Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
User avatar
Rowan Oak
Posts: 277
Joined: Mon May 09, 2016 2:11 pm
Location: Yoknapatawpha

Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by Rowan Oak » Wed Oct 17, 2018 9:48 am

I often see the argument against paying off your mortgage early, because it is "putting more money into your house". Isn't it the opposite?

I put the money in the day I closed on the house and took the mortgage. If anything the only added money going "into the house" is the interest on the mortgage so paying it off early is actually reducing the amount of money I'm putting into the house. Right?

Allan Roth on the matter:
Faulty arguments against paying down the mortgage:
Here are three of the most common arguments I regularly hear to counter my advice.
  • A more balanced portfolio of, say, 60 percent stocks and 40 percent bonds can earn more than what you'd gain by paying down your mortgage. Though this may be true, it is more a case of comparing apples to oranges. This argument is analogous to taking out a margin loan on your brokerage account to buy more stocks. You might earn more if your stocks go up, but I would not recommend it, even though margin loans are often at lower rates than mortgages. Also, I've heard this argument for decades and, so far this century, bonds have outperformed stocks. Borrowing to buy more stocks has backfired.
  • You don't want to put more money into the house. While I agree with this statement, it's irrelevant. I'm not suggesting a house remodel here. Again, paying down the mortgage has no impact on the price you ultimately sell your house for.
  • If you don't fully pay off your mortgage, your monthly payment typically will not change. This statement is also true, but it's not the full picture. Because a much greater proportion of the monthly payment is going toward principal as you pay down your mortgage, the mortgage is paid off much sooner and you still save the interest payments.
My advice:
The one valid argument for not paying down the mortgage, assuming you have the money to do so, is that you may need the cash to live on. Once the mortgage is paid down, it's not so simple to borrow the money again. Though there are ways to get access to cash, such as a home equity line of credit, you should feel comfortable about not needing the money you'd use to pay down the mortgage.

Once the mortgage is fully paid off and the consumer still has income, I recommend continuing to make the monthly payments to a savings or investment account.

In deciding whether this advice is right for you, keep two things in mind:
  • Neither banks, brokerage firms nor financial advisers benefit from this advice. Banks want you to keep paying them monthly interest on your mortgage. Brokerages and financial advisers would rather have you invest with them the money you'd use to pay off your mortgage. This is why the conventional wisdom you often hear from the financial industry is to keep your mortgage.
  • Think about it: Have you ever met anyone who regretted paying off their mortgage?
So if you have enough access to liquid investments and you don't mind cutting my industry out of profits, consider paying down the mortgage.
Consider Paying Down Your Mortgage
How to earn 3 to 6 percent annually with no risk
by Allan Roth, January 25, 2016
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger

AlohaJoe
Posts: 3833
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by AlohaJoe » Wed Oct 17, 2018 9:54 am

Rowan Oak wrote:
Wed Oct 17, 2018 9:48 am
I put the money in the day I closed on the house and took the mortgage. If anything the only added money going "into the house" is the interest on the mortgage so paying it off early is actually reducing the amount of money I'm putting into the house. Right?
Money moves from your checking account to your mortgage company's account. How is that taking money out of the house? Which of your accounts is larger?

KlangFool
Posts: 10416
Joined: Sat Oct 11, 2008 12:35 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by KlangFool » Wed Oct 17, 2018 9:59 am

Rowan Oak wrote:
Wed Oct 17, 2018 9:48 am
  • You don't want to put more money into the house. While I agree with this statement, it's irrelevant. I'm not suggesting a house remodel here. Again, paying down the mortgage has no impact on the price you ultimately sell your house for.
Rowan Oak,

My house mortgage is 300K. My portfolio is 1.2 million. If I pay off my 300K mortgage, I have no mortgage but my portfolio is down to 900K. So, I have less money outside the house. I had put more money into the house.

KlangFool

DJN
Posts: 151
Joined: Mon Nov 20, 2017 12:30 am

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by DJN » Wed Oct 17, 2018 10:03 am

25% drop in your portfolio is $300,000.

KlangFool
Posts: 10416
Joined: Sat Oct 11, 2008 12:35 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by KlangFool » Wed Oct 17, 2018 10:11 am

DJN wrote:
Wed Oct 17, 2018 10:03 am
25% drop in your portfolio is $300,000.
A) 25% drop of a 1.2 million portfolio is 300K. I left with 900K. My annual expense with a mortgage is 60K. I can survive for 15 years.

B) 25% drop of a 900K portfolio is 225K. I left with 675K. My annual expense without a mortgage is 45K. I can survive for 15 years.

In either case, my exposure to the house is 400K. The main difference is I have less asset diversity with a payoff mortgage.
.
KlangFool

DJN
Posts: 151
Joined: Mon Nov 20, 2017 12:30 am

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by DJN » Wed Oct 17, 2018 10:20 am

The maths are interesting but for me cashing in the $300,000 by reducing your mortgage is very attractive because you are locking in your hard won gains of the last 10 years or so. As they say once its gone its gone!

Jags4186
Posts: 2541
Joined: Wed Jun 18, 2014 7:12 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by Jags4186 » Wed Oct 17, 2018 10:35 am

KlangFool wrote:
Wed Oct 17, 2018 10:11 am
DJN wrote:
Wed Oct 17, 2018 10:03 am
25% drop in your portfolio is $300,000.
A) 25% drop of a 1.2 million portfolio is 300K. I left with 900K. My annual expense with a mortgage is 60K. I can survive for 15 years.

B) 25% drop of a 900K portfolio is 225K. I left with 675K. My annual expense without a mortgage is 45K. I can survive for 15 years.

In either case, my exposure to the house is 400K. The main difference is I have less asset diversity with a payoff mortgage.
.
KlangFool

The big difference though is that if you put the money into the house and the house loses value, you lose no utility whereas if your investments drop you've lost the utility of that money. Not claiming it is financially the long term best move, but it does lock in 1 aspect of life.

KlangFool
Posts: 10416
Joined: Sat Oct 11, 2008 12:35 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by KlangFool » Wed Oct 17, 2018 10:41 am

Jags4186 wrote:
Wed Oct 17, 2018 10:35 am
KlangFool wrote:
Wed Oct 17, 2018 10:11 am
DJN wrote:
Wed Oct 17, 2018 10:03 am
25% drop in your portfolio is $300,000.
A) 25% drop of a 1.2 million portfolio is 300K. I left with 900K. My annual expense with a mortgage is 60K. I can survive for 15 years.

B) 25% drop of a 900K portfolio is 225K. I left with 675K. My annual expense without a mortgage is 45K. I can survive for 15 years.

In either case, my exposure to the house is 400K. The main difference is I have less asset diversity with a payoff mortgage.
.
KlangFool

The big difference though is that if you put the money into the house and the house loses value, you lose no utility whereas if your investments drop you've lost the utility of that money. Not claiming it is financially the long term best move, but it does lock in 1 aspect of life.
Jags4186,

1) I lose the utility of the 300K that I put into the house. I cannot use the money unless I remortgage the house or sell the house. Even if it drops 25%, I still have the utility of the 75% of the 300K.

2) With or without a mortgage, I have the utility of the house.

KlangFool

DJN
Posts: 151
Joined: Mon Nov 20, 2017 12:30 am

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by DJN » Wed Oct 17, 2018 10:45 am

B) 25% drop of a 900K portfolio is 225K. I left with 675K. My annual expense without a mortgage is 45K. I can survive for 15 years.
Does this calculation include your additional available income?

User avatar
Vulcan
Posts: 215
Joined: Sat Apr 05, 2014 11:43 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by Vulcan » Wed Oct 17, 2018 10:46 am

It is unknowable in advance whether paying off mortgage is better than investing the funds.
To complicate things, the potential rate of investment return will, of course, depend on what those funds are invested into.
Even those who locked in the record low fixed interest rate are unlikely to see risk-free investments surpass the guaranteed returns of mortgage payoff.

However, there is another important aspect that I touched on in a recent discussion with KlangFool in a different thread (that appears to have since been deleted).

For families with college-bound children, incomes up to approx. $200-250K/yr and significant taxable assets paying off their mortgages can be a prudent move, since home equity is not considered in federal and some of the private financial aid calculation formulas.
http://www.thecollegesolution.com/will- ... d-chances/

"Putting money into the house" beats sending money into the bursar's office.

texasdiver
Posts: 2719
Joined: Thu Jun 25, 2009 12:50 am
Location: Vancouver WA

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by texasdiver » Wed Oct 17, 2018 10:49 am

Hypothetically speaking, a typical upper middle class couple might have three different classes of assets and liabilities:

$1 million investment portfolio
Home worth $500,000
Mortgage loan of $400,000

The mortage happens to be linked to the house in the sense that the home is the collateral for the loan. But it is not the house. This family would be in exactly the same situation if the mortgage was some other type of loan like a student loan (assuming the terms were the same).

I agree that paying off the mortgage doesn't put a dime into the value of the home. The only way to do that would be to make improvements or additions that add to the $500,000 value of the house. Likewise, taking out a second mortgage isn't pulling any money out of the house, it's simply borrowing more money from the bank. No different from running up a credit card bill except that the terms are probably better. The only way to actually take money out of the house would be to actually sell part of the house by ripping out fixtures, appliances or whatever and selling them. Or extracting rent value by renting out a portion of the house.

That said, whether it makes sense for a particular individual or couple to accelerate the payoff of their mortage loan, or add to it with a HLOC or 2nd motgage is an entirely different question. But in either case they are simply increasing or decreasing their debt, not actually putting money into or out of the the house.

KlangFool
Posts: 10416
Joined: Sat Oct 11, 2008 12:35 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by KlangFool » Wed Oct 17, 2018 10:52 am

DJN wrote:
Wed Oct 17, 2018 10:45 am
B) 25% drop of a 900K portfolio is 225K. I left with 675K. My annual expense without a mortgage is 45K. I can survive for 15 years.
Does this calculation include your additional available income?
1) What do you mean by that? Please explain.

2) It is irrelevant in this discussion anyhow. My point is paying off the mortgage is not necessarily safer. It does not change the cash flow/expense requirement enough to make a difference. The number of years that my portfolio can support is 15 years.

3) Each person needs to do his/her own calculation to check their own numbers.

KlangFool

KlangFool
Posts: 10416
Joined: Sat Oct 11, 2008 12:35 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by KlangFool » Wed Oct 17, 2018 10:58 am

texasdiver wrote:
Wed Oct 17, 2018 10:49 am
.
That said, whether it makes sense for a particular individual or couple to accelerate the payoff of their mortage loan, or add to it with a HLOC or 2nd motgage is an entirely different question. But in either case they are simply increasing or decreasing their debt, not actually putting money into or out of the the house.
texasdiver,

I disagreed.

A) The money has to come from somewhere. If you pay off the mortgage with some money, the money is coming from somewhere else. In general, it reduces your portfolio.

B) If you take more loan on the house, the money has to go somewhere. Unless you spend it all, it will be invested. Hence, there is more money outside the house.

The money does not show up from nowhere.

KlangFool

software
Posts: 121
Joined: Tue Apr 18, 2017 2:02 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by software » Wed Oct 17, 2018 11:01 am

DJN wrote:
Wed Oct 17, 2018 10:20 am
The maths are interesting but for me cashing in the $300,000 by reducing your mortgage is very attractive because you are locking in your hard won gains of the last 10 years or so. As they say once its gone its gone!
Who is “they”, and what is “it”? Have stocks never gone back up after they’ve gone down before?

To the original topic, no I will not be paying off my mortgage because I am a numbers guy and in my opinion paying off a mortgage should be treated as an emotional decision. The numbers almost never make sense but I’m sure it does feel good.

Things I appreciate about my mortgage:
1) It is low interest, non-callable leverage.
2) It provides a hedge against inflation. If we experience inflation my salary and home value should keep up, but my payments will not change.
3) If interest rates rise I have locked in a low interest rate that the bank has no power in to change.
4) If interest rates fall I can refinance to the now lower rate.

texasdiver
Posts: 2719
Joined: Thu Jun 25, 2009 12:50 am
Location: Vancouver WA

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by texasdiver » Wed Oct 17, 2018 11:09 am

KlangFool wrote:
Wed Oct 17, 2018 10:58 am
texasdiver wrote:
Wed Oct 17, 2018 10:49 am
.
That said, whether it makes sense for a particular individual or couple to accelerate the payoff of their mortage loan, or add to it with a HLOC or 2nd motgage is an entirely different question. But in either case they are simply increasing or decreasing their debt, not actually putting money into or out of the the house.
texasdiver,

I disagreed.

A) The money has to come from somewhere. If you pay off the mortgage with some money, the money is coming from somewhere else. In general, it reduces your portfolio.

B) If you take more loan on the house, the money has to go somewhere. Unless you spend it all, it will be invested. Hence, there is more money outside the house.

The money does not show up from nowhere.

KlangFool
I'm not arguing your math, just pointing out that the house and the loan are separate things. If column A is your portfolio, column B is the house, and column C is the mortgage then paying off the mortgage is simply moving funds from column A to column C and doesn't have any effect on column B, the house.

I think the mortage industry makes a huge effort to blur those lines which is why they like to talk about a HLOC as "tapping your equity" or "pulling money out of the house" when all you are actually doing is just borrowing money like any other loan that needs to be paid back.

AJS
Posts: 50
Joined: Sat May 14, 2011 6:56 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by AJS » Wed Oct 17, 2018 11:11 am

I like this article. Makes even more sense for me since I will no longer itemize due to new tax law.
The sea was angry that day my friends...

sillysaver
Posts: 148
Joined: Thu Oct 08, 2015 5:24 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by sillysaver » Wed Oct 17, 2018 11:18 am

It is not the opposite, it is a completely orthogonal concern (mortgage paydown vs. "putting more money into your house"), since a mortgage is just another liability which happens to be secured by your home.

You consider the loss of portfolio equity to be somehow different than the loss of home equity, but basically they are the same. If you leave the equity in the home, you could lose it due to a market downturn. The big difference is that housing values are more stable (lower volatility) than risky assets. However, with a long enough time horizon, equities always recover from a decline.

Also, paying down early limits your liquidity. Personally, I find that a big deal. If I have a portfolio of stocks and bonds, I can liquidate some to cover any short-term expenses. If I have lots of equity but no liquid assets, then I might be forced to go to the bank to refinance. If this happens at a time when I've lost my income, then it could be a big problem and could force me to sell the house, perhaps at a loss at a time when asset values are depressed.

So, I think you have to balance multiple considerations like cash reserves/liquidity, risk tolerance, time horizon, etc. when deciding whether to pay early. To reduce the risk of ruin I described above, it should only be done as a lump sum, unless your income is very stable/guaranteed.

Church Lady
Posts: 487
Joined: Sat Jun 28, 2014 7:49 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by Church Lady » Wed Oct 17, 2018 12:10 pm

I can hold very low risk investments that pay more than my mortgage rate. For example, a two year FDIC insured CD pays more than my mortgage rate. Holding low beta stock funds for the duration of the mortgage has worked even better -- so far.

This doesn't account for inflation, which is slowly decreasing my mortgage payment.

If I pay off the house, a home equity loan would cost 1.7x should I need to get the cash back.

My situation is far from unique. From where I'm sitting, holders of low fixed rate mortgages in the USA should sit tight and enjoy the ride. (YMMV. Each person must calculate for himself.)

There are other reasons to pay off a mortgage, but OP's post isn't asking about that.
He that loveth silver shall not be satisfied with silver; nor he that loveth abundance with increase: this is also vanity. Ecclesiastes 1:8

User avatar
Rowan Oak
Posts: 277
Joined: Mon May 09, 2016 2:11 pm
Location: Yoknapatawpha

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by Rowan Oak » Wed Oct 17, 2018 12:18 pm

grabiner if you have the time I would appreciate your opinion on this. Thank you
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger

NextMil
Posts: 502
Joined: Wed Dec 13, 2017 12:33 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by NextMil » Wed Oct 17, 2018 2:09 pm

Just to frame my response, I am very much pro paying off the mortgage. As long as you own that home you will owe the debt until it is paid.

That said, I understand the idea behind you are "putting money into your home," and I don't think its a false argument. I think if you are teetering on the edge of financial failure allocating cash to the sidelines and paying interest might not be the worst idea in the world. Meaning, if you have a war chest full of cash and paying a bunch of interest to the bank for your mortgage, you are probably better off in case a major storm comes.

Further to that point, most bogleheads, I would suggest, are not anywhere near that position. If we can agree that most bogleheads have zero debt other than a mortgage, maxing retirement and have a decent sized retirement portfolio (and in some cases) a roth IRA, an appropriate size emergency fund, and a taxable investment account (maybe not on the latter), then they are nowhere near financial failure, and in fact, fear of losing home because you are accelerating payoff is not legitimate fear.

Further to that point, mortgage delinquency and default rates are so low that I think the argument that you shouldn't pay your mortgage for fear of financial catastrophe because you have used your disposable income to accelerate mortgage payments is fear mongering of the worst kind in most all cases. See this link.https://www.consumerfinance.gov/data-re ... elinquent/

Based on all of this, I think accelerating your mortgage payments and curtailing your interest payments provides a guaranteed return on investment that is one viable approach to wealth building.

That all said, after having agonized over this issue and weighing both sides, I came to the conclusion of splitting disposable income into two buckets, accelerating the mortgage payoff, and investing in taxable (house payoff fund), because I have a low interest mortgage, and I think there might be a chance that investments could very well outperform for the duration of my holding the mortgage. I also think both sides make a lot of good points in this "beating a dead horse" debate. I also think both sides make some terrible points for why one over the other.

Admiral
Posts: 1395
Joined: Mon Oct 27, 2014 12:35 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by Admiral » Wed Oct 17, 2018 2:41 pm

Rowan Oak wrote:
Wed Oct 17, 2018 9:48 am
I often see the argument against paying off your mortgage early, because it is "putting more money into your house". Isn't it the opposite?

I put the money in the day I closed on the house and took the mortgage. If anything the only added money going "into the house" is the interest on the mortgage so paying it off early is actually reducing the amount of money I'm putting into the house. Right?

Allan Roth on the matter:
Faulty arguments against paying down the mortgage:
Here are three of the most common arguments I regularly hear to counter my advice.
  • A more balanced portfolio of, say, 60 percent stocks and 40 percent bonds can earn more than what you'd gain by paying down your mortgage. Though this may be true, it is more a case of comparing apples to oranges. This argument is analogous to taking out a margin loan on your brokerage account to buy more stocks. You might earn more if your stocks go up, but I would not recommend it, even though margin loans are often at lower rates than mortgages. Also, I've heard this argument for decades and, so far this century, bonds have outperformed stocks. Borrowing to buy more stocks has backfired.
  • You don't want to put more money into the house. While I agree with this statement, it's irrelevant. I'm not suggesting a house remodel here. Again, paying down the mortgage has no impact on the price you ultimately sell your house for.
  • If you don't fully pay off your mortgage, your monthly payment typically will not change. This statement is also true, but it's not the full picture. Because a much greater proportion of the monthly payment is going toward principal as you pay down your mortgage, the mortgage is paid off much sooner and you still save the interest payments.
My advice:
The one valid argument for not paying down the mortgage, assuming you have the money to do so, is that you may need the cash to live on. Once the mortgage is paid down, it's not so simple to borrow the money again. Though there are ways to get access to cash, such as a home equity line of credit, you should feel comfortable about not needing the money you'd use to pay down the mortgage.

Once the mortgage is fully paid off and the consumer still has income, I recommend continuing to make the monthly payments to a savings or investment account.

In deciding whether this advice is right for you, keep two things in mind:
  • Neither banks, brokerage firms nor financial advisers benefit from this advice. Banks want you to keep paying them monthly interest on your mortgage. Brokerages and financial advisers would rather have you invest with them the money you'd use to pay off your mortgage. This is why the conventional wisdom you often hear from the financial industry is to keep your mortgage.
  • Think about it: Have you ever met anyone who regretted paying off their mortgage?
So if you have enough access to liquid investments and you don't mind cutting my industry out of profits, consider paying down the mortgage.
Consider Paying Down Your Mortgage
How to earn 3 to 6 percent annually with no risk
by Allan Roth, January 25, 2016
You have it backwards. As a thought experiment, let's pretend we're talking about a very cheap car instead of a house.

You have $100 and you want to buy a $300 car. Since you don't have $300, you borrow $200 and pay $100 out of pocket. You now have nothing in the bank, and $100 worth of equity in the car, while the bank owns the other $200. As you pay off the loan--let's say $10 per year from cash flow--a portion of that goes to the loan principal, and a portion goes to service the debt. So, each month you own a little more of the car: a tire, the headlights, etc. If you make extra payments, you own more car each month but have less money to spend.

Now let's say you get a windfall of $75, which is coincidentally what you now owe to the bank. You can keep the $75, and keep paying your $10 per month, or pay the bank what you owe. If you keep the $75, you have $75. If you pay the bank, you have zero and a paid off car. You have just "put the money into the car" because you've chosen to own it outright: you've transferred the money from your bank to the bank that loaned you the money. They, in return, have given you the car. You can sell the car now and take the profit, or perhaps nobody wants it and you have to sell it at a loss.

Most people don't have enough cash to buy a home outright. Hence, a mortgage. Once you DO have enough to buy it outright (pay off your loan), then it's simply a question of where you want your money to go, and whether you feel you will be better off investing it or paying off the loan. But make no mistake: when you pay off the loan, the money is "in the house" because it's no longer "in the bank."

And let's be clear: a house is "worth" only what someone will pay for it. It is nothing like cash. There are high transaction costs (selling, or getting a loan) if you want to access that money. There is also the issue of asset diversification.

harvestbook
Posts: 488
Joined: Sat Mar 18, 2017 7:12 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by harvestbook » Wed Oct 17, 2018 2:49 pm

Rowan Oak wrote:
Wed Oct 17, 2018 9:48 am
  • Think about it: Have you ever met anyone who regretted paying off their mortgage?
This seems pretty important to me. Does anyone here regret paying off their mortgage early?

I paid mine off in two lump sums in 2012/2013 and even knowing now the math would've favored investing instead, I still don't regret it one single bit.

I suspect this will always be an emotional argument instead of a mathematical debate, especially since the future is unknowable.
I'm not smart enough to know, and I can't afford to guess.

michaeljc70
Posts: 3746
Joined: Thu Oct 15, 2015 3:53 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by michaeljc70 » Wed Oct 17, 2018 2:54 pm

Vulcan wrote:
Wed Oct 17, 2018 10:46 am
It is unknowable in advance whether paying off mortgage is better than investing the funds.
To complicate things, the potential rate of investment return will, of course, depend on what those funds are invested into.
Even those who locked in the record low fixed interest rate are unlikely to see risk-free investments surpass the guaranteed returns of mortgage payoff.

However, there is another important aspect that I touched on in a recent discussion with KlangFool in a different thread (that appears to have since been deleted).

For families with college-bound children, incomes up to approx. $200-250K/yr and significant taxable assets paying off their mortgages can be a prudent move, since home equity is not considered in federal and some of the private financial aid calculation formulas.
http://www.thecollegesolution.com/will- ... d-chances/

"Putting money into the house" beats sending money into the bursar's office.
I don't know about that. My mortgage is 3.375% and the 10 year is at 3.1% already. The long term average of the 10 year is over 6%.

User avatar
Vulcan
Posts: 215
Joined: Sat Apr 05, 2014 11:43 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by Vulcan » Wed Oct 17, 2018 3:22 pm

michaeljc70 wrote:
Wed Oct 17, 2018 2:54 pm
Vulcan wrote:
Wed Oct 17, 2018 10:46 am
It is unknowable in advance whether paying off mortgage is better than investing the funds.
To complicate things, the potential rate of investment return will, of course, depend on what those funds are invested into.
Even those who locked in the record low fixed interest rate are unlikely to see risk-free investments surpass the guaranteed returns of mortgage payoff.

However, there is another important aspect that I touched on in a recent discussion with KlangFool in a different thread (that appears to have since been deleted).

For families with college-bound children, incomes up to approx. $200-250K/yr and significant taxable assets paying off their mortgages can be a prudent move, since home equity is not considered in federal and some of the private financial aid calculation formulas.
http://www.thecollegesolution.com/will- ... d-chances/

"Putting money into the house" beats sending money into the bursar's office.
I don't know about that. My mortgage is 3.375% and the 10 year is at 3.1% already. The long term average of the 10 year is over 6%.
Long run is a misleading guide to current affairs. In the long run we are all dead. ~John Maynard Keynes

But yes, accelerated payoff of low interest fixed mortgage does not seem to be the best bet in most situations.
I described above one situation where it may be.

NextMil
Posts: 502
Joined: Wed Dec 13, 2017 12:33 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by NextMil » Wed Oct 17, 2018 3:29 pm

Don't you have to factor in federal taxes for the return on the ten year as well?

bryanm
Posts: 25
Joined: Mon Aug 13, 2018 3:48 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by bryanm » Wed Oct 17, 2018 3:47 pm

Admiral wrote:
Wed Oct 17, 2018 2:41 pm
Most people don't have enough cash to buy a home outright. Hence, a mortgage. Once you DO have enough to buy it outright (pay off your loan), then it's simply a question of where you want your money to go, and whether you feel you will be better off investing it or paying off the loan. But make no mistake: when you pay off the loan, the money is "in the house" because it's no longer "in the bank."
I personally find this misleading. When you pay off the mortgage, the money is "in" the paid off debt instrument. Taking you car analogy, let's say you wreck the car. Do you still owe the bank money? They would say you do. Similarly, if the car appreciates, you get to reap that benefit on sale, not the bank. By taking a fixed percentage of the debt, the bank is giving up the risk/reward of actually owning the asset. Having an asset as collateral on a loan is not the same thing as "owning" the asset. So you're not really buying the car/home, you're paying off your debt instrument.

mbasherp
Posts: 120
Joined: Mon Jun 26, 2017 8:48 am

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by mbasherp » Wed Oct 17, 2018 4:12 pm

Putting more money into your house? - maybe, maybe not.
Concentrating more of your assets in your house? - Definitely.

I feel that I have plenty of exposure as a percent of assets in my local real estate market. I do not need to add to that by making extra payments.

In addition, the loan on the house is at an artificially low, fixed interest rate for 30 years. I don't want to give up the profit I receive from inflation in the latter years of my repayment.

Even if I had the available cash to pay off my loan now, it is more worthwhile to pay sub 4% interest now for the opportunity to repay principle years from now with inflated dollars. It is incorrect to count nominal dollars when considering a 30 year mortgage repayment. Even a 2% inflation rate means that the last principal payments are roughly 55 cents on the dollar. I'm not aware of any other advantage as available and beneficial to us normal folks in the modern financial system. I won't forfeit mine because of disliking debt.

grokzilla
Posts: 84
Joined: Tue Aug 16, 2011 8:25 am

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by grokzilla » Wed Oct 17, 2018 4:28 pm

NextMil wrote:
Wed Oct 17, 2018 3:29 pm
Don't you have to factor in federal taxes for the return on the ten year as well?
Likely easily offset by the mortgage interest deduction, no?

NextMil
Posts: 502
Joined: Wed Dec 13, 2017 12:33 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by NextMil » Wed Oct 17, 2018 4:35 pm

grokzilla wrote:
Wed Oct 17, 2018 4:28 pm
NextMil wrote:
Wed Oct 17, 2018 3:29 pm
Don't you have to factor in federal taxes for the return on the ten year as well?
Likely easily offset by the mortgage interest deduction, no?
After the new tax law, I don’t pay enough interest. So in my case, no.

JoeRetire
Posts: 1647
Joined: Tue Jan 16, 2018 2:44 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by JoeRetire » Wed Oct 17, 2018 5:05 pm

Jags4186 wrote:
Wed Oct 17, 2018 10:35 am
The big difference though is that if you put the money into the house and the house loses value, you lose no utility whereas if your investments drop you've lost the utility of that money. Not claiming it is financially the long term best move, but it does lock in 1 aspect of life.
If you put the money into the house you have already lost the utility of that $300k.

JoeRetire
Posts: 1647
Joined: Tue Jan 16, 2018 2:44 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by JoeRetire » Wed Oct 17, 2018 5:10 pm

harvestbook wrote:
Wed Oct 17, 2018 2:49 pm
This seems pretty important to me. Does anyone here regret paying off their mortgage early?
I don't know anyone who admits to regretting having paid off their mortgage early.
And I don't know anyone who admits to regretting not having paid off their mortgage early.

I think that says something about the human mind...

MrBeaver
Posts: 239
Joined: Tue Nov 14, 2017 4:45 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by MrBeaver » Wed Oct 17, 2018 5:17 pm

bryanm wrote:
Wed Oct 17, 2018 3:47 pm
Admiral wrote:
Wed Oct 17, 2018 2:41 pm
Most people don't have enough cash to buy a home outright. Hence, a mortgage. Once you DO have enough to buy it outright (pay off your loan), then it's simply a question of where you want your money to go, and whether you feel you will be better off investing it or paying off the loan. But make no mistake: when you pay off the loan, the money is "in the house" because it's no longer "in the bank."
I personally find this misleading. When you pay off the mortgage, the money is "in" the paid off debt instrument. Taking you car analogy, let's say you wreck the car. Do you still owe the bank money? They would say you do. Similarly, if the car appreciates, you get to reap that benefit on sale, not the bank. By taking a fixed percentage of the debt, the bank is giving up the risk/reward of actually owning the asset. Having an asset as collateral on a loan is not the same thing as "owning" the asset. So you're not really buying the car/home, you're paying off your debt instrument.
This.

The way I think about it, it helps to mentally separate the debt (mortgage) from the item I own which I also hold all the risk in (the house), even though I understand they are legally connected via the bank's collateral. Paying down the mortgage does not change my risk and loss if the value of the house falls, since that would harm me the same way whether I held a mortgage or not. What paying down a mortgage does is reduce liquidity and any potential investment returns I might gain from that liquidity while also reducing future cash-flow needs. Paying down debt (mortgage) reduces risk while also reducing potential returns. Sometimes that's smart, and sometimes that's dumb.

Jags4186
Posts: 2541
Joined: Wed Jun 18, 2014 7:12 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by Jags4186 » Wed Oct 17, 2018 5:46 pm

JoeRetire wrote:
Wed Oct 17, 2018 5:05 pm
Jags4186 wrote:
Wed Oct 17, 2018 10:35 am
The big difference though is that if you put the money into the house and the house loses value, you lose no utility whereas if your investments drop you've lost the utility of that money. Not claiming it is financially the long term best move, but it does lock in 1 aspect of life.
If you put the money into the house you have already lost the utility of that $300k.
You’ve lost the liquidity of the money and gained imputed income. I wouldn’t say you’ve lost utility.

lotusflower
Posts: 188
Joined: Thu Oct 24, 2013 12:32 am

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by lotusflower » Wed Oct 17, 2018 6:16 pm

Rowan Oak wrote:
Wed Oct 17, 2018 9:48 am
I often see the argument against paying off your mortgage early, because it is "putting more money into your house". Isn't it the opposite?
This is all just semantics about the very generic and flexible English word "put".

"putting money into something" can mean
SPENDING money ON it
STORING money IN it

You can put your money into a vacation or you can put it into a piggy bank, and those meanings are quite different.
Paying off a mortgage is definitely storing your money "in the house" according to most people, but OP's point seems to be that prepaying a mortgage is not spending any money. So that's correct too, but sort of obvious and not very useful IMO.

samsdad
Posts: 133
Joined: Sat Jan 02, 2016 6:20 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by samsdad » Wed Oct 17, 2018 6:27 pm

Church Lady wrote:
Wed Oct 17, 2018 12:10 pm
I can hold very low risk investments that pay more than my mortgage rate. For example, a two year FDIC insured CD pays more than my mortgage rate. Holding low beta stock funds for the duration of the mortgage has worked even better -- so far.

This doesn't account for inflation, which is slowly decreasing my mortgage payment.

If I pay off the house, a home equity loan would cost 1.7x should I need to get the cash back.

My situation is far from unique. From where I'm sitting, holders of low fixed rate mortgages in the USA should sit tight and enjoy the ride. (YMMV. Each person must calculate for himself.)

There are other reasons to pay off a mortgage, but OP's post isn't asking about that.
What rate would you consider to low?

mortfree
Posts: 1298
Joined: Mon Sep 12, 2016 7:06 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by mortfree » Wed Oct 17, 2018 6:32 pm

harvestbook wrote:
Wed Oct 17, 2018 2:49 pm
Rowan Oak wrote:
Wed Oct 17, 2018 9:48 am
  • Think about it: Have you ever met anyone who regretted paying off their mortgage?
This seems pretty important to me. Does anyone here regret paying off their mortgage early?

I paid mine off in two lump sums in 2012/2013 and even knowing now the math would've favored investing instead, I still don't regret it one single bit.

I suspect this will always be an emotional argument instead of a mathematical debate, especially since the future is unknowable.
I totally regretted paying mine off. I was 39 and thought I was in the forever home.

A year later my house is on the market. I am moving.

House $225k
Cash $50k
Taxable Investments $60k

I didn’t want to sell the taxable investments. I had to sell the house first so I could complete the down payment on the next house.

To the real topic. Would you rather have $200k in the bank or be without the mortgage payment of say $1000/month.

200 months divided by 12 is about 16 years to get back your 200k.

Also payments for most everything only increase over time thus chipping away at your newly found savings of $1000 per month.

I love these debates and am amazed at how my viewpoint has changed since I had that previous experience. Fun stuff

Now I borrowed 200k at 3.875 for 30 years. I’ve made extra payments and plan to treat it like a 20-year mortgage. In reality I could pay it off but I would have $0 to my name. (Except for 401k and Roth money)
Last edited by mortfree on Wed Oct 17, 2018 6:57 pm, edited 1 time in total.

JoeNJ28
Posts: 12
Joined: Sat Aug 25, 2018 9:13 am

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by JoeNJ28 » Wed Oct 17, 2018 6:55 pm

samsdad wrote:
Wed Oct 17, 2018 6:27 pm
Church Lady wrote:
Wed Oct 17, 2018 12:10 pm
I can hold very low risk investments that pay more than my mortgage rate. For example, a two year FDIC insured CD pays more than my mortgage rate. Holding low beta stock funds for the duration of the mortgage has worked even better -- so far.

This doesn't account for inflation, which is slowly decreasing my mortgage payment.

If I pay off the house, a home equity loan would cost 1.7x should I need to get the cash back.

My situation is far from unique. From where I'm sitting, holders of low fixed rate mortgages in the USA should sit tight and enjoy the ride. (YMMV. Each person must calculate for himself.)

There are other reasons to pay off a mortgage, but OP's post isn't asking about that.
What rate would you consider to low?
+1 if rates keep rising at what point do people start thinking it’s wiser to pay down the mortgage since we don’t know what the market says will do going forward? 4% 5% etc

dknightd
Posts: 955
Joined: Wed Mar 07, 2018 11:57 am

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by dknightd » Wed Oct 17, 2018 6:55 pm

samsdad wrote:
Wed Oct 17, 2018 6:27 pm

What rate would you consider to low?
Good question. For me the answer is simple. If i can earn more than the mortgage rate financially it makes no sense to pay off. If I don't have the funds to pay it off, then it is a mute point. It was a mute point for many many years. Now I could pay it off if I wanted

I have 9 years left on a 3.25% loan. It started out at 10% and I've been paying to refinance over the years. 30 now! So my 30 year loan has turned into a 39 year loan. I would be surprised if I could not earn 3.25% over the next 9 years.

To pay it off I'd have to take money out of tax differed, or leave me with little money in after tax.

Using the car analogy, it makes no sense for me to keep a car in my driveway, I could rent one for less. But I like having one there, so I pay for it.

One day I might decide to pay off my house even though it does not make financial sense.

User avatar
grabiner
Advisory Board
Posts: 22900
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by grabiner » Wed Oct 17, 2018 10:05 pm

All three of Allan Roth's arguments are correct, as is discussed on the wiki: https://www.bogleheads.org/wiki/Paying_ ... _investing

The fair comparison is not between a balanced portfolio and the mortgage rate, but between bond rates and mortgage rates. While you can have a higher expected return with more risk by buying a balanced portfolio rather than paying down the mortgage, you can do the same by paying down the mortgage and moving an equal amount from bonds to stocks (or buying stocks on margin if you are already 100% stock). Once you decide how much risk you want to take, you can then decide what the best way is to take that amount of risk.

The reason an extra mortgage payment is not "putting more money into the house" is that you own the house either way. If you have a $500K house, and housing prices decline by 20%, your net worth declines by $100K regardless of your mortgage balance. You are putting more money into a financial instrument.

And the fact that you won't decrease your monthly payments (unless you refinance or recast) is not relevant to the return on the mortgage payment; the return is the mortgage rate, which you will receive when future payments are eliminated. However, it is one of the main reasons you might not pay down the mortgage; you give up the liquidity. (This is particularly important now that rates have increased; if you pay down your mortgage and take out a home-equity loan later, you will borrow at a higher rate.)

Another one of his points becomes stronger now. In 2016, most investors who considered paying down a mortgage itemized deductions, and any mortgage prepayment reduced the itemized deductions. Now, a married couple deducting the maximum in state tax needs $14,000 in mortgage interest and charitable contributions to get any deductible interest.

He misses one counter-argument: Most investors are better off maxing out an IRA or decent 401(k) than paying down a fixed-rate mortgage. With the recent rise in rates, you can probably earn more on bond funds of the same duration of the mortgage than by paying down the mortgage, even if the mortgage interest is not deductible. In addition, by putting more into your IRA or 401(k) now, you get more money to grow tax-deferred; if you pay off your mortgage, you might have to invest the savings in a taxable account later. Finally, a traditional IRA or 401(k) may give you a tax deduction now and have tax due at a lower rate later, improving your after-tax return; a Roth IRA does not have this advantage but gives liquidity since contributions can be withdrawn tax-free and penalty free. (Note the "fixed-rate"; paying down an ARM has a shorter-duration benefit, since you will be forced to refinance when the ARM resets.)

And despite his arguments, I do keep my own mortgage, for the same reason he did. I max out my retirement accounts, but my mortgage is fully deductible and at a very low rate (2.625%, 1.79% after state and federal tax), so I can earn more by investing an equal amount in bonds, without taking extra risk.
Wiki David Grabiner

mirror
Posts: 120
Joined: Mon Jan 26, 2015 11:24 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by mirror » Thu Oct 18, 2018 12:05 am

harvestbook wrote:
Wed Oct 17, 2018 2:49 pm
Rowan Oak wrote:
Wed Oct 17, 2018 9:48 am
  • Think about it: Have you ever met anyone who regretted paying off their mortgage?
This seems pretty important to me. Does anyone here regret paying off their mortgage early?

I paid mine off in two lump sums in 2012/2013 and even knowing now the math would've favored investing instead, I still don't regret it one single bit.

I suspect this will always be an emotional argument instead of a mathematical debate, especially since the future is unknowable.
I think the better question is: if you have paid off your mortgage (not hypothetical, but if you as an individual have actually paid off your mortgage), have you taken out, or considered taking out another mortgage? If you pay it off early (which I'm not advocating for or against) you can always take out another mortgage. So it would be interesting to see of those that actually paid off their mortgage how many have subsequently regretted the decision so much that they took out another mortgage.

nolesrule
Posts: 777
Joined: Thu Feb 26, 2015 10:59 am

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by nolesrule » Thu Oct 18, 2018 6:44 am

mirror wrote:
Thu Oct 18, 2018 12:05 am
harvestbook wrote:
Wed Oct 17, 2018 2:49 pm
Rowan Oak wrote:
Wed Oct 17, 2018 9:48 am
  • Think about it: Have you ever met anyone who regretted paying off their mortgage?
This seems pretty important to me. Does anyone here regret paying off their mortgage early?

I paid mine off in two lump sums in 2012/2013 and even knowing now the math would've favored investing instead, I still don't regret it one single bit.

I suspect this will always be an emotional argument instead of a mathematical debate, especially since the future is unknowable.
I think the better question is: if you have paid off your mortgage (not hypothetical, but if you as an individual have actually paid off your mortgage), have you taken out, or considered taking out another mortgage? If you pay it off early (which I'm not advocating for or against) you can always take out another mortgage. So it would be interesting to see of those that actually paid off their mortgage how many have subsequently regretted the decision so much that they took out another mortgage.

This is ignoring the interest rate changes which are going to be an influence on the decision making process.

I refinanced into a 20 year loan 2 years ago, and now the rate for the same term loan is 1.25% higher. Even if I went with a 15 year loan in a refinance now it's still be 0.875% higher. Taking out another mortgage doesn't just happen in a vacuum.

NextMil
Posts: 502
Joined: Wed Dec 13, 2017 12:33 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by NextMil » Thu Oct 18, 2018 7:07 am

nolesrule wrote:
Thu Oct 18, 2018 6:44 am

This is ignoring the interest rate changes which are going to be an influence on the decision making process.

I refinanced into a 20 year loan 2 years ago, and now the rate for the same term loan is 1.25% higher. Even if I went with a 15 year loan in a refinance now it's still be 0.875% higher. Taking out another mortgage doesn't just happen in a vacuum.
Sure, but the interest rate hikes are a fairly recent issue. In the past few years there has been plenty of options to refi into historically low mortgages if someone had paid off their home. Therefore, I don’t think its a terrible question to ask, although all of these questions are going to solicit biased responses.

******

I am still trying to wrap my head around investing in bonds to pay off my mortgage. At current pace, I have just under ten years left on a 15 year mortgage at 2.9%. I cannot deduct the interest because its not enough to qualify. Assuming that I can get a ten year bond at 4% (I know, being generous), after taxes what am I looking at for a real return and don’t I have to wait ten years for maturity? And in that time, any found money that would normally be thrown at the mortgage further accelerating through the amortization schedule, I would throw into bonds, but would have to wait until I reached $1k each time and then its a ten year window?

Just seems overly complicated and I would be waiting longer to pay off my home for what? A minor spread?

It’s obviously much riskier, but index funds at least makes sense to me because spread is larger because you are taking a bigger risk.

I just don’t see bonds worth the minor spread and being locked in for 10 years. Can someone show me why I am wrong?

User avatar
Rowan Oak
Posts: 277
Joined: Mon May 09, 2016 2:11 pm
Location: Yoknapatawpha

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by Rowan Oak » Thu Oct 18, 2018 7:33 am

grabiner wrote:
Wed Oct 17, 2018 10:05 pm
All three of Allan Roth's arguments are correct, as is discussed on the wiki: https://www.bogleheads.org/wiki/Paying_ ... _investing

The fair comparison is not between a balanced portfolio and the mortgage rate, but between bond rates and mortgage rates. While you can have a higher expected return with more risk by buying a balanced portfolio rather than paying down the mortgage, you can do the same by paying down the mortgage and moving an equal amount from bonds to stocks (or buying stocks on margin if you are already 100% stock). Once you decide how much risk you want to take, you can then decide what the best way is to take that amount of risk.

The reason an extra mortgage payment is not "putting more money into the house" is that you own the house either way. If you have a $500K house, and housing prices decline by 20%, your net worth declines by $100K regardless of your mortgage balance. You are putting more money into a financial instrument.

And the fact that you won't decrease your monthly payments (unless you refinance or recast) is not relevant to the return on the mortgage payment; the return is the mortgage rate, which you will receive when future payments are eliminated. However, it is one of the main reasons you might not pay down the mortgage; you give up the liquidity. (This is particularly important now that rates have increased; if you pay down your mortgage and take out a home-equity loan later, you will borrow at a higher rate.)

Another one of his points becomes stronger now. In 2016, most investors who considered paying down a mortgage itemized deductions, and any mortgage prepayment reduced the itemized deductions. Now, a married couple deducting the maximum in state tax needs $14,000 in mortgage interest and charitable contributions to get any deductible interest.

He misses one counter-argument: Most investors are better off maxing out an IRA or decent 401(k) than paying down a fixed-rate mortgage. With the recent rise in rates, you can probably earn more on bond funds of the same duration of the mortgage than by paying down the mortgage, even if the mortgage interest is not deductible. In addition, by putting more into your IRA or 401(k) now, you get more money to grow tax-deferred; if you pay off your mortgage, you might have to invest the savings in a taxable account later. Finally, a traditional IRA or 401(k) may give you a tax deduction now and have tax due at a lower rate later, improving your after-tax return; a Roth IRA does not have this advantage but gives liquidity since contributions can be withdrawn tax-free and penalty free. (Note the "fixed-rate"; paying down an ARM has a shorter-duration benefit, since you will be forced to refinance when the ARM resets.)

And despite his arguments, I do keep my own mortgage, for the same reason he did. I max out my retirement accounts, but my mortgage is fully deductible and at a very low rate (2.625%, 1.79% after state and federal tax), so I can earn more by investing an equal amount in bonds, without taking extra risk.
Very helpful. Thank you!
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger

Mako52
Posts: 49
Joined: Mon Jul 30, 2018 11:07 am

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by Mako52 » Thu Oct 18, 2018 8:32 am

I'm really curious if anyone on here truly regrets paying off their mortgage.

The $24k MFJ standard deduction is going to change some mindsets on interest deductions, now that SALT is limited to $10k. In our case, we're paying $20k a year in mortgage interest on a $450k balance. We made a number of extra principal payments early on in the 30 year / 4.125% mortgage, but nothing massive. I recently paid $25k against the $480k balance because the interest savings alone were in excess of $25k. So if we are still carrying a mortgage, the mortgage is giving us $6k in deductions that we would not have otherwise. What is the value of $6,000 in deductions in the 22% or 24% tax bracket? It's not going to make or break us long term.

I doubt that we are going to be in this house longer than another 10 years. Using the Vertex42 calculator, I figure that the prepayments we've made so far (equivalent to 15.6 monthly P&I payments) have shaved 40 payments off our mortgage. That's good ROI.

Paying down mortgage interest early on makes a ton of sense, but I'm still not seeing a huge upside to paying off a mortgage that has less than half its original term. As an example in our case, paying off $225k now would save us $167k in interest, paying it off in 8 years, vs. $206k in interest savings if we paid off the $450k entirely now. Do we really need to tie up $225k to save $40k in interest over 8 years? If we invested $225k now and made 5% over 8 years, we would have a gain of $107k vs $40k in interest savings.

KlangFool
Posts: 10416
Joined: Sat Oct 11, 2008 12:35 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by KlangFool » Thu Oct 18, 2018 8:46 am

Mako52 wrote:
Thu Oct 18, 2018 8:32 am

I'm really curious if anyone on here truly regrets paying off their mortgage.
Mako52,

Only folks that survive the recession posted on this forum. So, there is survivorship bias here. It is not hard to understand the following sequence is possible.

A) Someone pay off their mortgage.

B) The person has some emergency fund but little money outside of emergency fund.

C) The person has some money in the retirement account.

D) Recession hits and the person is unemployed long enough to wipe out the emergency fund. Housing market crashed and the house is severely undervalued. The stock market crashed too.

E) In a recession, nobody is buying the house. The person starts withdrawing money from retirement accounts and paying penalty and sell stock at a severe loss.

F) After a while, the person has nothing and stuck with a house that cannot. Then, the person loses the house because he has no money to pay property tax.

KlangFool

wolf359
Posts: 1424
Joined: Sun Mar 15, 2015 8:47 am

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by wolf359 » Thu Oct 18, 2018 8:58 am

Paying off the mortgage is a tradeoff between cash flow and liquidity.

If I pay it off, I recover some of the cash flow. (I still have to pay taxes and insurance.)

If I pay it off, my liquid assets drop by the amount of the payoff.

If I pay it off, the total cost of ownership drops because of the prepaid interest. This may not be as much of a factor as the other two, but it depends on your interest rate.

The actual numbers make all the difference.

If you have $200,000 in taxable liquid assets, would you pay $50,000 to pay off a mortgage that requires a monthly $1,000 payment? That late in the cycle (4 years left on the mortgage), you don't save much on interest, but you will still have liquid assets, and drop your expenses by $1K. I'd do that.

If you have $200,000 in liquid assets, would you pay $150,000 to pay off a mortgage that requires a monthly $1,000 payment? Now we're talking 12 years left on the mortgage, but the payment would leave you with only $50,000 in liquid assets. Liquid assets in this case is probably an investment account, so you're probably cashing out stocks to pay off the house. In that case, I'd probably pass. Maybe if the mortgage was requiring 2-3K/mo, because that would be a significant drop in expenses, and I'd be able to rebuild the liquid assets pretty rapidly with that additional cash flow.

It's not really about "money in your house." It's about whether or not you have sufficient liquidity. I'm willing to have money tied up in the house, but not ALL the money.

Paying DOWN the mortgage is also not the same as paying OFF the mortgage. Paying it down reduces your liquidity without the benefit of reducing your expenses (until that last payment is made.)

NoblesvilleIN
Posts: 19
Joined: Sat Mar 24, 2018 6:04 pm
Location: Noblesville IN

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by NoblesvilleIN » Thu Oct 18, 2018 9:08 am

Put me in the camp of paying it off early and definitely not regretting it. For us it was for two reasons: the emotional one of not liking debt and the more practical one of cash flow. The rest of this post is going to ignore the emotional aspect (although it was more important to me) and concentrate on the cash flow aspect. When we moved into our house in August of 1992 (two weeks after our first child was born), we set a goal of paying it off by the time he graduated from high school. The idea was that we would then cash flow his college. As a result, we did not set aside savings for college nor open a 529 when they became available. In hind site, we got lucky because we had no idea of how expensive college would get in the next 18 years. I'm going to put "extra" payments in quotes because I'm not sure that the extra amount we sent in for most of the 18.5 years (we missed our goal by about 6 months) it took to pay it off was larger than our initial payment amount. IIRC, the original interest rate was between 6.5% and 7%, it might have been a bit higher. When we refinanced several times, we kept making the same payment amount as before even though the interest rate was lower. The final lump sum of several thousand dollars paid in January of 2012 did not come from savings/investments. It came from cashing in two whole life policies (one on me and one on my wife) taken out in the mid-1980's before we even met. In late 2011, we had a discussion on whether we still needed life insurance. My wife observed that the cash value of the two policies was basically the same as what we still owed on the house. Couple that with a significant rise in the premium for my policy (not sure if it was because I was turning 55 or it was year 25 of the policy) and it became an easy decision. Prior to that year, the policy dividend had covered the premium for at least 15 years. This is not to say that having whole life was smart for us. The cash flow aspect has worked out well for us since. :D We were able to cover the kids college and then as they finished, I was able to go part time. Having the mortgage paid off as the oldest started his 2nd semester of college allowed us to reach FI about the same time as the youngest started her senior year. It also allowed me to go part time the same weekend the oldest graduated and the youngest became a senior.

Mako52
Posts: 49
Joined: Mon Jul 30, 2018 11:07 am

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by Mako52 » Thu Oct 18, 2018 9:24 am

After running our numbers on 2018 MFJ tax rates, I figured that we need waaaaay more than the annual P&I to keep the same standard of living by keeping the mortgage.....to the order of 1.75X in pretax income.

It helped put things in perspective by putting the numbers into a matrix.

Reduced Income (140k) Keep mortgage: -30k in Savings / Pay off mortgage: Neutral Savings
Higher Income (200k) Keep mortgage: Neutral Savings / Pay off mortgage: +34k in Savings

User avatar
bertilak
Posts: 6126
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by bertilak » Thu Oct 18, 2018 9:31 am

software wrote:
Wed Oct 17, 2018 11:01 am
Things I appreciate about my mortgage:
2) It provides a hedge against inflation. If we experience inflation my salary and home value should keep up, but my payments will not change.
If you pay off your mortgage your future payments will ALSO be unaffected by inflation: they will remain at zero. So, that is NOT a unique advantage of having a mortgage.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

Atgard
Posts: 390
Joined: Wed Apr 09, 2014 2:02 pm

Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by Atgard » Thu Oct 18, 2018 9:45 am

Vulcan wrote:
Wed Oct 17, 2018 10:46 am
It is unknowable in advance whether paying off mortgage is better than investing the funds.
To complicate things, the potential rate of investment return will, of course, depend on what those funds are invested into.
Even those who locked in the record low fixed interest rate are unlikely to see risk-free investments surpass the guaranteed returns of mortgage payoff.
I dunno, if you have a 3.75%, 30-year mortgage, isn't it pretty likely you'll see a CD paying more than that pretty soon, if not already? It was only about 10 years ago I remember earning 5% in liquid bank accounts and had a 6% CD (and some smart people who I definitely DO NOT jealously hate have 6% I-Bonds).

If you have a 3.15%, 15-year mortgage, you're probably already beating that with CDs.

Yeah, there are tax/inflation concerns on both sides (tax on CD gains, tax deduction on mortgage interest; inflation de-values your CD and your mortgage payment). But I think it is highly likely to do better than 3.75% (even at risk-free rates, let alone with stocks) over the next 30 years.

Again, it usually comes down to more of an emotional / practical choice.

Post Reply