How much did I spend? [mortgage question]

[RenoJay]

If I had a theoretical mortgage payment of $3,000 a month, and half of it went to interest and half to principle, did I spend $3,000, or did I spend $1,500 and reallocate $1,500 from cash to home equity?

[DSInvestor]

That's $3000 that you don't have to spend on something else until you tap the equity.

[lisaac]

You reallocated $1,500 to your house and spent $1500 on interest, of which some part would be gained back in tax dedications.

Also there are buying and selling fees which also affect the value of what you invested, also in addition to the interest there are property taxes and maintenance that need to be paid.

[TRC]

All depends on what someone's willing to pay for your house when you sell it.

[OAG]

You spent it all. You may recoup some sooner IF you itemize taxes and some a (maybe all or more than all) when you sell. Do you believe in Maybe's?

[jeffyscott]

Since the loan is a negative bond, you spent $1500 on interest and increased fixed income allocation by $1500. The $1500 in principle was spent when you bought the house with a loan.

If I buy a car for $20K, I have spent the entire $20K when I buy the thing, even if I do so with a loan. Same thing with a house (ignoring the possibility, in some jurisdictions, of legally walking away from an underwater mortgage).

[Crimsontide]

That's $3000 that you don't have to spend on something else until you tap the equity.

+1. Yep, that's $3k I wouldn't have on hand to loan to my toothless cousin...

[The Wizard]

This thread appears to derive from the latest Savings Rate thread?
So here's another one for you: let's say I buy $3000 worth of VTSMX (Total Stock Market) in my taxable account this month.
How much did I spend?

[docnews]

This topic is also covered in the topic on what constitutes savings.

For those who are strict accountants, principal equals savings and not spending.

I argued for those who are trying to calculate savings/spending for long term purposes (ie retirement), it is more honest to not count your primary residence as an investment (hence savings) and write it off as an expense since you will most likely always need a home. If this not your only house, then it could be argued that it is pure savings BUT one that is difficult to liquidate (especially since you might want the money when there is an economic downturn and others are trying to dump real estate).

[docnews]

This thread appears to derive from the latest Savings Rate thread?
So here's another one for you: let's say I buy $3000 worth of VTSMX (Total Stock Market) in my taxable account this month.
How much did I spend?

None. Since you have an investment that is easy to liquidate and one in which you will not need to have continuously. Though you have to "sell" your shares, you don't have to find the buyer.

[bobbun]

If I had a theoretical mortgage payment of $3,000 a month, and half of it went to interest and half to principle, did I spend $3,000, or did I spend $1,500 and reallocate $1,500 from cash to home equity?

Purely a matter of how you want to account for it--there is no right answer unless you're compelled to follow certain accounting rules (as a business might be). If you choose to consider the cost of the house as amortized over the life of the loan, then you spent 3000 (1500 to debt service, and 1500 as housing expense). If you prefer to consider the house as being paid for at the time you close on it, then you spent the full amount in the month that you closed, and the 1500 going to equity is "savings" in the form of debt reduction.

[Grt2bOutdoors]

This topic is also covered in the topic on what constitutes savings.

For those who are strict accountants, principal equals savings and not spending.

I argued for those who are trying to calculate savings/spending for long term purposes (ie retirement), it is more honest to not count your primary residence as an investment (hence savings) and write it off as an expense since you will most likely always need a home. If this not your only house, then it could be argued that it is pure savings BUT one that is difficult to liquidate (especially since you might want the money when there is an economic downturn and others are trying to dump real estate).

Ah yes, but an accountant would also depreciate the value of the fixed asset (the home), so $1,500 to principal is not really $1,500 in one-for-one asset accumulation, rather it is 1,500 - X% = Y minus the true value that a new buyer is willing to spend to own the home, the difference being a gain or loss on the sale of the home.

[The Wizard]

This thread appears to derive from the latest Savings Rate thread?
So here's another one for you: let's say I buy $3000 worth of VTSMX (Total Stock Market) in my taxable account this month.
How much did I spend?

None. Since you have an investment that is easy to liquidate and one in which you will not need to have continuously. Though you have to "sell" your shares, you don't have to find the buyer.

So liquidity and depreciation/appreciation affect how much I actually "spend", eh?
Let's try another one: Let's say I write a check for $30,000 to purchase a brand new F-150 pickup truck
How much have I spent in this instance?

[Grt2bOutdoors]

This thread appears to derive from the latest Savings Rate thread?
So here's another one for you: let's say I buy $3000 worth of VTSMX (Total Stock Market) in my taxable account this month.
How much did I spend?

None. Since you have an investment that is easy to liquidate and one in which you will not need to have continuously. Though you have to "sell" your shares, you don't have to find the buyer.

So liquidity and depreciation/appreciation affect how much I actually "spend", eh?
Let's try another one: Let's say I write a check for $30,000 to purchase a brand new F-150 pickup truck
How much have I spent in this instance?

Hold the vehicle for duration of vehicle life - $30K.
Hold vehicle for less than duration of vehicle life - $30K less what you receive from salvage value (price someone is willing to pay for your truck).

[sscritic]

Purely a matter of how you want to account for it--there is no right answer unless you're compelled to follow certain accounting rules (as a business might be). If you choose to consider the cost of the house as amortized over the life of the loan, then you spent 3000 (1500 to debt service, and 1500 as housing expense). If you prefer to consider the house as being paid for at the time you close on it, then you spent the full amount in the month that you closed, and the 1500 going to equity is "savings" in the form of debt reduction.

This is the thinking I have come to as a result of the other thread. It all starts with what does "buy a house" mean. If I buy a house for $200k using $50k down, what did I spend? I didn't spend the $50k, since I already had that money in a municipal bond fund (in my case) and I just transferred the equity in my bond fund to the equity in my house. If I spent the $150k of borrowed money at that time, then principal payments that reduce my debt are savings. On the other hand, I could consider that I got my house without spending a penny, in which case my principal payments are spending (they are how I am buying my house).

[freddie]

You spend more than that. Buying a new car in my area would cost you an extra 250/yr in tax, have to get collision for 500/yr in collision insurance, and since it gets have the gas milage there is another 700/yr.

What numbers to use all depend on what your trying to do with them. Cash flow calculation, net worth, savings rate,....

This thread appears to derive from the latest Savings Rate thread?
So here's another one for you: let's say I buy $3000 worth of VTSMX (Total Stock Market) in my taxable account this month.
How much did I spend?

None. Since you have an investment that is easy to liquidate and one in which you will not need to have continuously. Though you have to "sell" your shares, you don't have to find the buyer.

So liquidity and depreciation/appreciation affect how much I actually "spend", eh?
Let's try another one: Let's say I write a check for $30,000 to purchase a brand new F-150 pickup truck
How much have I spent in this instance?

Hold the vehicle for duration of vehicle life - $30K.
Hold vehicle for less than duration of vehicle life - $30K less what you receive from salvage value (price someone is willing to pay for your truck).

[Valuethinker]

This topic is also covered in the topic on what constitutes savings.

For those who are strict accountants, principal equals savings and not spending.

I argued for those who are trying to calculate savings/spending for long term purposes (ie retirement), it is more honest to not count your primary residence as an investment (hence savings) and write it off as an expense since you will most likely always need a home. If this not your only house, then it could be argued that it is pure savings BUT one that is difficult to liquidate (especially since you might want the money when there is an economic downturn and others are trying to dump real estate).

Ah yes, but an accountant would also depreciate the value of the fixed asset (the home), so $1,500 to principal is not really $1,500 in one-for-one asset accumulation, rather it is 1,500 - X% = Y minus the true value that a new buyer is willing to spend to own the home, the difference being a gain or loss on the sale of the home.

Let's add to the complexity.

The *structure* depreciates-- say 1-2% pa. However maintenance and home improvement adds to that value.

The land is not usually depreciated. Unless we 'mark to market' we don't actually revalue the land, we just hold it at cost. Over a sufficiently long holding period this gets ridiculous (my parents paid about $10k for the land, in 1960).

With the $3000 it is best to count

- $1500 interest as spending
- $1500 principal repayment as an investment in home equity. The underlying assumption is that we will sell the house for at least what we paid for it. Given inflation, over a sufficiently long period that is more than likely to be true. Even in a city like Buffalo (but perhaps not Detroit).

Depreciation I take as a wash: I spend on my house on repairs and maintenance about what it would depreciate, in the long run. That's simpler.

On the value of my home equity, I have a general feeling about what the market value of my house is at any given moment. I count my gross home value - disposal costs - outstanding mortgage debt as an 'investment' but it's an illiquid one. Since I break my retirement needs down to cash flow, I don't count it in the cash flow for retirement *other than* it reduces the rent I would otherwise pay (but conversely it also adds repair & maintenance costs, property taxes etc.).

So I don't count home equity in my net worth, except as a possible lump sum which could be realized by trading down in the future. I assume for at least the early years of retirement I won't be realizing home equity (unless I have a specific plan to relocate out of the metropolitan area to somewhere cheaper).

I think you, with your financial background, would agree with me on these principles?

[RenoJay]

I'm the original poster. Thanks for the lively debate. I actually didn't see the other thread that's being referred to.

The basis of the question is this: I'm considering early retirement in a few years. I'll have about 11 years left on my mortgage at that time. I have reasonable confidence that the home will maintain it's value in inflation-adjusted terms. So I'm trying to calculate my spend as a percentage of assets (i.e. withdrawl rate, to see if I'm in the "safe" 3% range recommended for early retirees.) I do not include the house when I consider investable assets, however, since the mortgage will go away in the future, I'm wondering if it's inappropriate to include the portion of my monthly payment that goes to principle when I consider what I "spend" in a month.

Any advice now that you know more specifics?

[sscritic]

I'm the original poster. Thanks for the lively debate. I actually didn't see the other thread that's being referred to.

The basis of the question is this: I'm considering early retirement in a few years. I'll have about 11 years left on my mortgage at that time. I have reasonable confidence that the home will maintain it's value in inflation-adjusted terms. So I'm trying to calculate my spend as a percentage of assets (i.e. withdrawl rate, to see if I'm in the "safe" 3% range recommended for early retirees.) I do not include the house when I consider investable assets, however, since the mortgage will go away in the future, I'm wondering if it's inappropriate to include the portion of my monthly payment that goes to principle when I consider what I "spend" in a month.

Any advice now that you know more specifics?

I would say it is spending from a cash flow perspective, but not from a net worth perspective. Will you ever downsize or take a reverse mortgage? If so, then paying off your mortgage is saving for yourself. If you are going to die in the house, then your mortgage payment is saving for your heirs.

In other words, don't fret the accounting. Can you afford it is the only question you need to ask. Even if your home equity is in your net worth, it is not subject to your 3% withdrawal rate, that coming all from easily cashable investments. If it were I, I would just stick to cash flow, in which case you need to cover the $3000 every month until the debt is paid.

[Phineas J. Whoopee]

It's $3000 per month on your cash flow statement, and a $1500 difference on the balance sheet if you produce one each month. With respect to retirement spending I'd use the cash flow definition. With respect to assets of course, the balance sheet rules.
PJW

[DSInvestor]

If you're going to keep the mortgage 11 years, that's 11 years that you'd have to withdraw from the retirement portfolio to make the payments. Once the mortgage is paid off you can reduce your withdrawals as your monthly costs are reduced by 3K/month.

[surfstar]

When I buy something at 40% off, I've saved money, right?

[Grt2bOutdoors]

This topic is also covered in the topic on what constitutes savings.

For those who are strict accountants, principal equals savings and not spending.

I argued for those who are trying to calculate savings/spending for long term purposes (ie retirement), it is more honest to not count your primary residence as an investment (hence savings) and write it off as an expense since you will most likely always need a home. If this not your only house, then it could be argued that it is pure savings BUT one that is difficult to liquidate (especially since you might want the money when there is an economic downturn and others are trying to dump real estate).

Ah yes, but an accountant would also depreciate the value of the fixed asset (the home), so $1,500 to principal is not really $1,500 in one-for-one asset accumulation, rather it is 1,500 - X% = Y minus the true value that a new buyer is willing to spend to own the home, the difference being a gain or loss on the sale of the home.

Let's add to the complexity.

The *structure* depreciates-- say 1-2% pa. However maintenance and home improvement adds to that value.

The land is not usually depreciated. Unless we 'mark to market' we don't actually revalue the land, we just hold it at cost. Over a sufficiently long holding period this gets ridiculous (my parents paid about $10k for the land, in 1960).

With the $3000 it is best to count

- $1500 interest as spending
- $1500 principal repayment as an investment in home equity. The underlying assumption is that we will sell the house for at least what we paid for it. Given inflation, over a sufficiently long period that is more than likely to be true. Even in a city like Buffalo (but perhaps not Detroit).

Depreciation I take as a wash: I spend on my house on repairs and maintenance about what it would depreciate, in the long run. That's simpler.

On the value of my home equity, I have a general feeling about what the market value of my house is at any given moment. I count my gross home value - disposal costs - outstanding mortgage debt as an 'investment' but it's an illiquid one. Since I break my retirement needs down to cash flow, I don't count it in the cash flow for retirement *other than* it reduces the rent I would otherwise pay (but conversely it also adds repair & maintenance costs, property taxes etc.).

So I don't count home equity in my net worth, except as a possible lump sum which could be realized by trading down in the future. I assume for at least the early years of retirement I won't be realizing home equity (unless I have a specific plan to relocate out of the metropolitan area to somewhere cheaper).

I think you, with your financial background, would agree with me on these principles?

Yes, I agree. I count home equity only when my wife asks for a full accounting of net worth in a liquidation sense. I don't count home equity when I know I will be living in my home or place of similar costs for the foreseeable future.

[Grt2bOutdoors]

When I buy something at 40% off, I've saved money, right?

Have you? If the cost of the product is $1.00, the dealer marks it up to $4.00, but now offers a 40% off sale, so it's marked down to $2.40, you buy it. It cost you $2.40, you haven't saved anything unless this item you purchased is one you would normally purchase on a regular basis. Otherwise, you are still out $2.40. That's $2.40 that could still be in your pocket to spend elsewhere, now you don't have it.

[an_asker]

I'm the original poster. Thanks for the lively debate. I actually didn't see the other thread that's being referred to.

The basis of the question is this: I'm considering early retirement in a few years. I'll have about 11 years left on my mortgage at that time. I have reasonable confidence that the home will maintain it's value in inflation-adjusted terms. So I'm trying to calculate my spend as a percentage of assets (i.e. withdrawl rate, to see if I'm in the "safe" 3% range recommended for early retirees.) I do not include the house when I consider investable assets, however, since the mortgage will go away in the future, I'm wondering if it's inappropriate to include the portion of my monthly payment that goes to principle when I consider what I "spend" in a month.

Any advice now that you know more specifics?

I don't think one person here (OK maybe I am exaggerating) will advice you to retire - that too, "early" - with a mortgage hanging over your head (even if it is the really low fixed interest kind).

That said, if you stick with your scenario where you will have a mortgage upon retirement, I would be inclined to say that you need to include the entire mortgage payment in your 'spend' column; reason being that you are using your retirement savings to finance your life which includes having to make the mortgage payment on a monthly basis. In other words, you need to be able to withdraw that much money from your retirement savings in addition to your other basic day-to-day living expenses.

[The Wizard]

When I buy something at 40% off, I've saved money, right?

No.
In general you've SPENT the 60% of the nominal purchase price of the item.
And for purposes of this discussion, it's not generally possible to purchase a semi-liquid asset for anything close to 40% off of its true market value...

[The Wizard]

I'm the original poster. Thanks for the lively debate. I actually didn't see the other thread that's being referred to.

The basis of the question is this: I'm considering early retirement in a few years. I'll have about 11 years left on my mortgage at that time. I have reasonable confidence that the home will maintain it's value in inflation-adjusted terms. So I'm trying to calculate my spend as a percentage of assets (i.e. withdrawl rate, to see if I'm in the "safe" 3% range recommended for early retirees.) I do not include the house when I consider investable assets, however, since the mortgage will go away in the future, I'm wondering if it's inappropriate to include the portion of my monthly payment that goes to principle when I consider what I "spend" in a month.

Any advice now that you know more specifics?

I don't think one person here (OK maybe I am exaggerating) will advice you to retire - that too, "early" - with a mortgage hanging over your head (even if it is the really low fixed interest kind).

That said, if you stick with your scenario where you will have a mortgage upon retirement, I would be inclined to say that you need to include the entire mortgage payment in your 'spend' column; reason being that you are using your retirement savings to finance your life which includes having to make the mortgage payment on a monthly basis. In other words, you need to be able to withdraw that much money from your retirement savings in addition to your other basic day-to-day living expenses.

I have no problem letting him retire with that mortgage still outstanding, since I did something similar.
I did refi my modest remaining mortgage balance down to 3.25% with a HELOC a few years before I retired.
The only issue is one's income or cash flow in retirement; if you can swing roughly the same net cash flow in retirement as prior to it, then what's the problem? And then a nice bonus a few years into retirement when you do pay off the mortgage and now have an extra $1000 a month or whatever to spend or reinvest. It takes the STING out of inflation...

[freddie]

I think he was joking:) You don't save money by spending it despite what my wife thinks:)

When I buy something at 40% off, I've saved money, right?

Have you? If the cost of the product is $1.00, the dealer marks it up to $4.00, but now offers a 40% off sale, so it's marked down to $2.40, you buy it. It cost you $2.40, you haven't saved anything unless this item you purchased is one you would normally purchase on a regular basis. Otherwise, you are still out $2.40. That's $2.40 that could still be in your pocket to spend elsewhere, now you don't have it.

[harikaried]

If I had a theoretical mortgage payment of $3,000 a month, and half of it went to interest and half to principle

What if it wasn't half/half? If we have a $500k 30-yr loan at 6%, the monthly payment is around $3k with the first payment covering $2500 in interest and $500 in principal. Did you spend more than on the 180th month with $1776 interest and $1224 principal? Or when there's 3 years left, the payment goes $500 interest and $2500 principal?

What if you bought a cheaper house with shorter term, say $100k 3-yr 5% (perhaps 3/x ARM to pay off in 3 years)? The monthly payment is still $3k but the first payment is already just $416 interest and $2584 principal -- did you spend more or less?

I'm not sure myself, but we're somewhat in this situation where we moved from a HCOL area and bought a much less expensive house that we'll be paying off the loan much faster. I think we're saving more money.

[jeffyscott]

Assuming otherwise taxable assets are available to pay off, I would only keep the mortgage if I could safely earn more than the interest rate. So I would look at it this way, subtract the mortgage balance from assets and then also do not count the payments on it in calculating spending rate. This way the spend rate is the same with or without the mortgage and keeping the mortgage is based on the (safe) returns available from investing the borrowed assets.

[dragon]

If I had a theoretical mortgage payment of $3,000 a month, and half of it went to interest and half to principle, did I spend $3,000, or did I spend $1,500 and reallocate $1,500 from cash to home equity?

The correct answer is: neither, you spent $0.

Let's say your home is worth $500K, you have a mortgage of $400K, and you have investments of $2.1 million.
You should view these as follows: you have $500K non-financial assets (the house) and you have $1700K net financial assets ($2.1 million investments minus $400K mortgage). In other words: the reason that you have the mortgage is to leverage up your investment portfolio cheaply. If you didn't think your investments would out-earn the mortgage, you'd just pay it off. If you paid it off, you'd still have $1700 net financial assets and a $500K house. The fact that the mortgage is secured by the house is a red herring - you shouldn't be grouping the mortgage payment with your house, you should be grouping it with your investment portfolio.

Thus the monthly mortgage payment is just moving money around on the financial side of your portfolio. The $1500 of principal payment reduces your gross assets by $1500 and also reduces your debt by $1500, so it's a wash. You can think of the $1500 of interest as reducing the income from your investments if you want - the $400K of extra investments that you've got due to the carrying the mortgage will hopefully generate more in income (and/or capital appreciation) than you're paying in interest.

To determine if you're OK to retire early, you do the math: ignoring your mortgage payment (which doesn't count as spending), is your spending less than 3% of your $1700K of net financial assets? [I wouldn't count your $500K house in the calculation, unless you fully intend to sell it and downsize.]

In short, I agree with jeffyscott.

[market timer]

As an economist, I'd say you consumed your forgone rent. That is, instead of living in the house yourself, you could have rented it to someone else and earned some money. The mortgage is irrelevant, as others have noted.

[sscritic]

If I had a theoretical mortgage payment of $3,000 a month, and half of it went to interest and half to principle, did I spend $3,000, or did I spend $1,500 and reallocate $1,500 from cash to home equity?

The correct answer is: neither, you spent $0.

Let's say your home is worth $500K, you have a mortgage of $400K, and you have investments of $2.1 million.
You should view these as follows: you have $500K non-financial assets (the house) and you have $1700K net financial assets ($2.1 million investments minus $400K mortgage). In other words: the reason that you have the mortgage is to leverage up your investment portfolio cheaply. If you didn't think your investments would out-earn the mortgage, you'd just pay it off.

And if you did think your investments would out-earn your mortgage, you would get an interest only mortgage or have a HELOC and borrow an extra amount equal to your principal payment each month each month (one for borrowing, one for payment). In fact, why do you even have a $400k mortgage when you could have a $485k mortgage? Anyone with a $400k mortgage on a $500k house is irrational. Either your mortgage should be zero or it should be as large as possible.

P.S. Me, I am irrational. I could have paid cash for my house, but I put 65% down and borrowed 35%. I should have put nothing down and gotten an interest only 100 year loan.

P.P.S. The other option is that something is wrong with this argument, both on the borrow zero and borrow 100% sides.

[sscritic]

Added: sorry, it was the middle of the night and I should have been sleeping. My brain was not fully functional.

The fact that the mortgage is secured by the house is a red herring

Which is why (if you buy the argument presented) you should buy stocks on margin if you think your investment returns will out-earn your cost of borrowing. Your investment portfolio should be $4200k at 50% margin, not $2100k.

Or, as I suggested, something is wrong with the argument based solely on the cost of borrowing vs the return on investment, which is not constant.

[peppers]

We paid off our mortgage several years ago. The heirs were pleased.

[sscritic]

We paid off our mortgage several years ago. The heirs were pleased.

Were they worried you were going to blow "their" money? I can see how they might think it easier to blow "their" money held at Vanguard than to blow "their" money locked up tight in "their" house.

I will have to ask my heirs where they want me to keep "their" money.

[peppers]

We paid off our mortgage several years ago. The heirs were pleased.

Were they worried you were going to blow "their" money? I can see how they might think it easier to blow "their" money held at Vanguard than to blow "their" money locked up tight in "their" house.

I will have to ask my heirs where they want me to keep "their" money.

Yes you should. It is important that you keep them updated on "their" investments.

[peppers]

And don't forget to include the grandchildren about "their" parents investments.

[dragon]

You would get an interest only mortgage or have a HELOC and borrow an extra amount equal to your principal payment each month each month (one for borrowing, one for payment). In fact, why do you even have a $400k mortgage when you could have a $485k mortgage? Anyone with a $400k mortgage on a $500k house is irrational. Either your mortgage should be zero or it should be as large as possible.

There are plenty of reasons why a $400k mortgage on a $500k house is likely to be preferable to the other options you suggest (including a margin loan).

• Interest Rate. Lenders generally charge a higher interest rate when a loan is interest-only or the loan-to-value ratio is greater than 80%. They also frequently charge a higher interest rate on a HELOC or a jumbo loan. So a conforming $400k mortgage probably has a lower interest rate than the other options. Paying a lower interest rate is preferable to paying a higher interest rate.
• Taxation. Interest on acquisition indebtedness is generally tax-deductible. Interest on home-equity loans or margin loans may also be tax-deductible in some circumstances, but those circumstances are less commonly met. Therefore, there are often tax advantages to a mortgage when compared to a HELOC or a margin loan.
• Guarantees. It is commonplace to find mortgages where the lender guarantees a fixed interest rate for a period of 15 or 30 years, whereas the borrower can pay off the loan at any time without penalty. These terms are very favorable to the borrower. For margin loans, by contrast, the lender typically can raise the interest rate at any time at their discretion. I believe it's also less common to find a HELOC with a long-term fixed rate of interest that is comparable to a mortgage.

For all of the above reasons, it's frequently rational to have a mortgage that is neither zero, nor as large as possible.

P.S. This thread is not really about whether it's wise for RenoJay to carry a mortgage. It's about what's the right way to account for the mortgage payment, given that RenoJay has already made the decision to carry the mortgage.

[RenoJay]

It's interesting...within the course of this discussion, there has been suggestion that the full amount paid counts as expense and that none of it counts as expense. That just shows that seemingly concrete rules of thumb, such as "The 4% Rule" are truly wishy washy because there is not universal agreement about what counts as spending. Again, thanks all for the lively discussion.

Also, as an FYI, the mortgage is 2.75% fixed for 14 more years and the reason I hold it is several fold:

1. On an after-tax basis, I'm doing better on my fixed income portfolio than what I'm spending in interest;
2. I'm making a bit of a bet that in the next 5+ years interest rates will rise and I'll look like a genius (and if I'm wrong on this bet, the cost is not that high);
3. I like having a large amount of liquid funds available in the event of emergency or opportunity. If I paid off the mortgage, there would be less available;
4. Based on certain agreements between my spouse and me, it makes sense to hold a mortgage;
5. I'm human and my decisions are based in part on what helps me sleep well as opposed to what a completely rational robot might do.

Thanks again!

[grabiner]

It's interesting...within the course of this discussion, there has been suggestion that the full amount paid counts as expense and that none of it counts as expense. That just shows that seemingly concrete rules of thumb, such as "The 4% Rule" are truly wishy washy because there is not universal agreement about what counts as spending.

And I would give two answers.

The total payment is an expense, because it is money you have to pay, and must include in your cash flow.

Only the interest payment is a loss, because your net worth decreases by the interest; the principal payment is moving money from one pocket to another. If you use extra cash to pay down principal, that is not a direct loss, as it doesn't change your net worth; it may be a good or bad use of the money depending on how the interest on the mortgage compares with any other use of the cash.

Also, as an FYI, the mortgage is 2.75% fixed for 14 more years and the reason I hold it is several fold:

1. On an after-tax basis, I'm doing better on my fixed income portfolio than what I'm spending in interest

This is a good enough reason, and it's the same reason I don't pay down my own 2.625% mortgage for 15 years. I could earn more on municipal bonds than I pay in interest, with very little risk. (I don't actually hold municipal bonds, because I hold my bonds in a retirement account, but municipal bonds give a fair comparison.)

[Watty]

That's $3000 that you don't have to spend on something else until you tap the equity.

Money that someone puts into a IRA is also locked up and difficult to spend until they turn 59.5 which could be decades in the future.

Without getting into the accounting definitions paying down the mortgage each month increases your net worth and that is a better measure of your wealth than the size of your stock and bond portfolio.

[sscritic]

Either your mortgage should be zero or it should be as large as possible.

There are plenty of reasons why a $400k mortgage on a $500k house is likely to be preferable to the other options you suggest (including a margin loan).
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For all of the above reasons, it's frequently rational to have a mortgage that is neither zero, nor as large as possible.

I was responding to the person who suggested using your estimate of your future investment returns as of a single point in time as the criterion for deciding whether to pay off the mortgage.

If you didn't think your investments would out-earn the mortgage, you'd just pay it off.

It seems as if you don't agree with that poster. I agree with you; I like the middle ground. I am neither zero nor $500k (I am closer to $150k out of $500k).

Just think: what if you kept changing your estimate of future earnings? Pay off, refinance, pay off, refinance, etc. Would it ever end?

[wavestream]

If you count "1500" as savings, you also need to count 'opportunity cost'. Suppose you rented the house, what would the rent be?

As Shiller's research has shown, housing has a very tiny real return ~1%. Property tax and insurance eliminates this gain. So any equity you have in a house you live in is earning nothing. Suppose you figure a 4% return if you invested your equity normally, you need to include not earning that in your cost of housing.

Best assumption: start your analysis assuming 100% financing.