POLL: Investing vs. pay down mortgage feelings

Have a question about your personal investments? No matter how simple or complex, you can ask it here.

When I had a choice of paying down the mortgage or investing...

I paid down the mortgage. I regret that decision, although I've never tried to do the math.
2
1%
I paid down the mortgage. I regret that decision, and I've done the math.
2
1%
I paid down the mortgage. I'm content with that decision, although I've never tried to do the math.
38
21%
I paid down the mortgage. I'm content with that decision, and I've done the math.
55
30%
I invested. I regret that decision, although I've never tried to do the math.
0
No votes
I invested. I regret that decision, and I've done the math.
0
No votes
I invested. I'm content with that decision, although I've never tried to do the math.
16
9%
I invested. I'm content with that decision, and I've done the math.
34
19%
I've never made such a decision.
18
10%
I made such a decision, but it wasn't long enough ago and I don't know yet how it will work out.
17
9%
 
Total votes: 182

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HueyLD
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Re: POLL: Investing vs. pay down mortgage feelings

Post by HueyLD » Sun Jan 19, 2014 2:19 pm

............
Last edited by HueyLD on Sun Feb 08, 2015 5:36 am, edited 1 time in total.

letsgobobby
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Re: POLL: Investing vs. pay down mortgage feelings

Post by letsgobobby » Sun Jan 19, 2014 2:27 pm

HueyLD wrote:I think it is a good idea to have the mortgage paid off just before retirement.
Why?

ResearchMed
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Re: POLL: Investing vs. pay down mortgage feelings

Post by ResearchMed » Sun Jan 19, 2014 2:31 pm

Harold wrote:
livesoft wrote:I apologize because I have never understood this statement.
Although I doubt you're sincerely expressing that you misunderstand, in case you are I'll point out two areas where paying off the mortgage can lead to a greater sense of financial freedom.

First and most obvious, without the mortgage you're not at risk of losing your home due to not being able to pay the mortgage.

Second, most people are putting the assets they're not paying the mortgage with into risky assets (which of course they might lose). If they're not putting that cash into risky assets, they should just pay the mortgage (unless they're in a less common situation of being able to make more valuable equivalent-risk investments with that cash). If they just like paying the cost of a mortgage to have extra cash around, then more power to them -- but they're losing financial ground that way.
It's sometimes (for some of us) more than just a comparison of the exact risks and/or exact returns - both unknown, of course.

It's something more like insurance, and it's obvious that there is quite a variety of opinion about when insurance is useful/warranted (including the costs thereof), be it life insurance, SPIA/DIA-type products, etc.

In this case, having that "pot of money" might not be expected to generate much more than the mortgage rate (taking into account all tax-related issues).
But having that money accessible can provide considerable peace of mind, as part of an emergency fund, or an extra emergency fund, perhaps invested very conservatively.

Occasionally someone writes that if one had lots of equity in a home, one could just take out a home equity loan, or use an untapped HELOC already in place, "if something unfortunate occurred", such as an extended job loss.

Alas, by the time one realizes that a situation like that has occurred, the chances of getting a new HELOC, without the same current income (or with other financial problems), is likely to be pretty slim.
And there is also a chance that the existing HELOC would be trimmed back or just cancelled, as soon as the lender had a hint of "financial problems".
And THAT is just when you'd need that line of credit.

RM

livesoft
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Re: POLL: Investing vs. pay down mortgage feelings

Post by livesoft » Sun Jan 19, 2014 2:35 pm

letsgobobby wrote:
HueyLD wrote:I think it is a good idea to have the mortgage paid off just before retirement.
Why?
I can help answer this: Because of cash flow. One will not need to withdraw as much money from retirement accounts to make the mortgage payment. Those withdrawals might put one in a higher tax bracket and cause all kinds of extra taxes. Or looked at from the other way, lower withdrawals from retirement accounts because expenses are lower may give one lower tax rates which in turn might allow more low-tax conversions to Roth IRAs.
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letsgobobby
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Re: POLL: Investing vs. pay down mortgage feelings

Post by letsgobobby » Sun Jan 19, 2014 2:39 pm

livesoft wrote:
letsgobobby wrote:
HueyLD wrote:I think it is a good idea to have the mortgage paid off just before retirement.
Why?
I can help answer this: Because of cash flow. One will not need to withdraw as much money from retirement accounts to make the mortgage payment. Those withdrawals might put one in a higher tax bracket and cause all kinds of extra taxes. Or looked at from the other way, lower withdrawals from retirement accounts because expenses are lower may give one lower tax rates which in turn might allow more low-tax conversions to Roth IRAs.
But you yourself have said many times that the money to pay off a mortgage came from somewhere.

AlohaBill
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Re: POLL: Investing vs. pay down mortgage feelings

Post by AlohaBill » Sun Jan 19, 2014 2:49 pm

We bought our house in 1989 w/o jobs. We were paying 11 3/4 %. Around 1991 I told my wife I wanted to start investing again. She said my best investment was paying off the mortgage. So we did. She got her house and I started investing. I am THE MAN!

livesoft
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Re: POLL: Investing vs. pay down mortgage feelings

Post by livesoft » Sun Jan 19, 2014 3:05 pm

letsgobobby wrote:
livesoft wrote:
letsgobobby wrote:
HueyLD wrote:I think it is a good idea to have the mortgage paid off just before retirement.
Why?
I can help answer this: Because of cash flow. One will not need to withdraw as much money from retirement accounts to make the mortgage payment. Those withdrawals might put one in a higher tax bracket and cause all kinds of extra taxes. Or looked at from the other way, lower withdrawals from retirement accounts because expenses are lower may give one lower tax rates which in turn might allow more low-tax conversions to Roth IRAs.
But you yourself have said many times that the money to pay off a mortgage came from somewhere.
Yes, a low-tax place like long-term capital gains offset by tax-loss carryovers. Now that one's W-2 income is gone, it's time to move on to the next set of tax-saving schemes.
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Billyboy
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Re: POLL: Investing vs. pay down mortgage feelings

Post by Billyboy » Sun Jan 19, 2014 3:20 pm

haban01 wrote:
Billyboy wrote:Have had three houses over a period of 42 years, all with 30 yr. fixed loans. Re-fied at least 4 or 5 times, both with cash out, (pay for living expenses, college for my two daughters, their first cars, weddings, remodeling) and no cash out, lowering interest rate, (currently 3.625%). Always maxed out my 401k. Never thought of paying off my house loan/loans and have never done the math.
If I were to pay off my current loan of $322,000 it would have to come out of my traditional IRA's. To me, this would make no sense.

What approx age does that make you Billy? Do you plan to have it paid off by retirement?
haban01
I retired in 2005 at age 61. I am 70 now and have no desire to pay off the mortgage, especially with tIRA money! I have over half the mortgage amount owed in after tax savings and CD's; however, no desire to use it to pay toward the mortgage.
Bill

letsgobobby
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Re: POLL: Investing vs. pay down mortgage feelings

Post by letsgobobby » Sun Jan 19, 2014 3:25 pm

livesoft wrote:
letsgobobby wrote:
livesoft wrote:
letsgobobby wrote:
HueyLD wrote:I think it is a good idea to have the mortgage paid off just before retirement.
Why?
I can help answer this: Because of cash flow. One will not need to withdraw as much money from retirement accounts to make the mortgage payment. Those withdrawals might put one in a higher tax bracket and cause all kinds of extra taxes. Or looked at from the other way, lower withdrawals from retirement accounts because expenses are lower may give one lower tax rates which in turn might allow more low-tax conversions to Roth IRAs.
But you yourself have said many times that the money to pay off a mortgage came from somewhere.
Yes, a low-tax place like long-term capital gains offset by tax-loss carryovers. Now that one's W-2 income is gone, it's time to move on to the next set of tax-saving schemes.
Seems to make no difference. If I paid off the mortgage before retirement, I still incurred those taxes you want to avoid. If I keep the mortgage in retirement, I keep the cash stash, and defer those taxes. If that was better while working, it still seems better in retirement.

Minot
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Re: POLL: Investing vs. pay down mortgage feelings

Post by Minot » Sun Jan 19, 2014 3:39 pm

I checked Paid down mortgage, content, never done math. Parts 2 and 3 of that sentence are true; part one is the closest I could come to the fact that I paid cash for my home, in 1982. This was not as impressive an accomplishment as it sounds; it was basically a shack (though in a great setting and fit my needs and desires almost perfectly) and in foreclosure. It was also long before I became a Boglehead, and was only possible because I had inherited the money with which to do it. Even so, it was a scary decision, but one with which I remain more than content.

The Wizard
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Re: POLL: Investing vs. pay down mortgage feelings

Post by The Wizard » Sun Jan 19, 2014 4:39 pm

Legally avoiding (or lowering) taxes in retirement using the Livesoft method requires significant conniving. And to a degree, paying more taxes during one's working years. The mortgage or not issue isn't the key point here...
Last edited by The Wizard on Mon Jan 20, 2014 3:46 am, edited 1 time in total.
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sls239
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Re: POLL: Investing vs. pay down mortgage feelings

Post by sls239 » Sun Jan 19, 2014 5:46 pm

We did pay down our mortgage because it was a 30 year loan and we expected to relocate and relocation came with the probability of a more expensive house.

Building up the equity was a lot like saving for a downpayment on the next house, except at a better rate than the banks were offering.

Now we don't expect to move anytime soon and with a 15 year at 2.85% I'm not paying a single dime before it's due.

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Re: POLL: Investing vs. pay down mortgage feelings

Post by Lafder » Sun Jan 19, 2014 8:03 pm

When our mortgage was at 5% we did the math to see the difference of paying it in full with $ we had in taxable accounts, and continuing to make the same payment as our mortgage into investing to build back up the $ we would have withdrawn to pay it off.

Versus continuing to pay on the mortgage, and leave the chunk of money in taxable investments. (it was about 150k)

We had the assumption that either way we would pay ahead on the mortgage and have it paid for in 10 years, so we only went out ten years in the calculations using the same number for investing or paying to the mortgage. We also I believe used 7% as our investment returns (optimistic I know).

What I recall is that it was within a $10,000 difference either way. We decided not to pull money out to pay off the mortgage. Within the year there was a big drop in the investment values and there was no longer enough to have the option paying off the mortgage.

We did hold the course and not panic or sell low.

At that time I wished we had paid it off before the drop. But I did not know the drop was coming. And that would have used almost all of our nonretirement savings. Now I am glad we did not pay it off then since our average returns have been higher than the mortgage rate.

I am having the current dilemma of whether to put extra $ to mortgage or taxable investing. BUT, this time the mortgage is bigger and we do not have enough to pay it off in full, AND the mortgage rate on the current loan is much less than back then.

I look forward to having zero debt some day.

lafder

Cash
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Re: POLL: Investing vs. pay down mortgage feelings

Post by Cash » Sun Jan 19, 2014 8:15 pm

sls239 wrote:We did pay down our mortgage because it was a 30 year loan and we expected to relocate and relocation came with the probability of a more expensive house.

Building up the equity was a lot like saving for a downpayment on the next house, except at a better rate than the banks were offering.
Seems unnecessarily risky. What if you had found the house you wanted in your new location, but had trouble selling the old house to meet the downpayment requirements? I don't intend to pay extra on our mortgage until we purchase our "forever home."

haban01
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Re: POLL: Investing vs. pay down mortgage feelings

Post by haban01 » Sun Jan 19, 2014 10:41 pm

Billyboy wrote:
haban01 wrote:
Billyboy wrote:Have had three houses over a period of 42 years, all with 30 yr. fixed loans. Re-fied at least 4 or 5 times, both with cash out, (pay for living expenses, college for my two daughters, their first cars, weddings, remodeling) and no cash out, lowering interest rate, (currently 3.625%). Always maxed out my 401k. Never thought of paying off my house loan/loans and have never done the math.
If I were to pay off my current loan of $322,000 it would have to come out of my traditional IRA's. To me, this would make no sense.

What approx age does that make you Billy? Do you plan to have it paid off by retirement?
haban01
I retired in 2005 at age 61. I am 70 now and have no desire to pay off the mortgage, especially with tIRA money! I have over half the mortgage amount owed in after tax savings and CD's; however, no desire to use it to pay toward the mortgage.
Bill
WOW, Thanks Bill. Just very interesting as one would need a large predictable cash flow and not worry about having enough to cover the mortgage. I would say your situation would be the exception rather than the norm. Most people need to pay it off by retirement because they could not live on the cash flow with the mortgage. It is a forced savings as well, but most bh don't have worry! :beer
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stilts1007
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Re: POLL: Investing vs. pay down mortgage feelings

Post by stilts1007 » Sun Jan 19, 2014 10:48 pm

We take the "extra" money left over at the end of the month after the bills are paid, and alternate between investing and paying down the mortgage month-to-month. Easy way to split the difference.

Dandy
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Re: POLL: Investing vs. pay down mortgage feelings

Post by Dandy » Mon Jan 20, 2014 9:41 am

There are other elements as far as content or regret from a monetary gain/loss standpoint. e.g. lost my job at 52 and had to put 2 kids through college and deal with a life threatening illness for my spouse. I did invest the freed up money rather than spend it. It was a relief that I did not have a monthly mortgage while unemployed, having a kid in college and one a year away and deal with medical issues.

The fact that the mortgage was 8% left little doubt that the math was in my favor or at least a push. As long as you have a decent amount of assets I usually favor trading assets for reduced monthly obligations. Today's very low rates on loan debt and paltry yields on safe investments is testing this philosophy a bit.

feh
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Re: POLL: Investing vs. pay down mortgage feelings

Post by feh » Mon Jan 20, 2014 12:46 pm

We did both, and I'm content with that decision.

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Phineas J. Whoopee
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Re: POLL: Investing vs. pay down mortgage feelings

Post by Phineas J. Whoopee » Mon Jan 20, 2014 9:06 pm

I did both at once, so I can't choose any of the poll options. I continued to max out my 401(k) and Roth IRA. My (in all but the direst of circumstances) rule was first I did those two things, then decided what else to do. I wasn't yet turned on to I Bonds. Money I could have invested in taxable I used to accelerate paying off the mortgage. Oh, wait, that is investing in taxable.

I did the math.

My motivation was to reduce risk, not to increase return, but as I've posted before, the cash flow improvement justifies the all-in expense after twelve years. It remains in place as long as I live here. I'm almost up to seven years already. After five more, any residual value is pure profit.

A dollar's a dollar. Fish is fish. Assets are assets and debt is debt. What difference does it make as long as I maintained a sensible asset allocation, which I did?

I'm content.

PJW

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Re: POLL: Investing vs. pay down mortgage feelings

Post by Rebecca_S » Mon Jan 20, 2014 9:29 pm

We paid off the mortgage about 4 years ago, so the market has done well since then and mathematicallly we could have done better with balanced investments. We were maxing out tax advantaged space however and if had done more taxable investing it would have been at very low risk, since my husband wanted to leave his job and start his own business. Having a paid off condo means that if necessary we could get by with very little income, although I make a nice wage myself. Psychologically it would have been harder for him to take the leap and quit his job if we had a monthly mortgage to pay, though mathematically the investments would have outperformed.

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Re: POLL: Investing vs. pay down mortgage feelings

Post by baw703916 » Mon Jan 20, 2014 11:08 pm

Rebecca_S wrote:We paid off the mortgage about 4 years ago, so the market has done well since then and mathematicallly we could have done better with balanced investments. We were maxing out tax advantaged space however and if had done more taxable investing it would have been at very low risk, since my husband wanted to leave his job and start his own business. Having a paid off condo means that if necessary we could get by with very little income, although I make a nice wage myself. Psychologically it would have been harder for him to take the leap and quit his job if we had a monthly mortgage to pay, though mathematically the investments would have outperformed.
That sounds like what Larry Swedroe refers to in many of his posts as a good strategy vs. a good outcome. Investing (as it turned out) was the best outcome, but paying off the mortgage to reduce your cash flow needs while your husband was established his business was a good strategy.
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ofcmetz
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Re: POLL: Investing vs. pay down mortgage feelings

Post by ofcmetz » Tue Jan 21, 2014 4:41 am

livesoft wrote:
TRC wrote:I did it for a sense of financial freedom and to minimize our expenses in the event my income drops substantially.
I apologize because I have never understood this statement. One had to take some money out of some account to pay off mortgage. If one did not pay off the mortgage that huge stash of money would serve as an emergency fund and a source of financial freedom and to pay expenses (including mortgage payments) in the event that one's income drops substantially. Basically, it is a a zero sum transaction moving money from a bank account to a house EXCEPT that now one is house rich and cash poor which is not something that one should want to be in the event one's income drops substantially. In other words, after paying off a mortage, one's net worth didn't change at all. Am I making sense?

^I really agree with livesoft on this one. Makes much more since to me to have the liquidity if income dropped suddenly.

We have been in a 15 year mortgage on our house for 4 years. We are making the regular monthly payments, and are putting all extra money into investments. I did toy around with the idea of getting a 30 year mortgage awhile back to invest even more, but I'm good with the path we are on.
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RNJ
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Re: POLL: Investing vs. pay down mortgage feelings

Post by RNJ » Tue Jan 21, 2014 12:03 pm

ofcmetz wrote:
livesoft wrote:
TRC wrote:I did it for a sense of financial freedom and to minimize our expenses in the event my income drops substantially.
I apologize because I have never understood this statement. One had to take some money out of some account to pay off mortgage. If one did not pay off the mortgage that huge stash of money would serve as an emergency fund and a source of financial freedom and to pay expenses (including mortgage payments) in the event that one's income drops substantially. Basically, it is a a zero sum transaction moving money from a bank account to a house EXCEPT that now one is house rich and cash poor which is not something that one should want to be in the event one's income drops substantially. In other words, after paying off a mortage, one's net worth didn't change at all. Am I making sense?

^I really agree with livesoft on this one. Makes much more since to me to have the liquidity if income dropped suddenly.

We have been in a 15 year mortgage on our house for 4 years. We are making the regular monthly payments, and are putting all extra money into investments. I did toy around with the idea of getting a 30 year mortgage awhile back to invest even more, but I'm good with the path we are on.
Ditto. As has been stated, it is much easier to put money into a house than it is to get it out. ESPECIALLY if one has just lost a job, there is a downturn in housing, a rate spike, etc.

We've got 28 or so years left on a 30 year note. A roughly 2.25% after-tax rate. We plan to stay in the house for another 12-14 years and are happy to rent it from the bank until then. In other areas of our financial lives, we are utterly debt-averse. But other than the U.S. falling into a deflationary spiral, I cannot for the life of me understand why I would rush to pay off this mortgage. To sleep better at night? I sleep well knowing that in a barn-on-fire-all-hands-on-deck-SHTF emergency I can write a check rather than take out a mortgage. I'm willing to pay ~.35% (the difference between my effective mortgage rate and my fixed-income yields) as the price for an inflation hedge and the peace of mind liquidity brings.

To each her own.

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Clearly_Irrational
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Re: POLL: Investing vs. pay down mortgage feelings

Post by Clearly_Irrational » Tue Jan 21, 2014 12:40 pm

Harold wrote:If one accounts for risk in his math calculation (and isn't explicitly making a simultaneous decision to increase risk), he'll generally conclude to pay down the mortgage -- if one doesn't account for risk, he'll generally conclude that investing is what the numbers tell him to do.
I always find it very strange when we have pay off the mortgage threads and we hear all about how the market has better returns than you'll get paying off the mortgage, but for some reason no one ever uses risk adjusted returns which usually tell a far different story.

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Re: POLL: Investing vs. pay down mortgage feelings

Post by MoonOrb » Tue Jan 21, 2014 12:49 pm

midareff wrote:The poll might make more sense if the interest rate of the mortgage was tracked as well. What you pay down at 5 or 5.5%, or more vs. what you might want to do with a 3% mortgage might be way different.
+1

It would be interesting to know the spread of the mortgage rate vs the market return for the relevant period.

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Re: POLL: Investing vs. pay down mortgage feelings

Post by steve r » Tue Jan 21, 2014 12:50 pm

I posted that I have done the math and happy.

But the truth is, I have been more aggressive in investing BECAUSE I paid down my house, then refinanced at really low shorter term mortgage. That savings was huge. Owning a larger percent in stocks is a plus. Whether I own more or less stocks is unknown as I do not know what my AA would otherwise be. IF it would have been age in bonds ... I am way ahead. That said, I doubt, I would be that conservative.

I guess I have read threads on this topic and view it as either or ... I sort of view it as a continuum of choices. If you are mortgaged to the hilt you need a larger cash balance and probably a touch more fixed income. If you have a lot of home equity (and a secure job) you can be more aggressive in stock/bond investing.
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FelixTheCat
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Re: POLL: Investing vs. pay down mortgage feelings

Post by FelixTheCat » Tue Jan 21, 2014 12:56 pm

I paid off my mortgage. It was the best decision I've made. I know I always have a house to live in. I take the ex-mortgage payment and I invest it.
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grabiner
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Re: POLL: Investing vs. pay down mortgage feelings

Post by grabiner » Tue Jan 21, 2014 1:23 pm

Clearly_Irrational wrote:
Harold wrote:If one accounts for risk in his math calculation (and isn't explicitly making a simultaneous decision to increase risk), he'll generally conclude to pay down the mortgage -- if one doesn't account for risk, he'll generally conclude that investing is what the numbers tell him to do.
I always find it very strange when we have pay off the mortgage threads and we hear all about how the market has better returns than you'll get paying off the mortgage, but for some reason no one ever uses risk adjusted returns which usually tell a far different story.
This is discussed on the wiki: Paying down loans versus investing
Usually, you should pay down the loan if the after-tax interest rate on the loan is significantly higher than the after-tax rate you can earn on a comparable bond investment (a low-risk bond investment with duration equal to the time until you will pay off the loan), and you can pay the loan down without any liquidity problems.
The logic is that stocks have better expected returns than mortgage payments, but stocks also have better returns than bonds. If you would like to increase your risk and return, you could sell bonds to buy stocks, and then decide whether you want to pay down the mortgage or buy more bonds at the new risk level.
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Clearly_Irrational
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Re: POLL: Investing vs. pay down mortgage feelings

Post by Clearly_Irrational » Tue Jan 21, 2014 1:33 pm

grabiner wrote:This is discussed on the wiki
Perhaps, but it rarely seems to come up during the discussion. For some reason the main point is usually "The market portfolio will have higher returns", which completely ignores that in most cases putting the money into a market portfolio raises your risk, so duh, of course your expected return goes up.

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Black Swan
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Re: POLL: Investing vs. pay down mortgage feelings

Post by Black Swan » Tue Jan 21, 2014 1:51 pm

I have never had to make that decision, but I'd be much more willing to pay down the mortgage if it has variable interest.

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