Mortgage as a negative bond...Don't pay down mortgage early...House is not a bond

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spdoublebass
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Mortgage as a negative bond...Don't pay down mortgage early...House is not a bond

Post by spdoublebass »

1.I've read a lot of threads as counting a mortgage as a negative bond.

I think I understand this in theory. If I have a mortgage at 5%, why be in a bond fund at 3% when I could just pay down my mortgage.

2. I've read threads saying do not pay down your mortgage early.

It took me a minute to understand this concept, but after doing the math on a few examples I see the advantage of putting money into retirement accounts and not paying off your mortgage early.

3. I've read read threads on the fact that a paid off house is not a bond.
A house doesn't pay a coupon. If my net worth was $1 million and my desired AA was 75/25. If I had a house worth $250K, I wouldn't want to be $750K in stock. So I get it that a house is not a bond.

The questions I'm left with after the above three statements are, How do I invest first, but also count the mortgage as a negative bond?

If we keep this really simple, Say a couple saves $20K a year, (they put $6k each in a Roth IRA and another $4k each in a Roth 401k), but also has a mortgage, how would they treat their mortgage as a negative bond with an 80/20 AA? Basically, I'm asking how to combine #1 and #2 above.

Thanks in advance.
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willthrill81
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by willthrill81 »

Mathematically, it's undeniable that a mortgage is a negative bond in that it it operates from the mortgage-holder's perspective completely opposite to being a bondholder. That alone doesn't mean that paying off a mortgage is a good or bad thing; it just describes how debt works.

To your example, if someone has a $100k mortgage, $100k of bonds, and $100k of stocks, then their effective AA is 100% stocks because the mortgage amount is subtracted from the bond holdings, leaving only the stocks.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by grabiner »

A paid-off house is not a bond, but it is still important to your investment needs. It works more like an annuity, by providing you a place to live for much less than the market rent; you pay only taxes, insurance, and maintenance.

Therefore, if you own a house (paid off, or still with a mortgage that you view as a negative bond), it is reasonable to have a more aggressive net asset allocation than if you rent. If you have a $250K home, a $200K mortgage, and a $100K stock portfolio, the mortgage and stock alone are 3x leveraged, but you aren't taking too much risk since only 2/3 of your net worth is in the stock market.

Also, "don't pay down your mortgage early" should not be taken as dogma. Since the mortgage is a negative bond, a mortgage prepayment is a fixed-income investment, with a yield equal to the mortgage rate. The return is long-term since you don't get the money back until you pay off the mortgage, and is illiquid. However, depending on your mortgage rate and on where the investment will go, the rate may be high enough that the long-term illiquid "bond" is a good investment for you. It's usually better to contribute to a 401(k) and IRA rather than making extra mortgage payments, since you get the long-term benefit of tax deferral.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by snowday2022 »

willthrill81 wrote: Sun Jul 10, 2022 6:54 pm Mathematically, it's undeniable that a mortgage is a negative bond in that it it operates from the mortgage-holder's perspective completely opposite to being a bondholder. That alone doesn't mean that paying off a mortgage is a good or bad thing; it just describes how debt works.

To your example, if someone has a $100k mortgage, $100k of bonds, and $100k of stocks, then their effective AA is 100% stocks because the mortgage amount is subtracted from the bond holdings, leaving only the stocks.
If this hypothetical had no bonds, would their effective AA be 200% stocks?
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by Watty »

spdoublebass wrote: Sun Jul 10, 2022 5:46 pm 3. I've read read threads on the fact that a paid off house is not a bond.
A house doesn't pay a coupon.
I agree that a house is not a bond that has a coupon but there is a concept called "imputed rent"(Google this) where having a paid off house benefits you by not having to pay rent or a mortgage payment each month. A big advantage of that is that it is tax free.

For example I am retired and have a paid off house. If I had a mortgage but owned investments instead of that home equity that generated income I would need to pay taxes on that income before using it to pay my mortgage payment then not only would I need a higher return on my investments but the additional income would likely also put me into a higher tax bracket.

Trying to compare home equity or things like Social Security, a pension, an annuity, farmland that is leased, or a lot of other things to a bond is a mistake. People often try to shoehorn lots of different things into being a stock or a bond but in reality there are easily a dozen or more different investment asset classes that are not stocks or bonds.
spdoublebass wrote: Sun Jul 10, 2022 5:46 pm The questions I'm left with after the above three statements are, How do I invest first, but also count the mortgage as a negative bond?
Something to keep in mind is to think of the roll that bonds have on your portfolio.

They are not there just to be an anchor in your portfolio usually they are there to reduce volatility because typically, but not always, they will move in the opposite direction of stocks(even though this has not worked recently). If you rebalance to your target asset allocation when one of them goes up or down you will tend to automatically "buy low and sell high" which is a good thing.

Where "mortgage as a negative bond" analogy breaks down is that when your stocks go up or down you could not sell or buy your mortgage to rebalance your asset allocation.

A lot of the lines are sort of fuzzy and there is some arm waiving when it comes to looking at how to handle mortgage debt since a mortgage you need to buy a house is a lot different than if you take out a new mortgage or home equity loan just to invest the money.

Depending how you use it keeping a mortgage just to invest the money can be as risky as using a margin loan.
spdoublebass wrote: Sun Jul 10, 2022 5:46 pm 2. I've read threads saying do not pay down your mortgage early.

It took me a minute to understand this concept, but after doing the math on a few examples I see the advantage of putting money into retirement accounts and not paying off your mortgage early.
When you are looking at the math be sure to take the sequence of returns risk into account since that can make investing and earning a higher return harder than it sounds. Here is a very simplistic example of sequence of returns risk which I have posted before.
If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To pay off the mortgage at the end of the second year you would need about $96.5K so you would need to gain back $12.5K and another $6,000 for the next years mortgage payments which combined is $18.5K. That would take a 22% return on the remaining $84K to get back to the point where you could pay off the mortgage.

In the past portfolios have declined in roughly one of four or five years depending on the asset allocation. (20 to 25 percent of the time)

https://investor.vanguard.com/investing ... allocation

The sequence of returns risk can also go the other way and you could get lucky and have the first couple of years get good returns that would put you on the path for large gains over the years. There will sometimes be very optimistic projections on just how much better not paying off the mortgage could be but one limiting factor that needs to be considered is that few people actually keep a 30 year mortgage for the full 30 years. It is difficult to put a number on it but many people who own a home will sell it in less than 10 years.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by alex_686 »

A house is not a bond. It is real estate. Sure, it is more bond like then equity like. Some people treat it like a bond, others not. Its risk and return profile is about the same as a BBB bond.

Real estate has 2 sources of returns.

The first is price appreciation. According to the Case-Shiller index this has been around 0% to 1% above inflation annually for the past 100 years. Great inflation hedge.

The second is rent. If you are living in your own real estate you are paying rent to yourself. i.e. imputed rent. i.e. you are “consuming” the rent generated. I mean, you could capture that rent. Rent out the house and live down by the river in a van.

I hold my home in my asset allocation with a zero expected return. It is a asset. It is a hedge against inflation. It balances out my liability- i.e. the mortgage. As a plan B I could sell it or do a reverse mortgage.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by willthrill81 »

snowday2022 wrote: Sun Jul 10, 2022 7:47 pm
willthrill81 wrote: Sun Jul 10, 2022 6:54 pm Mathematically, it's undeniable that a mortgage is a negative bond in that it it operates from the mortgage-holder's perspective completely opposite to being a bondholder. That alone doesn't mean that paying off a mortgage is a good or bad thing; it just describes how debt works.

To your example, if someone has a $100k mortgage, $100k of bonds, and $100k of stocks, then their effective AA is 100% stocks because the mortgage amount is subtracted from the bond holdings, leaving only the stocks.
If this hypothetical had no bonds, would their effective AA be 200% stocks?
Yes.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by Wanderingwheelz »

willthrill81 wrote: Sun Jul 10, 2022 9:15 pm
snowday2022 wrote: Sun Jul 10, 2022 7:47 pm
willthrill81 wrote: Sun Jul 10, 2022 6:54 pm Mathematically, it's undeniable that a mortgage is a negative bond in that it it operates from the mortgage-holder's perspective completely opposite to being a bondholder. That alone doesn't mean that paying off a mortgage is a good or bad thing; it just describes how debt works.

To your example, if someone has a $100k mortgage, $100k of bonds, and $100k of stocks, then their effective AA is 100% stocks because the mortgage amount is subtracted from the bond holdings, leaving only the stocks.
If this hypothetical had no bonds, would their effective AA be 200% stocks?
Yes.
It’s not so simple if you want to consider how much equity the homeowner has. A $100,000 mortgage on a $2MM home might be viewed differently than a $100,000 mortgage on a $120,000 home.

Of course, many would say that equity in your home has nothing to do with a persons asset allocation. But, if that’s true then why would a persons mortgage amount have an affect on asset allocation? How equity is an asset, regardless of whether a person wants to ignore it.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by grabiner »

Watty wrote: Sun Jul 10, 2022 7:48 pm Something to keep in mind is to think of the roll that bonds have on your portfolio.

They are not there just to be an anchor in your portfolio usually they are there to reduce volatility because typically, but not always, they will move in the opposite direction of stocks(even though this has not worked recently). If you rebalance to your target asset allocation when one of them goes up or down you will tend to automatically "buy low and sell high" which is a good thing.

Where "mortgage as a negative bond" analogy breaks down is that when your stocks go up or down you could not sell or buy your mortgage to rebalance your asset allocation.
However, as long as you also hold some conventional bonds, you can use those for reallocating.
alex_686 wrote: Sun Jul 10, 2022 7:52 pm A house is not a bond. It is real estate. Sure, it is more bond like then equity like. Some people treat it like a bond, others not. Its risk and return profile is about the same as a BBB bond.
I would prefer this analogy for a real estate investment, as opposed to the home you live in. For the home you live in, you do have the risk that the home price will decline, but the imputed rent eliminates the risk of rent changing: the home will always provide you with the same amount of housing.

But regardless of what you call it, the principle is the same. The fact that you own your home increases the risk you can take in your investment portfolio, because the portfolio affects a smaller fraction of your standard of living.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by bh1 »

  • A house is not a mortgage.
  • A mortgage is a bond, except under default. Then there a major difference. A mortgage is secured with your property.
  • Paying down a mortgage often has little benefit, unless you recast or refinance, thus reducing payments.
  • Paying off a mortgage generally causes happiness, even if not financially optimal.
Last edited by bh1 on Sun Jul 10, 2022 10:26 pm, edited 1 time in total.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by Yarlonkol12 »

spdoublebass wrote: Sun Jul 10, 2022 5:46 pm after doing the math on a few examples I see the advantage of putting money into retirement accounts and not paying off your mortgage early.
When I did the math, it made sense for me to pay off my mortgage.

"The math" requires assumptions to be made. My situation and assumptions are probably different than yours, that's why your math will produce a different result than mine, and others.
My posts are for entertainment purposes only.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by JBTX »

bh1 wrote: Sun Jul 10, 2022 10:15 pm
  • A house is not a mortgage.
  • A mortgage is a bond, except under default. Then there a major difference. A mortgage is secured with your property.
  • Paying down a mortgage often has little benefit, unless you recast or refinance, thus reducing payments.
  • Paying off a mortgage generally causes happiness, even if not financially optimal.
Paying down is no different than paying off. They are just matters of degrees. Paying down reduces your forward interest expense.

I may be an odd duck but I get no satisfaction in paying down/off a low interest mortgage. I actually wish I had a larger mortgage at my 2.375 rate. All that said our mortgage is pretty modest.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by bh1 »

JBTX wrote: Sun Jul 10, 2022 11:24 pm Paying down is no different than paying off. They are just matters of degrees. Paying down reduces your forward interest expense.
Interesting point of view. Seems to me like paying down results in the same monthly payment, but fewer in total, so no immediate relief of monthly cash flow. Paying off means no debt obligation at all, and thus no monthly payments.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by spdoublebass »

It seems this isn't as cut and dry as I'd like it to be.

Right now my wife and I (age 39 and 45) have an AA of 95/5. We are buying a house and should be closing in two months.

I had the idea of putting a percentage of our monthly retirement money towards the mortgage (5% rate). Say I put 20% of our monthly contribution towards the mortgage and pay it off in 12 years or so, is that better or worse than just saving that month and paying of the mortgage as scheduled? I could also just put that in a taxable account and pay it off in a lump sum when I have enough.

When I ran a couple scenarios, it didn't change much. However, as was pointed out up thread, I wasn't taking in account sequence of return risk. But also as pointed out up thread, the weight of not paying a mortgage would be a good feeling, what if I lost my job or something, just paying taxes is easier than a mortgage as well.

Again, I'm just looking for advice. I wish this was more black and white.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by Parkinglotracer »

Why do i care what i call my mortgage? Maybe I don’t understand or maybe This thread is making my head hurt. Can i think of it this way? I bought a house so I have bought an asset worth X; it is invested in real estate. Do with it what you want. It will go up or down in value as real estate does. At the same time i have a debt i am paying X interest on … say 5% these days. The after tax interest rate may be less than 5% but for our purposes lets say its 5%.

Since I am paying 5% to others to borrow money, it is the most effective use of my money to put the next dollar i have elsewhere if i can get more than 5% but if i can’t then it is the most effective use of my money to pay off the debt and stop paying the 5%.

of course that ignores whether the house and all the money it takes to keep it in livable condition is the best place to put my money in the first place.

Does this pass the common sense test? do I care what i call my mortgage?

Of course paying off a mortgage is a great feeling too so that has some worth in my book.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by Parkinglotracer »

JBTX wrote: Sun Jul 10, 2022 11:24 pm
bh1 wrote: Sun Jul 10, 2022 10:15 pm
  • A house is not a mortgage.
  • A mortgage is a bond, except under default. Then there a major difference. A mortgage is secured with your property.
  • Paying down a mortgage often has little benefit, unless you recast or refinance, thus reducing payments.
  • Paying off a mortgage generally causes happiness, even if not financially optimal.
Paying down is no different than paying off. They are just matters of degrees. Paying down reduces your forward interest expense.

I may be an odd duck but I get no satisfaction in paying down/off a low interest mortgage. I actually wish I had a larger mortgage at my 2.375 rate. All that said our mortgage is pretty modest.

Tough call on whether to have a mortgage or to pay off a mortgage or not. I feel good that i paid cash for a house in 2020 with the recent market decline. In the long run I might be better off if i didn’t. That being said at age 61 in the long run I’ll be dead! Lol.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by fourwheelcycle »

I definitely agree a paid-off house is not bond. If you are unemployed or face significant unexpected expenses, during a down market when you do not want to sell equities, you can't convert your house to cash as easily or efficiently as you can sell bonds. For the same reason, I do not think a paid-off house should be considered as a "bond" in your AA. I do agree a paid-off house is like an annuity that covers a portion of your housing expenses.

However, I do think it makes sense to pay-down or pay off your mortgage under certain circumstances. We started out with an 8.75% mortgage. When mortgage rates dropped to 6.0%, I considered paying off our mortgage, but I did not have sufficient cash on hand and our savings flow was committed to salary deductions that I did not want to interrupt. As a result, we spent about $1K in fees to refinance from 8.75% to 6.0%. Later, when mortgage rates dropped to 3.8%, I had enough extra cash that I called our mortgage holder, determined the exact pay-off amount, and sent them a check.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by AnEngineer »

JBTX wrote: Sun Jul 10, 2022 11:24 pm
Paying down is no different than paying off. They are just matters of degrees. Paying down reduces your forward interest expense.
Paying off is different than paying down because you see no effect of paying down until the mortgage is gone. If I pay down $1000 on a 30 year mortgage my obligations are the same until I reach the end of the mortgage. It's a liquidity issue. If everything goes well for you, it may not make a difference. If you lose your job, you may wish you had that $1000 back.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by AnEngineer »

spdoublebass wrote: Mon Jul 11, 2022 5:34 am It seems this isn't as cut and dry as I'd like it to be.

Right now my wife and I (age 39 and 45) have an AA of 95/5. We are buying a house and should be closing in two months.

I had the idea of putting a percentage of our monthly retirement money towards the mortgage (5% rate). Say I put 20% of our monthly contribution towards the mortgage and pay it off in 12 years or so, is that better or worse than just saving that month and paying of the mortgage as scheduled? I could also just put that in a taxable account and pay it off in a lump sum when I have enough.

When I ran a couple scenarios, it didn't change much. However, as was pointed out up thread, I wasn't taking in account sequence of return risk. But also as pointed out up thread, the weight of not paying a mortgage would be a good feeling, what if I lost my job or something, just paying taxes is easier than a mortgage as well.

Again, I'm just looking for advice. I wish this was more black and white.
Note that a lot of what's written against paying off early is in the context of sub 3% mortgage rates. At 5% I think it makes a lot more sense, but as always compare against the alternatives. (Bond yields are also higher now.)
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by lakpr »

AnEngineer wrote: Mon Jul 11, 2022 7:19 am Paying off is different than paying down because you see no effect of paying down until the mortgage is gone.
Not quite. YES, if the amount of pay-down is small, but if you are able to get the principal balance more than $10k below what the amortization tables indicate the principal balance would be (had you been paying only the monthly payment and nothing more), you should be able to "recast" the mortgage. Thus, you WILL be able to see the effect of paying down the mortgage even if it is not completely gone.

That said, I agree with your other post, that one should compare the alternatives (opportunity cost) before paying down the mortgage.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by grabiner »

JBTX wrote: Sun Jul 10, 2022 11:24 pm
bh1 wrote: Sun Jul 10, 2022 10:15 pm
  • A house is not a mortgage.
  • A mortgage is a bond, except under default. Then there a major difference. A mortgage is secured with your property.
  • Paying down a mortgage often has little benefit, unless you recast or refinance, thus reducing payments.
  • Paying off a mortgage generally causes happiness, even if not financially optimal.
Paying down is no different than paying off. They are just matters of degrees. Paying down reduces your forward interest expense.
There are two important differences. Paying down a mortgage has a longer duration than paying off the same mortgage, because the entire benefit is realized far in the future. And paying off a mortgage improves your cash flow.

If you refinance or recast (or if you have an ARM, which refinances itself when rates reset), then the difference between paying down and paying off disappears. Paying half the mortgage balance to halve your payments gives exactly half the benefit of paying off the mortgage.
I may be an odd duck but I get no satisfaction in paying down/off a low interest mortgage. I actually wish I had a larger mortgage at my 2.375 rate. All that said our mortgage is pretty modest.
I wouldn't pay it down now at that low a rate either, since you can earn more on municipal bonds.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by michaeljc70 »

spdoublebass wrote: Sun Jul 10, 2022 5:46 pm
I think I understand this in theory. If I have a mortgage at 5%, why be in a bond fund at 3% when I could just pay down my mortgage.
Since others addressed the bond part (and I don't find it important), I'll chime in on the highlighted part:

1) Bond fund yield and total return are different. You don't really now the total return in advance.
2) You may get a tax break on the interest paid for the mortgage. Less likely since the tax code changed in 2017.
3) The money you put into a bond fund might be tax deductible if you put it into certain types of accounts. This changes the math (if you otherwise wouldn't be maxing out those accounts).
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by willthrill81 »

spdoublebass wrote: Mon Jul 11, 2022 5:34 am It seems this isn't as cut and dry as I'd like it to be.

Right now my wife and I (age 39 and 45) have an AA of 95/5. We are buying a house and should be closing in two months.

I had the idea of putting a percentage of our monthly retirement money towards the mortgage (5% rate). Say I put 20% of our monthly contribution towards the mortgage and pay it off in 12 years or so, is that better or worse than just saving that month and paying of the mortgage as scheduled? I could also just put that in a taxable account and pay it off in a lump sum when I have enough.

When I ran a couple scenarios, it didn't change much. However, as was pointed out up thread, I wasn't taking in account sequence of return risk. But also as pointed out up thread, the weight of not paying a mortgage would be a good feeling, what if I lost my job or something, just paying taxes is easier than a mortgage as well.

Again, I'm just looking for advice. I wish this was more black and white.
Apart from the interest rate issue, it's often a good idea to have no mortgage going into retirement because doing so increases sequence of returns risk. This happens because it increases the amount that you must withdraw in order to pay the mortgage even if your portfolio is suffering.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by MindBogler »

lakpr wrote: Mon Jul 11, 2022 7:35 am
AnEngineer wrote: Mon Jul 11, 2022 7:19 am Paying off is different than paying down because you see no effect of paying down until the mortgage is gone.
Not quite. YES, if the amount of pay-down is small, but if you are able to get the principal balance more than $10k below what the amortization tables indicate the principal balance would be (had you been paying only the monthly payment and nothing more), you should be able to "recast" the mortgage. Thus, you WILL be able to see the effect of paying down the mortgage even if it is not completely gone.

That said, I agree with your other post, that one should compare the alternatives (opportunity cost) before paying down the mortgage.
This is one of the potential negatives of VA loans, they do not allow recasting.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by JBTX »

grabiner wrote: Mon Jul 11, 2022 7:50 am
JBTX wrote: Sun Jul 10, 2022 11:24 pm
bh1 wrote: Sun Jul 10, 2022 10:15 pm
  • A house is not a mortgage.
  • A mortgage is a bond, except under default. Then there a major difference. A mortgage is secured with your property.
  • Paying down a mortgage often has little benefit, unless you recast or refinance, thus reducing payments.
  • Paying off a mortgage generally causes happiness, even if not financially optimal.
Paying down is no different than paying off. They are just matters of degrees. Paying down reduces your forward interest expense.
There are two important differences. Paying down a mortgage has a longer duration than paying off the same mortgage, because the entire benefit is realized far in the future. And paying off a mortgage improves your cash flow.

If you refinance or recast (or if you have an ARM, which refinances itself when rates reset), then the difference between paying down and paying off disappears. Paying half the mortgage balance to halve your payments gives exactly half the benefit of paying off the mortgage.
I may be an odd duck but I get no satisfaction in paying down/off a low interest mortgage. I actually wish I had a larger mortgage at my 2.375 rate. All that said our mortgage is pretty modest.
I wouldn't pay it down now at that low a rate either, since you can earn more on municipal bonds.
I know what you mean and I hear that a lot but it is literally wrong, in one sense. In my mind, making a $200k payment, in order to save $5000 per year on interest, especially when inflation is well over $10k per year, is not increasing cash flow in any sense. Quite the opposite. In terms of the principle portion I don’t see how paying $X now, so that you can avoid the same $x in the future (or less than $x in real terms) is increasing cash flow.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by willthrill81 »

JBTX wrote: Mon Jul 11, 2022 9:50 amI know what you mean and I hear that a lot but it is literally wrong, in one sense. In my mind, making a $200k payment, in order to save $5000 per year on interest, especially when inflation is well over $10k per year, is not increasing cash flow in any sense. Quite the opposite. In terms of the principle portion I don’t see how paying $X now, so that you can avoid the same $x in the future (or less than $x in real terms) is increasing cash flow.
The price of increasing cash flow does not mean that the cash flow is or is not increased.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by lakpr »

JBTX wrote: Mon Jul 11, 2022 9:50 am I know what you mean and I hear that a lot but it is literally wrong, in one sense. In my mind, making a $200k payment, in order to save $5000 per year on interest, especially when inflation is well over $10k per year, is not increasing cash flow in any sense.
Beg to disagree. Keeping that $200k in cash is losing $18.2k per year (current inflation rate of 9.1%), AND you are bleeding $5000 per year in additional interest. Payoff the mortgage, you have no more bleeding, either in inflation or interest expense.

During inflationary times, quick acquisition and consumption of goods is a hedge against inflation. Applies equally to mortgage.
Last edited by lakpr on Mon Jul 11, 2022 10:03 am, edited 1 time in total.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by JBTX »

willthrill81 wrote: Mon Jul 11, 2022 9:53 am
JBTX wrote: Mon Jul 11, 2022 9:50 amI know what you mean and I hear that a lot but it is literally wrong, in one sense. In my mind, making a $200k payment, in order to save $5000 per year on interest, especially when inflation is well over $10k per year, is not increasing cash flow in any sense. Quite the opposite. In terms of the principle portion I don’t see how paying $X now, so that you can avoid the same $x in the future (or less than $x in real terms) is increasing cash flow.
The price of increasing cash flow does not mean that the cash flow is or is not increased.
Presumably to pay off a mortgage the money has to come from somewhere, most likely from an investment that is creating its own cash flow (or perhaps deferred cash flow)
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by michaeljc70 »

lakpr wrote: Mon Jul 11, 2022 10:02 am
JBTX wrote: Mon Jul 11, 2022 9:50 am I know what you mean and I hear that a lot but it is literally wrong, in one sense. In my mind, making a $200k payment, in order to save $5000 per year on interest, especially when inflation is well over $10k per year, is not increasing cash flow in any sense.
Beg to disagree. Keeping that $200k in cash is losing $18.2k per year (current inflation rate of 9.1%), AND you are bleeding $5000 per year in additional interest. Payoff the mortgage, you have no more bleeding, either in inflation or interest expense.

During inflationary times, quick acquisition and consumption of goods is a hedge against inflation. Applies equally to mortgage.
That is assuming you keep the money in a no interest account. Who would do that??
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by willthrill81 »

JBTX wrote: Mon Jul 11, 2022 10:03 am
willthrill81 wrote: Mon Jul 11, 2022 9:53 am
JBTX wrote: Mon Jul 11, 2022 9:50 amI know what you mean and I hear that a lot but it is literally wrong, in one sense. In my mind, making a $200k payment, in order to save $5000 per year on interest, especially when inflation is well over $10k per year, is not increasing cash flow in any sense. Quite the opposite. In terms of the principle portion I don’t see how paying $X now, so that you can avoid the same $x in the future (or less than $x in real terms) is increasing cash flow.
The price of increasing cash flow does not mean that the cash flow is or is not increased.
Presumably to pay off a mortgage the money has to come from somewhere, most likely from an investment that is creating its own cash flow (or perhaps deferred cash flow)
Most of those with mortgages have earned income. But even then, one is trading an asset (i.e., newly earned cash) for liability reduction, reducing future obligations, and increasing immediate cashflow if the mortgage is paid off.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by Apathizer »

lakpr wrote: Mon Jul 11, 2022 7:35 am
AnEngineer wrote: Mon Jul 11, 2022 7:19 am Paying off is different than paying down because you see no effect of paying down until the mortgage is gone.
Not quite. YES, if the amount of pay-down is small, but if you are able to get the principal balance more than $10k below what the amortization tables indicate the principal balance would be (had you been paying only the monthly payment and nothing more), you should be able to "recast" the mortgage. Thus, you WILL be able to see the effect of paying down the mortgage even if it is not completely gone.

That said, I agree with your other post, that one should compare the alternatives (opportunity cost) before paying down the mortgage.
As someone who opted to pay off most of my 4.2% mortgage early this year I agree. While I still have a mortgage my balance is so small most of the interest penalty is gone and about 95% of my monthly payment is principle. So in terms of unrecoverable costs it's almost like not having a mortgage.

It worked out really well for me. Russia invaded Ukraine a couple months later and the markets tanked. Now I'm rebuilding my taxable account at an opportune time when markets are down.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by lakpr »

michaeljc70 wrote: Mon Jul 11, 2022 10:06 am
lakpr wrote: Mon Jul 11, 2022 10:02 am
JBTX wrote: Mon Jul 11, 2022 9:50 am I know what you mean and I hear that a lot but it is literally wrong, in one sense. In my mind, making a $200k payment, in order to save $5000 per year on interest, especially when inflation is well over $10k per year, is not increasing cash flow in any sense.
Beg to disagree. Keeping that $200k in cash is losing $18.2k per year (current inflation rate of 9.1%), AND you are bleeding $5000 per year in additional interest. Payoff the mortgage, you have no more bleeding, either in inflation or interest expense.

During inflationary times, quick acquisition and consumption of goods is a hedge against inflation. Applies equally to mortgage.
That is assuming you keep the money in a no interest account. Who would do that??
Really doesn't change the math or the concept very much. What is the best interest rate will you get on that $200k? 3%? So you are still bleeding $18,200 + $5,000 - $6,000 = $17,200 per year.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by 8foot7 »

I'm not big on blanket advice but paying off a sub-3% (maybe even sub-4%) mortgage these days, with (a) inflation where it is and (b) mortgage rates on the rise, is almost certainly suboptimal from a math perspective. There can be other reasons to do so, of course.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by aristotelian »

Mortgage is a debt and drags directly against your bond allocation. You can call it whatever you want but you have to account for it somehow. If you are trying to calculate your Safe Withdrawal Rate, I think it is most convenient and accurate to count it against your bond allocation while not counting the mortgage as an expense.

As an example, say you have $1.2M portfolio invested 50/50 with $200k mortgage. The mortgage offsets $200k of your bonds, so your net allocation is in fact $600k stocks/$400k bonds (60/40) with $1M net portfolio value. Your Safe Withdrawal for non-mortgage expense is $40k using the 4% rule.

If at some point you decide to pay off your mortgage, you pull from your bond allocation, resulting in no change to your overall allocation.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by lakpr »

8foot7 wrote: Mon Jul 11, 2022 10:16 am I'm not big on blanket advice but paying off a sub-3% (maybe even sub-4%) mortgage these days, with (a) inflation where it is and (b) mortgage rates on the rise, is almost certainly suboptimal from a math perspective. There can be other reasons to do so, of course.
Other than Liquidity concerns, paying off the mortgage is exactly what Math recommends that you do. See my previous post, in the hypothetical example of someone having $200k cash and a $200k mortgage at 2.5% APR. Even in the best case scenario, the person is losing $17,200 per year.

This is a cost the person must bear if there are no other assets beyond that $200k (and that's why I started this post with 'other than liquidity concerns' caveat), but if the person can look forward to future income and cashflows, the best course of action is to pay off the mortgage.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by JBTX »

lakpr wrote: Mon Jul 11, 2022 10:02 am
JBTX wrote: Mon Jul 11, 2022 9:50 am I know what you mean and I hear that a lot but it is literally wrong, in one sense. In my mind, making a $200k payment, in order to save $5000 per year on interest, especially when inflation is well over $10k per year, is not increasing cash flow in any sense.
Beg to disagree. Keeping that $200k in cash is losing $18.2k per year (current inflation rate of 9.1%), AND you are bleeding $5000 per year in additional interest. Payoff the mortgage, you have no more bleeding, either in inflation or interest expense.

During inflationary times, quick acquisition and consumption of goods is a hedge against inflation. Applies equally to mortgage.
Who said anything about keeping it in zero interest cash? That would be stupid (apart from short term liquidity needs). In my case most of my mortgage balance is invested in ibonds. Even some of the extra liquid cash I have is in a 3.0% promotional account, some of which will soon be diverted to more ibonds. There are other options too.

A sub market fixed rate mortgage, that you can invest in inflation sensitive investments, is an inflation hedge.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by JBTX »

lakpr wrote: Mon Jul 11, 2022 10:27 am
8foot7 wrote: Mon Jul 11, 2022 10:16 am I'm not big on blanket advice but paying off a sub-3% (maybe even sub-4%) mortgage these days, with (a) inflation where it is and (b) mortgage rates on the rise, is almost certainly suboptimal from a math perspective. There can be other reasons to do so, of course.
Other than Liquidity concerns, paying off the mortgage is exactly what Math recommends that you do. See my previous post, in the hypothetical example of someone having $200k cash and a $200k mortgage at 2.5% APR. Even in the best case scenario, the person is losing $17,200 per year.

This is a cost the person must bear if there are no other assets beyond that $200k (and that's why I started this post with 'other than liquidity concerns' caveat), but if the person can look forward to future income and cashflows, the best course of action is to pay off the mortgage.
This is terrible advice and mathematically flawed.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by 8foot7 »

lakpr wrote: Mon Jul 11, 2022 10:27 am
8foot7 wrote: Mon Jul 11, 2022 10:16 am I'm not big on blanket advice but paying off a sub-3% (maybe even sub-4%) mortgage these days, with (a) inflation where it is and (b) mortgage rates on the rise, is almost certainly suboptimal from a math perspective. There can be other reasons to do so, of course.
Other than Liquidity concerns, paying off the mortgage is exactly what Math recommends that you do. See my previous post, in the hypothetical example of someone having $200k cash and a $200k mortgage at 2.5% APR. Even in the best case scenario, the person is losing $17,200 per year.

This is a cost the person must bear if there are no other assets beyond that $200k (and that's why I started this post with 'other than liquidity concerns' caveat), but if the person can look forward to future income and cashflows, the best course of action is to pay off the mortgage.
I completely disagree, unless possibly one is retired without a COLA-adjusted income stream. For the vast majority of folks they will be earning dollars that adjust for inflation. This also ignores low- to no-risk investments that can be protected from or outearn inflation. Granted, if the interest rate is 4% and the inflation rate is 4% it doesn't much matter. Greater deltas between the two make the case more significant.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by lakpr »

JBTX wrote: Mon Jul 11, 2022 10:28 am Who said anything about keeping it in zero interest cash? That would be stupid (apart from short term liquidity needs). In my case most of my mortgage balance is invested in ibonds. Even some of the extra liquid cash I have is in a 3.0% promotional account, some of which will soon be diverted to more ibonds. There are other options too.

A sub market fixed rate mortgage, that you can invest in inflation sensitive investments, is an inflation hedge.
Now you are changing the parameters of the discussion, but let me indulge.
1. If you already have $200k in I-bonds in this hypothetical example, great!! But at the current limit of $10k per person per year, even for a couple it would take at least 10 years to reach that level. I-bonds were not beating the mortgage rates for at least 8 years out of those 10, thus you would have lost money on first 8 years, made money on the last 2 years: I'd wager you still ended up on the losing side.

2. You have $200k in cash right now, the max you can invest in I-bonds per couple is $20k. Leaves $180k in cash, and the best rate I think you can get that's bond-like is 3.4% on that money (for a 1-year period). That's still a loss of 9.1% - 3.4% = 5.7% per year, plus the $5000 per year you are paying in mortgage interest, for a net cash outflow = $10,260 + $5,000 = $15,260 per year. Would you rather not keep that $15,260 in your own pocket?
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by michaeljc70 »

lakpr wrote: Mon Jul 11, 2022 10:27 am
8foot7 wrote: Mon Jul 11, 2022 10:16 am I'm not big on blanket advice but paying off a sub-3% (maybe even sub-4%) mortgage these days, with (a) inflation where it is and (b) mortgage rates on the rise, is almost certainly suboptimal from a math perspective. There can be other reasons to do so, of course.
Other than Liquidity concerns, paying off the mortgage is exactly what Math recommends that you do. See my previous post, in the hypothetical example of someone having $200k cash and a $200k mortgage at 2.5% APR. Even in the best case scenario, the person is losing $17,200 per year.

This is a cost the person must bear if there are no other assets beyond that $200k (and that's why I started this post with 'other than liquidity concerns' caveat), but if the person can look forward to future income and cashflows, the best course of action is to pay off the mortgage.
A lot of people that don't pay off their mortgage are putting that money into stocks and not a low yield MM or bond. It is a lot more than math because you don't know future returns of stocks or even bonds (unless held to maturity). A lot of it has to do with how risk averse you are also.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by Kenkat »

snowday2022 wrote: Sun Jul 10, 2022 7:47 pm
willthrill81 wrote: Sun Jul 10, 2022 6:54 pm Mathematically, it's undeniable that a mortgage is a negative bond in that it it operates from the mortgage-holder's perspective completely opposite to being a bondholder. That alone doesn't mean that paying off a mortgage is a good or bad thing; it just describes how debt works.

To your example, if someone has a $100k mortgage, $100k of bonds, and $100k of stocks, then their effective AA is 100% stocks because the mortgage amount is subtracted from the bond holdings, leaving only the stocks.
If this hypothetical had no bonds, would their effective AA be 200% stocks?
Sell the house and pay off the mortgage. Rent a house instead.

Is the asset allocation now 50/50? Does this make sense?

It never did to me as the situation is largely unchanged yet there is a huge shift in your asset allocation.

I prefer to view the house as an asset paying inputed rent and a mortgage to enable you to hold the asset and provide a place to live. You do have a liability on the books but you also have an asset offsetting it, albeit somewhat illiquid.

Others may view it differently but that is my view of it.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by JBTX »

lakpr wrote: Mon Jul 11, 2022 10:35 am
JBTX wrote: Mon Jul 11, 2022 10:28 am Who said anything about keeping it in zero interest cash? That would be stupid (apart from short term liquidity needs). In my case most of my mortgage balance is invested in ibonds. Even some of the extra liquid cash I have is in a 3.0% promotional account, some of which will soon be diverted to more ibonds. There are other options too.

A sub market fixed rate mortgage, that you can invest in inflation sensitive investments, is an inflation hedge.
Now you are changing the parameters of the discussion, but let me indulge.
1. If you already have $200k in I-bonds in this hypothetical example, great!! But at the current limit of $10k per person per year, even for a couple it would take at least 10 years to reach that level. I-bonds were not beating the mortgage rates for at least 8 years out of those 10, thus you would have lost money on first 8 years, made money on the last 2 years: I'd wager you still ended up on the losing side.

2. You have $200k in cash right now, the max you can invest in I-bonds per couple is $20k. Leaves $180k in cash, and the best rate I think you can get that's bond-like is 3.4% on that money (for a 1-year period). That's still a loss of 9.1% - 3.4% = 5.7% per year, plus the $5000 per year you are paying in mortgage interest, for a net cash outflow = $10,260 + $5,000 = $15,260 per year. Would you rather not keep that $15,260 in your own pocket?
I’ve put over $100k in ibonds over the last couple of years. Go to the ibonds thread to see how to do it. But even without ibonds, heck I’d buy TIPS in a taxable account, even with the tax inefficiency you’re making out in the long run. You can break even with some intermediate term CDs or bonds, or potentially perhaps invest a modest percent in stocks. Invest more in tax advantaged accounts. Don’t pull as much from tax advantaged accounts. Defer social security. Avoid capital gains. Do a Roth conversion if optimal. Open a couple of accounts with large bonuses. There are a plethora of choices one could do that would be better than paying off a 2.5% mortgage.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by nisiprius »

I think I've got this right...

I agree that a house is not a bond, but I think that's an irrelevant red herring. The mortgage isn't the house. The mortgage is just a loan based on dollar numbers.

The house is loan collateral, but its fluctuating value doesn't enter into the dollar calculations of the effect of prepayment.

Of course there are exceptional situations--as when the market value of the house drops too far, or the financial consequences if you can't meet the mortgage payments. But if you are considering prepayment you obviously are planning to exceed the payment schedule, so you are obviously capable of meeting it. And neither of these possibilities changes your mortgage payments or the rate at which your principal decreases. The principal is the loan principal, not the market value of your house.

Reducing the principal of the loan reduces the monthly payments, and the amount of the reduction is based entirely on the terms of the loan and not at all on the value of the house. The bank did not invest in your house. You are not financial partners with the bank in a real estate investment. The investment is all yours. You made it on the day when you closed on the mortgage. And you committed to all the financial risk of the real estate investment on that day.

This should be about right although I may not be calculating it the precise way a bank would.

Consider, say, a 30-year mortgage for $500,000 at 6%. The monthly payment is $2997.75. If you are, let's say 20 years into the mortgage, you still owe $271,659.

At this point, suppose you prepay $100,000 extra. Your principal is cut to $170,010, your monthly payments drop to $1,887.57. By committing $100,000, you have cut your payment by $1110.18 per month for ten years.

There is no financial difference at all between that situation and paying $100,000 and buying a bond that will pay you $1110.18 per month for ten years.
Last edited by nisiprius on Mon Jul 11, 2022 11:08 am, edited 4 times in total.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by rockstar »

JBTX wrote: Mon Jul 11, 2022 10:58 am
lakpr wrote: Mon Jul 11, 2022 10:35 am
JBTX wrote: Mon Jul 11, 2022 10:28 am Who said anything about keeping it in zero interest cash? That would be stupid (apart from short term liquidity needs). In my case most of my mortgage balance is invested in ibonds. Even some of the extra liquid cash I have is in a 3.0% promotional account, some of which will soon be diverted to more ibonds. There are other options too.

A sub market fixed rate mortgage, that you can invest in inflation sensitive investments, is an inflation hedge.
Now you are changing the parameters of the discussion, but let me indulge.
1. If you already have $200k in I-bonds in this hypothetical example, great!! But at the current limit of $10k per person per year, even for a couple it would take at least 10 years to reach that level. I-bonds were not beating the mortgage rates for at least 8 years out of those 10, thus you would have lost money on first 8 years, made money on the last 2 years: I'd wager you still ended up on the losing side.

2. You have $200k in cash right now, the max you can invest in I-bonds per couple is $20k. Leaves $180k in cash, and the best rate I think you can get that's bond-like is 3.4% on that money (for a 1-year period). That's still a loss of 9.1% - 3.4% = 5.7% per year, plus the $5000 per year you are paying in mortgage interest, for a net cash outflow = $10,260 + $5,000 = $15,260 per year. Would you rather not keep that $15,260 in your own pocket?
I’ve put over $100k in ibonds over the last couple of years. Go to the ibonds thread to see how to do it. But even without ibonds, heck I’d buy TIPS in a taxable account, even with the tax inefficiency you’re making out in the long run. You can break even with some intermediate term CDs or bonds, or potentially perhaps invest a modest percent in stocks. Invest more in tax advantaged accounts. Don’t pull as much from tax advantaged accounts. Defer social security. Avoid capital gains. Do a Roth conversion if optimal. Open a couple of accounts with large bonuses. There are a plethora of choices one could do that would be better than paying off a 2.5% mortgage.
The problem here is how long people typically own their homes before moving. If you’re selling and moving in less than 10 years, then paying down a mortgage might make more sense than investing. The reality is that a future mortgage might have a higher rate. Inflation can come back down to below 2%. You really have to be lucky when making this choice. The longest I’ve been in a home was seven years.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by sls239 »

Well a mortgage is literally a negative bond.

But housing is, for good reasons, something that many people consider to not be a part of their investment portfolio. And therefore the mortgage isn’t part of the investment portfolio either.

So then it becomes more a question of when is it worth reducing your investment portfolio to accomplish some other goal?
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by Broken Man 1999 »

Is a 7 year (yeah, they are available) car loan a negative bond?

Maybe a short-term negative bond?

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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by lakpr »

JBTX wrote: Mon Jul 11, 2022 10:58 am I’ve put over $100k in ibonds over the last couple of years. Go to the ibonds thread to see how to do it. But even without ibonds, heck I’d buy TIPS in a taxable account, even with the tax inefficiency you’re making out in the long run. You can break even with some intermediate term CDs or bonds, or potentially perhaps invest a modest percent in stocks. Invest more in tax advantaged accounts. Don’t pull as much from tax advantaged accounts. Defer social security. Avoid capital gains. Do a Roth conversion if optimal. Open a couple of accounts with large bonuses. There are a plethora of choices one could do that would be better than paying off a 2.5% mortgage.
1. I am familiar with how to put $100k in I-bonds. [ Gifting, creating a trust or perhaps two in each spouse's name, etc. ]. A person (I am one) may not be willing to go through all those hoops.

2. TIPS in taxable account are yielding only 2.12% for 1-year, and by buying TIPS you are betting that the long term inflation rate is going to be above your mortgage rate before the TIPS reaches maturity or your mortgage term completes (whichever is sooner). You may or may not win with this strategy; even if you do win, I am willing to bet that the win margin might not be too large compared to what you may have gotten by paying off the mortgage now.

3. Investing in stocks is likely to beat paying off the mortgage, no question about that. But it is also likely that you will lose money in the short term. A person who had $200k at the beginning of the year would be regretting not paying off the mortgage and letting it ride in the stock market this year ....

4. If you pay off the mortgage, you do NOT have to pull from the tax advantaged accounts for living expenses .. carrying the mortgage into retirement is what forces you to pull more out of the tax-advantaged accounts.

I don't want to belabor the point, I am simply saying that paying off the mortgage now, if you have cash available, may still be a good choice with minimal steps to take. OR, one can go your way, open trusts / chase bonuses / buy TIPS (questionable choice in my opinion) etc. Simplicity vs. Multi-pronged yield-chasing tactics that may or may not payoff at the end. With paying off the mortgage, you will see its impact IMMEDIATELY. Carrying the mortgage and chasing yields elsewhere you will see the impact AT THE END, whose impact is unknown at this time. *MY* preference is for the former, but I understand if someone prefers the other, all I ask is that you acknowledge that my choice is also valid and rational.
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by Apathizer »

rockstar wrote: Mon Jul 11, 2022 11:06 am
JBTX wrote: Mon Jul 11, 2022 10:58 am
lakpr wrote: Mon Jul 11, 2022 10:35 am
JBTX wrote: Mon Jul 11, 2022 10:28 am Who said anything about keeping it in zero interest cash? That would be stupid (apart from short term liquidity needs). In my case most of my mortgage balance is invested in ibonds. Even some of the extra liquid cash I have is in a 3.0% promotional account, some of which will soon be diverted to more ibonds. There are other options too.

A sub market fixed rate mortgage, that you can invest in inflation sensitive investments, is an inflation hedge.
Now you are changing the parameters of the discussion, but let me indulge.
1. If you already have $200k in I-bonds in this hypothetical example, great!! But at the current limit of $10k per person per year, even for a couple it would take at least 10 years to reach that level. I-bonds were not beating the mortgage rates for at least 8 years out of those 10, thus you would have lost money on first 8 years, made money on the last 2 years: I'd wager you still ended up on the losing side.

2. You have $200k in cash right now, the max you can invest in I-bonds per couple is $20k. Leaves $180k in cash, and the best rate I think you can get that's bond-like is 3.4% on that money (for a 1-year period). That's still a loss of 9.1% - 3.4% = 5.7% per year, plus the $5000 per year you are paying in mortgage interest, for a net cash outflow = $10,260 + $5,000 = $15,260 per year. Would you rather not keep that $15,260 in your own pocket?
I’ve put over $100k in ibonds over the last couple of years. Go to the ibonds thread to see how to do it. But even without ibonds, heck I’d buy TIPS in a taxable account, even with the tax inefficiency you’re making out in the long run. You can break even with some intermediate term CDs or bonds, or potentially perhaps invest a modest percent in stocks. Invest more in tax advantaged accounts. Don’t pull as much from tax advantaged accounts. Defer social security. Avoid capital gains. Do a Roth conversion if optimal. Open a couple of accounts with large bonuses. There are a plethora of choices one could do that would be better than paying off a 2.5% mortgage.
The problem here is how long people typically own their homes before moving. If you’re selling and moving in less than 10 years, then paying down a mortgage might make more sense than investing. The reality is that a future mortgage might have a higher rate. Inflation can come back down to below 2%. You really have to be lucky when making this choice. The longest I’ve been in a home was seven years.
Exactly. Debt increases risk, esp in the short-term. That was very much my thinking. If everything works out I'll sell my place in a few months and will net most of the sale price, which I'll use for taxable investments. So for me paying most of the mortgage greatly reduced what would've been more significant overall losses this year.
ROTH: 40% AVUS, 30% DFAX, 30% BNDW. Taxable: 50% BNDW, 30% AVUS, 20% DFAX.
aristotelian
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by aristotelian »

Broken Man 1999 wrote: Mon Jul 11, 2022 11:15 am Is a 7 year (yeah, they are available) car loan a negative bond?

Maybe a short-term negative bond?

Broken Man 1999
I'd say so. What does the term have to do with it? Bonds have a variety of terms.
lakpr
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Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by lakpr »

michaeljc70 wrote: Mon Jul 11, 2022 10:48 am A lot of people that don't pay off their mortgage are putting that money into stocks and not a low yield MM or bond.
Then we are comparing apples to oranges: paying off a mortgage is like investing in bonds. Investing in stocks comes with its own risks. A person who may have had $200k at the beginning of the year in stocks and $200k mortgage, I bet is regretting mightily now not paying off the mortgage.
michaeljc70 wrote: Mon Jul 11, 2022 10:48 am It is a lot more than math because you don't know future returns of stocks or even bonds (unless held to maturity). A lot of it has to do with how risk averse you are also.
PRECISELY!! A person who chooses to pay off the mortgage is generally risk-averse. If the person feels he/she has the appetite for risk, then by all means, invest in the market according to the preferred asset allocation.
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