Paying off mortgage....risk?

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fittan
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Paying off mortgage....risk?

Post by fittan » Fri Aug 10, 2018 12:19 pm

Ok...I know we've beaten this horse to death a thousand times already but please bear with me. I know there are many pros and cons on whether to pay off entire mortgage if one can afford.

One cons (or risk) that is at the back of my mind is "what happens in a worse case, total lost event that is not covered by insurance?" (e.g. earthquake, severe flood, meteor strike, nuclear). Ok, I understand there is only a 0.0000000000000000000000001% chance that will happen but my response to that would be there's also only a 0.000000000000001% chance your postman will slip and fall on your driveway and sue you and yet you buy insurance to cover that.

Anyway my point is, in such a worse case scenario, if I still have a mortgage AND the insurance refuse to cover, I can play hard ball between the bank and the insurer, and walk away from mortgage (let's assume I don't care about credit being wrecked). BUT, if house is fully paid off AND insurer refuses to cover, then I really have no recourse but to accept a complete loss.

So isn't this risk sufficient enough NOT to pay off mortgage? Please advise if there's something wrong with my logic. Thanks.

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9-5 Suited
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Re: Paying off mortgage....risk?

Post by 9-5 Suited » Fri Aug 10, 2018 12:40 pm

This may be an eye-roll generating response, but I am not a fan of any strategy that relies on welching on legitimate debt as the payoff. I get that it’s possible and legal depending on your state, but I just don’t like it. So I would plan my life as if that were not an option and manage my risk accordingly.

mega317
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Re: Paying off mortgage....risk?

Post by mega317 » Fri Aug 10, 2018 12:43 pm

You should have earthquake and flood insurance if you are at risk for those things. If a nuclear weapon strikes your house, even if you are 1000 miles away at the time, you and the rest of us have bigger problems. I don't know about your math on the risk of a meteor* (and I think you mean meteorite) but probably whatever that risk is, it doesn't outweigh the benefit of saving on interest if there are no other factors. I don't pay my mortgage because I deduct the interest and it ends up not costing much more than other risk-free return I could get and I value the liquidity.

*An attempt on the math: There are somewhere in the neighborhood of 100 million homes in the US. I have been an adult who pays attention to the news for about 20 years. Based on an assumption that if someones house was destroyed by a meteorite it would make the news, and it hasn't, it's at least less than 1 in 2 billion. Who knows if that kind of news would make it out of another country to me.

Here's a blurb in wired that estimates 1 in 4 trillion of being hit. There are lots of little meteorites that wouldn't destroy the house. But with all those 0s I think you actually underestimated the chance.
https://www.wired.com/2013/02/hit-by-a-meteorite/

I bet if your house actually got destroyed you could come up with a good chunk of cash on Gofundme to help offset the loss.

SimonJester
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Re: Paying off mortgage....risk?

Post by SimonJester » Fri Aug 10, 2018 12:50 pm

fittan wrote:
Fri Aug 10, 2018 12:19 pm
So isn't this risk sufficient enough NOT to pay off mortgage? Please advise if there's something wrong with my logic. Thanks.
No its not, what you are missing is that every mortgage payment a sizable chuck of the payment goes to the bank. Its gone, lost to your forever in the form of the interest payment. When you pay off your mortgage what do you think happens to that mortgage payment money every month? It doesn't just disappear. You now have a LOT of extra cash and if you do not inflate your lifestyle you can now pile up loads of cash. Cash that was previously given to a bank.

I think people posting these pay off mortgage questions should take a look at their amortization schedule and see just how much they are paying the bank for that mortgage.
"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." - Benjamin Franklin

123
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Re: Paying off mortgage....risk?

Post by 123 » Fri Aug 10, 2018 12:59 pm

Why not just rent?

Don't bother with any real estate or mortgage at all.

There are lot of rationales if someone wants to maximize their debt. Financial advisers sometimes advise people to refinance and take cash out equity to invest in some offering that they can't lose on. However the "they" usually turns out to be the financial adviser coming out ahead on the product commission.
The closest helping hand is at the end of your own arm.

thx1138
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Re: Paying off mortgage....risk?

Post by thx1138 » Fri Aug 10, 2018 1:17 pm

This would only work in "non-recourse" states that allow you to "walk away" from a mortgage and not be liable for the difference between your balance and the market value of the house. There are about 12 non-recourse states.

In all the other states after your home gets nuked and insurance doesn't cover it you still owe your bank the mortgage balance. Indeed if you had at the same time not saved any money you could then declare bankruptcy and clear that now non-secured debt. But presumably you were saving that money (if not, what was the point of making the pay-off comparison) and thus in bankruptcy the judge will send those savings to the bank to cover their loss. The wrinkle here is if you can shelter those assets from bankruptcy then to a degree you can stick it to the bank.

RickBoglehead
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Re: Paying off mortgage....risk?

Post by RickBoglehead » Fri Aug 10, 2018 1:25 pm

Meteor strike? Nuclear war?

If these potential disasters keep you up at night, perhaps your hat isn't properly adjusted?

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chevca
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Re: Paying off mortgage....risk?

Post by chevca » Fri Aug 10, 2018 1:25 pm

fittan wrote:
Fri Aug 10, 2018 12:19 pm
Anyway my point is, in such a worse case scenario, if I still have a mortgage AND the insurance refuse to cover, I can play hard ball between the bank and the insurer, and walk away from mortgage (let's assume I don't care about credit being wrecked). BUT, if house is fully paid off AND insurer refuses to cover, then I really have no recourse but to accept a complete loss.

So isn't this risk sufficient enough NOT to pay off mortgage? Please advise if there's something wrong with my logic. Thanks.
So, 30 years pass by with none of these extreme events happening and you finally paid off the mortgage... do you take out another mortgage just to keep this hard ball tactic in your pocket... do you refinance every year to keep the house as mortgaged as you can?? No, right.

As mentioned earlier, if this is such a concern, just rent and never own any real estate.

47Percent
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Re: Paying off mortgage....risk?

Post by 47Percent » Fri Aug 10, 2018 2:07 pm

fittan wrote:
Fri Aug 10, 2018 12:19 pm
Ok...I know we've beaten this horse to death a thousand times already but please bear with me. I know there are many pros and cons on whether to pay off entire mortgage if one can afford.

One cons (or risk) that is at the back of my mind is "what happens in a worse case, total lost event that is not covered by insurance?" (e.g. earthquake, severe flood, meteor strike, nuclear). Ok, I understand there is only a 0.0000000000000000000000001% chance that will happen but my response to that would be there's also only a 0.000000000000001% chance your postman will slip and fall on your driveway and sue you and yet you buy insurance to cover that.

Anyway my point is, in such a worse case scenario, if I still have a mortgage AND the insurance refuse to cover, I can play hard ball between the bank and the insurer, and walk away from mortgage (let's assume I don't care about credit being wrecked). BUT, if house is fully paid off AND insurer refuses to cover, then I really have no recourse but to accept a complete loss.

So isn't this risk sufficient enough NOT to pay off mortgage? Please advise if there's something wrong with my logic. Thanks.
Why even "own" a home? By logical extension, you should in fact be renting instead. That way you can let someone else carry the mortgage.

noco-hawkeye
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Re: Paying off mortgage....risk?

Post by noco-hawkeye » Fri Aug 10, 2018 2:28 pm

Some of these replies are great.

I would add that paying off a mortgage should be considered when it does not represent the majority of your assets. This is my opinion of course, but I think many in the paid off camp are somewhere along this line of thinking. So if something strange happens to your house and that is 80% of your NW, that is a problem. If it's 25-30%, it's less of a big deal.

You can buy insurance for almost anything, and adding an umbrella policy frequently goes along with paying off a house (at least in my mind).

JoeRetire
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Re: Paying off mortgage....risk?

Post by JoeRetire » Fri Aug 10, 2018 2:29 pm

fittan wrote:
Fri Aug 10, 2018 12:19 pm
So isn't this risk sufficient enough NOT to pay off mortgage? Please advise if there's something wrong with my logic. Thanks.
There's a long list of good reasons not to make a lot of your money illiquid by tying it up in the walls of your home.
This is very far down that list.

Nate79
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Re: Paying off mortgage....risk?

Post by Nate79 » Fri Aug 10, 2018 3:17 pm

SimonJester wrote:
Fri Aug 10, 2018 12:50 pm
fittan wrote:
Fri Aug 10, 2018 12:19 pm
So isn't this risk sufficient enough NOT to pay off mortgage? Please advise if there's something wrong with my logic. Thanks.
No its not, what you are missing is that every mortgage payment a sizable chuck of the payment goes to the bank. Its gone, lost to your forever in the form of the interest payment. When you pay off your mortgage what do you think happens to that mortgage payment money every month? It doesn't just disappear. You now have a LOT of extra cash and if you do not inflate your lifestyle you can now pile up loads of cash. Cash that was previously given to a bank.

I think people posting these pay off mortgage questions should take a look at their amortization schedule and see just how much they are paying the bank for that mortgage.
The return of making any additional mortgage principal payment or paying off the mortgage is a risk free after tax return at the interest rate of the loan. The only reason you are paying more interest during the beginning of the mortgage is not some fancy math trick but a extremely simple concept that the amount remaining on the mortgage is the highest at the beginning. In other words the amount of interest that you pay each month is simply the interest rate / 12 * total outstanding balance. Every month you are paying the same rate of interest and the amount is just a function of the remaining balance.

Nate79
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Re: Paying off mortgage....risk?

Post by Nate79 » Fri Aug 10, 2018 3:20 pm

fittan wrote:
Fri Aug 10, 2018 12:19 pm
Ok...I know we've beaten this horse to death a thousand times already but please bear with me. I know there are many pros and cons on whether to pay off entire mortgage if one can afford.

One cons (or risk) that is at the back of my mind is "what happens in a worse case, total lost event that is not covered by insurance?" (e.g. earthquake, severe flood, meteor strike, nuclear). Ok, I understand there is only a 0.0000000000000000000000001% chance that will happen but my response to that would be there's also only a 0.000000000000001% chance your postman will slip and fall on your driveway and sue you and yet you buy insurance to cover that.

Anyway my point is, in such a worse case scenario, if I still have a mortgage AND the insurance refuse to cover, I can play hard ball between the bank and the insurer, and walk away from mortgage (let's assume I don't care about credit being wrecked). BUT, if house is fully paid off AND insurer refuses to cover, then I really have no recourse but to accept a complete loss.

So isn't this risk sufficient enough NOT to pay off mortgage? Please advise if there's something wrong with my logic. Thanks.
Very few states are non-recourse loan and even those that are have very specific rules around this. And, in some states those rules change over time and so you have to be very careful to even be thinking you can get away with no recourse on the mortgage. So unless you live in a state that has rock solid non-recourse laws then this is not a valid reason as you still owe the mortgage no matter what happens to the house.

protagonist
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Re: Paying off mortgage....risk?

Post by protagonist » Fri Aug 10, 2018 5:03 pm

fittan wrote:
Fri Aug 10, 2018 12:19 pm


One cons (or risk) that is at the back of my mind is "what happens in a worse case, total lost event that is not covered by insurance?" (e.g. earthquake, severe flood, meteor strike, nuclear). Ok, I understand there is only a 0.0000000000000000000000001% chance that will happen but my response to that would be there's also only a 0.000000000000001% chance your postman will slip and fall on your driveway and sue you and yet you buy insurance to cover that.


So isn't this risk sufficient enough NOT to pay off mortgage?
No it isn't.

As you pointed out, the risk is very small. Life is full of small risks. Do you drive? Do you cross the street?

If you are in a flood zone you should have flood insurance. If you are on a fault line you should have earthquake insurance. Maybe the fed government would even bail you out, though I wouldn't count on that either.

And what would you do with the money if you didn't pay off your mortgage? Invest in stocks? What if the stock market crashes and loses 90% or more of its value? That's more likely I would guess than a meteor or nuclear attack on your home (and if the latter, you would have a lot more to worry about than financial bailout). Nothing is a sure bet.

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vitaflo
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Re: Paying off mortgage....risk?

Post by vitaflo » Fri Aug 10, 2018 5:46 pm

Even if the house is destroyed by, say, an earthquake and you don’t have insurance, the land still has value. It wouldn’t be a complete loss.

At least when these same crazy ideas ran through my head that helped me sleep at night as our land is 1/3 of our total property value.

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