Mortgages and financial freedom

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Jozxyqk
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Mortgages and financial freedom

Post by Jozxyqk »

Good afternoon, all.

I apologize for possibly revisiting some well-trodden ground. As background, I have a mortgage -- about $170k. My TIPI payment is about $1100. Don't itemize, so no tax benefit.

I occasionally think about putting extra money towards the principal and weigh the various pros (quicker payoff, risk-free "investment") and cons (liquidity, diversification).

One item I have a tough time understanding is often mentioned on mortgage threads -- Financial "freedom" or "security." Some people report being extremely happy about paying off the mortgage because they no longer have the debt and payment "hanging over their heads."

If you are in this camp, I ask the following: Why do you feel more financially free or secure with the mortgage paid off? If I chose to pay off my mortgage, it would require me to pile $170k into a fairly illiquid asset. *That* sounds scary to me. $170k could feed, clothe and house my family for something like 5 years--probably more if we went into financial-distress mode. Put another, perhaps more positive, way: if I have sufficient income/assets that I am thinking about cranking out $170k to pay off my mortgage, how could I possibly be worried about a $1100/month mortgage payment? Hell, I don't make an outrageous salary or have an emergency fund that's anywhere near that, but making the mortgage payment is extremely low on my list of worries.

So what say you, mortgage payers? Is there some hidden concern that has gone over my head? Are you worried that the bank will kick you out of your house on some basis other than missed payments? What am I missing?
technovelist
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Re: Mortgages and financial freedom

Post by technovelist »

I agree with you that piling a bunch of money into an illiquid asset wouldn't make me feel more comfortable.
Maybe that's why I haven't paid off my mortgage early. :beer
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cherijoh
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Re: Mortgages and financial freedom

Post by cherijoh »

Personally, I agree with you. I did pay down my mortgage ahead of schedule to be debt-free at my projected early retirement date. (Full disclosure: I'm still working and paid off my mortgage as of Dec 2012). I can't say that no longer having the mortgage makes me feel any more secure. On the other hand, getting in a cash flow pinch would have made me feel a lot less secure.

I think the "pay it off early" folks totally ignore the impact of concentrating their wealth in an illiquid asset and hone in on the "guaranteed return" argument. FYI, that argument will ALWAYS look favorable for a relatively new mortgage in a stable interest rate environment. Duh, of course the bank is going to charge you a higher interest rate on a mortgage than it will offer you on a risk-free CD! :oops:

And a much overlooked reason to keep a fixed interest rate mortgage is that it is a great inflation hedge, since if inflation ever kicks back up like it did in the 70's, you get to pay the mortgage off in cheaper dollars.
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mhc
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Re: Mortgages and financial freedom

Post by mhc »

I have been debt free for a number of years now. Long before I learned how to invest properly.

I equate being in debt with slavery. When I owe money, there are extra restrictions placed on my life. I have chosen to eliminate those restrictions. That increases my freedom. I don't think it has much impact on my financial freedom because paying off the mortgage or not does not substantially impact net worth.

Having no mortgage simplifies life.
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LeeMKE
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Re: Mortgages and financial freedom

Post by LeeMKE »

I'm in the camp of pay off the mortgage early, sort of.

30 year mortgages are too expensive IMHO if you want to accumulate net worth. I'm good with 15 year loans because the cost is closer to a reasonable reach for most ordinary folks.

$200,000.00
30 year mortgage at current rate: 4.125% will cost you interest of $95,100 by the end of 15 years, and you still have 15 years to pay, or you can pay it off at $130,000 still owing.
15 year mortgage at current rate: 3.25% will cost you interest of $68,200.

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Jack FFR1846
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Re: Mortgages and financial freedom

Post by Jack FFR1846 »

I've always paid at least a little extra monthly towards all my mortgages. I could care less if the house was depreciating, appreciating, whatever. I owed the money and paid interest. I didn't want to pay interest. At one point, I came into money from stock options at work and paid it off.

One point is that there was nothing I was depriving myself of. I didn't forgo a new Ferrari because I wanted to pay off the mortgage.

Once paid, guess what? I had the entire payment plus whatever extra I would have paid to do with whatever I wanted. It is very nice getting to the first of the month and having no payments to make. It is very nice.

Now, you might say that I could have instead taken that money and invested it. Problem is, I wouldn't have. I would have left it in a money market account, so that would not have worked for me.
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Topic Author
Jozxyqk
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Re: Mortgages and financial freedom

Post by Jozxyqk »

mhc wrote:
I equate being in debt with slavery. When I owe money, there are extra restrictions placed on my life.
What restrictions are you talking about (I assume we're talking about debt on real property here)? Assuming you're in a situation where you have enough money to pay for a home out of pocket, what restrictions does having a mortgage put on your life?





....... I don't really want to touch the slavery thing, but really? Slavery? I think you need to get some perspective. There are doubtless people on this board whose relatively recent ancestors were *actual* slaves. I'm going to say that it's not really comparable to choosing whether to pay off your home or have a bunch of cash sitting around.
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dumbbunny
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Re: Mortgages and financial freedom

Post by dumbbunny »

LeeMKE wrote:I'm in the camp of pay off the mortgage early, sort of.

30 year mortgages are too expensive IMHO if you want to accumulate net worth. I'm good with 15 year loans because the cost is closer to a reasonable reach for most ordinary folks.

$200,000.00
30 year mortgage at current rate: 4.125% will cost you interest of $95,100 by the end of 15 years, and you still have 15 years to pay, or you can pay it off at $130,000 still owing.
15 year mortgage at current rate: 3.25% will cost you interest of $68,200.

Compounding works both for you when you are a saver, and against you when you are a debtor.
Agree. I paid off my 15 year mortgage in 2005 and invested my "mortgage payment." I sold the house in 2012 and invested much of the proceeds 70/30 as a renter.
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Jozxyqk
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Re: Mortgages and financial freedom

Post by Jozxyqk »

To clarify, I'm not asking in general if there are *any* reasons to pay off a mortgage. I understand that people might do so for a variety of financial and personal reasons (mortgage interest is big on a 30 year mortgage, feels good to reach a financial goal, etc.).

I'm asking about the specific reason some offer about a paid off mortgage giving more security, taking a "load off" the mind, permitting greater job flexibility. How is a paid off mortgage more advantageous to security and ease of mind than a large amount of cash?

(I think Jack FFR1846 is close to the mark in making me understand... I guess if you're not going to invest the cash, it might be mentally difficult to see your mortgage payment going to pay a bunch of interest while your cash sits around and does nothing. I would think that person would still not have much in the way of financial worry about making the payment though).
technovelist
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Re: Mortgages and financial freedom

Post by technovelist »

Jozxyqk wrote:To clarify, I'm not asking in general if there are *any* reasons to pay off a mortgage. I understand that people might do so for a variety of financial and personal reasons (mortgage interest is big on a 30 year mortgage, feels good to reach a financial goal, etc.).

I'm asking about the specific reason some offer about a paid off mortgage giving more security, taking a "load off" the mind, permitting greater job flexibility. How is a paid off mortgage more advantageous to security and ease of mind than a large amount of cash?

(I think Jack FFR1846 is close to the mark in making me understand... I guess if you're not going to invest the cash, it might be mentally difficult to see your mortgage payment going to pay a bunch of interest while your cash sits around and does nothing. I would think that person would still not have much in the way of financial worry about making the payment though).
For greater job flexibility, rent. Real estate ownership, with or without a mortgage, is NOT conducive to job flexibility, since most jobs aren't close enough to commute to from any one location. :confused
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Atilla
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Re: Mortgages and financial freedom

Post by Atilla »

Starting about 4 years ago we had enough savings and taxable investments to pay off the mortgage and have some left over...but if we had done it we would have been pretty tapped out in the event of a real emergency.

Instead we paid an extra $500 a month and threw the annual tax refund at it.

Then about 2 years ago the balance gets low enough you start to get itchy to be done with it. So maybe every now and then you throw an extra $5K at it out of savings. Nothing drastic.

Now in the final year the balance is petty enough you just want to kill it off in one final swoop. So we did.

Threw the occasional extra $5K at it...tax refund at it...then the final $35K or so - take it out of cash savings and DONE. We still had enough on hand to squeek by for 2-3 years in the event both of us became unemployed.

Money piles up a lot quicker when you got no mortgage. And now we're pretty bullet-proof financially in the event of something bad - mandatory monthly cash flow took a HUGE dive.
Last edited by Atilla on Mon Aug 25, 2014 6:02 pm, edited 1 time in total.
Topic Author
Jozxyqk
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Re: Mortgages and financial freedom

Post by Jozxyqk »

technovelist wrote:
Jozxyqk wrote:To clarify, I'm not asking in general if there are *any* reasons to pay off a mortgage. I understand that people might do so for a variety of financial and personal reasons (mortgage interest is big on a 30 year mortgage, feels good to reach a financial goal, etc.).

I'm asking about the specific reason some offer about a paid off mortgage giving more security, taking a "load off" the mind, permitting greater job flexibility. How is a paid off mortgage more advantageous to security and ease of mind than a large amount of cash?

(I think Jack FFR1846 is close to the mark in making me understand... I guess if you're not going to invest the cash, it might be mentally difficult to see your mortgage payment going to pay a bunch of interest while your cash sits around and does nothing. I would think that person would still not have much in the way of financial worry about making the payment though).
For greater job flexibility, rent. Real estate ownership, with or without a mortgage, is NOT conducive to job flexibility, since most jobs aren't close enough to commute to from any one location. :confused
Maybe "flexibility" isn't the right word. You will commonly hear people with paid off mortgages talk about how they are thankful that their mortgage is paid off so they are less worried about a layoff. I remember a thread where someone mentioned that a paid off mortgage was a plus in salary negotiations because you didn't "need" the job as much.
rayout
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Re: Mortgages and financial freedom

Post by rayout »

My current residence is a duplex. I rent out the other side. I plan on paying off my mortgage at 3.625% as slowly as possible :)
Twins Fan
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Re: Mortgages and financial freedom

Post by Twins Fan »

Jozxyqk wrote:Maybe "flexibility" isn't the right word. You will commonly hear people with paid off mortgages talk about how they are thankful that their mortgage is paid off so they are less worried about a layoff. I remember a thread where someone mentioned that a paid off mortgage was a plus in salary negotiations because you didn't "need" the job as much.
For that part about the layoff, I think it means they don't worry about a layoff because the EF/savings now stretches further with no mortgage, if needed they can take a lower paying job after the layoff because no mortgage payment to worry about, and things along those lines. I.E. "security" of not having to worry how that mortgage is going to get paid after a layoff. The salary negotiations part I'm not sure about.

I'm a little confused by your original post, OP. You mention throwing extra at the mortgage principal, which I take to mean some extra each month or year, and then you talk about throwing $170k at it all at once. While both are accelerating the payment of debt, they're kind of similar but different. As the thread goes on, it seems you are talking about someone has $170k in savings/taxable/somewhere and a $170k balance left on the mortgage. Is that the scenario we're discussing?

And no, you probably won't get any new info on this one. It's a very personal decision and can depend on the situation as well. You will get answers/comments from folks on both sides of the fence.
flyingaway
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Re: Mortgages and financial freedom

Post by flyingaway »

I paid off my 30 year mortgage in about 4.5 years. I do not feel good to own anyone any money. Furthermore, I could not guarantee to get better return from investment than the mortgage interest. Looking back, I would have made more money if I did not buy a bigger house in 2009, or if I did not paid down my mortgage so quickly and invested the extra money. However, I never regretted to pay off the mortgage as soon as I could.
TRC
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Re: Mortgages and financial freedom

Post by TRC »

Your subject has words that are part of my logic for doing it. No mortgage is one step closer to true financial freedom. Minimizing expenses is my main goal. I didn't want to be strapped to a $3,000 a month payment like many of my friends are. In fact just tonight my wife in I were in our backyard admiring our house and landscaping. I told my wife "look around....it's all ours".
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mhc
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Re: Mortgages and financial freedom

Post by mhc »

Jozxyqk wrote:
mhc wrote:
I equate being in debt with slavery. When I owe money, there are extra restrictions placed on my life.
What restrictions are you talking about (I assume we're talking about debt on real property here)? Assuming you're in a situation where you have enough money to pay for a home out of pocket, what restrictions does having a mortgage put on your life?





....... I don't really want to touch the slavery thing, but really? Slavery? I think you need to get some perspective. There are doubtless people on this board whose relatively recent ancestors were *actual* slaves. I'm going to say that it's not really comparable to choosing whether to pay off your home or have a bunch of cash sitting around.
Maybe you should look up what slavery means and not hold such a narrow view. There are a lot of writings that talk about slavery in a different way than you are looking at it.

If you have a mortgage, read the paperwork and see what restrictions you have. Try selling your property that has a mortgage. Try buying property when you need a mortgage. Maybe this will give you an idea of the restrictions.
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BigJohn
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Re: Mortgages and financial freedom

Post by BigJohn »

Jozxyqk wrote:Why do you feel more financially free or secure with the mortgage paid off? If I chose to pay off my mortgage, it would require me to pile $170k into a fairly illiquid asset.
I think a major difference between the two schools of thought on this are whether you view a house as an investment asset or an expense. My perspective is that a house is an expense not an investment. As a result, I look at this decision from a cash flow/net worth perspective and don't worry about liquidity. I am currently not paying off my 3.25%, 15 year mortgage early because after the tax deduction I think I can do better keeping it invested. In the next few years I expect the value of the tax deduction to be substantially reduced at which point I'll pay-off the balance. The feeling of financial freedom and security I get at that point will come from knowing I've permanently reduced my expenses and increased my future net worth.
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Re: Mortgages and financial freedom

Post by Kosmo »

Not having a mortgage reduces your required monthly payments. That's the best argument I've heard. Would you rather have a large pile of cash and large required payments, or a smaller pile of cash with significantly reduced (but not eliminated) payments?

For reference, I'm not pre-paying my mortgage.
ArthurO
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Re: Mortgages and financial freedom

Post by ArthurO »

if you have a mortgage and are investing the difference you are essentially investing on margin, and that is not recommended. I pay my mortgage as quickly as I can, but at the same time I do max out all my tax advantaged accounts because that space will never come back if not taken advantage of, but after that is filled up, I take my excess income and pluck it right into my mortgage payments even though my interest is only 2.75%.

And for those who think that paid off mortgage is money tied up, you are not right, you can always take a home equity loan and keep it there for emergencies, you can get access to money relatively quickly, so this argument does not hold.

Having any kind of a loan is detrimental to ones financial success, you can play with the numbers the way you want, if banks could make more money in market comparing to giving people loans they would do it, they give you mortgage loans because it is a safe profit for them with property backup as collateral.

My advice is, pay it off as quickly as you can if you have excess, and when it is paid off, go wild and invest your mortgage payment.
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Re: Mortgages and financial freedom

Post by basspond »

Jozxyqk wrote: If you are in this camp, I ask the following: Why do you feel more financially free or secure with the mortgage paid off?

So what say you, mortgage payers? Is there some hidden concern that has gone over my head? Are you worried that the bank will kick you out of your house on some basis other than missed payments? What am I missing?
My main reason was cost. When I refinanced to a 15 year note because of favorable interest rates my interest payments went from double the value of the mortgage to 1/2 the value of the mortgage. Costs are guaranteed, returns are not. I also had most of my portfolio in stocks so thought it would be wise to own property to be more diversified.
python99
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Re: Mortgages and financial freedom

Post by python99 »

With a mortgage rate of 2.6% on my 30 year fixed ...factoring in tax deduction and inflation....the mortgage money is basically free money...better to keep the lump sum invested in long term investment horizon..which also is more liquid then a house..even with a HELOC (which only covers part of the equity in the house)
spectec
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Re: Mortgages and financial freedom

Post by spectec »

I'm not keen on paying off the mortgage unless the interest differential is significant. I do, however, thinks it's wise to reach retirement with roughly a 60% or less LTV. Aside for those two considerations, having the money available to pay off the mortgage offsets the mortgage liability, so net worth is not affected. The payment is irrelevant, because the payment is offset by the decreased liquidity, and the interest differential is the price for having that liquidity.

I do often hear that you could just "borrow on a HELOC" if you need to do so. I see two problems with that. First of all, the interest on a HELOC is usually greater than on a first mortgage. Secondly. The worst time to borrow money is when you need it.

There's certainly nothing wrong with paying off the mortgage, but it's really as much about perception and feelings as it is about sound financial practices.
Last edited by spectec on Mon Aug 25, 2014 11:45 pm, edited 1 time in total.
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denovo
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Re: Mortgages and financial freedom

Post by denovo »

mhc wrote:I have been debt free for a number of years now. Long before I learned how to invest properly.

. When I owe money, there are extra restrictions placed on my life. I have chosen to eliminate those restrictions. That increases my freedom. I don't think it has much impact on my financial freedom because paying off the mortgage or not does not substantially impact net worth.

Having no mortgage simplifies life.
Even when you don't have a mortgage, you have a mandatory payment related to your home. It's called property taxes. If you don't pay them, the government will take away your house eventually. I guess you need utilities too and it's prudent to have home insurance. All that adds up real quickly. The idea that getting rid of a mortgage gives you financial freedom is a red herring.
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Re: Mortgages and financial freedom

Post by placeholder »

LeeMKE wrote:30 year mortgages are too expensive IMHO if you want to accumulate net worth. I'm good with 15 year loans because the cost is closer to a reasonable reach for most ordinary folks.
I don't agree with that as the lower payment can free up cash for investing and study after study shows that the sooner you put money to work investing the more you have as long as you DO invest the difference and not spend it elsewhere and your calculations on the interest completely ignored that aspect.
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Re: Mortgages and financial freedom

Post by placeholder »

Kosmo wrote:Not having a mortgage reduces your required monthly payments. That's the best argument I've heard. Would you rather have a large pile of cash and large required payments, or a smaller pile of cash with significantly reduced (but not eliminated) payments?
Option 1 definitely.
saladdin
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Re: Mortgages and financial freedom

Post by saladdin »

Widowed MIL has taken every extra dime to pay off 200k house. She is now 60 with no retirement savings at all but is mortgage free. Who do you think she came to when she needed money to pay property taxes last year?
I've told my GF that house will have to be sold one day to pay for health care. Some siblings are already planning on what to do with that house when MIL dies. They have no clue how this is going to play out.

Now, if you can fund both than great. But majority of folks only have enough money to either throw it at retirement or house. I choose retirement.
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Re: Mortgages and financial freedom

Post by investingdad »

My mortgage is a 30 year loan at 3.375%. Our last house had a smaller mortgage but at a higher rate, 4.125%. On the new place, our monthly payment went down by $100 a month even though the nut was bigger. We have opted to continue making the larger payment plus another $20 or so to round it off. The net effect is we make one extra full payment per year.

As for the HELOC and what not...it's a strategy that a guy I used to know adheres to. He's constantly taking out new HELOCs as he needs them and is on a refi carousel. I can only imagine how much he's paid in fees over the years. Best part? He's a Financial Adviser.
keystone
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Re: Mortgages and financial freedom

Post by keystone »

I have a 30 year FRM at 3.25%. I feel really fortunate to have the mortgage. I really like my chances that I can beat a 2.6% after-tax return in the long run as well as having a fixed monthly payment that will not increase with inflation. Perhaps when I get down to the final stretch I will just pay it off to be done with it, but I am in no rush anytime soon.
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Re: Mortgages and financial freedom

Post by bloom2708 »

I equate mortgage interest to a high expense ratio mutual fund. Most Bogleheads will quibble over paying .20% over .05% for an index mutual fund, but many have no trouble keeping their mortgage well past retirement. I've read all the arguments on both sides. They all make sense to each individual or family.

It really isn't a financial decision for many. It is a lifestyle choice. I would never consider retiring with a mortgage. Many will and do and have no trouble with it.

For us, paying off the mortgage (in 2007) was a combination of saving all the future interest, lowering our required monthly expenses, knowing you are debt free and knowing that if you lose your job, the mortgage payment doesn't have to be made. I could and did choose to make less. I traded time for salary because we had no debt.

I realize with property taxes, insurance and maintenance you never really have your home "paid for". That is OK.

Once you have the $200k or $300k mortgage, paying it off early by $200 or $300 per month is pretty daunting. Figuring out that borrowing less and getting to a paid off mortgage is a goal before you borrow is pretty hard to do. It is also not always possible depending on where you live and how much houses cost.

It is always an interesting discussion. Good luck.
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TheTimeLord
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Re: Mortgages and financial freedom

Post by TheTimeLord »

I am cash flow oriented so not having a payment reduces my monthly cash flow needs thus giving me more flexibility in other things. Plus last I checked everyone needs to live somewhere, why not in an illiquid asset?
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mchop
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Re: Mortgages and financial freedom

Post by mchop »

Hi OP,

"Why do you feel more financially free or secure with the mortgage paid off?"

I am facing this very scenario right now as I am waiting for the sale of my former home to complete (after purchasing a new home I rented this out for 2 yrs). In the next 30 days I will have enough cash to pay off my mortgage on the new home. I try to be a good Boglehead. Stick to my AA at 60/40. 5 index funds at Vanguard. Invest monthly, etc...

While the voice on my left shoulder tells me to invest the proceeds at my AA for all the obvious reasons - the voice on my right shoulder is making me think about how 'gutted' i MIGHT feel if we have a significant market event. Sure I might come out okay in the long run (10+ yrs)...but it would almost be a case of "what COULD have been" (mortgage paid off).

So it COULD turn out to be 3 / 5 / ? years of regret waiting for the markets to recover

In these terms...I might feel more financially free / secure with the mortgage paid off...which at the end of the day comes down to my risk profile I guess?

Thanks for posting this question in a subtly different way...because i have been trying to think about this question in unique / different ways and then I am sure once the money hits the bank account...my perspective may change again.

Regards
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Re: Mortgages and financial freedom

Post by camptalcott »

So I'm sort of in the halfway zone.

I have a mortgage and while I always put 150 extra every month toward the principal I'm not in any big rush to pay it off.

Now I'm planning on retiring in the next 5-6 years so my number one goal is to increase my assets as much as possible. one of the reason I'm a new comer here late in life is I realized I needed my money to work for me. So right now I need all my cash to work as hard as possible and I don't see paying off my mortgage right now as the way to do that.

In the interest of full disclosure, on my salary I'm able to max out my 401K and my roth annually, pay the mortgage and other living expenses.

I don't see having a mortgage as any "extra" restriction on my life. I'm doing pretty much any thing I would do if I didn't have a mortgage so I can't say it's any type of slavery for me.

So for me "financial freedom" is more about having choices. My mortgage does not limit any choice I have so I'm pretty financially free.
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Re: Mortgages and financial freedom

Post by placeholder »

Over the years at times I was renter or a homeowner with mortgage or one without and at no time did I feel more or less financially secure (although renting I felt less "in control" of other aspects of my life).
sesq
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Re: Mortgages and financial freedom

Post by sesq »

Jozxyqk wrote: If you are in this camp, I ask the following: Why do you feel more financially free or secure with the mortgage paid off? If I chose to pay off my mortgage, it would require me to pile $170k into a fairly illiquid asset. *That* sounds scary to me. $170k could feed, clothe and house my family for something like 5 years--probably more if we went into financial-distress mode.
Consider the source of the distress. If its 2008, but worse then perhaps you've lost your job and your liquid investment have been hammered. The paid off house looks nice in hindsight (as long as you have a few more bucks elsewhere, too). Realistically you wouldn't want the paid off house to be your only asset. But with a base level of savings I think it becomes an attractive vehicle. Or rather, the mortgage elimination becomes attractive in lieu of other safe investments (yield-wise).

I am in the kill it as soon as practical camp (essentially post maxing retirement accounts, funding e-fund). In fact I am down to 45K financed on a teaser rate HELOC (with room to spare on the line). Part of my plan to ease liquidity was to open a HELOC when I paid it off, the fact that I could do so and lower my rate in the closing months was convenient. I am aware that in a broader crisis the HELOC line would probably get squished by the bank, so I maintain the e-fund.
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Re: Mortgages and financial freedom

Post by MP173 »

With a variable income it has been my philosophy to reduce personal fixed costs as much as possible. So twice I have paid off the mortgage (different houses). A great idea is to balance the extra payments with your cash reserves and funding other investments and use extra free cash flow to payoff debt. Corporations do this but not on debt, but by buying back stock.

Ed
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Meg77
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Re: Mortgages and financial freedom

Post by Meg77 »

I haven't read all the responses, but I am on the other end of the typical Boglehead extreme and am probably a bit too comfortable with debt. I think of leverage - particularly long term fixed rate tax deductible leverage - as a powerful tool. It has enabled me to accumulate a very large asset base of real estate at a young age, the benefits of which will compound throughout the rest of my life. My husband and I both opted for car loans at 2.15% and 1.99% because our checking accounts earn 2% in interest - and as rates increase we may earn more on our savings than we pay on those loans (in the meantime at the very least we get to maintain liquidity and do things like max out his ESPP this year which has a 15% bonus).

It did take time to get comfortable with my now 7 figures of fixed rate mortgage debt as it accumulated slowly. I have 9 "home loans" (6 rental mortgages, my home mortgage, a home improvement loan, and one unsecured loan I used for a down payment), and my average interest rate is 3.84%. My average tax effective rate is 2.58%. That's barely over the rate of inflation. Several of my loans (three 15 year fixed ones at 3.25% and 3.00%) are actually LESS than the inflation rate after taxes. Why pay those off early? In any event, I don't feel enslaved or burdened by my payments at all, nor do the balances bother me; they are accompanied by large asset balances as well! I eagerly watch the loan balances decline each month; even though I value the real estate at cost, my net worth climbs by leaps and bounds each quarter as the loans amortize.
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IlliniDave
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Re: Mortgages and financial freedom

Post by IlliniDave »

Jozxyqk wrote:Good afternoon, all.

I apologize for possibly revisiting some well-trodden ground. As background, I have a mortgage -- about $170k. My TIPI payment is about $1100. Don't itemize, so no tax benefit.

I occasionally think about putting extra money towards the principal and weigh the various pros (quicker payoff, risk-free "investment") and cons (liquidity, diversification).

One item I have a tough time understanding is often mentioned on mortgage threads -- Financial "freedom" or "security." Some people report being extremely happy about paying off the mortgage because they no longer have the debt and payment "hanging over their heads."

If you are in this camp, I ask the following: Why do you feel more financially free or secure with the mortgage paid off? If I chose to pay off my mortgage, it would require me to pile $170k into a fairly illiquid asset. *That* sounds scary to me. $170k could feed, clothe and house my family for something like 5 years--probably more if we went into financial-distress mode. Put another, perhaps more positive, way: if I have sufficient income/assets that I am thinking about cranking out $170k to pay off my mortgage, how could I possibly be worried about a $1100/month mortgage payment? Hell, I don't make an outrageous salary or have an emergency fund that's anywhere near that, but making the mortgage payment is extremely low on my list of worries.

So what say you, mortgage payers? Is there some hidden concern that has gone over my head? Are you worried that the bank will kick you out of your house on some basis other than missed payments? What am I missing?
All of my grandparents grew up on farms. Three of four of those farms were lost to foreclosure during the (real) Great Depression. The fourth was owned outright because that branch of the family had a one generation head start immigrating. That fourth farm is still in the family (operated by my second cousins). So it's in my blood, you could say, to be uncomfortable with liens. Early repayment of my mortgage came only after I had sufficient liquid assets for "emergencies" and a good start on long-term investments. There was never a moment in time where my home equity exceeded 50% of my liquid financial portfolio (i.e., one-third of my net worth). So what you've posited is maybe a bit of a strawman as there are prudent ways to go about paying off a mortgage early, and foolish ones.
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investor1
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Re: Mortgages and financial freedom

Post by investor1 »

I tend to put a percentage of income toward large cost items such as retirement or a house. If I have extra money that I need to figure out what to do with it, sure I might put some of it toward retirement, but I would rarely put all of it in retirement accounts. The percentage that I have set going toward retirement is set at that percentage because I think it is sufficient to maintain my lifestyle during retirement. Having more is great, but I don't think I need it.

Beyond that, I rarely "invest" for the short-medium term. I have regular savings to cover that stuff. That doesn't help me figure out what to do with that extra money.

Putting the money toward a house helps me get closer to simplifying my life (less income toward monthly bills, less worry about a job loss) while giving me a return (equal to the rate of the loan). Getting a return is better than no return at all, and I like living a simple life. Not to mention, I'll be able to afford to do more things like nice vacations, etc. once I free up that monthly income that goes toward the mortgage.

Not that I always put extra money toward a mortgage :)
Grt2bOutdoors
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Re: Mortgages and financial freedom

Post by Grt2bOutdoors »

Meg77 wrote:I haven't read all the responses, but I am on the other end of the typical Boglehead extreme and am probably a bit too comfortable with debt. I think of leverage - particularly long term fixed rate tax deductible leverage - as a powerful tool. It has enabled me to accumulate a very large asset base of real estate at a young age, the benefits of which will compound throughout the rest of my life. My husband and I both opted for car loans at 2.15% and 1.99% because our checking accounts earn 2% in interest - and as rates increase we may earn more on our savings than we pay on those loans (in the meantime at the very least we get to maintain liquidity and do things like max out his ESPP this year which has a 15% bonus).

It did take time to get comfortable with my now 7 figures of fixed rate mortgage debt as it accumulated slowly. I have 9 "home loans" (6 rental mortgages, my home mortgage, a home improvement loan, and one unsecured loan I used for a down payment), and my average interest rate is 3.84%. My average tax effective rate is 2.58%. That's barely over the rate of inflation. Several of my loans (three 15 year fixed ones at 3.25% and 3.00%) are actually LESS than the inflation rate after taxes. Why pay those off early? In any event, I don't feel enslaved or burdened by my payments at all, nor do the balances bother me; they are accompanied by large asset balances as well! I eagerly watch the loan balances decline each month; even though I value the real estate at cost, my net worth climbs by leaps and bounds each quarter as the loans amortize.
Unless you are in the latter half of the amortization period, loan balance declines are not growing by leaps and bounds. Nice to hear that your net worth is increasing though. Now I know who to turn to for a loan when I need it. :wink:
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bigfun
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Re: Mortgages and financial freedom

Post by bigfun »

Are any of the early payers running their own amortization schedule and cross-checking it against the bank's? I'd be worried about a clerical error. This fear would be more of a burden on me than the feeling of debt.

I have to confess, like the OP, I don't get the "freedom from mortgage debt" appeal. As stated earlier, homeowners will always have taxes and utilities, unless you can live in a unabomber cabin.
tj
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Re: Mortgages and financial freedom

Post by tj »

denovo wrote:
mhc wrote:I have been debt free for a number of years now. Long before I learned how to invest properly.

. When I owe money, there are extra restrictions placed on my life. I have chosen to eliminate those restrictions. That increases my freedom. I don't think it has much impact on my financial freedom because paying off the mortgage or not does not substantially impact net worth.

Having no mortgage simplifies life.
Even when you don't have a mortgage, you have a mandatory payment related to your home. It's called property taxes. If you don't pay them, the government will take away your house eventually. I guess you need utilities too and it's prudent to have home insurance. All that adds up real quickly. The idea that getting rid of a mortgage gives you financial freedom is a red herring.
Those are small potatoes compared to a mortgage or rent, generally speaking. If I only had to pay for prop taxes, insurance and utilities, I could probably get by working at McDonalds.
Johno
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Re: Mortgages and financial freedom

Post by Johno »

The good feeling of not having a mortgage is a personal intangible, can't be valued explicitly. Also it's true that the fixed costs of home ownership aren't limited to mortgage payments.

Back on objective financial side though, several have given examples of now below market mortgage rates and after tax equivalents. But even if mid-high 2% after tax was current, and even it it's 'almost free money after inflation', lending the US govt money by buying treasuries is almost free money after inflation for them, more than free unless the term is fairly long. So whether or not to pay down a mortgage depends in part what else you'd invest the money in otherwise. If stocks and you can take the risk, OK; if you haven't maxed out tax deferred saving vehicles you probably should. However if any of the money would instead be invested in government (or even other high grade) bonds in taxable accounts, or muni's IMO, that's a lot more questionable. It's either a negative spread or a narrow spread for non-negligible credit risk. A 30 yr mortgage has avg life of ~18yrs, after tax 18y treasury yield is below the after tax mortgage rate for most.

IMO this is where it's important not to view the financial investment portfolio completely separately from home and mortgage. Paying down a mortgage can be a more efficient substitute, at least in part, for a high grade bond allocation in a taxable account.

One other point, OP's comment that paying off a mortgage on a house already owned is 'scary to pile money into an illiquid asset' doesn't make sense unless perhaps in a non-recourse state (to some degree). Otherwise you already did pile money into the illiquid asset, just borrowed money.
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greg24
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Re: Mortgages and financial freedom

Post by greg24 »

Jozxyqk wrote:What restrictions are you talking about (I assume we're talking about debt on real property here)? Assuming you're in a situation where you have enough money to pay for a home out of pocket, what restrictions does having a mortgage put on your life.
A few years ago, my mortgage holder sent me a letter than FEMA had recently (incorrectly) classified my property as being in a flood plain, and that they would be tacking a $2000 annual flood insurance premium to my mortgage if I didn't purchase my own flood insurance. Six months of headaches and approximately $1000 out of pocket convinced FEMA and my mortgage holder that I didn't need flood insurance.

I guess I could have just paid my mortgage off at that point, but it would have been a lot easier if I just didn't have a mortgage holder bossing me around.
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Re: Mortgages and financial freedom

Post by technovelist »

Johno wrote:The good feeling of not having a mortgage is a personal intangible, can't be valued explicitly. Also it's true that the fixed costs of home ownership aren't limited to mortgage payments.

Back on objective financial side though, several have given examples of now below market mortgage rates and after tax equivalents. But even if mid-high 2% after tax was current, and even it it's 'almost free money after inflation', lending the US govt money by buying treasuries is almost free money after inflation for them, more than free unless the term is fairly long. So whether or not to pay down a mortgage depends in part what else you'd invest the money in otherwise. If stocks and you can take the risk, OK; if you haven't maxed out tax deferred saving vehicles you probably should. However if any of the money would instead be invested in government (or even other high grade) bonds in taxable accounts, or muni's IMO, that's a lot more questionable. It's either a negative spread or a narrow spread for non-negligible credit risk. A 30 yr mortgage has avg life of ~18yrs, after tax 18y treasury yield is below the after tax mortgage rate for most.

IMO this is where it's important not to view the financial investment portfolio completely separately from home and mortgage. Paying down a mortgage can be a more efficient substitute, at least in part, for a high grade bond allocation in a taxable account.

One other point, OP's comment that paying off a mortgage on a house already owned is 'scary to pile money into an illiquid asset' doesn't make sense unless perhaps in a non-recourse state (to some degree). Otherwise you already did pile money into the illiquid asset, just borrowed money.
I don't know about other states, but apparently in Texas ALL "home equity loans" are non-recourse (http://www.avvo.com/legal-answers/is-te ... 22933.html), and that apparently includes cash-out refinances.

Here's an article that describes this very borrower-friendly rule:
http://www.jpatricksuttonlaw.com/page5/ ... df-26.html
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flyingaway
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Re: Mortgages and financial freedom

Post by flyingaway »

For those who want to use the mortgage for investment, did we have discussions about considering mortgage as negative bond? There is no guarantee that any investment will make positive returns. For conservative investors, paying off mortgage is not a bad idea, I think. (I paid off my mortgage and I have no bond).
Johno
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Re: Mortgages and financial freedom

Post by Johno »

technovelist wrote:
Johno wrote: One other point, OP's comment that paying off a mortgage on a house already owned is 'scary to pile money into an illiquid asset' doesn't make sense unless perhaps in a non-recourse state (to some degree). Otherwise you already did pile money into the illiquid asset, just borrowed money.
I don't know about other states, but apparently in Texas ALL "home equity loans" are non-recourse (http://www.avvo.com/legal-answers/is-te ... 22933.html), and that apparently includes cash-out refinances.
Yes it depends mainly on state law and is generally either one way or the other for all loans in a given state. In most states (tending toward older ones in general) any mortgage is recourse, though in states with a significant % of the population home mortgages are non-recourse. In recourse states you can't get a non-recourse home owner mortgage as a rule (though there is non-recourse financing for multi-family rental properties). This makes a potentially important difference, and it's probably not that useful to have a discussion of where mortgages fit into the overall financial position without taking it into account. Where I live, the bank can come after you for other assets if you default on the loan (not always worthwhile for them to do so in practice, but still) so in a worst case you already 'shoveled the money into an illiquid asset' when you bought the house, whether you financed it or not.
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BarbaricYawp
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Re: Mortgages and financial freedom

Post by BarbaricYawp »

Not to hijack the thread entirely, but would the answers change about pre-paying if you have a business that is based on the property? I'm of 2 minds -- our business is ag based and therefore subject to wild swings in revenue. Should I decide to leave my office job and begin to farm full time, not having a mortgage would certainly help in the 'down cycle'. On the other hand, would I be putting too many eggs in one basket (see what I did there? LOL) to pay off the loan because both my personal equity and the income from the business would then be located in the same place.

At the moment I'm more interested in building retirement funds, but I will admit, paying off the mortgage looks appealing because I can continue to derive some income from the property, so it is not entirely as illiquid as a traditional house on a suburban lot.
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devilrox
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Re: Mortgages and financial freedom

Post by devilrox »

flyingaway wrote:For those who want to use the mortgage for investment, did we have discussions about considering mortgage as negative bond? There is no guarantee that any investment will make positive returns. For conservative investors, paying off mortgage is not a bad idea, I think. (I paid off my mortgage and I have no bond).
This is a very good point. A way to look at this that may make the decision clearer for you personally: if you woke up today with your house paid for in full, would you go out tomorrow to get a mortgage on it, and then invest that money in the marketplace?

By not paying off your mortgage early, this is mathematically exactly what you are doing.

Some would, some would not.

I personally would not borrow money against my paid for home to invest. Good discussion.
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SkierMom
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Re: Mortgages and financial freedom

Post by SkierMom »

I'm in the camp that piling a bunch of money into an illiquid asset is not likely to "make" people feel more comfortable. In our case, it would mean that over 50% of our net worth would be tied up into California real estate. Now THAT's scary.

Regardless, I would still owe property taxes and special assessments and a HOA fee every totaling about $550/month. You are still paying a monthly bill for housing every month.

Our mortgage is at 3.5%. When simple savings account interest rates return to a more normal range (4-5% ?), I am going to feel very comfortable.

That's why I haven't paid off my mortgage early.
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