Why I want to pay my mortgage off early

[boarder42]

I guess the real underlying assumption in all this discussion is that investing in the stock market, having been a better option historically, will continue to be the best option going forward.  I don't feel comfortable with that underlying assumption, so I choose to out a little more money towards what I see as a more sure bet.

what is your plan for your income in FIRE?  if its real estate or pension ok but if its some version of the 4% SWR then thats where many dont get how you cant link those 2 together.  B/c if you dont feel comfortable with that assumption how much extra are you working just to get into a comfortable SWR?

This is a false dilemma.

Many of us morgage payers dont rely in the 4% rule either for precisely the same reason, which you fail repeatedly to refute.

Personally, i dont rely in historical market returns to enable my early retirement.  I rely on the resiliance of my diversified, large stache and upon my ability to have accumulated wealth and connections by being an effective worker.

A final note.  I worked in Japan advising CEOs from 1989-92.  At the time the Japanese market had never done anything but rise at a rate even better than the US, since WW2.  Equities hawkers were bullish as those pushing index funds in the US are now.  This era was called the bubble economy, because it was followed by 30 years of stagnant returns, deflation, and poor employment prospects.  Japan survived, but those using leverage to invest were absolutely slaughtered in Japan.  I have friends in that group.  One guy I worked for owned 10 homes, and all the ones in Japan dropped 50% in value.  Luckily his earning power was pretty amazing and he cash flowed his way back...but.....

again you're an outlier by not funding based on this rule an exception to a rule.  when people make the comment about not trusting the returns for their mortgage yet follow it for FIRE plans its a direct contradiciton

[BlueHouse]

10 year treasury note avg is 5.18% ... so by paying it down now b/c of the low rates you're cutting your self off from every investing in that in the future with that money and keeping it liquid.  just food for thought.  if you want to use that as comparison.

and again if the stock market doesnt beat the sub 4% mortgage over 30 years then most of this forum is doomed to fail in FIRE.

Where do you find this?  This is not the return I see.

[boarder42]

10 year treasury note avg is 5.18% ... so by paying it down now b/c of the low rates you're cutting your self off from every investing in that in the future with that money and keeping it liquid.  just food for thought.  if you want to use that as comparison.

and again if the stock market doesnt beat the sub 4% mortgage over 30 years then most of this forum is doomed to fail in FIRE.

Where do you find this?  This is not the return I see.

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html

if its wrong let me know.  but i think it adds a very large wrinkle to everyone comparing to bonds.

[slide]

but regardless of the size of the market crash and whether you're pumping 100% of your extra dollars to the mortgage or have other investments.  the person choosing to invest over rapidly pay down their mortgage will have more money to ride out any life hiccups. if you're 50% mortgage 50% invest and i'm 100% invest on the same total money i will have more money to keep making the same mortgage payment for longer than you will.

now i doubt we see another housing crash the scale of 2008 but i personally would rather ride out a market crash selling investments a loss as needed rather than taking a gut punch on my entire house if needed. as described above.  housing most everywhere has recovered past pre 2007 levels.  the market has recovered much faster though.
[/quote]

You will also potentially lose more money because you will be selling investments at a loss. How much you lose and what the impact is depends on your personal situation. With a paid off house, I have to sell $20k less per year (for example) at a loss. Over a 5 year downturn, I have AT LEAST $100k more investments than you when the market turns positive. In the long run, those that are paying down their mortgage (some of us) are hedging against this scenario.

[boarder42]

I guess the real underlying assumption in all this discussion is that investing in the stock market, having been a better option historically, will continue to be the best option going forward.  I don't feel comfortable with that underlying assumption, so I choose to out a little more money towards what I see as a more sure bet.

what is your plan for your income in FIRE?  if its real estate or pension ok but if its some version of the 4% SWR then thats where many dont get how you cant link those 2 together.  B/c if you dont feel comfortable with that assumption how much extra are you working just to get into a comfortable SWR?

This is a false dilemma.

Many of us morgage payers dont rely in the 4% rule either for precisely the same reason, which you fail repeatedly to refute.

Personally, i dont rely in historical market returns to enable my early retirement.  I rely on the resiliance of my diversified, large stache and upon my ability to have accumulated wealth and connections by being an effective worker.

A final note.  I worked in Japan advising CEOs from 1989-92.  At the time the Japanese market had never done anything but rise at a rate even better than the US, since WW2.  Equities hawkers were bullish as those pushing index funds in the US are now.  This era was called the bubble economy, because it was followed by 30 years of stagnant returns, deflation, and poor employment prospects.  Japan survived, but those using leverage to invest were absolutely slaughtered in Japan.  I have friends in that group.  One guy I worked for owned 10 homes, and all the ones in Japan dropped 50% in value.  Luckily his earning power was pretty amazing and he cash flowed his way back...but.....

again you're an outlier by not funding based on this rule an exception to a rule.  when people make the comment about not trusting the returns for their mortgage yet follow it for FIRE plans its a direct contradiciton

On this point we are mostly in agreement.  There is no free lunch.  Paying the morgage has an opportunity cost.

The opportunity cost is defined by the economic results of the alternative choices, which are unknown.

The math suggests that a leveraged strategy will likely optimizes ones financial outcome with relatively low risk.

However, while that is a 'great bet to make' it is not an absolutely certain result.

So people make a choice based on their risk and reward goals.

Cant understand why that's so hard to converge towards.  No face punching is needed.  Some simply prefer a slower path to FIRE with less exposure to equities risk.

slower path to FIRE completely understand. but those following a 4% SWR are already highly equity exposed. 

[boarder42]

You will also potentially lose more money because you will be selling investments at a loss. How much you lose and what the impact is depends on your personal situation. With a paid off house, I have to sell $20k less per year (for example) at a loss. Over a 5 year downturn, I have AT LEAST $100k more investments than you when the market turns positive. In the long run, those that are paying down their mortgage (some of us) are hedging against this scenario.

down turn years are few and far between so i guess if you want to bet on the 10% chance and increase risk then so be it but thats what you're doing you're betting on a smaller probability and increasing overall risk. not hedging. 

its like betting on green on the roulette wheel vs red and black at the same time.  At least historically.  B/c your situation is looking at this from a vacuum number of years.  when this strategy should be applied continuously for 30 years.

[mm1970]

but regardless of the size of the market crash and whether you're pumping 100% of your extra dollars to the mortgage or have other investments.  the person choosing to invest over rapidly pay down their mortgage will have more money to ride out any life hiccups. if you're 50% mortgage 50% invest and i'm 100% invest on the same total money i will have more money to keep making the same mortgage payment for longer than you will.

now i doubt we see another housing crash the scale of 2008 but i personally would rather ride out a market crash selling investments a loss as needed rather than taking a gut punch on my entire house if needed. as described above.  housing most everywhere has recovered past pre 2007 levels.  the market has recovered much faster though.

Bolded part: I don't care.  My equity in my home is approx. 17% of my net worth.

On another housing crash...
- Value of a home like mine:
1996: $250k
2002: $580k
2004: $790k
2006: $870k
2011: $500k
2012: $600k
2017: $790k

...it's getting pretty close to peak, right before the last crash.  Yeah, the housing market varies a lot by region, but I'm not so confident that another (local) crash isn't around the corner.

[Scortius]

but regardless of the size of the market crash and whether you're pumping 100% of your extra dollars to the mortgage or have other investments.  the person choosing to invest over rapidly pay down their mortgage will have more money to ride out any life hiccups. if you're 50% mortgage 50% invest and i'm 100% invest on the same total money i will have more money to keep making the same mortgage payment for longer than you will.

now i doubt we see another housing crash the scale of 2008 but i personally would rather ride out a market crash selling investments a loss as needed rather than taking a gut punch on my entire house if needed. as described above.  housing most everywhere has recovered past pre 2007 levels.  the market has recovered much faster though.

Bolded part: I don't care.  My equity in my home is approx. 17% of my net worth.

On another housing crash...
- Value of a home like mine:
1996: $250k
2002: $580k
2004: $790k
2006: $870k
2011: $500k
2012: $600k
2017: $790k

...it's getting pretty close to peak, right before the last crash.  Yeah, the housing market varies a lot by region, but I'm not so confident that another (local) crash isn't around the corner.

Ok, and of course you can pay down your mortgage if you want to, but housing bubbles and crashes (as well as market bubbles and crashes) don't actually change the calculus that much.  You can go look through my much longer post on the previous page.  Unless you were planning on selling your house and depending on its value for future living expenses, the current value of your primary residence doesn't really matter when doing these calculations.  If the housing market crashes, does it affect you?  No, you paid off your house early.  What about someone who is still making payments.  Does it affect them?  No!  They still make the same payments they were already planning on making.  The only time is makes a difference to the advantage of the person paying off the house first is an extremely artificially constructed scenario where the person does not have any savings left over to meet living expenses and must liquidate the house before the market recovers, but does not have enough left over in their portfolio to cover the underwater gap due to the decreased market value of their home.  That pretty much affects no one here.  On the other hand, in almost all other scenarios, paying off the mortgage loses money and loses safety and security.

[boarder42]

mm1970 you made a choice to have yours paid off we get that.  but if you went into the pay down your mortgage thread i bet greater than 50% of those thinking they are doing the right thing are greatly increasing their risk early in their working careers. 

screaming I DONT CARE about the math basically as you're doing hurts the younger newer members IMO.  similar to having a thread about why escalades are awesome and everyone posting pictures of their new whip.  Its a decision you made its suboptimal this is a forum focused around optimizing. 

[partgypsy]

Ok, here's a question. Why does everyone say that selling a house is illiquid, while selling stocks, is not? For me all my stock are in a retirement fund. If I needed to sell them tomorrow I would need to pay a 10% fee PLUS taxes. If they are in a retirement fund they are not liquid in considering transaction costs. Especially when considering when one might want to liquidate stocks, is during an economic downtown.
Am I missing something here?

ps. No one has again, brought up the psychological reality, that for most middle class people the choice is not whether to pay off house early or invest in stocks, but to buy a cheaper house but also spend money on an expensive truck, vacations, versus an expensive house (which could be liquidated for a higher amount of money). While not mathematically optimal, spending spare money on the expensive house "wins" over the less expensive house but depreciating assets. Maybe many here do not fit that profile, but I can see simply from coworkers, that that is the way that many are approaching this problem (mortgage is forced savings) versus here on this thread.

[Scortius]

Ok, here's a question. Why does everyone say that selling a house is illiquid, while selling stocks, is not? For me all my stock are in a retirement fund. If I needed to sell them tomorrow I would need to pay a 10% fee PLUS taxes. If they are in a retirement fund they are not liquid in considering transaction costs. Especially when considering when one might want to liquidate stocks, is during an economic downtown.
Am I missing something here?

You can liquidate the principal of your Roth IRA at any point.  You can liquidate your 401k at a 10% penalty, which it turns out is not a huge deal (MadFIentist has a good article on that).

Further, many people assume that the extra mortgage payments are coming after all tax advantaged accounts are maximized (as they should be), so the difference we're talking about is using extra to pay off the mortgage vs. adding extra to a taxable investment account (which is liquid).

ps. No one has again, brought up the psychological reality, that for most middle class people the choice is not whether to pay off house early or invest in stocks, but to buy a cheaper house but also spend money on an expensive truck, vacations, versus an expensive house (which could be liquidated for a higher amount of money). While not mathematically optimal, spending spare money on the expensive house "wins" over the less expensive house but depreciating assets. Maybe many here do not fit that profile, but I can see simply from coworkers, that that is the way that many are approaching this problem (mortgage is forced savings) versus here on this thread.

This has been brought up and it's a very valid point.

[Valhalla]

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.

This.  Please read.

Pay down a mortgage is NOT a risk free transaction.  You're essentially move your financial assets into a property that can go down in value, and can lock you into a location at an inconvenient time.

For example, say you own your house free and clear, and a recession happens.  You find out you have to pull cash out to pay some emergency bills - kid's medical bills, need to move due to work circumstance, family situation, etc.  You would have to sell the house at a loss, and lose all that equity, in order to relocate, or pay an emergency medical bill that may be a significant expense.

If you had a mortgage on the house, you could do a short sale, essentially sharing the risk with the bank.  They take a loss, you take a loss, and move on.  The person with the mortgage would have less risk than the person who paid off their mortgage fully.  In addition, the person with the mortgage, if they had saved that cash and invested it correctly, could have more cash to fend off financial surprises. They could pay the minimum on the mortgage and float things out until the economy improved, compared to the person who has much of their cash locked into the house that is tough to sell in a downturn.

So paying off a house is not a zero-risk decision.  There are risks to this decision.  I'm all about diversification and maintaining flexibility and having options, especially with mortgage rates at historic low rates.  If I can't pay my mortgage with rates next to zero, then I shouldn't have a house.   

If mortgage rates were 8% or higher, like in the early 2000's, sure, consider paying it off, especially as investments bring far less. Right now, paying off mortgages at historic low rates, seems to be the most short-sighted thing one could do. But hey, if it helps you to feel better, locking your money and paying off a super low interest rate loan, good for you.

[Valhalla]

mm1970 you made a choice to have yours paid off we get that.  but if you went into the pay down your mortgage thread i bet greater than 50% of those thinking they are doing the right thing are greatly increasing their risk early in their working careers. 

screaming I DONT CARE about the math basically as you're doing hurts the younger newer members IMO.  similar to having a thread about why escalades are awesome and everyone posting pictures of their new whip.  Its a decision you made its suboptimal this is a forum focused around optimizing.

Agree, especially at this point in time, where mortgage rates are at historic lows, paying it off sounds like the worst move possible. If mortgage rates were higher, yea I'd say consider paying it off.  But with rates near the bottom, I can't believe people don't understand the math behind not paying it off. 

[desertadapted]

Boarder42 provides a community service by laying out the compelling case for not paying down your mortgage early, particularly if you can refinance at today’s historically low rates.  I’ve found it to be a refreshing (if abrasively delivered) education, and I’m convinced that it’s correct after reading B42’s mortgage oeuvre.  It’s critical that folks new to personal finance understand B42’s arguments when deciding how to approach paying off their mortgage. 

OP’s point is that an informed adult can be aware that paying off the mortgage early may be mathematically sub-optimal, but it can still be the right choice for emotional reasons.  At that point, B42, et al. should let it go.  You’ve done your civic duty.  You don’t gain credibility by continuing to beat that horse.   On the flip side, it would be a courtesy if early mortgage payers (I paid off mine before I had the benefit of B42’s observations) would stop conflating the emotional benefits with financial ones.  I’m immensely happy owning my home free and clear, and it fit my personality to do so.  But financially?   I would have a lot more money today if I had placed all the extra money I put into the mortgage into one of my go-to index funds instead.

Making financially sub-optimal choices is part of life.  I think the point of the blog/forum is to give people the facts, and encourage them to think purposefully about their financial choices, and to meaningfully investigate whether a less spendthrift life can lead to equal or greater life satisfaction.     

[Midwest]

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.

This.  Please read.

If you had a mortgage on the house, you could do a short sale, essentially sharing the risk with the bank.  They take a loss, you take a loss, and move on. 

Are you talking about people with no assets other than the house or mustachians with large non-retirement assets?  In many states, the bank is coming after your assets in the event of a short sale.  If you are investing all this money you didn't pay down on the mortgage, the bank is coming after those investments and/or they simply don't approve the short sale.

[FIT_Goat]

people keep bringing up this same analogy.  it takes 0 life energy to swap from paying down a mortgage to investing.

Hey, I wouldn't say it took me "zero" life energy.  I had to change my automatic payment back down to the minimum, and up my automatic investment to make up for the new funds I freed up.  That took me like 3 whole minutes, mostly because my bank's website is slow. ;-)

[PiobStache]

I think some ways that paying off a mortgage avoids or mitigate risks are being missed.  For instance, some above said if your house is paid off, the value drops, then you need to move for work you'll sell your house at a loss.  Well, it's paid off...who says you have to sell it?  Simply rent it, collect any tax benefits possible, and sell it when the market rebounds.  Or, if the job doesn't work out, move back to that paid off house.

Just one example where people are getting too hooked on what they feel is definitive math when they're actually not including all the variables into the algebra.

[Scortius]

I think some ways that paying off a mortgage avoids or mitigate risks are being missed.  For instance, some above said if your house is paid off, the value drops, then you need to move for work you'll sell your house at a loss.  Well, it's paid off...who says you have to sell it?  Simply rent it, collect any tax benefits possible, and sell it when the market rebounds.  Or, if the job doesn't work out, move back to that paid off house.

Just one example where people are getting too hooked on what they feel is definitive math when they're actually not including all the variables into the algebra.

Is just as easy to rent it while still making payments. And meanwhile you own a larger portfolio that will generate more value when the market recovers.

[PiobStache]

Is just as easy to rent it while still making payments. And meanwhile you own a larger portfolio that will generate more value when the market recovers.

Not necessarily.  What if the mortgage payments are such that rent won't cover the cash flow?  You've just moved the family to a new city, need another dwelling (which of course eats more cash flow,) and your portfolio is down due to market drop so you're liquidating losses vs. generating "more value" as there's less of it when the market recovers.

[PiobStache]

Oh, and that rent on the paid off home can cover the cost of housing in your new city.

[Scortius]

Oh, and that rent on the paid off home can cover the cost of housing in your new city.

So in this example, the rent from the house isn't enough to cover the mortgage payments, insurance, maintenance, and property taxes, but it is enough to cover insurance, maintenance, and property taxes and cover living expenses in another city.

Meanwhile you've moved to another city and have a new job, but still can't cover your rental's mortgage payments plus current housing expenses with the combination of your new income, your monthly rents from your old house, plus your extra investment portfolio which while smaller, still contains a significant fraction of the extra payments you've been investing instead of applying to your mortgage.

Therefore you are liquidating your depressed portfolio (which still may have had time to grow significantly before this crash) at a rate sufficient to cover the extra principal and interest that is not covered by your rental income and new job income (which again was enough to cover your living expenses plus your non-mortgage rental expenses).

Yes, in this situation you may come out a little behind. 

[slide]

You will also potentially lose more money because you will be selling investments at a loss. How much you lose and what the impact is depends on your personal situation. With a paid off house, I have to sell $20k less per year (for example) at a loss. Over a 5 year downturn, I have AT LEAST $100k more investments than you when the market turns positive. In the long run, those that are paying down their mortgage (some of us) are hedging against this scenario.

down turn years are few and far between so i guess if you want to bet on the 10% chance and increase risk then so be it but thats what you're doing you're betting on a smaller probability and increasing overall risk. not hedging. 

its like betting on green on the roulette wheel vs red and black at the same time.  At least historically.  B/c your situation is looking at this from a vacuum number of years.  when this strategy should be applied continuously for 30 years.

Thats my point though, I'm not looking at it in a vacuum. That extra $100,000 turns into >$500,000 after 25 years in the mark at 7%. That is assuming a crash hits the day after you pay off your mortgage, so the math will change depending on the timing and length, but the premise is the same.

[undercover]

The amount of debate in these threads that pop up ever five days should make it obviously known that there is no clear winner here.

It boils down to - would you borrow X amount to make X+Y amount?

At the end of the day there are FAR worse things you could do with your money than pay down debt or invest. It's really a win-win.

[PiobStache]

The amount of debate that these threads that pop up ever five days should make it obviously known that there is no clear winner here.

It boils down to - would you borrow X amount to make X+Y amount?

At the end of the day there are FAR worse things you could do with your money than down debt or invest. It's really a win-win.

Best statement I've seen on the topic here so far.  I look on it as balancing risk vs. surety, balancing what % equity in your primary dwelling represents of your total wealth, and act accordingly based on your personal plans and your own personal risk tolerance.

If you're well capitalized, as we were during the crash, one can always dip into one's HELOC and scoop up foreclosed homes or just buy into VOO or the like and wait for that recovery.  Gobbling up a big tranche of VOO with our HELOC was very profitable in the last several years, and after selling a tranche to pay off the HELOC, we still have a nice chunk left that keeps growing and paying dividends.

As Gordon Gecko said, if you dilute your capital reserves, you can't pee in the grass with the big dogs!

[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.

This.  Please read.

Pay down a mortgage is NOT a risk free transaction.  You're essentially move your financial assets into a property that can go down in value, and can lock you into a location at an inconvenient time.

For example, say you own your house free and clear, and a recession happens.  You find out you have to pull cash out to pay some emergency bills - kid's medical bills, need to move due to work circumstance, family situation, etc.  You would have to sell the house at a loss, and lose all that equity, in order to relocate, or pay an emergency medical bill that may be a significant expense.

If you had a mortgage on the house, you could do a short sale, essentially sharing the risk with the bank.  They take a loss, you take a loss, and move on.  The person with the mortgage would have less risk than the person who paid off their mortgage fully.  In addition, the person with the mortgage, if they had saved that cash and invested it correctly, could have more cash to fend off financial surprises. They could pay the minimum on the mortgage and float things out until the economy improved, compared to the person who has much of their cash locked into the house that is tough to sell in a downturn.

So paying off a house is not a zero-risk decision.  There are risks to this decision.  I'm all about diversification and maintaining flexibility and having options, especially with mortgage rates at historic low rates.  If I can't pay my mortgage with rates next to zero, then I shouldn't have a house.   

If mortgage rates were 8% or higher, like in the early 2000's, sure, consider paying it off, especially as investments bring far less. Right now, paying off mortgages at historic low rates, seems to be the most short-sighted thing one could do. But hey, if it helps you to feel better, locking your money and paying off a super low interest rate loan, good for you.

Where you are not comparing properly is by conflating the house and morgage. 

They are two distict financial assets, one that is offered as security for the other.

When you buy the house, you own it.  Whether it goes up or down in value is only tangentially related to the reduction of your debt.   So throw out the house value issue.  It is not relevant, financially. 

Think about it this way.  Assume you have $1M cash in 50/50 portfolio, a 200k loan on a 500k valued home.  Your house will almost always have positive equity and you can pay it off or invest.  You need to decide how to invest $1.3M.  Right now you have 300k in the house, 500k in bonds, and 500k in stocks.  Your returns are driven by the positive cash flow in the 1M, the negative cash flow on the 200k. Your wealth on the portfolio and hose appreciation.

So you can change cash flow by reducing the debt and selling bonds.  Your assets become 500k stock, 300k bonds, 500k house.  You eliminate the negative cash flow of the debt in exchange for losing bond returns and your asset mix is 800k financial 500k house.

This is exactly correct.  Paying down your mortgage is a risk-free investment, and whether or not your home value goes up or down has absolutely no bearing on the risk of prepaying your mortgage.  The decision to purchase the house is the investment decision that holds risk.

[Midwest]

This is exactly correct.  Paying down your mortgage is a risk-free investment, and whether or not your home value goes up or down has absolutely no bearing on the risk of prepaying your mortgage.  The decision to purchase the house is the investment decision that holds risk.

If you are in a non-recourse state, the bank retains more risk in the event of a housing decline that exceeds equity.  Most states are recourse, but I think CA is non-recourse which could impact the decision tree.

[BlueHouse]

mm1970 you made a choice to have yours paid off we get that.  but if you went into the pay down your mortgage thread i bet greater than 50% of those thinking they are doing the right thing are greatly increasing their risk early in their working careers. 

screaming I DONT CARE about the math basically as you're doing hurts the younger newer members IMO. similar to having a thread about why escalades are awesome and everyone posting pictures of their new whip.  Its a decision you made its suboptimal this is a forum focused around optimizing.

Kind of like all of your previous boast-posts about your boat, your mcmansion, etc?  Yeah, I don't think we get to tell people that their opinions don't matter or that they are hurting other members. 

[Valhalla]

I think some ways that paying off a mortgage avoids or mitigate risks are being missed.  For instance, some above said if your house is paid off, the value drops, then you need to move for work you'll sell your house at a loss.  Well, it's paid off...who says you have to sell it?  Simply rent it, collect any tax benefits possible, and sell it when the market rebounds.  Or, if the job doesn't work out, move back to that paid off house.

Just one example where people are getting too hooked on what they feel is definitive math when they're actually not including all the variables into the algebra.

What if circumstances require that you sell it?  ie emergency medical bills that come due, need to relocate permanently far away, and yet having to deal with bad tenants in a place far away.  Life's constantly changing. Unless you're 100% sure you'll never move, will live in that house forever, or have so much cash that locking in a lot of your portfolio into a house, I wouldn't pay down a super cheap mortgage to limit my options.  Have more options, generally, is better than limiting your options.

Interestingly, the attitude of paying down your house is "I own it forever" and the pride of not having a mortgage. While that's fine, try not paying property taxes, HOA dues, or not maintaining it.  I look at my house as part of my investment portfolio.  Meaning it's an asset, nothing more.  I don't sleep any better or worse knowing certain % of my portfolio is weighted in my house.  I look at how my portfolio is balanced.  If my portfolio is too heavily weighted in real estate, including my home, I re-balance my portfolio to have a certain % in short term liquid assets, and longer term stocks / bonds / real estate / other investments.

I'm not emotionally tied to my "home".  Yes it's nice to not have to pay a mortgage, but if the mortgage is super low rate, and tax deductible, I'm using that to my advantage.

Even Tony Robbins advises buying a "house" and not a "home"  http://www.cnbc.com/2017/03/26/why-tony-robbins-tells-millennials-to-buy-a-house-not-a-home.html.

Those that pay down their mortgage feel great...like they "own" it.  Truth is you don't own your home, you never will.  You will have to keep up with maintenance / taxes / fees.  If you can make a lump sump payment to forever get rid of costs associated with living there, that's something to look into. Until then, I look at my house / mortgage strictly from a business perspective.  Don't get emotionally vested with one single type of asset and tie up too much of your money into that category, especially if it's inflexible and reduces your options.

[Valhalla]

This is exactly correct.  Paying down your mortgage is a risk-free investment, and whether or not your home value goes up or down has absolutely no bearing on the risk of prepaying your mortgage.  The decision to purchase the house is the investment decision that holds risk.

I still don't understand how locking up your money into an asset that costs a ton of money to maintain, buy and sell, is a risk-free investment.

Think of it this way. You are handed $300k today. Option A: you can invest that $300k in the market, in a laddered approach where you can have a balanced portfolio with short term and long term investments, to cover your living expenses for the next 1-2 years and longer time horizon farther out.

Or Option B: you can you lock that $300k into a physical asset that costs a lot of money to buy and sell, and should you have an emergency you cannot easily get that money out to handle the emergency.  And that asset generally does not go up as much as other financial investments, and costs your money to maintain it, pay taxes / fees or you'll lose it to the government. On top of this, if you put this $300k into that physical asset, you are penalized by the way of removing your "tax deduction" incentive which shields a portion of your returns on your choice.

Which options is the better choice?  It is clear here by looking at this from a business perspective, option A is by far the better option.  Option B has too many limitations, risks, and costs associated with it.

Too many people are too emotionally invested with their "home".  That's fine for you if you feel the psychology of owning your house is worth it.  But from a pure, unemotional perspective, this is a no brainer from a financial perspective.

[PiobStache]

What if circumstances require that you sell it?  ie emergency medical bills that come due, need to relocate permanently far away, and yet having to deal with bad tenants in a place far away.  Life's constantly changing. Unless you're 100% sure you'll never move, will live in that house forever, or have so much cash that locking in a lot of your portfolio into a house, I wouldn't pay down a super cheap mortgage to limit my options.  Have more options, generally, is better than limiting your options.

Agree that more options = more better. 

I can create all kinds of scenarios where being mortgaged to the hilt would yield more options and I can create all kinds of scenarios where it won't.  I think each person has to intelligently assess their own situation and act from there. 

I think you were conveying something about not having the equity of your dwelling be too large a component of your personal wealth, and not only do I agree, I think I said something about that in a post here.  I've seen retired folks with only SS for cash flow but sitting on a million plus home paid off.  Their emotions get in the way of selling to monetize their only asset and leading a better life.  Humans are funny critters!

[Valhalla]

The amount of debate in these threads that pop up ever five days should make it obviously known that there is no clear winner here.

It boils down to - would you borrow X amount to make X+Y amount?

At the end of the day there are FAR worse things you could do with your money than pay down debt or invest. It's really a win-win.

I appreciate your sentiment, but I think given current circumstances (historic low interest rates), the better option is to keep the mortgage and use the money to invest.  If circumstances change (rates go up), then the better choice may also change.

[Valhalla]

What if circumstances require that you sell it?  ie emergency medical bills that come due, need to relocate permanently far away, and yet having to deal with bad tenants in a place far away.  Life's constantly changing. Unless you're 100% sure you'll never move, will live in that house forever, or have so much cash that locking in a lot of your portfolio into a house, I wouldn't pay down a super cheap mortgage to limit my options.  Have more options, generally, is better than limiting your options.

Agree that more options = more better. 

I can create all kinds of scenarios where being mortgaged to the hilt would yield more options and I can create all kinds of scenarios where it won't.  I think each person has to intelligently assess their own situation and act from there. 

I think you were conveying something about not having the equity of your dwelling be too large a component of your personal wealth, and not only do I agree, I think I said something about that in a post here.  I've seen retired folks with only SS for cash flow but sitting on a million plus home paid off.  Their emotions get in the way of selling to monetize their only asset and leading a better life.  Humans are funny critters!

That is true. The key here is mortgage rates are at historic low rates. Given this fact, it tilts the argument more to one direction.  At any other time in history relative to rates, the argument is far less clear.

[slide]

This is exactly correct.  Paying down your mortgage is a risk-free investment, and whether or not your home value goes up or down has absolutely no bearing on the risk of prepaying your mortgage.  The decision to purchase the house is the investment decision that holds risk.

I still don't understand how locking up your money into an asset that costs a ton of money to maintain, buy and sell, is a risk-free investment.

Think of it this way. You are handed $300k today. Option A: you can invest that $300k in the market, in a laddered approach where you can have a balanced portfolio with short term and long term investments, to cover your living expenses for the next 1-2 years and longer time horizon farther out.

Or Option B: you can you lock that $300k into a physical asset that costs a lot of money to buy and sell, and should you have an emergency you cannot easily get that money out to handle the emergency.  And that asset generally does not go up as much as other financial investments, and costs your money to maintain it, pay taxes / fees or you'll lose it to the government. On top of this, if you put this $300k into that physical asset, you are penalized by the way of removing your "tax deduction" incentive which shields a portion of your returns on your choice.

Which options is the better choice?  It is clear here by looking at this from a business perspective, option A is by far the better option.  Option B has too many limitations, risks, and costs associated with it.

Too many people are too emotionally invested with their "home".  That's fine for you if you feel the psychology of owning your house is worth it.  But from a pure, unemotional perspective, this is a no brainer from a financial perspective.

Similarly to how some people in these threads are wanting to eradicate the mathematical flaws that people who advocate paying down a mortgage are making (eg. what about the reduction in interest payments??), this is flawed thinking on the other side.

As mentioned in the comment you replied to, once you have a mortgage, paying it down is a risk free investment in terms of real ROI. The decision to purchase in the first place is where the risk plays in.

[PizzaSteve]

This is exactly correct.  Paying down your mortgage is a risk-free investment, and whether or not your home value goes up or down has absolutely no bearing on the risk of prepaying your mortgage.  The decision to purchase the house is the investment decision that holds risk.

I still don't understand how locking up your money into an asset that costs a ton of money to maintain, buy and sell, is a risk-free investment.

...

The point is that by choosing to buy the home you have already locked in the full investment, regardless of how you financed it.  Financing is a distinct financial decision.  Ponder that, as you keep mixing returns of the housing value with the loan costs.

You might argue that, when you use leverage, the bank is providing you with a sort of 'put product' that protects against downside losses (note a put is a contract promising to buy an asset at a specific price).  I would agree that there is some hedge value in being able to walk from an underwater property, but note that this is valueless to most homeowners with normal lives.  If the bank is foreclosing, then you have a messed up situation, and likely your mix of assets and risk was badly constructed.  I would never want my personal residence to be over exposed.   

So if you shouldn't have put yourself there to begin with, the morgage as a hedge value is for FIRE speculators (unless we are talking RE investing instead of personal home).   For speculators on a risky property, they generally should be leveraged and held in an LLC.

I feel that math is becoming a euphamism for 'rationalization of high risk, high reward' based strategies to reach FIRE more quickly, by folks who want to be optimistic.  Those seeking to retire on leverage are taking risks.  The decription of using a HELOC to market time/increase equity exposure described above is one such strategy. 

It is fine, but to push it as a sure thing is not serving everyone well.

[Valhalla]

This is exactly correct.  Paying down your mortgage is a risk-free investment, and whether or not your home value goes up or down has absolutely no bearing on the risk of prepaying your mortgage.  The decision to purchase the house is the investment decision that holds risk.

I still don't understand how locking up your money into an asset that costs a ton of money to maintain, buy and sell, is a risk-free investment.

Think of it this way. You are handed $300k today. Option A: you can invest that $300k in the market, in a laddered approach where you can have a balanced portfolio with short term and long term investments, to cover your living expenses for the next 1-2 years and longer time horizon farther out.

Or Option B: you can you lock that $300k into a physical asset that costs a lot of money to buy and sell, and should you have an emergency you cannot easily get that money out to handle the emergency.  And that asset generally does not go up as much as other financial investments, and costs your money to maintain it, pay taxes / fees or you'll lose it to the government. On top of this, if you put this $300k into that physical asset, you are penalized by the way of removing your "tax deduction" incentive which shields a portion of your returns on your choice.

Which options is the better choice?  It is clear here by looking at this from a business perspective, option A is by far the better option.  Option B has too many limitations, risks, and costs associated with it.

Too many people are too emotionally invested with their "home".  That's fine for you if you feel the psychology of owning your house is worth it.  But from a pure, unemotional perspective, this is a no brainer from a financial perspective.

Similarly to how some people in these threads are wanting to eradicate the mathematical flaws that people who advocate paying down a mortgage are making (eg. what about the reduction in interest payments??), this is flawed thinking on the other side.

As mentioned in the comment you replied to, once you have a mortgage, paying it down is a risk free investment in terms of real ROI. The decision to purchase in the first place is where the risk plays in.

I still don't understand.  Mortgage rates are at historic lows.  Do you think there's a chance these historic low rate of tax deductible mortgages will outperform stocks / bonds in the long run?  If that's the case, we better sell everything we got, and put it all into cash.

This is essentially the same argument as the person who stuffs all of their savings into their mattress. Hey, having my cash next to me feels safer than putting it in a bank somewhere.  Mathematically it makes no sense. But if it makes you feel better, go for it.

[Midwest]

This is exactly correct.  Paying down your mortgage is a risk-free investment, and whether or not your home value goes up or down has absolutely no bearing on the risk of prepaying your mortgage.  The decision to purchase the house is the investment decision that holds risk.

I still don't understand how locking up your money into an asset that costs a ton of money to maintain, buy and sell, is a risk-free investment.

Think of it this way. You are handed $300k today. Option A: you can invest that $300k in the market, in a laddered approach where you can have a balanced portfolio with short term and long term investments, to cover your living expenses for the next 1-2 years and longer time horizon farther out.

Or Option B: you can you lock that $300k into a physical asset that costs a lot of money to buy and sell, and should you have an emergency you cannot easily get that money out to handle the emergency.  And that asset generally does not go up as much as other financial investments, and costs your money to maintain it, pay taxes / fees or you'll lose it to the government. On top of this, if you put this $300k into that physical asset, you are penalized by the way of removing your "tax deduction" incentive which shields a portion of your returns on your choice.

Which options is the better choice?  It is clear here by looking at this from a business perspective, option A is by far the better option.  Option B has too many limitations, risks, and costs associated with it.

Too many people are too emotionally invested with their "home".  That's fine for you if you feel the psychology of owning your house is worth it.  But from a pure, unemotional perspective, this is a no brainer from a financial perspective.

Similarly to how some people in these threads are wanting to eradicate the mathematical flaws that people who advocate paying down a mortgage are making (eg. what about the reduction in interest payments??), this is flawed thinking on the other side.

As mentioned in the comment you replied to, once you have a mortgage, paying it down is a risk free investment in terms of real ROI. The decision to purchase in the first place is where the risk plays in.

I still don't understand.  Mortgage rates are at historic lows.  Do you think there's a chance these historic low rate of tax deductible mortgages will outperform stocks / bonds in the long run?  If that's the case, we better sell everything we got, and put it all into cash.

Investment grade bonds are yielding 3.5%.  http://money.cnn.com/data/bonds/

I wouldn't suggest one forgo investing in stocks to pay down the mortgage, but why would you leverage a house to buy corporate bonds?

Your portfolio should be diversified.  Paying down the mortgage can be part of that strategy.  Your situation and locale, may impact that decision.

[Valhalla]

This is exactly correct.  Paying down your mortgage is a risk-free investment, and whether or not your home value goes up or down has absolutely no bearing on the risk of prepaying your mortgage.  The decision to purchase the house is the investment decision that holds risk.

I still don't understand how locking up your money into an asset that costs a ton of money to maintain, buy and sell, is a risk-free investment.

...

The point is that by choosing to buy the home you have already locked in the full investment, regardless of how you financed it.  Financing is a distinct financial decision.  Ponder that, as you keep mixing returns of the housing value with the loan costs.

You might argue that, when you use leverage, the bank is providing you with a sort of 'put product' that protects against downside losses (note a put is a contract promising to buy an asset at a specific price).  I would agree,  but note that this is valueless to most.  If the bank is foreclosing, your mix of assets and risk was over exposed and you shouldnt have put yourself there  (unless we are talking RE investing instead of personal home), in which case a risky property generally should be leveraged and held in an LLC.

Buying vs renting is similarly a mathematical choice of how you put a roof on your head.  You can rent and not buy, and use the down payment for investments.  Don't get locked into a notion that just because you chose to sign your name on a house, that it's any more special than any other investment choices you made.

I'm seeing a ton of emotion about paying down a house.  Way more emotion than it warrants.  I get it, but I think there's way too much tied to "pride of home ownership", similarly to buying a BWM or some other brand new luxury car.  If I can drive a beater that gets me from here to my destination, I'll do it. If I can lease a BMW that gets me from here to my destination, cheaper or at a similar cost, I'll do it.  There's no emotion tied to this. It's simply optimizing my choices.

[Valhalla]

This is exactly correct.  Paying down your mortgage is a risk-free investment, and whether or not your home value goes up or down has absolutely no bearing on the risk of prepaying your mortgage.  The decision to purchase the house is the investment decision that holds risk.

I still don't understand how locking up your money into an asset that costs a ton of money to maintain, buy and sell, is a risk-free investment.

Think of it this way. You are handed $300k today. Option A: you can invest that $300k in the market, in a laddered approach where you can have a balanced portfolio with short term and long term investments, to cover your living expenses for the next 1-2 years and longer time horizon farther out.

Or Option B: you can you lock that $300k into a physical asset that costs a lot of money to buy and sell, and should you have an emergency you cannot easily get that money out to handle the emergency.  And that asset generally does not go up as much as other financial investments, and costs your money to maintain it, pay taxes / fees or you'll lose it to the government. On top of this, if you put this $300k into that physical asset, you are penalized by the way of removing your "tax deduction" incentive which shields a portion of your returns on your choice.

Which options is the better choice?  It is clear here by looking at this from a business perspective, option A is by far the better option.  Option B has too many limitations, risks, and costs associated with it.

Too many people are too emotionally invested with their "home".  That's fine for you if you feel the psychology of owning your house is worth it.  But from a pure, unemotional perspective, this is a no brainer from a financial perspective.

Similarly to how some people in these threads are wanting to eradicate the mathematical flaws that people who advocate paying down a mortgage are making (eg. what about the reduction in interest payments??), this is flawed thinking on the other side.

As mentioned in the comment you replied to, once you have a mortgage, paying it down is a risk free investment in terms of real ROI. The decision to purchase in the first place is where the risk plays in.

I still don't understand.  Mortgage rates are at historic lows.  Do you think there's a chance these historic low rate of tax deductible mortgages will outperform stocks / bonds in the long run?  If that's the case, we better sell everything we got, and put it all into cash.

Investment grade bonds are yielding 3.5%.  http://money.cnn.com/data/bonds/

I wouldn't suggest one forgo investing in stocks to pay down the mortgage, but why would you leverage a house to buy corporate bonds?

Your portfolio should be diversified.  Paying down the mortgage can be part of that strategy.  Your situation and locale, may impact that decision.

Yes, of course investment grade bonds are yielding 3.5% RIGHT NOW. That's why mortgage rates are so dang low.  No duh.

The key here is, do you think these low rates will last as long as most 15 - 30 year mortgages?   Will rates continue to be so low or will they go up?   If 15-30 year mortgage rates will outperform the stock market / bonds over the life of the mortgage, then I'd think twice about even owning a house.  I'd cash out and move to somewhere cheap and live like a king, since the economy will be so depressing for the next 15-30 years.

Many people who FIRE'd on a 4% SWR should then be very worried, if their investments won't come close to return on investment compared to a stupidly low mortgage for the next 15 - 30 years. 

[Valhalla]

I still don't understand.  Mortgage rates are at historic lows.  Do you think there's a chance these historic low rate of tax deductible mortgages will outperform stocks / bonds in the long run?  If that's the case, we better sell everything we got, and put it all into cash.

This is essentially the same argument as the person who stuffs all of their savings into their mattress. Hey, having my cash next to me feels safer than putting it in a bank somewhere.  Mathematically it makes no sense. But if it makes you feel better, go for it.

Yes.  There is a non-zero chance that bonds or even cash will outperform the market.  Don't you get that?

How badly you are crushed under this scenario is proportional to the extent of leverage you are willing to take.  That IS the math.

everything in life is non-zero chance. You could die today or tomorrow.  Nothing is guaranteed. Does that mean you make arbitrary decisions without regard to any probability or trend?  My point is to look at trends, and probabilities.

What are the probabilities that historic low mortgages of today outperform the stocks / bonds for the next 15-30 years?  Is it a high probability? A 1% probability? The answer is somewhere in between, but given the starting point of where mortgage rates are about as low as they can get, the probability of mortgage rates outperforming stocks / bonds is about as low as it gets.   There's only opportunity for mortgage rates (and stocks / bonds) to go up, not down.

So given the starting point of where you are pretty much set at the lowest point for ROI, it's a pretty safe bet to say that stocks / bonds will outperform the mortgage rates of today.

[slide]

This is exactly correct.  Paying down your mortgage is a risk-free investment, and whether or not your home value goes up or down has absolutely no bearing on the risk of prepaying your mortgage.  The decision to purchase the house is the investment decision that holds risk.

I still don't understand how locking up your money into an asset that costs a ton of money to maintain, buy and sell, is a risk-free investment.

Think of it this way. You are handed $300k today. Option A: you can invest that $300k in the market, in a laddered approach where you can have a balanced portfolio with short term and long term investments, to cover your living expenses for the next 1-2 years and longer time horizon farther out.

Or Option B: you can you lock that $300k into a physical asset that costs a lot of money to buy and sell, and should you have an emergency you cannot easily get that money out to handle the emergency.  And that asset generally does not go up as much as other financial investments, and costs your money to maintain it, pay taxes / fees or you'll lose it to the government. On top of this, if you put this $300k into that physical asset, you are penalized by the way of removing your "tax deduction" incentive which shields a portion of your returns on your choice.

Which options is the better choice?  It is clear here by looking at this from a business perspective, option A is by far the better option.  Option B has too many limitations, risks, and costs associated with it.

Too many people are too emotionally invested with their "home".  That's fine for you if you feel the psychology of owning your house is worth it.  But from a pure, unemotional perspective, this is a no brainer from a financial perspective.

Similarly to how some people in these threads are wanting to eradicate the mathematical flaws that people who advocate paying down a mortgage are making (eg. what about the reduction in interest payments??), this is flawed thinking on the other side.

As mentioned in the comment you replied to, once you have a mortgage, paying it down is a risk free investment in terms of real ROI. The decision to purchase in the first place is where the risk plays in.

I still don't understand.  Mortgage rates are at historic lows.  Do you think there's a chance these historic low rate of tax deductible mortgages will outperform stocks / bonds in the long run?  If that's the case, we better sell everything we got, and put it all into cash.

This is essentially the same argument as the person who stuffs all of their savings into their mattress. Hey, having my cash next to me feels safer than putting it in a bank somewhere.  Mathematically it makes no sense. But if it makes you feel better, go for it.

You're having different arguments now:

- Paying down your mortgage is a risk free investment in the same way that investing in the stock market is not a risk free investment (you are guaranteed to get a return on your money at whatever your interest rate is)
- Based on historical data, it will probably not be the BEST financial decision if your goal is to maximize net worth

Both of the above statements are correct.

[PizzaSteve]

Yes, but you have been arguing that there is only one best strategy 'based on math' and completely dismissing modern portfolio management theory and risk as factors to consider when constructing your asset mix.  You are also mixing morgage as a liability with house values.

We are trying to educate the group that both strategies (paying or not) are viable and rational.

Several people keep insisting that it is not rational to take less risk.

[Valhalla]

This is exactly correct.  Paying down your mortgage is a risk-free investment, and whether or not your home value goes up or down has absolutely no bearing on the risk of prepaying your mortgage.  The decision to purchase the house is the investment decision that holds risk.

I still don't understand how locking up your money into an asset that costs a ton of money to maintain, buy and sell, is a risk-free investment.

Think of it this way. You are handed $300k today. Option A: you can invest that $300k in the market, in a laddered approach where you can have a balanced portfolio with short term and long term investments, to cover your living expenses for the next 1-2 years and longer time horizon farther out.

Or Option B: you can you lock that $300k into a physical asset that costs a lot of money to buy and sell, and should you have an emergency you cannot easily get that money out to handle the emergency.  And that asset generally does not go up as much as other financial investments, and costs your money to maintain it, pay taxes / fees or you'll lose it to the government. On top of this, if you put this $300k into that physical asset, you are penalized by the way of removing your "tax deduction" incentive which shields a portion of your returns on your choice.

Which options is the better choice?  It is clear here by looking at this from a business perspective, option A is by far the better option.  Option B has too many limitations, risks, and costs associated with it.

Too many people are too emotionally invested with their "home".  That's fine for you if you feel the psychology of owning your house is worth it.  But from a pure, unemotional perspective, this is a no brainer from a financial perspective.

Similarly to how some people in these threads are wanting to eradicate the mathematical flaws that people who advocate paying down a mortgage are making (eg. what about the reduction in interest payments??), this is flawed thinking on the other side.

As mentioned in the comment you replied to, once you have a mortgage, paying it down is a risk free investment in terms of real ROI. The decision to purchase in the first place is where the risk plays in.

I still don't understand.  Mortgage rates are at historic lows.  Do you think there's a chance these historic low rate of tax deductible mortgages will outperform stocks / bonds in the long run?  If that's the case, we better sell everything we got, and put it all into cash.

This is essentially the same argument as the person who stuffs all of their savings into their mattress. Hey, having my cash next to me feels safer than putting it in a bank somewhere.  Mathematically it makes no sense. But if it makes you feel better, go for it.

You're having different arguments now:

- Paying down your mortgage is a risk free investment in the same way that investing in the stock market is not a risk free investment (you are guaranteed to get a return on your money at whatever your interest rate is)
- Based on historical data, it will probably not be the BEST financial decision if your goal is to maximize net worth

Both of the above statements are correct.

Holding all of your money in cash in your mattress is a risk free investment as well, if you want to look at it that way.  If 100% of your holdings are all in your mattress, there's virtually no risk that you'll lose any of it (especially if you have sprinklers all over the place and you never leave home  :)  ).

This idea of "risk free" is what offends me.  Everything has risk. Even holding cash has risk.  Paying off a mortgage has a risk.  There is virtually nothing you do that is risk free.  However, maximizing returns based on historical trends is what will minimize risk.

[Valhalla]

Yes, but you have been arguing that there is only one best strategy 'based on math' and completely dismissing modern portfolio management theory and risk as factors to consider when constructing your asset mix.  You are also mixing morgage as a liability with house values.

We are trying to educate the group that both strategies (paying or not) are viable and rational.

Several people keep insisting that it is not rational to take less risk.

We are going back to risk now.  Buying a house is a risk. Paying down a house is a risk.  Putting all of your money into CDs or cash is a risk.  Everything has risk tied to it.

The key here is, looking at how to optimize your choices in the long run, and minimize your risk of not keeping pace with inflation / long term returns while covering yourself in the short run.

Anyone who says paying down a house is a "risk free" decision, is wrong.  There is risk to making long term decisions with your money.  Period.

[PiobStache]

We are going back to risk now.  Buying a house is a risk. Paying down a house is a risk.  Putting all of your money into CDs or cash is a risk.  Everything has risk tied to it.

The key here is, looking at how to optimize your choices in the long run, and minimize your risk of not keeping pace with inflation / long term returns while covering yourself in the short run.

Anyone who says paying down a house is a "risk free" decision, is wrong.  There is risk to making long term decisions with your money.  Period.

Completely agree but would add not all decisions carry equal risk, which of course, is why some investments yield higher returns than others.

[slide]

This is exactly correct.  Paying down your mortgage is a risk-free investment, and whether or not your home value goes up or down has absolutely no bearing on the risk of prepaying your mortgage.  The decision to purchase the house is the investment decision that holds risk.

I still don't understand how locking up your money into an asset that costs a ton of money to maintain, buy and sell, is a risk-free investment.

Think of it this way. You are handed $300k today. Option A: you can invest that $300k in the market, in a laddered approach where you can have a balanced portfolio with short term and long term investments, to cover your living expenses for the next 1-2 years and longer time horizon farther out.

Or Option B: you can you lock that $300k into a physical asset that costs a lot of money to buy and sell, and should you have an emergency you cannot easily get that money out to handle the emergency.  And that asset generally does not go up as much as other financial investments, and costs your money to maintain it, pay taxes / fees or you'll lose it to the government. On top of this, if you put this $300k into that physical asset, you are penalized by the way of removing your "tax deduction" incentive which shields a portion of your returns on your choice.

Which options is the better choice?  It is clear here by looking at this from a business perspective, option A is by far the better option.  Option B has too many limitations, risks, and costs associated with it.

Too many people are too emotionally invested with their "home".  That's fine for you if you feel the psychology of owning your house is worth it.  But from a pure, unemotional perspective, this is a no brainer from a financial perspective.

Similarly to how some people in these threads are wanting to eradicate the mathematical flaws that people who advocate paying down a mortgage are making (eg. what about the reduction in interest payments??), this is flawed thinking on the other side.

As mentioned in the comment you replied to, once you have a mortgage, paying it down is a risk free investment in terms of real ROI. The decision to purchase in the first place is where the risk plays in.

I still don't understand.  Mortgage rates are at historic lows.  Do you think there's a chance these historic low rate of tax deductible mortgages will outperform stocks / bonds in the long run?  If that's the case, we better sell everything we got, and put it all into cash.

This is essentially the same argument as the person who stuffs all of their savings into their mattress. Hey, having my cash next to me feels safer than putting it in a bank somewhere.  Mathematically it makes no sense. But if it makes you feel better, go for it.

You're having different arguments now:

- Paying down your mortgage is a risk free investment in the same way that investing in the stock market is not a risk free investment (you are guaranteed to get a return on your money at whatever your interest rate is)
- Based on historical data, it will probably not be the BEST financial decision if your goal is to maximize net worth

Both of the above statements are correct.

Holding all of your money in cash in your mattress is a risk free investment as well, if you want to look at it that way.  If 100% of your holdings are all in your mattress, there's virtually no risk that you'll lose any of it (especially if you have sprinklers all over the place and you never leave home  :)  ).

This idea of "risk free" is what offends me.  Everything has risk. Even holding cash has risk.  Paying off a mortgage has a risk.  There is virtually nothing you do that is risk free.  However, maximizing returns based on historical trends is what will minimize risk.

I believe the term you are referring to is 'opportunity cost'. Holding cash has opportunity cost, but no risk. Paying down your mortgage has opportunity cost, but no risk.

[Valhalla]

We are going back to risk now.  Buying a house is a risk. Paying down a house is a risk.  Putting all of your money into CDs or cash is a risk.  Everything has risk tied to it.

The key here is, looking at how to optimize your choices in the long run, and minimize your risk of not keeping pace with inflation / long term returns while covering yourself in the short run.

Anyone who says paying down a house is a "risk free" decision, is wrong.  There is risk to making long term decisions with your money.  Period.

Completely agree but would add not all decisions carry equal risk, which of course, is why some investments yield higher returns than others.

I think we are starting to agree now.  I don't see my house as a risk free asset.  I see it simply as a vehicle to hold some of my money.  This is where the emotions of "I now own my house" start to obscure the risks of holding real estate.

A house is not a home. It is simply real estate. Government subsidized property - if you choose to have a mortgage.  I could sell mine today and buy another tomorrow, or go rent for the rest of my life. I'm not going to treat my house any differently than any other asset I own.

[Valhalla]

I believe the term you are referring to is 'opportunity cost'. Holding cash has opportunity cost, but no risk. Paying down your mortgage has opportunity cost, but no risk.

Holding cash has a ton of risk.  The main risk is that inflation will make your cash worth less over time.  To say it has no risk is completely wrong.  This is why people diversify.

[Midwest]

http://money.cnn.com/data/bonds/[/url]

I wouldn't suggest one forgo investing in stocks to pay down the mortgage, but why would you leverage a house to buy corporate bonds?

Your portfolio should be diversified.  Paying down the mortgage can be part of that strategy.  Your situation and locale, may impact that decision.

Yes, of course investment grade bonds are yielding 3.5% RIGHT NOW. That's why mortgage rates are so dang low.  No duh.

So are you investing in bonds or are you 100% in the stock market?   If not, and you are shooting for an 80/20 portfolio, then you are buying bonds at that shitty yield financed by a mortgage?  If you are buying bonds at the current 3.5% yield, what happens to bond prices when the yields increase?  FYI - Being 100% in the market has it's own issues. 

My choice is buying bonds at an awful yield or paying down  the mortgage.  Over the last 10 years, I've been right or it's been very close.

The key here is, do you think these low rates will last as long as most 15 - 30 year mortgages?   Will rates continue to be so low or will they go up?   If 15-30 year mortgage rates will outperform the stock market / bonds over the life of the mortgage, then I'd think twice about even owning a house.  I'd cash out and move to somewhere cheap and live like a king, since the economy will be so depressing for the next 15-30 years.

If paying down the mortgage is a replacement for the bond portion of the portfolio, the stock market yield is irrelevant to the decision.  I'm in the stock market for 80% of the portfolio.  The only differential is do I take shitty bond yields or pay off a low rate mortgage.

I'm in the market.  The equities market will beat mortgages over the long haul.  I'd prefer not to have 100% of my capital in the market.  For that portion the difference is bonds, cash or debt reduction.

[Valhalla]

http://money.cnn.com/data/bonds/[/url]

I wouldn't suggest one forgo investing in stocks to pay down the mortgage, but why would you leverage a house to buy corporate bonds?

Your portfolio should be diversified.  Paying down the mortgage can be part of that strategy.  Your situation and locale, may impact that decision.

Yes, of course investment grade bonds are yielding 3.5% RIGHT NOW. That's why mortgage rates are so dang low.  No duh.

So are you investing in bonds or are you 100% in the stock market?   If not, and you are shooting for an 80/20 portfolio, then you are buying bonds at that shitty yield financed by a mortgage?  If you are buying bonds at the current 3.5% yield, what happens to bond prices when the yields increase?  FYI - Being 100% in the market has it's own issues. 

My choice is buying bonds at an awful yield or paying down  the mortgage.  Over the last 10 years, I've been right or it's been very close.

The key here is, do you think these low rates will last as long as most 15 - 30 year mortgages?   Will rates continue to be so low or will they go up?   If 15-30 year mortgage rates will outperform the stock market / bonds over the life of the mortgage, then I'd think twice about even owning a house.  I'd cash out and move to somewhere cheap and live like a king, since the economy will be so depressing for the next 15-30 years.

If paying down the mortgage is a replacement for the bond portion of the portfolio, the stock market yield is irrelevant to the decision.  I'm in the stock market for 80% of the portfolio.  The only differential is do I take shitty bond yields or pay off a low rate mortgage.

I'm in the market.  The equities market will beat mortgages over the long haul.  I'd prefer not to have 100% of my capital in the market.  For that portion the difference is bonds, cash or debt reduction.

Good to hear.  I agree with you.

[PizzaSteve]

Yes, but you have been arguing that there is only one best strategy 'based on math' and completely dismissing modern portfolio management theory and risk as factors to consider when constructing your asset mix.  You are also mixing morgage as a liability with house values.

We are trying to educate the group that both strategies (paying or not) are viable and rational.

Several people keep insisting that it is not rational to take less risk.

We are going back to risk now.  Buying a house is a risk. Paying down a house is a risk.  Putting all of your money into CDs or cash is a risk.  Everything has risk tied to it.

The key here is, looking at how to optimize your choices in the long run, and minimize your risk of not keeping pace with inflation / long term returns while covering yourself in the short run.

Anyone who says paying down a house is a "risk free" decision, is wrong.  There is risk to making long term decisions with your money.  Period.

It is because you are not approaching risk with a consistent financial framework, while insisting it is all math.  The example you raise of 100% cash is a good one.  Under a low risk situation, 100% cash is perfectly rational.  In fact i recently read an article about a billionaire who felt market conditions and his risk preferences had him in almost 100% cash equivalents.  This can be a rational portfolio.

Anyway, i think we are in general agreement that people should make informed decisions taking into account sequence of returns risks and the opportunity cost of using or not using leverage given cheap available capital via home equity loans.