 stock to bonds at a fixed price interest of 4% over 30 years when you FIRE takes you from

CFIREsim over 40 years

500k invested at 80/20 with 4% SWR = 89.72% success rate

1.5MM with a 1MM dollar mortgage at 4% for 30 years invested at 80/20 with the same 20k spending plus mortgage on top =  97.2% success rate.

and that's at 4% what does it look like under 4% which was pretty easy to get on a 30 year fixed rate for the past 4-5 years until the last few months. Right before the election I got an offer to refi to a 15 year for 2.625% or 2.75% with 1.5k towards closing costs.

[Zinsch]

Well, in 41 of 118 cycles, the assets dipped by more than 40% according to cFIREsim (I got a success rate of 96.61%, so I probably chose slightly different parameters somewhere). That means your net worth dipped below negative $100k 35% of the time.

Do we really count that as a successful retirement? How do you get the liquidity to keep making those interest payments?
(I hope I'm not reading the output wrong)

[BoonDogle]

Paying down mortgage lengthens time to fire. So if your goal is to fire you're inhibiting your own goal thru not doing something that takes no extra effort. Just optimization of green soldiers.

Not the case here.  Savings rate is more important to FIRE than the potential extra gains in the market by investing vs. paying down a mortgage.  In my case, I've run the numbers for paying the mortgage off in 4 years, 8 years (which is the original payment terms), and refinancing for 30 years.  Doesn't move the goal post for me.  If everything plays out exactly like I put it into the spreadsheet, I would end up having marginally more money at the end of the time by investing, but not enough to make any difference in my decisions.

[boarder42]

Well, in 41 of 118 cycles, the assets dipped by more than 40% according to cFIREsim (I got a success rate of 96.61%, so I probably chose slightly different parameters somewhere). That means your net worth dipped below negative $100k 35% of the time.

Do we really count that as a successful retirement? How do you get the liquidity to keep making those interest payments?
(I hope I'm not reading the output wrong)

you're reading it wrong, CFIREsim considers it a failure when you drop below 0.  and you cant get 96.61% on a 4% SWR with 500k. even with 0% fees.  your assets can dip my more than 40% and still not go below 0. in fact they could dip by 40% yearly forever and never reach 0.  thats how math works. 

[Zinsch]

I was talking about the scenario when you have 1.5M assets and 1M debt. If your assets dip by 40%, then they are worth 900k, so you have a negative net worth of 100k.

[mm1970]

But I'll agree, after FI, you can be sub-optimal, and that seems to be where this guy was coming from.

Why?  Why can't you be sub-optimal before FI?  What's it to you?

You know what would be "optimal" for me right now?

I should leave, find a new job (locally, if possible), that pays about $25k a year more than I make now.  Most likely, that job will require extra hours (45-50 a week).  So, it will cost a *little* more in child care, as I'd need a nanny to pick up the kids from school and after school, and drive them to their activities.  Why?  Well, because I'd be working until at least 6 pm.

So a better-paying job, $25k.  Take home is a bit less, and additional child care will be about $5000 a year. 

That's financially optimal, why don't I do it?

Because I'd rather spend more time with my kids.

We pre-paid the mortgage for years, and what does that mean?  It means that in 2008-2010, when the house was worth about $280,000 less than we paid for it - WE WERE STILL NOT UNDERWATER.  Which means had we needed to sell, we could have done so.  We did not suffer a foreclosure like the next door neighbors.

[MrsPete]

I've only had one mortgage, and I paid it off early.  If I were suddenly transported back in time to my 20s and -- knowing all I know now -- I would make the same choice again.  You can show me hypothetical math all day long (and it is hypothetical -- none of us know for certain what's going to happen with investments), and I still wouldn't change my mind. 

Why?  Because I grew up without financial security.  I was rather frequently hungry, I rarely had nice clothes, I took part in only a fraction of the activities most kids take for granted, and -- yes -- I was afraid of losing our home.  When I got out on my own, I had no parental safety net behind me, and every month I was worried about not being able to make rent.  Between childhood and young adulthood, I lived this way for YEARS.  It was stressful, and it still affects the way I view money today; I am more cautious financially than the average poster here.

I love knowing that my house is MINE.  Every brick, every window, every tile.  Money and investments are very nice, and I'm not knocking them at all, but I can't live in my 401K, and it's possible that my investments could be lost /decreased.  A bit of that poor kid is still living inside me, and I feel much more secure knowing that my house is MINE.  As I approach retirement, I know I can easily live month-to-month on my pension (saving my investments for other things) because my housing costs are very low. 

I'll take that security over a small percentage here and there. 

[golden1]

We pre-paid the mortgage for years, and what does that mean?  It means that in 2008-2010, when the house was worth about $280,000 less than we paid for it - WE WERE STILL NOT UNDERWATER.  Which means had we needed to sell, we could have done so.  We did not suffer a foreclosure like the next door neighbors.

Yeah, I don't really understand how people are not seeing this angle.  Holding a mortgage for a long period has a non-zero risk of tying you to a specific place until that mortgage is paid off.  That is a definite factor in whether you choose to buy or rent or pay down the mortgage.  Paying off your mortgage can give you freedom to change jobs to take a higher paying one, or move somewhere with a low COL.  It isn't always the optimal choice. 

[Midwest]

your point that people understand the mathmatical loss they are taking is very incorrect.  i dont have time to go thru and find the numerous flawed mathematical comments that come up every time this question is raised but like clock work you will get some guy saying

3. youll get someone claiming that paying down a mortgage is lower risk than investing - newsflash its not

Based on what hypothetical?  10 year time frame on equities?  If you have a long enough time frame, equities win.  If you need to access the funds, the variability of the equities market can harm you if you don't have sufficient liquidity.  Variability in the equities market is the risk without sufficient liquidity.

5. you'll get someone claiming its like a bond allocation when its not liquid and cannot be rebalanced. - no a HELOC is not the same as a low interest fixed mortgage they are typically callable and variable rate.

You are correct, HELOC's lines are callable.  In practice, that is infrequent and often corresponds with a decline in credit quality of the borrower or underlying assets. 

You infer that bonds can be more easily rebalanced than a HELOC.  In a constant or declining rate environment, that may be correct.  In a rising rate environment, however, those bonds are declining in value and there is a higher cost to re-balancing or accessing the liquidity in your portfolio. 

An example -

I'm 100% equities with a paid off house representing 20% of my net worth (an 80/20 allocation).  I have a HELOC representing 16% of my net worth.

The alternative to this (assuming an 80/20 strategy) is to have 80% in equities and 20% in bonds.  With bonds approximating those of a mortgage, those 2 strategies yield similar results.

As you can see, I'm advocating a balanced portfolio.  Based on your other responses, you seem to be advocating a 100% equities position with little liquidity.  That has risks of it's own in a crisis situation.