"6 Reasons The Rich Should Pay-Off Their Mortgage"

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"6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by Taylor Larimore » Fri Jun 03, 2016 2:10 pm

Bogleheads:

Boglehead Jim Dahle has written a very helpful article for wealthy Bogleheads with extra cash who cannot decide whether to pay-off their mortgage or invest in stocks & bonds:

6 Reasons The Rich Should Pay-Off Their Mortgage

Thank you, Jim

Best wishes.
Taylor
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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by jackholloway » Fri Jun 03, 2016 2:13 pm

Since I am strongly considering paying off my mortgage, I, of course, liked the article.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by vk8216 » Fri Jun 03, 2016 2:18 pm

This article is helpful as we have been trying to figure out whether to invest in the market or recast our mortgage to lower our payments to give ourselves more job flexibility. Thanks for posting.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by randomguy » Fri Jun 03, 2016 2:45 pm

1) Sure

2) Works both ways. Need to make more money but get to deduct more of the interest.

3) Maybe. You could also argue this is just an AA issue. Some people will derisk, others want the risk so they can retire 5 years earlier.

4) Who the heck cares about status symbols? And more importantly how is your neighbor going to know if you have a mortgage or not?

5) Sure but it is a toss up. You give up inflation protection and the possibility of buying deflation protection with that money.

6) I don't see choosing to less stupid as a good reason:)

I am not seeing any reason why rich people are different than more moderate income people.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by Call_Me_Op » Fri Jun 03, 2016 3:16 pm

Another reason to pay-off your mortgage is asset protection benefit (in a homestead state).
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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by CoAndy » Fri Jun 03, 2016 3:17 pm

jackholloway wrote:Since I am strongly considering paying off my mortgage, I, of course, liked the article.
Me too.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by Call_Me_Op » Fri Jun 03, 2016 3:17 pm

randomguy wrote:1)

I am not seeing any reason why rich people are different than more moderate income people.


There is one big reason. The rich would not experience a significant decrease in liquidity if they pay-off their mortgage.
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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by bertilak » Fri Jun 03, 2016 4:11 pm

Don't know if I count as rich or not.

NO: because I don't have a massive nest egg.
YES: because I have a great pension and only occasionally dip into my nest egg for unexpected major expenses. (So far a new septic system is the big one.)

But I am aggressively paying down my mortgage. I now have only 29 months left instead o4 24 years.

My Reasoning: If I die before my wife she loses a LOT of income. When the mortgage is paid off the elimination of the monthly payment offsets that lost income just about perfectly. It's like buying an annuity at a cheap price and on top of that, buying it from myself! Sure I spent a big wad of money but since that went into the equity of my house (instead of some insurance company's general fund) it didn't really cost me anything. I also save a bunch on interest payments without having to refinance at a lower rate.

So the one-line reason is improved cash flow. Maybe that can be cast as some combination of the six reasons in the article.
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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by Toons » Fri Jun 03, 2016 5:02 pm

Did I hear pay off the mortgage??
Do it if you can.
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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by GoldenFinch » Fri Jun 03, 2016 5:31 pm

For us, paying off our mortgage set us on a trajectory of saving and investing that made our nest egg grow much, much bigger. It was one of our better financial decisions. I know we were not rich before we paid off our mortgage, but since then we have become financially secure and no longer worry about money. :happy

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by Random Walker » Fri Jun 03, 2016 5:39 pm

For me, there was a huge benefit I discovered after I did it. I found that having a paid off mortgage helped add psychological strength and conviction to stick to my fairly aggressive AA.

Dave

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by bertilak » Fri Jun 03, 2016 5:54 pm

Random Walker wrote:For me, there was a huge benefit I discovered after I did it. I found that having a paid off mortgage helped add psychological strength and conviction to stick to my fairly aggressive AA.

Dave

I bumped my AA from 50/50 to 60/40 on the strength of having a paid off mortgage -- even if it is still 29 months away.
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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by DVMResident » Fri Jun 03, 2016 6:04 pm

#6) The author fails to consider the liquidity risk associated and subsequent costs of tapping home equity. HELOC? Not cheap.

That said, sure, a paid off house is one road to FI.
Not the road I'm choosing because I like liquidity, but no debt certainly is a good option.
Many roads for many people. Happy savings everyone :beer

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by bertilak » Fri Jun 03, 2016 6:18 pm

DVMResident wrote:#6) The author fails to consider the liquidity risk associated and subsequent costs of tapping home equity. HELOC? Not cheap.

That said, sure, a paid off house is one road to FI.
Not the road I'm choosing because I like liquidity, but no debt certainly is a good option.
Many roads for many people. Happy savings everyone :beer

I look at the liquidity issue as having traded a liquid "lump sum" to the liquidity of an excess income stream. It's the same income but it is no longer irrevocably dedicated to a mortgage payment and can be used however one chooses. This can include beefing up an emergency fund.
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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by telemark » Fri Jun 03, 2016 6:42 pm

I paid off the mortgage on my condo without being rich and that may have been a mistake. At the time I knew nothing about investing and probably would not have made good choices there either. On the other hand, it was an ARM and I don't think the rate ever dropped below 10%, so maybe it wasn't a mistake after all.

My big mistake was not putting more money into my 401K, bad as it was, after I finished with the mortgage.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by Artsdoctor » Fri Jun 03, 2016 6:44 pm

DVMResident wrote:#6) The author fails to consider the liquidity risk associated and subsequent costs of tapping home equity. HELOC? Not cheap.

That said, sure, a paid off house is one road to FI.
Not the road I'm choosing because I like liquidity, but no debt certainly is a good option.
Many roads for many people. Happy savings everyone :beer


He actually does touch on this.

The liquidity is important--when you're starting out and in mid-accumulation stages. Later in the investment cycle, depending on the person, the house makes up an increasingly smaller portion of overall net worth. Although you THINK you're losing out on liquidity, paying off your mortgage really doesn't make all that much difference if you're looking at it objectively since your taxable account may have grown to far more than the mortgage balance or house value.

His points are valid, I think. The only point I'd quibble with has to do with where the money comes from. I don't think generating capital gains to pay off a mortgage makes a lot of sense--especially for high income earners. If you're going to pay off the mortgage with dividends, interest, and income, then certainly his plan has merit.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by Grt2bOutdoors » Fri Jun 03, 2016 6:49 pm

bertilak wrote:
DVMResident wrote:#6) The author fails to consider the liquidity risk associated and subsequent costs of tapping home equity. HELOC? Not cheap.

That said, sure, a paid off house is one road to FI.
Not the road I'm choosing because I like liquidity, but no debt certainly is a good option.
Many roads for many people. Happy savings everyone :beer

I look at the liquidity issue as having traded a liquid "lump sum" to the liquidity of an excess income stream. It's the same income but it is no longer irrevocably dedicated to a mortgage payment and can be used however one chooses. This can include beefing up an emergency fund.


I am advocate of paying a mortgage off, however let's look at it from the other side of the coin. You have a remaining mortgage of 100,000 with a 3.5% interest rate and you have 100,000 in cold hard cash earning 1% in the Gimme Money Bank. You are employed and are able to meet your mortgage payments but you job security is medium to poor and finding new employment if you were to be let go would take a year or more. Your living expenses including the mortgage payment is $30K (mortgage payment is $15K per year for principal and interest), if you were to be unemployed, your cost of healthcare balloons your expenses to $45K.

Are you making the argument that plunking down $100K lump-sum gets you an excess liquidity stream of $15K per year? The first $3,500 of the $15K expense in my example above is the excess income stream, the repayment of principal which you would owe whether you pay off lump sum or over time is not excess, it is "dead money" that you would invest at 3.5%. Should the feller in the example above become unemployed, he will find the cost of money goes through the roof when you are unemployed as most traditional sources of borrowing dry up and the next most accessible forms of financing involve unsavory choices like high interest credit cards, payday loans, pawn shops. No one will lend money to an unemployed person at favorable rates even if you could find someone to lend to you. However, one who is liquidity rich will have the ability to extend the day of reckoning and may not even have to face it if they are able to find suitable employment in a reasonable amount of time.

Liquidity = options on your schedule, not someone else's.
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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by bertilak » Fri Jun 03, 2016 7:16 pm

Grt2bOutdoors wrote:
bertilak wrote:
DVMResident wrote:#6) The author fails to consider the liquidity risk associated and subsequent costs of tapping home equity. HELOC? Not cheap.

That said, sure, a paid off house is one road to FI.
Not the road I'm choosing because I like liquidity, but no debt certainly is a good option.
Many roads for many people. Happy savings everyone :beer

I look at the liquidity issue as having traded a liquid "lump sum" to the liquidity of an excess income stream. It's the same income but it is no longer irrevocably dedicated to a mortgage payment and can be used however one chooses. This can include beefing up an emergency fund.

Are you making the argument that plunking down $100K lump-sum gets you an excess liquidity stream of $15K per year?

That's pretty much how it works out for me. I am retired and my current income stream (pension + SS) is guaranteed as long as I live.

My goal is to maintain a guaranteed income stream sufficient for my wife after I die. The keyword is "guaranteed." Sure, she could spend out of the portfolio but that is risky income not guaranteed income. Converting a pile of cash to a guarantee is what I was up to. Another keyword is "sufficient." This can be accomplished by increasing guaranteed income OR by reducing non-negotiable expenses, which paying off a mortgage does. It also saves money that would be spent on mortgage interest.

That may not be appropriate for everybody but for some of us it is and can, for us, be a good reason to pay off the mortgage. So it depends on personal circumstances.
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Re: 1 Reason Not to Pay-Off a Mortgage

Post by Taylor Larimore » Fri Jun 03, 2016 7:28 pm

Bogleheads:

Not everyone wants to leave heirs equity in a difficult to sell, mortgage-free home for heirs to squabble over.

When Pat and I were in our 80s, we took out a (low-interest) mortgage on our condo so we could give our heirs our home equity while we were still alive and when they needed it most.

Best wishes.
Taylor
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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by PhysicianOnFIRE » Fri Jun 03, 2016 7:29 pm

Even better than paying off a mortgage is starting without one. This is the route we chose when making our most recent move 2.5 years ago to a low cost of living area.

We found a great home, offered cash (putting ourselves in a good negotiating position) and were able to close quickly with fewer forms and fees.

I appreciate Dr. Dahle clarifying the Pease provision as an effective increase on the marginal income tax rate. I see this misunderstood, even on other personal finance blogs, and used as a reason to avoid charitable giving, which I find bothersome.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by obafgkm » Fri Jun 03, 2016 8:35 pm

In the article...
Joe Average has a household income in the $50,000-100,000 range. He is almost surely not maxing out a 401(k) ($18,000 employee contribution if under 50) and a backdoor Roth IRA for himself and his wife ($5,500 each).


Why would a couple making between $50,000 and $100,000 need to do a backdoor Roth IRA? Why not just, you know, contribute to a Roth IRA directly? What am I missing?

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by 2 Tasty » Sat Jun 04, 2016 11:39 am

I'm surprised the ability to self-insure wasn't mentioned. Little difference from not buying, say, life insurance, once one's wealth exceeds the level required to provide for the family after the loss.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by staythecourse » Sat Jun 04, 2016 11:49 am

I would say a quick scan of the article AND the posters on here are full of confirmation bias.

The only true answer is: WHO KNOWS??

This is one of the many questions in life (not just in investing but life) that there may be one answer, but for sure you will not know until in retrospect looking back years down the road. Even then a good dose of rationalization will likely sway you into thinking you made the right decision anyways.

For those reading: Read the article and comments, but don't be a lemming. Do what you feel comfortable. As the old saying goes (paraphrasing) One's life is meant to be lived going forward and not looking backwards.

Good luck.
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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by Nowizard » Sat Jun 04, 2016 11:51 am

I agree with Taylor. Reduced home equity when you could pay it off if it came to that does not eliminate the issue of heirs disposing of a home when inherited, but it does reduce the amount of the inheritance represented by equity in it.

Tim

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by rgs92 » Sat Jun 04, 2016 12:15 pm

Would it make sense to use tax-sheltered funds (like traditional IRA funds beyond the penalty phase) to payoff a mortgage (at current rates, like 4%)?
Would the big tax payment be worth it? If so, in what situations? Maybe one's bond funds in the IRA would be better off there since the bond fund would be paying about 2% these days.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by sport » Sat Jun 04, 2016 12:33 pm

These discussions seem to ignore the possibility of a future interest rate increase. A mortgage is a long term instrument. What will interest rates be in 5 years? 10 years? 15 years? No one knows. If intermediate term rates should rise to 5 or 6 percent, a 3.5% mortgage would be a very desirable thing to have. What if rates went to 8%? So much the better.

Here is my personal experience: My loan was for 6.75% (a very good rate at the time). About 8 years into the loan, money market rates were 18%. The bank offered to lend me money at the bargain rate of only 14% if I would refinance the mortgage. I was very happy to be holding a mortgage and paying "only" 6.75%. I certainly had no desire to accelerate payments.

So, it seems that the desirability of paying off a mortgage early depends on what happens to future interest rates. It may be a good idea to pay it early, or it may not. Like many things, there are "two sides to the coin".

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by broadreach » Sat Jun 04, 2016 12:49 pm

I am going to have to respectfully disagree with Dr. Dahle on this one:

-Liquidity is extremely valuable because it gives you choices. HELOC is ok, but large taxable account with margin capabilities is better.
-Mortgage interest deduction is one of the few deductions preserved for high income earners. This is effectively a govt subsidy.
-With mortgage interest rates so low now, the interest savings in aggressively paying off a mortgage is modest:
Consider 3.5% jumbo after the tax deduction, this is around 2.3% equivalent for someone in the 35% bracket. Do you really feel your after tax investments can't beat 2.3% over the long term?
-I'm more concerned about inflation over long term. I really don't think deflation is a realistic consideration policy/fed-wise.
-Aggressively paying off mortgage means LESS diversification, as assets become more concentrated in residential real estate (your home) with less left over in other areas.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by btenny » Sat Jun 04, 2016 1:19 pm

When I worked I carried a big mortgage on a big kid friendly house to get the extra tax deductions. When I bought the home I never planned to keep that home into retirement. I used high leverage to get more investment return during my holding period. When I bought inflation was high and so were interest rtes. I wanted to lock in my expenses.

I sold this big home 22 years later after I retired. I converted all the equity from my big home to a smaller retirement home. I owned both for a short time so I started with a mortgage. But I paid off the new home with cash from the sale of the old one.

I calculated it would cost me about $2000 a year in lost opportunity costs to NOT carry a mortgage in retirement. I was no longer in a very high tax bracket so I would only save $500 for that. Then I figured earning 1% above the mortgage cost would net me about $1500 per year. So I paid off that mortgage. But I also noted if I wanted to buy a much bigger home and carry a bigger mortgage the cost would go up a lot and maybe in that case a mortgage made sense. So it depends.

I also wanted minimum monthly housing costs if something would happen to me or my wife in early retirement. Then one of us would lose a lot of income and need lower expenses. So no mortgage.

But now that I am a lot older I am seeing much higher taxes due to RMDs etc.. So maybe a mortgage will again become a good idea.

So I guess it depends. Good Luck.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by obafgkm » Sat Jun 04, 2016 3:56 pm

In the article...
Joe Average has a household income in the $50,000-100,000 range. He is almost surely not maxing out a 401(k) ($18,000 employee contribution if under 50) and a backdoor Roth IRA for himself and his wife ($5,500 each).

obafgkm wrote:Why would a couple making between $50,000 and $100,000 need to do a backdoor Roth IRA? Why not just, you know, contribute to a Roth IRA directly? What am I missing?


Bump. Any answer to my question? Is this a misunderstanding on my part, or a misstatement in the article?

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by livesoft » Sat Jun 04, 2016 4:02 pm

^I think you are misunderstanding the article. Such a couple are NOT doing a backdoor Roth IRA as the quote states. It is the high income folks doing all that.

They might be doing a Roth IRA, but so what? They might also be contributing 50% of their income to retirement accounts and living on a fraction of their income. So what?
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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by grabiner » Sat Jun 04, 2016 4:05 pm

Random Walker wrote:For me, there was a huge benefit I discovered after I did it. I found that having a paid off mortgage helped add psychological strength and conviction to stick to my fairly aggressive AA.


I actually do it the other way. I count my mortgage as a negative bond in my asset allocation. When I bought my home three years ago, my target asset allocation was 100% stock, but I held bonds (in my retirement account) equal to my mortgage balance. I canceled out the money I owe the bank with the money the Treasury owes me.

And if I do choose to pay off the mortgage, I will pay it off with the bonds. I will sell taxable stock to pay off the mortgage, and move an equal amount from bonds to stock in my retirement account, keeping the same amount in stock and thus not changing my portfolio risk. If I didn't count the mortgage as a negative bond, I would have a more aggressive asset allocation; the way I count it, I wouldn't change the allocation. (I am not paying off my mortgage now because my stock has large capital gains; the tax bill makes a payoff not worthwhile. Even at the February market bottom, I didn't have anywhere near enough stock with low or no gains to clear the whole mortgage.)
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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by White Coat Investor » Sat Jun 04, 2016 4:07 pm

obafgkm wrote:In the article...
Joe Average has a household income in the $50,000-100,000 range. He is almost surely not maxing out a 401(k) ($18,000 employee contribution if under 50) and a backdoor Roth IRA for himself and his wife ($5,500 each).

obafgkm wrote:Why would a couple making between $50,000 and $100,000 need to do a backdoor Roth IRA? Why not just, you know, contribute to a Roth IRA directly? What am I missing?


Bump. Any answer to my question? Is this a misunderstanding on my part, or a misstatement in the article?


Clearly an error in the article. You're absolutely correct that "backdoor" should be deleted. We should talk to that guy and get him to fix it. :)
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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by pkcrafter » Sat Jun 04, 2016 4:13 pm

Just for balance, I'll post the other side of this strategy. As many of you probably know, Ric Edelman is opposed to paying off a mortgage. Here are his reasons.

http://www.edelmanfinancial.com/educati ... g-mortgage

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by jackholloway » Sat Jun 04, 2016 4:21 pm

sport wrote:These discussions seem to ignore the possibility of a future interest rate increase. A mortgage is a long term instrument. What will interest rates be in 5 years? 10 years? 15 years? No one knows. If intermediate term rates should rise to 5 or 6 percent, a 3.5% mortgage would be a very desirable thing to have. What if rates went to 8%? So much the better.

Here is my personal experience: My loan was for 6.75% (a very good rate at the time). About 8 years into the loan, money market rates were 18%. The bank offered to lend me money at the bargain rate of only 14% if I would refinance the mortgage. I was very happy to be holding a mortgage and paying "only" 6.75%. I certainly had no desire to accelerate payments.

So, it seems that the desirability of paying off a mortgage early depends on what happens to future interest rates. It may be a good idea to pay it early, or it may not. Like many things, there are "two sides to the coin".


Perhaps.

Scenario 1: 500k in loans at 3.5%, 900K in stocks, 600k in bonds earning 2%.

Scenario 2; no loan, 700K in stocks, 300K in bonds earning 2%, assuming you took more risk due to lower need.

Rates go to 14%, which causes your bond NAV to drop by ~12*7% for the next seven years, and you start turning a profit again on the bonds after that.

A leaves you down not quite your mortgage if you need the money in those seven years, and about even after waiting out the duration. B leaves you down half that if you need the money in the meantime, and I am not convinced the stock market would actually be up any with the implied inflation of that major rise.

I am not sure which is the better plan, but it seems you could make the argument turn out however you wanted with the right assumptions around risk, liquidity, etc.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by NMJack » Sat Jun 04, 2016 4:24 pm

obafgkm wrote:In the article...
Joe Average has a household income in the $50,000-100,000 range. He is almost surely not maxing out a 401(k) ($18,000 employee contribution if under 50) and a backdoor Roth IRA for himself and his wife ($5,500 each).

obafgkm wrote:Why would a couple making between $50,000 and $100,000 need to do a backdoor Roth IRA? Why not just, you know, contribute to a Roth IRA directly? What am I missing?


Bump. Any answer to my question? Is this a misunderstanding on my part, or a misstatement in the article?


When I read the article, that jumped out at me as well. Any author who publishes such a glaring mistake either a) doesn't know what he is talking about or b) is so sloppy that he doesn't even proof read his own material.

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Re: 1 Reason Not to Pay-Off a Mortgage

Post by NMJack » Sat Jun 04, 2016 4:26 pm

Taylor Larimore wrote:Bogleheads:

Not everyone wants to leave heirs equity in a difficult to sell, mortgage-free home for heirs to squabble over.

When Pat and I were in our 80s, we took out a (low-interest) mortgage on our condo so we could give our heirs our home equity while we were still alive and when they needed it most.

Best wishes.
Taylor


That is a great point. Also, if somebody puts a dollar into an ERISA protected retirement account, they have fantastic asset protection. If they put that same dollar into home equity, they've just increased the size of the target (understanding the risk may be somewhat mitigated by homestead protections).

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by HIinvestor » Sat Jun 04, 2016 4:46 pm

In our state and portion of the island in particular, there is historically low inventory and high demand at high prices for houses. We have given our kids a bit of money to help them now and probably will continue to do so periodically. We do not have a mortgage on our place any more and like it that way.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by HomerJ » Sat Jun 04, 2016 4:48 pm

I never maxed out my retirement accounts in any year, but I still paid off my mortgage.

Greatest thing ever. I'm not fully financially independent, but paying off the mortgage got me so close I can taste it.

I used to be very poor. I used to worry about money a lot. I NEVER worry about money now. It's feels like heaven,

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by ObliviousInvestor » Sat Jun 04, 2016 5:00 pm

NMJack wrote:When I read the article, that jumped out at me as well. Any author who publishes such a glaring mistake either a) doesn't know what he is talking about or b) is so sloppy that he doesn't even proof read his own material.

When you write a lot of words over the years, mistakes slip through on occasion, even big ones. I proofread zealously and still have errors slip through. Even traditionally published books by knowledgable, well respected authors still have big ugly errors from time to time, and that's after a team of people reading and checking the book.
Mike Piper, author/blogger

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by NMJack » Sat Jun 04, 2016 5:46 pm

HomerJ wrote:Greatest thing ever. I'm not fully financially independent, but paying off the mortgage got me so close I can taste it.

I used to be very poor. I used to worry about money a lot. I NEVER worry about money now. It's feels like heaven,


:sharebeer :beer Congrats brother!

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by bhsince87 » Sat Jun 04, 2016 5:54 pm

I'd be considered "rich" by most measures, and I did indeed pay off our mortgage a few years ago, with no regrets.

One of the biggest advantages I see is in reducing cash flow needs in retirement, especially early retirement. This can lower your "number" significantly.

Also, reverse mortgages became much more attractive with the federal rule changes a few years ago.

That being said, I am not a fan of making early or additional mortgage payments. Mostly for liquidity reasons, I invested that money, and waited to pay the mortgage off when I had plenty of excess investments on hand.

I might consider taking out a mortgage later as an inflation hedge. I will get a fixed pension of $900 a month when I turn 65. At that point, I might take out a mortgage with a $900 monthly payment, and invest the proceeds.
BH87

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by JonnyDVM » Sat Jun 04, 2016 7:26 pm

NMJack wrote:
obafgkm wrote:In the article...
Joe Average has a household income in the $50,000-100,000 range. He is almost surely not maxing out a 401(k) ($18,000 employee contribution if under 50) and a backdoor Roth IRA for himself and his wife ($5,500 each).

obafgkm wrote:Why would a couple making between $50,000 and $100,000 need to do a backdoor Roth IRA? Why not just, you know, contribute to a Roth IRA directly? What am I missing?


Bump. Any answer to my question? Is this a misunderstanding on my part, or a misstatement in the article?


When I read the article, that jumped out at me as well. Any author who publishes such a glaring mistake either a) doesn't know what he is talking about or b) is so sloppy that he doesn't even proof read his own material.


Easy guys, it's an Internet blog not an Op-Ed piece in the New York Times. Obvious mistake. I was going to email him when I read the article the other day but figured 300 people probably already did. It's not often a Roth is mentioned on the site without "backdoor" in front of it.

Personally, mortgage debt is the one debt I don't mind carrying for reasons already mentioned. Most notably the interest deduction and the fact that rates are so low right now. I also like having more liquidity. So though I might be considered rich, I feel no great impulse to pay off a mortgage despite the reasons listed.
Last edited by JonnyDVM on Sat Jun 04, 2016 8:37 pm, edited 3 times in total.
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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by tfb » Sat Jun 04, 2016 7:27 pm

sport wrote:These discussions seem to ignore the possibility of a future interest rate increase. A mortgage is a long term instrument. What will interest rates be in 5 years? 10 years? 15 years? No one knows. If intermediate term rates should rise to 5 or 6 percent, a 3.5% mortgage would be a very desirable thing to have. What if rates went to 8%? So much the better.

I agree. My loan is 2.5% fixed. I have equivalent amount in 3% CDs. When those CDs mature, I expect to find higher yield ones. If not, I can always pay off at that time.
Harry Sit, taking a break from the forums.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by NMJack » Sat Jun 04, 2016 9:58 pm

JonnyDVM wrote:It's not often a Roth is mentioned on the site without "backdoor" in front of it.



Really??? :confused

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by JonnyDVM » Sat Jun 04, 2016 10:14 pm

NMJack wrote:
JonnyDVM wrote:It's not often a Roth is mentioned on the site without "backdoor" in front of it.



Really??? :confused


On the WCI site geared towards high income professionals? - ummm yah. We all want access to that precious precious Roth space but the income limit for a standard contribution (which IMO is a pretty dumb part of the tax code but whatever) gets in the way. Ergo there's a lot of talk about contribution via the "backdoor" which is of great benefit to those that make too much to do it the traditional way which I would assume is the bulk of the website's readers.
Sometimes the questions are complicated and the answers are simple. -Dr. Seuss

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by edge » Sun Jun 05, 2016 3:06 am

I didn't find these very compelling.

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by madbrain » Sun Jun 05, 2016 3:31 am

1) compare to a taxable account
This really depends on your interest rate. I am in the 25% federal tax bracket and 9.3% CA state bracket, ie. 34.3% marginal tax rate. My mortgage is at 3.375%. All of the interest is fully deductible, as long as I'm working - state income tax and property tax alone exceed the standard deduction.
So, the net after-tax effective interest rate is only 2.21%. CA state tax free municipal bonds can nearly match this depending on term, though there is of course interest and credit risk. It doesn't make a whole lot of sense to pay off. I'm paying it down faster, but not paying it off.
If I was in a higher tax bracket, it would make even less sense to pay down/off.

2) yes, but you don't have to compare only to qualified dividends and long-term capital gains. There are other options available like AMT-exempt muni bonds.

3) see 2 - compare to municipal bonds

4) I have never cared for status symbols, whether they are BMW or paid-off mortgages. Status symbols have no place in a a rational argument discussion, IMO

5) periods of deflation throughout history don't seem to be very long-lasting, certainly not anywhere as long as a 30 year mortgage. This doesn't really seem like much of a serious risk.

6) Hmm, this is forgetting bogleheads.org :)

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by SeeMoe » Sun Jun 05, 2016 1:56 pm

Random Walker wrote:For me, there was a huge benefit I discovered after I did it. I found that having a paid off mortgage helped add psychological strength and conviction to stick to my fairly aggressive AA.

Dave

Agree. Paid off two houses earlier than expected when I had enough buck$ on hand and the Freedom it gave us was affecting. Then we used the former monthly mortgage money payments to invest more. Worked out well for us too. That was 20 years ago..
SeeMoe.. :moneybag
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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by goodenyou » Sun Jun 05, 2016 3:50 pm

Count me in on the paid off house. Done that.
"Ignorance more frequently begets confidence than does knowledge" | "The best years you have left are the ones you have right now"

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Re: "6 Reasons The Rich Should Pay-Off Their Mortgage"

Post by Bacchus01 » Sun Jun 05, 2016 8:58 pm

sport wrote:These discussions seem to ignore the possibility of a future interest rate increase. A mortgage is a long term instrument. What will interest rates be in 5 years? 10 years? 15 years? No one knows. If intermediate term rates should rise to 5 or 6 percent, a 3.5% mortgage would be a very desirable thing to have. What if rates went to 8%? So much the better.

Here is my personal experience: My loan was for 6.75% (a very good rate at the time). About 8 years into the loan, money market rates were 18%. The bank offered to lend me money at the bargain rate of only 14% if I would refinance the mortgage. I was very happy to be holding a mortgage and paying "only" 6.75%. I certainly had no desire to accelerate payments.

So, it seems that the desirability of paying off a mortgage early depends on what happens to future interest rates. It may be a good idea to pay it early, or it may not. Like many things, there are "two sides to the coin".


But long term rates really don't matter. If you can pay it off now, why wouldn't you be able to pay it off later if rates go up?

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