Anyone else fighting off urge to pay off mortgage??
Anyone else fighting off urge to pay off mortgage??
Rationally, I do not think anything has changed going forward expectationally.
I do not believe in short medium term prognostication now, anymore than I trust say the 2007 IMF report (housing noted, but no problemo), or the 1979 "Death of equites" magazine cover (ouch, followed by stock boom 17 percent on average for 17 years or something like that).
I think the evidence shows, that stocks long run, will outrun paying off the house.
Especially since now, my mortgage, is at a 4 percent rate, for 30 years, after tax, its at most 3 percent rate. Which happens to be expected inflation.
ie, expectationally, over 30 years, the loan is free leverage.
So now, being human, I continually want to deleverage, and pay off the mortgage! Cheapest leverage ever = strongest human urge to pay it off. Its a thing of beauty. I could do this in a couple years with cash flow, I could do it tommorrow with taxable investments.
I think this is wrong thing to do, and have rationally purposefully decided to use the leverage. (house is about 60 percent paid off already).
But my gut, its a constant fight to not pay it off. its so in vogue now too : )
At 42 though, I plan to attempt to keep it, and put the money in the stock market instead.
I do not believe in short medium term prognostication now, anymore than I trust say the 2007 IMF report (housing noted, but no problemo), or the 1979 "Death of equites" magazine cover (ouch, followed by stock boom 17 percent on average for 17 years or something like that).
I think the evidence shows, that stocks long run, will outrun paying off the house.
Especially since now, my mortgage, is at a 4 percent rate, for 30 years, after tax, its at most 3 percent rate. Which happens to be expected inflation.
ie, expectationally, over 30 years, the loan is free leverage.
So now, being human, I continually want to deleverage, and pay off the mortgage! Cheapest leverage ever = strongest human urge to pay it off. Its a thing of beauty. I could do this in a couple years with cash flow, I could do it tommorrow with taxable investments.
I think this is wrong thing to do, and have rationally purposefully decided to use the leverage. (house is about 60 percent paid off already).
But my gut, its a constant fight to not pay it off. its so in vogue now too : )
At 42 though, I plan to attempt to keep it, and put the money in the stock market instead.
Re: Anyone else fighting off urge to pay off mortgage??
On the other hand, where else can you earn a guaranteed 3% these days?
Re: Anyone else fighting off urge to pay off mortgage??
This is a silly comparison.LH wrote:"I think the evidence shows, that stocks long run, will outrun paying off the house."
Re: Anyone else fighting off urge to pay off mortgage??
Not silly.555 wrote:This is a silly comparison.LH wrote:"I think the evidence shows, that stocks long run, will outrun paying off the house."
Quite the discussion...... : )
Re: Anyone else fighting off urge to pay off mortgage??
Yeah, but its over 30 years of a mortgage. And its the real that counts, not the nominal.Dynastar wrote:On the other hand, where else can you earn a guaranteed 3% these days?
I think that humans think nominally, and its very hard for us to think real, and to think returns over long periods of time in real on top of that.
Right now, current conditions, 3 percent nominal feels good. But expectationally, it does not seem so over the next thirty years.
Opportunity cost rationally seems high for the leveraged expected risk/expected return of not using the expectationally free leverage.
Free loan, to invest over 30 years in the stock market. Humans hate that, I hate that. Really want to pay it off, and take the expected zero to slighly negative real return.
Re: Anyone else fighting off urge to pay off mortgage??
Rick Edelman's reasons for not paying off a mortgage.
http://www.ricedelman.com/cs/education/ ... icleId=232
Paul
http://www.ricedelman.com/cs/education/ ... icleId=232
Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
Re: Anyone else fighting off urge to pay off mortgage??
pkcrafter wrote:http://www.ricedelman.com/cs/education/ ... icleId=232
You’re buying your home because you think it will rise in value over time
I thought you were supposed to live inside them?Everyone wants to build equity. It’s the main financial reason for owning a house.
Have you noticed that your home is worth much more than it was 10 years ago?
How old is this article?If that house rises in value at the rate of 3% per year, it will be worth $542,150 in 20 years! You’ll have nearly a quarter million dollars in new equity even if your principal balance never declines!
Re: Anyone else fighting off urge to pay off mortgage??
LH,
Yes, I ask myself the same thing. It is really a tough call.
My mortgage is currently at the same rate as yours - 4% fixed for 30 years.
The expectation is indeed that investing the money in stocks will have a payoff greater than the interest on the mortgage.
My mortgage is also 30 year fixed at 4% currently.
I will add a few considerations you didn't explore.
First, reasons to pay it off early.
1) The tax deduction for the mortgage interest is not necessarily going to be there the whole 30 years if we keep it. There are a few reasons why.
a) if taking early retirement, one may have significantly lower taxable income, and could be in much lower tax brackets, so the benefit of continuing to pay interest would be much less.
b) there is less and less interest paid every year on a mortgage. In later years, the amount will become very small . It may be less than
the standard deduction. I don't see that mattering much for me though, given my property tax bill, it is alone greater than the standard deduction.
c) other intangibles - possible changes in the tax code. I believe the mortgage interest deduction will likely be phased out somehow, before the 30 years are up. At least, it should be, if the country has any hope to get the national debt under control.
2) the expected inflation is 3%, however, we really don't know what real inflation will be for the next 30 years. There could be periods of deflation, and if that happens, that means your income will likely shrink, and you really don't want to have a large mortgage payment.
3) even free leverage can be misused. You could invest in assets that underperform your mortgage over the long term. When indexing, this is less likely. But this is still a risk to consider.
Now, for the reasons to keep the loan as long as possible :
1) diversification. You never want to have all your eggs in one basket. For most people, their home is a significant part of their net worth, maybe their only asset. But bogleheads are not most people, obviously One really has to decide what portion of their net worth should be tied up in their home. Here are the main problems I can think of with tying too much into your house :
a) regardless of value, it is an illiquid asset. It can take a long time to sell. Home equity may not be accessible without documented income. If you need to go to a nursing home tomorrow, a paid home may not pay the bills all by itself.
b) uninsured perils, or very expensive to insure. Think earthquakes and hurricanes. You may be able to default on the loan if the asset is destroyed, if it is a non-recourse mortgage.
c) correlation of the value of your home with the value of your investments, for example, investment properties you may have in the same area, or REITs, or even stocks of companies in the same country if you want to be that broad. Again, think California earthquake, or Japanese nuclear meltdown, etc.
2) your mortality. If you don't have heirs, you may not mind, or even prefer dying broke. Obviously these can be fairly personal considerations based on your health and family. Even if you have a spouse who may survive you, your combined life expectancy may still be less than the term of the mortgage. In this case, more leverage can be a really good thing. If you can, say, refinance your mortgage for a low fixed rate on a 30 year term, and then take retirement the next day, and your life expectancy is much less than 30 years, IMO, it makes sense. Or take a reverse mortgage if you are old enough to qualify, and those loans still exist then. Doing so means you can have a better life during the time you have left, as you will never have to pay the principal in your lifetime. You probably wouldn't invest the money in something risky in those situations, though. Again the leverage has to be used judiciously.
Personally, I try to think of all this in terms of overall net worth.
Quicken helps with this . It has one category called "property and debt".
I have listed the current (estimated) value of my primary residence and my old home - even though it is rented, I don't designate it as investment property since I'm a reluctant landlord, and it is only cash flow neutral.
I have also listed the mortgages - one fixed mortgage for each property.
Then, Quicken calculates the total - which is the value of the assets less the loan.
At the very bottom of the left pane, Quicken lists my total net worth.
At this time, I can see that about 28% of my net worth is from home equity at this time. That is a ratio I can live with - ie, it is not so high that I will be destitute if the house is destroyed in an earthquake, and I have to find another place to live (I live in California and the earthquake insurance on my home would be $14,000 a year).
My old home (also in California) is sale pending, and when it finally closes, hopefully this month, I will use the net proceeds (after its associated mortgage payoff) towards the large mortgage on my primary residence.
I will only have one home and one mortgage, instead of 2 of each currently. But I will still have the same net dollar amount of home equity, and it will be the same percentage of my net worth. However, I will be able to bring the mortgage balance on my primary residence down to $417,000, which will allow me to refinance at 3.5% 30 year fixed instead of the current 4% rate.
I have thought long and hard about what to do with the sales proceeds - even though I don't even have them yet. It's tempting to invest them somewhere else. That comes with extra risk. It's also tempting to spend a portion of them. I decided on paying down the loan on the first property.
I could also choose to pay that loan down to $0 instead of $417,000. But I prefer to continue to grow all my investments through regular 401k, IRA and taxable account contributions, and grow my home equity more slowly as well through the mortgage payment (which will be much lower after the refinance). It is a very fine balance.
Yes, I ask myself the same thing. It is really a tough call.
My mortgage is currently at the same rate as yours - 4% fixed for 30 years.
The expectation is indeed that investing the money in stocks will have a payoff greater than the interest on the mortgage.
My mortgage is also 30 year fixed at 4% currently.
I will add a few considerations you didn't explore.
First, reasons to pay it off early.
1) The tax deduction for the mortgage interest is not necessarily going to be there the whole 30 years if we keep it. There are a few reasons why.
a) if taking early retirement, one may have significantly lower taxable income, and could be in much lower tax brackets, so the benefit of continuing to pay interest would be much less.
b) there is less and less interest paid every year on a mortgage. In later years, the amount will become very small . It may be less than
the standard deduction. I don't see that mattering much for me though, given my property tax bill, it is alone greater than the standard deduction.
c) other intangibles - possible changes in the tax code. I believe the mortgage interest deduction will likely be phased out somehow, before the 30 years are up. At least, it should be, if the country has any hope to get the national debt under control.
2) the expected inflation is 3%, however, we really don't know what real inflation will be for the next 30 years. There could be periods of deflation, and if that happens, that means your income will likely shrink, and you really don't want to have a large mortgage payment.
3) even free leverage can be misused. You could invest in assets that underperform your mortgage over the long term. When indexing, this is less likely. But this is still a risk to consider.
Now, for the reasons to keep the loan as long as possible :
1) diversification. You never want to have all your eggs in one basket. For most people, their home is a significant part of their net worth, maybe their only asset. But bogleheads are not most people, obviously One really has to decide what portion of their net worth should be tied up in their home. Here are the main problems I can think of with tying too much into your house :
a) regardless of value, it is an illiquid asset. It can take a long time to sell. Home equity may not be accessible without documented income. If you need to go to a nursing home tomorrow, a paid home may not pay the bills all by itself.
b) uninsured perils, or very expensive to insure. Think earthquakes and hurricanes. You may be able to default on the loan if the asset is destroyed, if it is a non-recourse mortgage.
c) correlation of the value of your home with the value of your investments, for example, investment properties you may have in the same area, or REITs, or even stocks of companies in the same country if you want to be that broad. Again, think California earthquake, or Japanese nuclear meltdown, etc.
2) your mortality. If you don't have heirs, you may not mind, or even prefer dying broke. Obviously these can be fairly personal considerations based on your health and family. Even if you have a spouse who may survive you, your combined life expectancy may still be less than the term of the mortgage. In this case, more leverage can be a really good thing. If you can, say, refinance your mortgage for a low fixed rate on a 30 year term, and then take retirement the next day, and your life expectancy is much less than 30 years, IMO, it makes sense. Or take a reverse mortgage if you are old enough to qualify, and those loans still exist then. Doing so means you can have a better life during the time you have left, as you will never have to pay the principal in your lifetime. You probably wouldn't invest the money in something risky in those situations, though. Again the leverage has to be used judiciously.
Personally, I try to think of all this in terms of overall net worth.
Quicken helps with this . It has one category called "property and debt".
I have listed the current (estimated) value of my primary residence and my old home - even though it is rented, I don't designate it as investment property since I'm a reluctant landlord, and it is only cash flow neutral.
I have also listed the mortgages - one fixed mortgage for each property.
Then, Quicken calculates the total - which is the value of the assets less the loan.
At the very bottom of the left pane, Quicken lists my total net worth.
At this time, I can see that about 28% of my net worth is from home equity at this time. That is a ratio I can live with - ie, it is not so high that I will be destitute if the house is destroyed in an earthquake, and I have to find another place to live (I live in California and the earthquake insurance on my home would be $14,000 a year).
My old home (also in California) is sale pending, and when it finally closes, hopefully this month, I will use the net proceeds (after its associated mortgage payoff) towards the large mortgage on my primary residence.
I will only have one home and one mortgage, instead of 2 of each currently. But I will still have the same net dollar amount of home equity, and it will be the same percentage of my net worth. However, I will be able to bring the mortgage balance on my primary residence down to $417,000, which will allow me to refinance at 3.5% 30 year fixed instead of the current 4% rate.
I have thought long and hard about what to do with the sales proceeds - even though I don't even have them yet. It's tempting to invest them somewhere else. That comes with extra risk. It's also tempting to spend a portion of them. I decided on paying down the loan on the first property.
I could also choose to pay that loan down to $0 instead of $417,000. But I prefer to continue to grow all my investments through regular 401k, IRA and taxable account contributions, and grow my home equity more slowly as well through the mortgage payment (which will be much lower after the refinance). It is a very fine balance.
LH wrote:Rationally, I do not think anything has changed going forward expectationally.
I do not believe in short medium term prognostication now, anymore than I trust say the 2007 IMF report (housing noted, but no problemo), or the 1979 "Death of equites" magazine cover (ouch, followed by stock boom 17 percent on average for 17 years or something like that).
I think the evidence shows, that stocks long run, will outrun paying off the house.
Especially since now, my mortgage, is at a 4 percent rate, for 30 years, after tax, its at most 3 percent rate. Which happens to be expected inflation.
ie, expectationally, over 30 years, the loan is free leverage.
So now, being human, I continually want to deleverage, and pay off the mortgage! Cheapest leverage ever = strongest human urge to pay it off. Its a thing of beauty. I could do this in a couple years with cash flow, I could do it tommorrow with taxable investments.
I think this is wrong thing to do, and have rationally purposefully decided to use the leverage. (house is about 60 percent paid off already).
But my gut, its a constant fight to not pay it off. its so in vogue now too : )
At 42 though, I plan to attempt to keep it, and put the money in the stock market instead.
Re: Anyone else fighting off urge to pay off mortgage??
SSSS,
If you take away that assumption about the direction of home prices, then the following of his points fall apart :
2, 6, 7, 8, 9, 10.
Some of his other points are just silly, also.
3. it's still not cheap money if there is deflation
11. don't bother getting rid of the principal & interest because you still have taxes and insurance and maintenance ? wow.
The guy must never have heard of cash flow.
Have to agree. The article assumes that home prices only go in one direction, up. This is of course not true, as the last 5 years have shown. Of course, there are have been real estate crashes before, and there will be again.SSSS wrote: How old is this article?
If you take away that assumption about the direction of home prices, then the following of his points fall apart :
2, 6, 7, 8, 9, 10.
Some of his other points are just silly, also.
3. it's still not cheap money if there is deflation
11. don't bother getting rid of the principal & interest because you still have taxes and insurance and maintenance ? wow.
The guy must never have heard of cash flow.
Re: Anyone else fighting off urge to pay off mortgage??
LH,
Thanks for sharing, I think this can be an excellent discussion. Surprised at some of the emphasis in the responses relating to home price appreciation and the amount of equity tied up in your home. If you are like most of the world and you don't consider defaulting on your mortgage as a potential part of your financial planning, then this is irrelevant.
This is basically all about risk. It's fascinating to see the world so risk averse, with a continued bias toward deleveraging. The Option ARM has been replaced by the 15 year fixed rate mortgage as the flavor of the month. This may be the new normal, but it certainly is not normal at least in a historical sense. If you look at your situation, not paying off the mortgage only makes sense to the extent you are willing to put that money at risk, be it in the form of the stock market, rental properties, a local franchise, whatever.
There is no right or wrong answer here. It's not as simple as comparing to the risk free rate of return. Odds are in your favor that you end up with more money by not paying off the mortgage. But you'll also likely be happier in the short term if you do, if the euphoria frequently voiced here by those that have paid off their mortgage is any indication. That's how risk works. The avoidance of risk seems to feel the best at times when it may be the most prudent to take it.
Thanks for sharing, I think this can be an excellent discussion. Surprised at some of the emphasis in the responses relating to home price appreciation and the amount of equity tied up in your home. If you are like most of the world and you don't consider defaulting on your mortgage as a potential part of your financial planning, then this is irrelevant.
This is basically all about risk. It's fascinating to see the world so risk averse, with a continued bias toward deleveraging. The Option ARM has been replaced by the 15 year fixed rate mortgage as the flavor of the month. This may be the new normal, but it certainly is not normal at least in a historical sense. If you look at your situation, not paying off the mortgage only makes sense to the extent you are willing to put that money at risk, be it in the form of the stock market, rental properties, a local franchise, whatever.
There is no right or wrong answer here. It's not as simple as comparing to the risk free rate of return. Odds are in your favor that you end up with more money by not paying off the mortgage. But you'll also likely be happier in the short term if you do, if the euphoria frequently voiced here by those that have paid off their mortgage is any indication. That's how risk works. The avoidance of risk seems to feel the best at times when it may be the most prudent to take it.
Re: Anyone else fighting off urge to pay off mortgage??
Well, perhaps many people fail to consider all the risks of homeownership, that doesn't mean we all should.swaption wrote: Thanks for sharing, I think this can be an excellent discussion. Surprised at some of the emphasis in the responses relating to home price appreciation and the amount of equity tied up in your home. If you are like most of the world and you don't consider defaulting on your mortgage as a potential part of your financial planning, then this is irrelevant.
How many people do you know who would continue to make payments on a loan secured by property that's been destroyed ?
I suspect many homeowners haven't thought about it, and would only consider the situation if it arises. Unfortunately, it does once in a while. Florida has regular hurricanes. California has much less regular earthquakes. Both are horrendously expensive to insure against. Lenders don't require the insurance against them. If they did, there would basically be no more lending in those areas that are at risk, or insurance rates would have to go down, or property prices in those areas would go down, or some combination of all.
Not true, there are other reasons not to prepay, see what I wrote about mortality above.If you look at your situation, not paying off the mortgage only makes sense to the extent you are willing to put that money at risk, be it in the form of the stock market, rental properties, a local franchise, whatever.
There are risks on either side, whether you prepay the loan or not. Just different sorts of risks.There is no right or wrong answer here. It's not as simple as comparing to the risk free rate of return. Odds are in your favor that you end up with more money by not paying off the mortgage. But you'll also likely be happier in the short term if you do, if the euphoria frequently voiced here by those that have paid off their mortgage is any indication. That's how risk works. The avoidance of risk seems to feel the best at times when it may be the most prudent to take it.
Re: Anyone else fighting off urge to pay off mortgage??
For me, that's reason #1. I have no desire to carry a mortgage payment in retirement.madbrain wrote:11. don't bother getting rid of the principal & interest because you still have taxes and insurance and maintenance ? wow.
The guy must never have heard of cash flow.
Re: Anyone else fighting off urge to pay off mortgage??
For us, there was no urge to fight off in order to pay off the mortgage. We just did what we had to do. My wife and I bought our first home when we were around fifty years of age, back in 1999, with a large down payment. We paid the small mortgage off, two and a half years later without anyone else's help, but just through diligently saving together. We're just middle class, in case anyone thinks we're rich. We're both debt averse. We paid just over $19,000 cash for a brand new car a few months ago, to replace our eighteen year old vehicle that was getting too expensive to maintain. After living most of my life in rental apartments, I don't look at home ownership as an investment, but as a lifestyle. A pleasant one at that.
Re: Anyone else fighting off urge to pay off mortgage??
There is another side to this coin and one size does not fit all. I'm scheduled to close a 3.875% refi (condo) 20 year mortgage tomorrow evening. My current rate is 5.875% with 21.5 years remaining and the new note is $158 a month less, a true no brainer. Regardless of any changes in resale value of the property I can't see myself changing addresses as I was fortunate enough to buy location, location, location, in an original condo conversiion.Tom_T wrote:For me, that's reason #1. I have no desire to carry a mortgage payment in retirement.madbrain wrote:11. don't bother getting rid of the principal & interest because you still have taxes and insurance and maintenance ? wow.
The guy must never have heard of cash flow.
I am 64, recently retired with a pension and SS that probably cover 85% of my life style expenses. My (Boglehead) portfolio covers the remaining 15% through dividend distributions from taxable space. I'm letting the IRA's reinvest until RMD when I will probably use those funds to pay the IRS and pay down the remaining balance of the mortgage, which has reamortization features. I could pay off the mortgage now but can't see how that would benefit me vs. retaining the liquidity and the inflationary advantages of a low rate fixed note. History may not repeat but it rhymes. The Fed will keep doing what its doing with inflation and interest rates returning to the mean one day.
How many people do you know who would continue to make payments on a loan secured by property that's been destroyed ?
Quote madbrain "I suspect many homeowners haven't thought about it, and would only consider the situation if it arises. Unfortunately, it does once in a while. Florida has regular hurricanes. California has much less regular earthquakes. Both are horrendously expensive to insure against. Lenders don't require the insurance against them. If they did, there would basically be no more lending in those areas that are at risk, or insurance rates would have to go down, or property prices in those areas would go down, or some combination of all."
Thought about it and the HOA has 100% coverage on the building and I have 100% coverage on the contents. This is a zero factor for me and there is no difference in having or not having a mortgage in this situation.
Last edited by midareff on Wed Jul 04, 2012 8:49 am, edited 1 time in total.
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Re: Anyone else fighting off urge to pay off mortgage??
There are considerations beyond comparative investment return. Money sitting in a taxable account is unprotected. In a homestead state, home equity is a protected asset. All depends upon what "sleeping at night" means to the individual.LH wrote:Rationally, I do not think anything has changed going forward expectationally.
I do not believe in short medium term prognostication now, anymore than I trust say the 2007 IMF report (housing noted, but no problemo), or the 1979 "Death of equites" magazine cover (ouch, followed by stock boom 17 percent on average for 17 years or something like that).
I think the evidence shows, that stocks long run, will outrun paying off the house.
Especially since now, my mortgage, is at a 4 percent rate, for 30 years, after tax, its at most 3 percent rate. Which happens to be expected inflation.
ie, expectationally, over 30 years, the loan is free leverage.
So now, being human, I continually want to deleverage, and pay off the mortgage! Cheapest leverage ever = strongest human urge to pay it off. Its a thing of beauty. I could do this in a couple years with cash flow, I could do it tommorrow with taxable investments.
I think this is wrong thing to do, and have rationally purposefully decided to use the leverage. (house is about 60 percent paid off already).
But my gut, its a constant fight to not pay it off. its so in vogue now too : )
At 42 though, I plan to attempt to keep it, and put the money in the stock market instead.
Best regards, -Op |
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"In the middle of difficulty lies opportunity." Einstein
Re: Anyone else fighting off urge to pay off mortgage??
I am trying to pay off my mortgage as soon as I can because:
- I view the mortgage as a negative bond.
- I can't bring myself to invest 100% in stocks, I am at ~60% stocks
- The 40% in bonds and cash is earning much less than the return from paying off the mortgage.
- I am maximizing my 401k and Roth IRA contributions. Any excess goes towards the mortgage.
- I view the mortgage as a negative bond.
- I can't bring myself to invest 100% in stocks, I am at ~60% stocks
- The 40% in bonds and cash is earning much less than the return from paying off the mortgage.
- I am maximizing my 401k and Roth IRA contributions. Any excess goes towards the mortgage.
Re: Anyone else fighting off urge to pay off mortgage??
Silly is not the word I would use (seems a bit impolite). But I would describe it as a behavioral rationalization -- not based on mathematical or financial principles.LH wrote:Not silly.555 wrote:This is a silly comparison.LH wrote:"I think the evidence shows, that stocks long run, will outrun paying off the house."
Quite the discussion...... : )
Look, if someone wants to borrow to invest it doesn't have a whole lot to do with buying a home, except that buying a home often allows one to borrow cheaper. If you've made the financial decision to borrow and invest in a risky investment with higher expected returns (e.g. stocks) there's not even anything to discuss here -- you keep the mortgage, and you may well even borrow more if that fits your original financial decision.
What you don't do (at least if you're taking a solely mathematical/financial approach) is to just make decisions here and there based on how much you can make, without deliberate consideration of differences in risk.
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Re: Anyone else fighting off urge to pay off mortgage??
It can certainly be complicated in regards to paying off a mortgage in regards of the risks vs. benefits.
In our case we refinanced a couple of years ago and paid a large chunk of principle (our payment dropped quite a bit between principle and our rate dropping from around 6.75% in 2005 to 3.75% in 2010!). However, we are planning to pay off the rest in the next 2-3 years as we have no plans to move anytime soon (as a physician, the world would have to end before I could leave the area given the amount of time I have spent building a practice!) our rate of natural disasters is low except for being the most tornado plagued state in the USA many years, we have no plans to add a second house or other large expenses. Our last van was paid for in cash. After paying off the house we will have fairly minimal expenses, after standard consumer expenses, the next would probably be our cumulative insurance bill, followed by the power bill. I could live for years if I stopped working entirely! The psychology of this situation is just too good to pass up.
In our case we refinanced a couple of years ago and paid a large chunk of principle (our payment dropped quite a bit between principle and our rate dropping from around 6.75% in 2005 to 3.75% in 2010!). However, we are planning to pay off the rest in the next 2-3 years as we have no plans to move anytime soon (as a physician, the world would have to end before I could leave the area given the amount of time I have spent building a practice!) our rate of natural disasters is low except for being the most tornado plagued state in the USA many years, we have no plans to add a second house or other large expenses. Our last van was paid for in cash. After paying off the house we will have fairly minimal expenses, after standard consumer expenses, the next would probably be our cumulative insurance bill, followed by the power bill. I could live for years if I stopped working entirely! The psychology of this situation is just too good to pass up.
Indexed Fully!
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Re: Anyone else fighting off urge to pay off mortgage??
Its a debt. Pay the house off. You will then feel good all the time. Priceless!
Last edited by reggiesimpson on Wed Jul 04, 2012 11:13 am, edited 1 time in total.
Re: Anyone else fighting off urge to pay off mortgage??
This topic resurfaces every so often with same expected pro-this, pro-that.LH wrote:Especially since now, my mortgage, is at a 4 percent rate, for 30 years, after tax, its at most 3 percent rate. Which happens to be expected inflation.
ie, expectationally, over 30 years, the loan is free leverage.
So now, being human, I continually want to deleverage, and pay off the mortgage! Cheapest leverage ever = strongest human urge to pay it off. Its a thing of beauty. I could do this in a couple years with cash flow, I could do it tommorrow with taxable investments.
I think this is wrong thing to do, and have rationally purposefully decided to use the leverage. (house is about 60 percent paid off already).
But my gut, its a constant fight to not pay it off. its so in vogue now too : )
At 42 though, I plan to attempt to keep it, and put the money in the stock market instead.
It is actually quite simple.
- 1. You need a place to live.
2. Cash flow is cash flow. You EITHER:- Pay rent to others, or
- Pay all associated costs to own (interest [if any], taxes, insurance, repairs, etc).
- If you don't use leverage, the cost is potential loss of opportunity of your capital - if any - since you buy a hard asset with related risks of depreciation/appreciation.
- If you do use leverage without need, then it is all a matter of taking risks* to do otherwise with your money. Nothing more.
Landy |
Be yourself, everyone else is already taken -- Oscar Wilde
Re: Anyone else fighting off urge to pay off mortgage??
I have a 15 year mortgage @ 3.25%. I have no urge whatsoever to give up my mortgage interest deduction or to give up the benefits from my investments. I have no anxiety over mortgage debt because I know that I can pay it off anytime I wish. Since I track my net worth it really makes no difference if it is in my house or in my investments other that what I can earn off it.
"Earn All You Can; Give All You Can; Save All You Can." .... John Wesley
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Re: Anyone else fighting off urge to pay off mortgage??
Except possibly for asset-protection benefit associated with paying it off.bengal22 wrote: Since I track my net worth it really makes no difference if it is in my house or in my investments other that what I can earn off it.
Best regards, -Op |
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"In the middle of difficulty lies opportunity." Einstein
Re: Anyone else fighting off urge to pay off mortgage??
The numbers don’t always add up, but having a paid off mortgage will help me sleep better, so that is enough reason for me.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!
Re: Anyone else fighting off urge to pay off mortgage??
Here is a good example of what I just wrote. Bengal22:bengal22 wrote:I have a 15 year mortgage @ 3.25%. I have no urge whatsoever to give up my mortgage interest deduction or to give up the benefits from my investments. I have no anxiety over mortgage debt because I know that I can pay it off anytime I wish. Since I track my net worth it really makes no difference if it is in my house or in my investments other that what I can earn off it.
1. Decided to own (vs. renting) and decided to leverage even though it is not necessary in this instance.
2. Instead of eliminating debt to earn a guaranteed and risk free return of 3.25% (less mortgage interest deduction), decided to risk this capital to do otherwise.
I have a 2-fold correction/notation to the quote above:
1. Mortgage Interest Deduction is only useful ABOVE the standard deduction.
2. "Benefits from investments" are NOT guaranteed "to earn" anything.
Landy |
Be yourself, everyone else is already taken -- Oscar Wilde
Re: Anyone else fighting off urge to pay off mortgage??
I paid off my 15 yr @ 4.5% mortgage on Monday! Yay!
I was able to do so as I used a 15 month 0% no-fee balance transfer offer. I was on my way to paying off my mortgage in 15 months anyway. It will save me anywhere between $800 to $1000 depending on how you account for it. I was not using any mortgage deduction anyways.
I was able to do so as I used a 15 month 0% no-fee balance transfer offer. I was on my way to paying off my mortgage in 15 months anyway. It will save me anywhere between $800 to $1000 depending on how you account for it. I was not using any mortgage deduction anyways.
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Re: Anyone else fighting off urge to pay off mortgage??
LH, if you can pay off the mortgage you can also swing a 15 year, probably sub 3%. That's what we did. At 2.875% in the 33% bracket, the after inflation cost is expectationally negative over 15 years. That relieved us of the urge to prepay. Something to consider.
Re: Anyone else fighting off urge to pay off mortgage??
My wife is losing her job this year.madbrain wrote:11. don't bother getting rid of the principal & interest because you still have taxes and insurance and maintenance ? wow.
The guy must never have heard of cash flow.
We can easily live on my salary alone if the mortgage is paid off... no change in lifestyle needed
We still owe $215,000 on the house... We have plenty of monery in taxable... About $470,000...
We could just leave it all in stocks, and pull out $2500 a month to pay the mortgage... But stocks can go down... a lot, and I could lose my job in the same environment where stocks crash 50% (or more)... I do not like the idea of being out of a job, with only $235,000 (or less) in taxable, and a $200,000 or so mortgage.
Instead, I recently moved $220,000 to short-term bonds and cash... I'd pay off the house today, but we're thinking we might move after my wife loses her job, so we're saving it for a down-payment (and then, after we sell our old house, we'd pay off the new house in full)
I just feel a lot more comfortable knowing my house is basically paid off, and my stock market portfolio really is long-term (retirement), and therefore I don't have to worry about short-term fluctuations.
(Sorry for the detailed figures - I tried to write it without exact numbers, but I think my thought-process makes more sense when I include the actual numbers).
Last edited by HomerJ on Wed Jul 04, 2012 12:12 pm, edited 2 times in total.
Re: Anyone else fighting off urge to pay off mortgage??
Heh, it doesn't really count if you pay off your mortgage with a credit card....kd2008 wrote:I paid off my 15 yr @ 4.5% mortgage on Monday! Yay!
I was able to do so as I used a 15 month 0% no-fee balance transfer offer. I was on my way to paying off my mortgage in 15 months anyway. It will save me anywhere between $800 to $1000 depending on how you account for it. I was not using any mortgage deduction anyways.
Re: Anyone else fighting off urge to pay off mortgage??
This... I 'm 50% bonds anyway, and they aren't making too much more than my mortgage anyway... so I put aside enough to pay off the mortgage. (although I then rebalanced my remaining money to 50/50, so I'm really 35/65 stocks/bonds right now - but I prefer thinking of it as "50/50 with the house paid off")gatorking wrote:I can't bring myself to invest 100% in stocks, I am at ~60% stocks
- The 40% in bonds and cash is earning much less than the return from paying off the mortgage.
Last edited by HomerJ on Wed Jul 04, 2012 12:12 pm, edited 1 time in total.
Re: Anyone else fighting off urge to pay off mortgage??
What if stocks crash 75% and you lose your job? Can you still pay it off anytime you want?bengal22 wrote:I have no anxiety over mortgage debt because I know that I can pay it off anytime I wish.
Re: Anyone else fighting off urge to pay off mortgage??
Hi LH,
Have you considered going half way by paying off half the note balance and refinancing into a fifteen year mortgage?
I am in a similiar situation and that is what I did. I am now in a 3.375% 15 year note. The monthly payment is about equal to my property tax bill.
I agree, there is a strong urge to pay it off. Perhaps the Dave Ramsey effect, " Where the paid off home mortgage is the new status symbol". I just can't justify giving up such a low rate. Plus, if I really needed to cut my budget I would move to a home with lower property taxes ($11,000 per year, ouch!)
Sebastian
Have you considered going half way by paying off half the note balance and refinancing into a fifteen year mortgage?
I am in a similiar situation and that is what I did. I am now in a 3.375% 15 year note. The monthly payment is about equal to my property tax bill.
I agree, there is a strong urge to pay it off. Perhaps the Dave Ramsey effect, " Where the paid off home mortgage is the new status symbol". I just can't justify giving up such a low rate. Plus, if I really needed to cut my budget I would move to a home with lower property taxes ($11,000 per year, ouch!)
Sebastian
Re: Anyone else fighting off urge to pay off mortgage??
Nice post.madbrain wrote:LH,
Yes, I ask myself the same thing. It is really a tough call.
My mortgage is currently at the same rate as yours - 4% fixed for 30 years.
The expectation is indeed that investing the money in stocks will have a payoff greater than the interest on the mortgage.
My mortgage is also 30 year fixed at 4% currently.
I will add a few considerations you didn't explore.
First, reasons to pay it off early.
1) The tax deduction for the mortgage interest is not necessarily going to be there the whole 30 years if we keep it. There are a few reasons why.
a) if taking early retirement, one may have significantly lower taxable income, and could be in much lower tax brackets, so the benefit of continuing to pay interest would be much less.
b) there is less and less interest paid every year on a mortgage. In later years, the amount will become very small . It may be less than
the standard deduction. I don't see that mattering much for me though, given my property tax bill, it is alone greater than the standard deduction.
c) other intangibles - possible changes in the tax code. I believe the mortgage interest deduction will likely be phased out somehow, before the 30 years are up. At least, it should be, if the country has any hope to get the national debt under control.
2) the expected inflation is 3%, however, we really don't know what real inflation will be for the next 30 years. There could be periods of deflation, and if that happens, that means your income will likely shrink, and you really don't want to have a large mortgage payment.
3) even free leverage can be misused. You could invest in assets that underperform your mortgage over the long term. When indexing, this is less likely. But this is still a risk to consider.
Now, for the reasons to keep the loan as long as possible :
1) diversification. You never want to have all your eggs in one basket. For most people, their home is a significant part of their net worth, maybe their only asset. But bogleheads are not most people, obviously One really has to decide what portion of their net worth should be tied up in their home. Here are the main problems I can think of with tying too much into your house :
a) regardless of value, it is an illiquid asset. It can take a long time to sell. Home equity may not be accessible without documented income. If you need to go to a nursing home tomorrow, a paid home may not pay the bills all by itself.
b) uninsured perils, or very expensive to insure. Think earthquakes and hurricanes. You may be able to default on the loan if the asset is destroyed, if it is a non-recourse mortgage.
c) correlation of the value of your home with the value of your investments, for example, investment properties you may have in the same area, or REITs, or even stocks of companies in the same country if you want to be that broad. Again, think California earthquake, or Japanese nuclear meltdown, etc.
2) your mortality. If you don't have heirs, you may not mind, or even prefer dying broke. Obviously these can be fairly personal considerations based on your health and family. Even if you have a spouse who may survive you, your combined life expectancy may still be less than the term of the mortgage. In this case, more leverage can be a really good thing. If you can, say, refinance your mortgage for a low fixed rate on a 30 year term, and then take retirement the next day, and your life expectancy is much less than 30 years, IMO, it makes sense. Or take a reverse mortgage if you are old enough to qualify, and those loans still exist then. Doing so means you can have a better life during the time you have left, as you will never have to pay the principal in your lifetime. You probably wouldn't invest the money in something risky in those situations, though. Again the leverage has to be used judiciously.
Personally, I try to think of all this in terms of overall net worth.
Quicken helps with this . It has one category called "property and debt".
I have listed the current (estimated) value of my primary residence and my old home - even though it is rented, I don't designate it as investment property since I'm a reluctant landlord, and it is only cash flow neutral.
I have also listed the mortgages - one fixed mortgage for each property.
Then, Quicken calculates the total - which is the value of the assets less the loan.
At the very bottom of the left pane, Quicken lists my total net worth.
At this time, I can see that about 28% of my net worth is from home equity at this time. That is a ratio I can live with - ie, it is not so high that I will be destitute if the house is destroyed in an earthquake, and I have to find another place to live (I live in California and the earthquake insurance on my home would be $14,000 a year).
My old home (also in California) is sale pending, and when it finally closes, hopefully this month, I will use the net proceeds (after its associated mortgage payoff) towards the large mortgage on my primary residence.
I will only have one home and one mortgage, instead of 2 of each currently. But I will still have the same net dollar amount of home equity, and it will be the same percentage of my net worth. However, I will be able to bring the mortgage balance on my primary residence down to $417,000, which will allow me to refinance at 3.5% 30 year fixed instead of the current 4% rate.
I have thought long and hard about what to do with the sales proceeds - even though I don't even have them yet. It's tempting to invest them somewhere else. That comes with extra risk. It's also tempting to spend a portion of them. I decided on paying down the loan on the first property.
I could also choose to pay that loan down to $0 instead of $417,000. But I prefer to continue to grow all my investments through regular 401k, IRA and taxable account contributions, and grow my home equity more slowly as well through the mortgage payment (which will be much lower after the refinance). It is a very fine balance.
LH wrote:Rationally, I do not think anything has changed going forward expectationally.
I do not believe in short medium term prognostication now, anymore than I trust say the 2007 IMF report (housing noted, but no problemo), or the 1979 "Death of equites" magazine cover (ouch, followed by stock boom 17 percent on average for 17 years or something like that).
I think the evidence shows, that stocks long run, will outrun paying off the house.
Especially since now, my mortgage, is at a 4 percent rate, for 30 years, after tax, its at most 3 percent rate. Which happens to be expected inflation.
ie, expectationally, over 30 years, the loan is free leverage.
So now, being human, I continually want to deleverage, and pay off the mortgage! Cheapest leverage ever = strongest human urge to pay it off. Its a thing of beauty. I could do this in a couple years with cash flow, I could do it tommorrow with taxable investments.
I think this is wrong thing to do, and have rationally purposefully decided to use the leverage. (house is about 60 percent paid off already).
But my gut, its a constant fight to not pay it off. its so in vogue now too : )
At 42 though, I plan to attempt to keep it, and put the money in the stock market instead.
If I retired, I would pay off the house. Certainty and lower cash flow needs would be good to have then. Really I would sell house, and downsize.
Leverage and retirement, do not go well together in my mind, if one is skating somewhat near the edge, as almost anyone with less than 3-5 million is with 30 year plus retirement timeframe would be.
the leverage misuse/consumption is good point, if you just buy a bigger car or boat because of the money, then its not an investment. Hard/impossible to track too. Cant run the experiment both ways in time. Maybe one would only have bought the boat with the mortgage money, maybe if one paid off mortgage, one would have bought same boat anyway. Unknowable.
Tax code change can go either way. unknowable. I can see then capping it, which I would fall under now anyway,
en.wikipedia.org/wiki/Average_Joe, assuming they cap it above the median. I would think that eliminating it, would be unlikely, but who knows.The median value of a housing unit in the US was $167500 in 2005
House is currenty 18 percent of my net worth on my spreadsheet.
Deflation is a risk, but having some expectantly cheap loan as inflation hedge, is nice. Currently I could always choose to pay it off as well at anytime, even if stock market dropped 50 percent.
My mortgage leverage, to my net worth, is about 10 percent currently. This is interesting way to think, considering the house mortgage as leverage. Before it was just a home, that I had to buy with a loan, since I had near zero net worth out of residency (less than 20K). Now however, (and likely then too of course), it truly is strictly a leverage CHOICE that I am making. I might add it in to my spreadsheet. Which I guess would be
mortgage to net worth ratio ?
Is there a name for that? Leverage or Net leverage or something? Cant recall reading this in boglehead books. Usually the mortgage is treated like a black hole, completely separate from investing considerations.
Thanks for the reply,
LH
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Re: Anyone else fighting off urge to pay off mortgage??
Technically mine is paid off. It was a bit confusing as I had sent Wells Fargo the amount of the outstanding principal. However, there was also a $24 recording fee. After thinking about it, WF actually advanced me the $24, and declared it paid. I assumed that they wouldn't complete it until I paid that, but they went ahead with the process, and the lien removal was recorded 6/19.
HOWEVER, I'm in the process of getting a home-equity loan from Penfed. At 1.99% fixed over five years, tax-deductible interest, with no fees (once I get them to agree to no appraisal), that's cheap money. I could get 2.74% tax-deferred in my stable-value fund, although it will actually be invested according to plan, so the exact return is unknown.
As I have expressed before, I'm not someone who has any emotional reaction to debt, at least in the reasonable amounts I take on. It's purely financial, and this is a good financial decision in my mind.
For a young person (not me so much anymore) a long-term low-interest rate loan is a good hedge against rising interest rates and inflation. It's not bad for me, although five years isn't long of a span.
Brian
HOWEVER, I'm in the process of getting a home-equity loan from Penfed. At 1.99% fixed over five years, tax-deductible interest, with no fees (once I get them to agree to no appraisal), that's cheap money. I could get 2.74% tax-deferred in my stable-value fund, although it will actually be invested according to plan, so the exact return is unknown.
As I have expressed before, I'm not someone who has any emotional reaction to debt, at least in the reasonable amounts I take on. It's purely financial, and this is a good financial decision in my mind.
For a young person (not me so much anymore) a long-term low-interest rate loan is a good hedge against rising interest rates and inflation. It's not bad for me, although five years isn't long of a span.
Brian
Re: Anyone else fighting off urge to pay off mortgage??
Bingo. Thats what I am reading here daily (underline added by me above), as well as in boglehead books recently. Prior, the argument that leverage home was the way to go was standard, I would say easily over 50 percent of posts would express that, if not much higher. Now one gets a simple "silly" as a "counterargument".swaption wrote:LH,
Thanks for sharing, I think this can be an excellent discussion. Surprised at some of the emphasis in the responses relating to home price appreciation and the amount of equity tied up in your home. If you are like most of the world and you don't consider defaulting on your mortgage as a potential part of your financial planning, then this is irrelevant.
This is basically all about risk. It's fascinating to see the world so risk averse, with a continued bias toward deleveraging. The Option ARM has been replaced by the 15 year fixed rate mortgage as the flavor of the month. This may be the new normal, but it certainly is not normal at least in a historical sense. If you look at your situation, not paying off the mortgage only makes sense to the extent you are willing to put that money at risk, be it in the form of the stock market, rental properties, a local franchise, whatever.
There is no right or wrong answer here. It's not as simple as comparing to the risk free rate of return. Odds are in your favor that you end up with more money by not paying off the mortgage. But you'll also likely be happier in the short term if you do, if the euphoria frequently voiced here by those that have paid off their mortgage is any indication. That's how risk works. The avoidance of risk seems to feel the best at times when it may be the most prudent to take it.
Being fearful when others are greedy, and greedy when others are fearful, is a tough tough thing. really so is staying the course as a boglehead. One can see the correlation with recent events/recency with the stock/bond allocation recommendations in 2007 and now.
I think one of the big behavioral errors of Passive indexing as practiced/discussed on this board is the lack of integration of the home mortgage/leverage into the investing picture. Investing is about net worth. The AA is just one part of net worth. Risk includes the whole picture of net worth, not just the AA risk. Its risk to net worth that matters. In the end, it gives relatively large leeway, for the average boglehead, to in practice, time the market, by not paying off mortgage when things feel good, and then paying off mortgage when things feel bad. The amount of money involved is likely signficant percentage of net worth.
Timing is Timing.
Re: Anyone else fighting off urge to pay off mortgage??
My house is 60 percent paid off already.64415 wrote:Hi LH,
Have you considered going half way by paying off half the note balance and refinancing into a fifteen year mortgage?
I am in a similiar situation and that is what I did. I am now in a 3.375% 15 year note. The monthly payment is about equal to my property tax bill.
I agree, there is a strong urge to pay it off. Perhaps the Dave Ramsey effect, " Where the paid off home mortgage is the new status symbol". I just can't justify giving up such a low rate. Plus, if I really needed to cut my budget I would move to a home with lower property taxes ($11,000 per year, ouch!)
Sebastian
I am 10 percent mortgage debt leveraged relative to net worth now.
I just went the opposite way from a 4.5 percent 15 year, to a 30 year 4.0 rate (3.0 rate after tax writeoff). Basically for leverage and inflation hedge (and lower cash flow entered into the picture too-though I could just pay it off, so that is likely not really a rational reason, interesting question).
I have enough money in taxable AA to pay it off entirely.
I briefly wondered about even MORE leverage actually, taking money out, and investing, but did not do so (not even close really, but did wonder about it). Probably based on some sort of status quo behavoiral reasoning basis. The 10 percent leverage number, I thought of in general gestalt sense, as mortgage debt to net worth, but not as the actual hard number.
Re: Anyone else fighting off urge to pay off mortgage??
We paid off our 4% fixed mortgage but kept our 2.25% (variable) Home Equity Line of Credit open. (I used the HELOC for a lump sum to pay off the mortgage.)Our balance on that is about $30,000 out of an available $80,000. I pay $2,000 per month.
The HELOC is very nice to have to smooth cash flow. For example, our 25-year old deck needs replacing, at a cost of $20 - 30,000. (Why so much is another story.)
I could sell some taxable investments, true. But the HELOC amount will be paid off in a couple of years with only about $300 in financing charges. Seems like a minimum hassle no-brainer to me.
We have about $250k in taxable investments, so we could pay off the HELOC easily if interest rates rise.
By the way, I do not include the value of the house when I calculate our net worth.
Keith
The HELOC is very nice to have to smooth cash flow. For example, our 25-year old deck needs replacing, at a cost of $20 - 30,000. (Why so much is another story.)
I could sell some taxable investments, true. But the HELOC amount will be paid off in a couple of years with only about $300 in financing charges. Seems like a minimum hassle no-brainer to me.
We have about $250k in taxable investments, so we could pay off the HELOC easily if interest rates rise.
By the way, I do not include the value of the house when I calculate our net worth.
Keith
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Re: Anyone else fighting off urge to pay off mortgage??
are you planning on staying in the home more than 15 years? I went 30 to 15 because I realized I would probably not stay in the home much more than 15-20 years. So the additional leverage years 20-30 of a 30 year mortgage are not helpful to me.LH wrote:I just went the opposite way from a 4.5 percent 15 year, to a 30 year 4.0 rate (3.0 rate after tax writeoff). Basically for leverage and inflation hedge (and lower cash flow entered into the picture too-though I could just pay it off, so that is likely not really a rational reason, interesting question).
I have enough money in taxable AA to pay it off entirely.
If you don't want to refi again, 4% guaranteed return (less after the tax benefit) is nothing to sneeze at. Do you hold any bonds at all? Assuming you do, how can you justify that given they pay less than you do?
Re: Anyone else fighting off urge to pay off mortgage??
LH, I think you are trying to use your brain to override what is basically, for you, an emotional decision. In a conflict between the brain and the gut, I would go with the gut if either outcome is reasonable.
Obviously, there are times when the gut wants something and the brain knows it is a really stupid idea. Just as obviously, this is not one of those times.
Paying off debt is rarely a bad thing. I'd say "Just do it".
Obviously, there are times when the gut wants something and the brain knows it is a really stupid idea. Just as obviously, this is not one of those times.
Paying off debt is rarely a bad thing. I'd say "Just do it".
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Re: Anyone else fighting off urge to pay off mortgage??
Another reason to pay off the mortgage is if you are of average means to be able to qualify for another loan on another house. It is not prudent to have two mortgages at the same time. I'm 9 years into a 15 year fixed at 5.5%. I'm not refinancing because I'm paying more principle each month and in 3 years from now the balance will be paid. But there is an itch for me just to end the suffering and use some existing funds. But I like having Cash in the bank for 'security' - maybe psychological peace of mind.
This might be crazy to some bogleheads here, but i do plan to leverage again on my next house. But the plan is to 1) pay off existing house, 2) qualify for a loan of about $200,000 for next house, 3) find and purchase next house with 20% down and $200,000 bank loan or owner financing, 4) put old house on the market after moving into "new" house, 5) use proceeds from old house to pay off new house.
This might be crazy to some bogleheads here, but i do plan to leverage again on my next house. But the plan is to 1) pay off existing house, 2) qualify for a loan of about $200,000 for next house, 3) find and purchase next house with 20% down and $200,000 bank loan or owner financing, 4) put old house on the market after moving into "new" house, 5) use proceeds from old house to pay off new house.
Re: Anyone else fighting off urge to pay off mortgage??
Incomplete is more like it.555 wrote:This is a silly comparison.LH wrote:"I think the evidence shows, that stocks long run, will outrun paying off the house."
It is easy to look at the numbers and for example try to compare a $100K paid off house to having $100K invested in the stock market and a $100K 15 year mortgage at 4%. Historically it will be very rare that the 15 stock market return is less than 4% so it looks like a simple comparison to the 10% stock market return that is often quoted and that shows stocks winning hands down.
The problem is that this does not reflect reality since the person with the paid off house would not have the $740 a month mortgage payment that the person with a mortgage would have. Over the 15 years the 180 mortgage payments add up to about $133k without any investment return but if the $740 a month was dollar cost averaged into investments the average purchase price would be very favorable and the average time the money would have been invested is 7.5 years.
If the person paying the mortgage is retired and paying the $740 a month out of their savings then it is even worse for them because they are doing the reverse of dollar cost averaging and selling more shares of stock when the market is low to raise the $740 that is needed each month so the average price they sold the stock at would below the average price.
You can make all sorts of assumptions about tax rates, future interest and inflation rates, what percent of the portfolio would be invested in stocks, etc but there is not an clear choice. For me with this uncertainty the question then becomes if there is a need to take additional risk by using the mortgage for leverage. For most people who are near retirment or retired this is not a risk worth taking.
By the way, on the topic of the long term return on housing you can look at it as having these three components;
1) Price change in the value of the land; hard to say what it is.
2) Price change in the value of the building; Over the long term this is nearly negative 100% since few buildings will be worth much when they are a hundred years old, much less two hundred. Even if the average price of a house in a city is twenty times higher now than it was 100 years ago in 1912, it does not mean that the average house that existed in 1912 is worth twenty time what is cost then. Most of them would have been torn down years ago.
3) The value of the rental income or the use of the house. This provides the vast majority of the return of owning a home.
Re: Anyone else fighting off urge to pay off mortgage??
Do you own any bonds that are yielding less than the cost of the loan?
If so, sell the bonds and buy stocks. You accomplish the same thing at lower costs.
If so, sell the bonds and buy stocks. You accomplish the same thing at lower costs.
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Re: Anyone else fighting off urge to pay off mortgage??
Just my 2 cents. I paid mine off. Risk free return. I had trouble keeping an allocation to bonds while paying off mortgage. I ultimately decided to only hold bonds after mortgage paid off. Then I progressed to 80/20 AA. I'm in accumulation phase. I have found the Psychological Benefits to be huge! Mainly it adds to my financial wherewithall to stick to my aggressive AA. I too believe equities will outperform over long run. By paying off mortgage I feel strengthened to take that additional risk.
Dave
Dave
Re: Anyone else fighting off urge to pay off mortgage??
Yes I can but we will have a lot more to worry about if stocks crash 75%. There is a difference between being risk aversive and just flat out scared of life.rrosenkoetter wrote:What if stocks crash 75% and you lose your job? Can you still pay it off anytime you want?bengal22 wrote:I have no anxiety over mortgage debt because I know that I can pay it off anytime I wish.
"Earn All You Can; Give All You Can; Save All You Can." .... John Wesley
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Re: Anyone else fighting off urge to pay off mortgage??
We owe about $25K on the mortgage. After moving in 2010, we'll have paid off a 15 year mortgage in 3 to 3.5 years. We've always paid stuff off as quickly as we can.
Deleveraging is about risk control and about cash flow. The free cash flow from not having a mortgage will allow me to move from 10 to 15% in the TSP and will allow DW to spend some money on stuff she wants (stuff and vacations) without squeezing the budget.
I'm generally in favor of doing what you can to lower the monthly required payments. The more free cash flow you have the more options you have for investing and for pleasure.
Good Luck
Harry
Deleveraging is about risk control and about cash flow. The free cash flow from not having a mortgage will allow me to move from 10 to 15% in the TSP and will allow DW to spend some money on stuff she wants (stuff and vacations) without squeezing the budget.
I'm generally in favor of doing what you can to lower the monthly required payments. The more free cash flow you have the more options you have for investing and for pleasure.
Good Luck
Harry
Re: Anyone else fighting off urge to pay off mortgage??
My wife and I are 65 and are in the process of re-financing into a "new" 30-yr fixed at 3.45%. I doubt we'll pay that off. Within five years or so, we might well be making more than 3.45% on new 7-yr CDs. On our condo, the re-set rate is 2.25% (currently). I doubt we'll pay that off, either.
Throw in Garn-StGermain and our estate plan, those mortgages are worthy of keeping.
Throw in Garn-StGermain and our estate plan, those mortgages are worthy of keeping.
Re: Anyone else fighting off urge to pay off mortgage??
Perfect analysis....YDNAL wrote:This topic resurfaces every so often with same expected pro-this, pro-that.LH wrote:Especially since now, my mortgage, is at a 4 percent rate, for 30 years, after tax, its at most 3 percent rate. Which happens to be expected inflation.
ie, expectationally, over 30 years, the loan is free leverage.
So now, being human, I continually want to deleverage, and pay off the mortgage! Cheapest leverage ever = strongest human urge to pay it off. Its a thing of beauty. I could do this in a couple years with cash flow, I could do it tommorrow with taxable investments.
I think this is wrong thing to do, and have rationally purposefully decided to use the leverage. (house is about 60 percent paid off already).
But my gut, its a constant fight to not pay it off. its so in vogue now too : )
At 42 though, I plan to attempt to keep it, and put the money in the stock market instead.
It is actually quite simple.* taking risks comes with NO guarantee of success.
- 1. You need a place to live.
2. Cash flow is cash flow. You EITHER:3. If you decide to own, you EITHER don't use leverage or you do.
- Pay rent to others, or
- Pay all associated costs to own (interest [if any], taxes, insurance, repairs, etc).
- If you don't use leverage, the cost is potential loss of opportunity of your capital - if any - since you buy a hard asset with related risks of depreciation/appreciation.
- If you do use leverage without need, then it is all a matter of taking risks* to do otherwise with your money. Nothing more.
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Re: Anyone else fighting off urge to pay off mortgage??
There is NO DOUBT you will come out ahead putting that money to use in your investment portfolio vs. paying it down. That is not even an argument when your talking of a <4% interest rate.
The only question comes to the duration of the leveraging. It is for ?30 years so how confident are you on your human capital? Are u in a job/ field you are confident to work for at least 20 years at your current salary? Be careful answering that question, because many who think the answer is yes find out it is actually no the hard way. In my opinion, unless your a doctor, tenured faculty, or city/state employee anything can happen and often does. Humans, especially Americans, are very susceptible to overconfidence which extends to thinking the are indispensable at their work.
My answer overall is if your investments are large enough that you could pay it off in one fell swoop IF absolutely needed I would just keep investing.
One has to live life according to PROBABILITIES and not POSSIBILITIES. When the remote happens you just have to roll with the punches assuming the laws of probabilities will even itself out. That is why time horizon is the ULTIMATE x variable.
Good luck.
The only question comes to the duration of the leveraging. It is for ?30 years so how confident are you on your human capital? Are u in a job/ field you are confident to work for at least 20 years at your current salary? Be careful answering that question, because many who think the answer is yes find out it is actually no the hard way. In my opinion, unless your a doctor, tenured faculty, or city/state employee anything can happen and often does. Humans, especially Americans, are very susceptible to overconfidence which extends to thinking the are indispensable at their work.
My answer overall is if your investments are large enough that you could pay it off in one fell swoop IF absolutely needed I would just keep investing.
One has to live life according to PROBABILITIES and not POSSIBILITIES. When the remote happens you just have to roll with the punches assuming the laws of probabilities will even itself out. That is why time horizon is the ULTIMATE x variable.
Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” |
-Jack Bogle
Re: Anyone else fighting off urge to pay off mortgage??
Fighting off the urge to pay off the mortgage? Yes. That monthly payment doesn't go away until you pay it all off. And I'm a cash-flow kinda guy.
You can have profit and you can have loss, but cash flow is king and it never lies.
You can have profit and you can have loss, but cash flow is king and it never lies.
- stevewolfe
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Re: Anyone else fighting off urge to pay off mortgage??
This. Plain and simple - this is exactly why we paid ours off. 5 years ago tomorrow.stemikger wrote:The numbers don’t always add up, but having a paid off mortgage will help me sleep better, so that is enough reason for me.
Re: Anyone else fighting off urge to pay off mortgage??
What do you mean by that ?Call_Me_Op wrote:Except possibly for asset-protection benefit associated with paying it off.bengal22 wrote: Since I track my net worth it really makes no difference if it is in my house or in my investments other that what I can earn off it.