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

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

Post by edge » Thu Oct 18, 2018 9:47 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!
this does not lock in any gains. it reduces debt.

goblue100
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Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by goblue100 » Thu Oct 18, 2018 9:47 am

My .02. There are two topics that are endlessly debated on this forum, when to take social security and if one should pay off a house. I suspect in most cases the decision is so close that there is no right or wrong answer. If you would like the security of no house payment, pay it off. If you want to pay back more money using ever cheaper dollars, pay it out.
Can't take it with you when you're gone | But I want enough to get there on - Rollin with the flow - Jerry Hayes

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

Post by Vulcan » Thu Oct 18, 2018 9:57 am

goblue100 wrote:
Thu Oct 18, 2018 9:47 am
My .02. There are two topics that are endlessly debated on this forum, when to take social security and if one should pay off a house. I suspect in most cases the decision is so close that there is no right or wrong answer. If you would like the security of no house payment, pay it off. If you want to pay back more money using ever cheaper dollars, pay it out.
College finaid is a big exception that can tilt the equation.
For parents of pre-college kids mortgage payoff is a reasonable next place to put savings into once all tax-sheltered accounts are maxed out.

For every 100K sitting in taxable they could, under certain circumstances, be looking at missing out on almost 50K in finaid over two 4-year college terms.
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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

Post by wannabebogler » Thu Oct 18, 2018 10:08 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.
My house is not paid off but I could if I wanted to. Literally, every day I drive up to my house I scoff as I think about how much equity I have tied into my house. Obviously, that feeling would be worse if it were paid off. My rate is 2.875%. Short of dying and wanting to protect my family, I can't think of any reason why I would want to pay the house off.

Flyer24
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Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by Flyer24 » Thu Oct 18, 2018 10:15 am

Guess I am just the opposite. I would rather have equity than debt. I was be pleased to drive up to a paid off house and still have good retirement/emergency funds. Everyone is different and there is no right/wrong.

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

Post by an_asker » Thu Oct 18, 2018 10:28 am

grabiner wrote:
Wed Oct 17, 2018 10:05 pm
[...]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.
Please shed some light on what you deem to be a "fully deductible mortgage."

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

Post by retiresoon222 » Thu Oct 18, 2018 12:30 pm

Mako52 wrote:
Thu Oct 18, 2018 8:32 am
I'm really curious if anyone on here truly regrets paying off their mortgage.

We paid off our mortgage and do not regret it.

The day we paid a check for a couple hundred K, our net worth remained exactly the same.
Assets (cash) went down, liabilities (mortgage) went down. Net worth UNCHANGED. Also, value of house remains unchanged.

In my mind, the piece of mind of having ZERO debt is quite appealing. This is not a tangible calculation of investment returns vs. interest paid etc.

Over the long horizon, it likely makes more financial sense to keep your low interest rate mortgage and keep investments in the market (or some diversified portfolio). That is not what we did. To reiterate, we have no regrets paying off the mortgage. YRMV Now we just invest that much more every month!
Last edited by retiresoon222 on Thu Oct 18, 2018 1:32 pm, edited 1 time in total.

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

Post by jalbert » Thu Oct 18, 2018 1:11 pm

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.
Most lenders will let you re-amortize the loan after a prepayment, typically charging a nominal administrative fee for the service (around $25).

Paying down a mortgage is mostly equivalent to investing the funds in a taxable account in a bond with maturity corresponding to the remaining term of the mortgage. The bond would be more liquid. It only should be viewed in terms of how much money is invested in a house if one were to default on the mortgage and end up in foreclosure or sell the house in a short sale.
Risk is not a guarantor of return.

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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 1:27 pm

Mako52 wrote:
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
Mako52,

I have no idea what do you mean by those numbers.

1) Are you retired?

2) How big is your mortgage? What is the interest rate?

3) What is the opportunity cost of paying off your mortgage?

KlangFool

Mako52
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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 2:06 pm

KlangFool wrote:
Thu Oct 18, 2018 1:27 pm
Mako52 wrote:
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
Mako52,

I have no idea what do you mean by those numbers.

1) Are you retired?

2) How big is your mortgage? What is the interest rate?

3) What is the opportunity cost of paying off your mortgage?

KlangFool
The analysis I ran tried to show what our annual burn or surplus would look like assuming current expenditures (including Federal income tax depending on various income scenarios), except paying off the mortgage. At 140k in gross income, we would be burning through 30k a year if we kept the mortgage, and be neutral (zero savings, zero burn) if it were paid off. At 200k in gross income, we would be neutral if we still carried the mortgage, and saving $34k if we didn't have the mortgage.

1. No.

2. 455k left at 4.125%

3. Reduced liquidity and flexibility for investments.

KlangFool
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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 2:32 pm

Mako52 wrote:
Thu Oct 18, 2018 2:06 pm
KlangFool wrote:
Thu Oct 18, 2018 1:27 pm
Mako52 wrote:
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
Mako52,

I have no idea what do you mean by those numbers.

1) Are you retired?

2) How big is your mortgage? What is the interest rate?

3) What is the opportunity cost of paying off your mortgage?

KlangFool
The analysis I ran tried to show what our annual burn or surplus would look like assuming current expenditures (including Federal income tax depending on various income scenarios), except paying off the mortgage. At 140k in gross income, we would be burning through 30k a year if we kept the mortgage, and be neutral (zero savings, zero burn) if it were paid off. At 200k in gross income, we would be neutral if we still carried the mortgage, and saving $34k if we didn't have the mortgage.

1. No.

2. 455k left at 4.125%

3. Reduced liquidity and flexibility for investments.
Mako52,

Do you max up all your tax-advantaged accounts under all 4 combinations of income versus paying off mortgages?

KlangFool

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

Post by scophreak » Thu Oct 18, 2018 3:14 pm

bertilak wrote:
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.
I think the point is that, all things being equal, if inflation doesn't affect the payment then one should opt for a larger payment in future years (i.e. NOT paying off the mortgage). Someone earlier in the thread explained it well - after 30 years of inflation, I'll be paying a fixed payment in current dollars while my salary is earned in future dollars. If future dollars are only worth the equivalent of 55 cents after inflation then I realize a tangible benefit. Sounds like a favorable tradeoff to me.

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

Post by PharmerBrown » Thu Oct 18, 2018 3:14 pm

There are two distinct situations.
The first group has enough investments in non-retirement accounts where they could withdraw the money tomorrow and pay off the mortgage.
The more common group has discretionary income that they are deciding what to do with, and this is a function of budgeting. Most of us would agree that the first priority in budgeting discretionary income is determining required savings. Just about everything else (including extra savings) will come after that. We often debate between investing and paying off the mortgage, but that is more applicable to the first group. The second group is debating between paying off the mortgage early and everything else they do with discretionary income. That includes cars, dinners, toys, landscaping...... We make these decisions based on our priorities. That is why it's difficult to find someone that regrets paying off their mortgage early. That was their priority. I'm never going to look back and regret the cars I purchased because I got all of the options, or I didn't buy the minimum required to get from A to B. Even though that means I could have paid off my mortgage faster. To some of you, that makes me a fool, but we have different priorities......and that's just fine. It's why posts like this can have so many responses.

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

Post by grokzilla » Thu Oct 18, 2018 4:04 pm

scophreak wrote:
Thu Oct 18, 2018 3:14 pm
bertilak wrote:
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.
I think the point is that, all things being equal, if inflation doesn't affect the payment then one should opt for a larger payment in future years (i.e. NOT paying off the mortgage). Someone earlier in the thread explained it well - after 30 years of inflation, I'll be paying a fixed payment in current dollars while my salary is earned in future dollars. If future dollars are only worth the equivalent of 55 cents after inflation then I realize a tangible benefit. Sounds like a favorable tradeoff to me.
This seems like a pretty significant point, but I'm no mathematical inflating amortization wizard...so, is it?!

Every year, my salary inflates, but I pay the old uninflated mortgage rate, a benefit that improves every year. What's more, the home benefits from the same inflation dynamic appreciating in most years.

It seems like win, win, win.

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bertilak
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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 4:07 pm

scophreak wrote:
Thu Oct 18, 2018 3:14 pm
bertilak wrote:
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.
I think the point is that, all things being equal, if inflation doesn't affect the payment then one should opt for a larger payment in future years (i.e. NOT paying off the mortgage). Someone earlier in the thread explained it well - after 30 years of inflation, I'll be paying a fixed payment in current dollars while my salary is earned in future dollars. If future dollars are only worth the equivalent of 55 cents after inflation then I realize a tangible benefit. Sounds like a favorable tradeoff to me.
I agree that if one HAS a mortgage payment the upside is that inflation does not affect it. I made that observation a few years ago when doing my retirement planning. My un-inflatable mortgage (about a third of my total expenses) meant my investments had about a third less work to do to cover inflation. All that was good!

I eventually realized that I could spend some of my investments to improve my cash flow immediately. Inflation would then have to work very hard to eat away that extra cash flow! In the mean time that extra cash flow could be put to work.

The math primarily boiled down to, I think, not needing to pay the interest with the advantage that there is an immediate benefit -- starting immediately, one does NOT have a mortgage payment at all.

Two things to consider: 1) The improved cash flow without a mortgage and 2) is your portfolio large enough to survive a major depletion.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

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

Post by Church Lady » Thu Oct 18, 2018 4:26 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?
I compare my mortgage rate to what an investment I am comfortable holding for the duration of the mortgage is paying. So if I had 30 years to go on my mortgage, I compare that to what stocks would return over 30 years. Or if I were conservative, I would compare that to what 30 year bonds were paying. If I have only ten years to go on my mortgage, I may or may not use stocks, but I would certainly compare to what ten year bonds were paying. If I can get more from my comfortable investment, I should stay invested.
He that loveth silver shall not be satisfied with silver; nor he that loveth abundance with increase: this is also vanity. Ecclesiastes 1:8

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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 4:51 pm

I still don’t understand why inflation matters. It’s a fixed payment no matter what. From the minute you purchased you locked in the cost of your home. That does not change if you pay it off or not. Either way you have to pay it, and who cares if it’s x percentage less of your take home pay in the future, than a larger percentage now of your take home pay. You still have to pay your fixed cost.

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

Post by software » Thu Oct 18, 2018 5:37 pm

NextMil wrote:
Thu Oct 18, 2018 4:51 pm
I still don’t understand why inflation matters. It’s a fixed payment no matter what. From the minute you purchased you locked in the cost of your home. That does not change if you pay it off or not. Either way you have to pay it, and who cares if it’s x percentage less of your take home pay in the future, than a larger percentage now of your take home pay. You still have to pay your fixed cost.
Instead of a mortgage, think of it as a loaf of bread. 100 years ago a loaf of bread cost a penny. People during that time were only making a hundred dollars a week or so.

Imagine at that time you knew you needed 1 loaf of bread per month for the next 100 years, you were given a choice to pay for all the bread up front or pay for the bread at a fixed payment of one penny per month.

Would it have made more sense to buy all the bread up front using your meager 100 dollars salary? Surely you can see that it is more favorable to buy a one penny loaf of bread using your today salary of tens or hundreds of thousands of dollars.

A mortgage works in a similar way (although the math is a bit more complex due to interest)

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

Post by Flyer24 » Thu Oct 18, 2018 6:00 pm

I really don’t see how that scenario relates to this topic. Your scenario is like asking if I would prepay my cable bill for an entire year. You leave out the factors of debt, interest rates, and significant monthly cash flow. There is a lot more at play here.
Last edited by Flyer24 on Thu Oct 18, 2018 6:16 pm, edited 1 time in total.

NextMil
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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 6:06 pm

software wrote:
Thu Oct 18, 2018 5:37 pm
NextMil wrote:
Thu Oct 18, 2018 4:51 pm
I still don’t understand why inflation matters. It’s a fixed payment no matter what. From the minute you purchased you locked in the cost of your home. That does not change if you pay it off or not. Either way you have to pay it, and who cares if it’s x percentage less of your take home pay in the future, than a larger percentage now of your take home pay. You still have to pay your fixed cost.
Instead of a mortgage, think of it as a loaf of bread. 100 years ago a loaf of bread cost a penny. People during that time were only making a hundred dollars a week or so.

Imagine at that time you knew you needed 1 loaf of bread per month for the next 100 years, you were given a choice to pay for all the bread up front or pay for the bread at a fixed payment of one penny per month.

Would it have made more sense to buy all the bread up front using your meager 100 dollars salary? Surely you can see that it is more favorable to buy a one penny loaf of bread using your today salary of tens or hundreds of thousands of dollars.

A mortgage works in a similar way (although the math is a bit more complex due to interest)
But it’s not. Your cost of housing or loaf of bread doesn’t change. You still owe the same amount regardless of what you are making. I understand it via a vis buy vs rent because you locked in on purchase and rent can increase if you rent, but I cannot square the circle that somehow you are making out any different on holding a mortgage vs paying it off. It’s still the same price you locked in on purchase.

Put it to you this way. Your salary increases because your employer is actually giving you raises to keep up with inflation. Whether you have a mortgage or not has no bearing on that fact.

So you earn a bunch of cash over a bunch of years and have to pay for your housing contract over that time frame. It’s not cheaper if you keep the mortgage to full term, in fact it’s more expensive because you are paying more interest than if you had paid it off quickly. It may be easier to pay as a smaller percentage of your take home pay in the out years, but you aren’t saving any money. The cost is the cost regardless of when you pay it in your earning years.

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

Post by betablocker » Thu Oct 18, 2018 6:23 pm

I don't agree with paying off a mortgage in most circumstances but if you don't itemize because of the new tax legislation and what if you had a new rate in the 5s? Expected returns from a stock bond mix are about that so I would consider using a windfall to pay off a mortgage in that circumstance if I had enough liquidity otherwise. One the other hand I'm financing a basement remodel now and I can get a prime minus 1-1.25 HELOC. I'm in the highest tax bracket and itemize. I can borrow on the HELOC get the deduction and keep my cash in a muni money market at Vanguard a make a few basis points on it. In that case I won't pay off the debt.

It's just math to me. The argument usually comes down to people who are averse to debt for emotional or other biased reasons (feels like an accomplishment to pay off a mortgage, debt is evil, etc.) and those who decide based on the math. I don't make a judgement that emotional reasons aren't valid, they clearly are. I've made several decisions in my life that didn't maximize economic value and I don't regret them. Just remember the guy who popularize the liquor, ladies, and leverage line is vice chairman of a company that makes all its money investing insurance float (ie leverage).
Last edited by betablocker on Thu Oct 18, 2018 6:24 pm, edited 1 time in total.

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

Post by JoeJohnson » Thu Oct 18, 2018 6:24 pm

NextMil wrote:
Thu Oct 18, 2018 4:51 pm
I still don’t understand why inflation matters. It’s a fixed payment no matter what. From the minute you purchased you locked in the cost of your home. That does not change if you pay it off or not. Either way you have to pay it, and who cares if it’s x percentage less of your take home pay in the future, than a larger percentage now of your take home pay. You still have to pay your fixed cost.
Inflation and a mortgage is primarily a cash flow consideration. Where it starts mattering in equations is when home owners have historically low interest rates on their mortgage. If rates go up, the mortgage rate does not. It may then be possible to arbitrage the debt if, for example, savings accounts return 5% and the mortgage is 3%. That's an easy win for not paying the mortgage.
Last edited by JoeJohnson on Thu Oct 18, 2018 7:00 pm, edited 1 time in total.

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

Post by software » Thu Oct 18, 2018 6:38 pm

NextMil wrote:
Thu Oct 18, 2018 6:06 pm
software wrote:
Thu Oct 18, 2018 5:37 pm
NextMil wrote:
Thu Oct 18, 2018 4:51 pm
I still don’t understand why inflation matters. It’s a fixed payment no matter what. From the minute you purchased you locked in the cost of your home. That does not change if you pay it off or not. Either way you have to pay it, and who cares if it’s x percentage less of your take home pay in the future, than a larger percentage now of your take home pay. You still have to pay your fixed cost.
Instead of a mortgage, think of it as a loaf of bread. 100 years ago a loaf of bread cost a penny. People during that time were only making a hundred dollars a week or so.

Imagine at that time you knew you needed 1 loaf of bread per month for the next 100 years, you were given a choice to pay for all the bread up front or pay for the bread at a fixed payment of one penny per month.

Would it have made more sense to buy all the bread up front using your meager 100 dollars salary? Surely you can see that it is more favorable to buy a one penny loaf of bread using your today salary of tens or hundreds of thousands of dollars.

A mortgage works in a similar way (although the math is a bit more complex due to interest)
But it’s not. Your cost of housing or loaf of bread doesn’t change. You still owe the same amount regardless of what you are making. I understand it via a vis buy vs rent because you locked in on purchase and rent can increase if you rent, but I cannot square the circle that somehow you are making out any different on holding a mortgage vs paying it off. It’s still the same price you locked in on purchase.

Put it to you this way. Your salary increases because your employer is actually giving you raises to keep up with inflation. Whether you have a mortgage or not has no bearing on that fact.

So you earn a bunch of cash over a bunch of years and have to pay for your housing contract over that time frame. It’s not cheaper if you keep the mortgage to full term, in fact it’s more expensive because you are paying more interest than if you had paid it off quickly. It may be easier to pay as a smaller percentage of your take home pay in the out years, but you aren’t saving any money. The cost is the cost regardless of when you pay it in your earning years.
You're thinking in terms of nominal dollars. Yes, it's true, 2300 payment today is the same face value dollar amount as a 2300 payment 30 years from now. In real terms the house payment absolutely does get cheaper (assuming inflation and not deflation).

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

Post by dknightd » Thu Oct 18, 2018 8:09 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?
No. As others have already pointed out. This really has nothing to do with your house. It is moving money from savings to pay off debt.

Financially it makes little sense for me to pay off my house. I have about $50k to pay over the next 9 years at 3.25%.
When I could deduct the interest it was a no brainer not to pay off early. With the new tax laws, it still does not make much sense. But it is getting closer.

Emotionally it does make sense to pay it off. I could do that if I wanted to. But I try hard to leave emotions out of my finances.

For me, the financial difference is probably small. I might eventually let emotions take over.

edit: Let me add, I'm looking forward to the day I have no house debt payments. It will improve my cash flow. As long I do not move. And, before anybody asks I would not borrow more money with the idea of investing it. If I do move, I'd probably take out a new mortgage if required.

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

Post by grabiner » Thu Oct 18, 2018 9:27 pm

an_asker wrote:
Thu Oct 18, 2018 10:28 am
grabiner wrote:
Wed Oct 17, 2018 10:05 pm
[...]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.
Please shed some light on what you deem to be a "fully deductible mortgage."
I am single, so my standard deduction is $12,000. I pay more than $10,000 in state and local taxes, and donate more than $2000 to charity Therefore, I would itemize deductions even if I paid off the mortgage, so I get full benefit from the deduction of mortgage interest.

Far fewer married couples have this benefit. With the SALT deduction still limited to $10,000, a married couple would need to donate $14,000 to charity (or other deductions which are less common) to deduct all the mortgage interest.
Wiki David Grabiner

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

Post by mbasherp » Thu Oct 18, 2018 10:19 pm

I'm the one who threw out the "55 cents on the dollar" comment upthread. To elaborate:

Nominal dollars are NOT real dollars. If I took out a fixed 4% mortgage today for $250,000, nominal dollars folks would argue how much interest I'm going to pay, more than what the house should/could cost. Said mortgage would incur $179,673.77 in interest over 30 years, making the total price paid for the home $429,673.77. But it is wrong to look at this number and say "I know how much money that is." I don't.

With 2% annual inflation, my $1193.54 monthly payment at the beginning becomes a $651.05 payment worth of TODAY'S Dollars, in 30 years. I will pay gradually less money every month. The value of the house (assuming no appreciation) would be $452,840 after 30 years. I have not, in fact, paid either $250,000, $429,673.77, OR $452,840 for the house. I paid an amount (which I won't calculate right now) which has been blended between them, over 30 years of 2% inflation.

This effect is already dramatic at 2% inflation, but it really gets crazy with higher inflation numbers. It's confusing but is the only true apples to apples way to consider this. Dollars do not equal dollars over time. Daniel Amerman has written some very interesting stuff on this topic. It is a trade of going long the real (property, keeps up with inflation) and short the illusion (money).

The ONLY variable? Don't default.

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

Post by jalbert » Thu Oct 18, 2018 10:57 pm

NextMil wrote:
Thu Oct 18, 2018 4:51 pm
I still don’t understand why inflation matters. It’s a fixed payment no matter what. From the minute you purchased you locked in the cost of your home. That does not change if you pay it off or not. Either way you have to pay it, and who cares if it’s x percentage less of your take home pay in the future, than a larger percentage now of your take home pay. You still have to pay your fixed cost.
The mortgage payment decreases over time in real terms if inflation is positive. This is probably the main financial benefit of owning over renting.
Risk is not a guarantor of return.

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

Post by mirror » Fri Oct 19, 2018 1:32 am

nolesrule wrote:
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.
You're right, please forgive me, sometimes I forget that there can be gnat excrement in pepper and do not remember to separate the two. If you live in the United States of America, paid off your mortgage between years 1981 to 2012, and had a conventional fixed rate 30 year mortgage, have you subsequently been so distraught by your decision that you took out another mortgage?

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

Post by JoeJohnson » Fri Oct 19, 2018 7:20 am

jalbert wrote:
Thu Oct 18, 2018 10:57 pm
NextMil wrote:
Thu Oct 18, 2018 4:51 pm
I still don’t understand why inflation matters. It’s a fixed payment no matter what. From the minute you purchased you locked in the cost of your home. That does not change if you pay it off or not. Either way you have to pay it, and who cares if it’s x percentage less of your take home pay in the future, than a larger percentage now of your take home pay. You still have to pay your fixed cost.
The mortgage payment decreases over time in real terms if inflation is positive. This is probably the main financial benefit of owning over renting.
The main financial benefit of owning is that you are buying an asset and can create equity whereas renting is always pure expense. The biggest financial benefit is when the mortgage payments are $0.

The fact that the payment decreases in real terms is, of course, nice. It's also something you've paid for via interest. The only thing that matters in these mortgage payoff calculations is the interest rate. Everything else is emotional.

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

Post by an_asker » Fri Oct 19, 2018 9:20 am

grabiner wrote:
Thu Oct 18, 2018 9:27 pm
an_asker wrote:
Thu Oct 18, 2018 10:28 am
grabiner wrote:
Wed Oct 17, 2018 10:05 pm
[...]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.
Please shed some light on what you deem to be a "fully deductible mortgage."
I am single, so my standard deduction is $12,000. I pay more than $10,000 in state and local taxes, and donate more than $2000 to charity Therefore, I would itemize deductions even if I paid off the mortgage, so I get full benefit from the deduction of mortgage interest.

Far fewer married couples have this benefit. With the SALT deduction still limited to $10,000, a married couple would need to donate $14,000 to charity (or other deductions which are less common) to deduct all the mortgage interest.
D'uh! That makes sense. Never thought of it that way. Yes, I guess singles - in the specific states (with high taxes) - are not as badly impacted as married folks are.

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

Post by NextMil » Fri Oct 19, 2018 11:14 am

mbasherp wrote:
Thu Oct 18, 2018 10:19 pm
I'm the one who threw out the "55 cents on the dollar" comment upthread. To elaborate:

Nominal dollars are NOT real dollars. If I took out a fixed 4% mortgage today for $250,000, nominal dollars folks would argue how much interest I'm going to pay, more than what the house should/could cost. Said mortgage would incur $179,673.77 in interest over 30 years, making the total price paid for the home $429,673.77. But it is wrong to look at this number and say "I know how much money that is." I don't.

With 2% annual inflation, my $1193.54 monthly payment at the beginning becomes a $651.05 payment worth of TODAY'S Dollars, in 30 years. I will pay gradually less money every month. The value of the house (assuming no appreciation) would be $452,840 after 30 years. I have not, in fact, paid either $250,000, $429,673.77, OR $452,840 for the house. I paid an amount (which I won't calculate right now) which has been blended between them, over 30 years of 2% inflation.

This effect is already dramatic at 2% inflation, but it really gets crazy with higher inflation numbers. It's confusing but is the only true apples to apples way to consider this. Dollars do not equal dollars over time. Daniel Amerman has written some very interesting stuff on this topic. It is a trade of going long the real (property, keeps up with inflation) and short the illusion (money).

The ONLY variable? Don't default.
You don't pay less money. You pay the exact same amount, which is the fixed cost based on an amortization schedule that you agreed to at the time of purchase. The fact that you locked in your cost is the only thing that matters - at the point when you put a contract on your house to buy - Not how you finance it. Inflation only drives up the costs of items, and therefore devalues the dollar, which is why you are happy that you locked in your cost - regardless of how you paid for it. If your employer does not increase your salary to keep up with inflation you are actually worse off, and for a number of years that can and actually has happened.

My point is, its just a silly argument to keep a mortgage. Maybe this hypothetical will articulate it more clearly.

You purchase a house for $500k today.
Inflation kicks in, and your salary of $200k has a yearly increase of 2%.

Your monthly payment is lets say $3,000.

Year 1 $200,000
Year 2 $204,000
Year 3 $208,080

So because your employer is keeping your salary up with inflation because everything is getting more expensive you make more money and therefore your $3k payment seems to cost less than that it did when you made less money, because why? Because you locked in your housing cost.

What if you paid off your mortgage in year three? Do you all of a sudden stop getting increases in salary? Of course not. Inflation and wage growth isn't some magic reason to keep your mortgage longer because it feels like you are paying less of a percentage of your take home pay.

This is why I think inflation is a bogus argument to keep a mortgage.

There are other valid reasons to keep a mortgage such as you can outperform your mortgage rate in the market and so cash above and beyond what is required dropped into the market could very well outperform the guaranteed rate of return of paying down prinicpal.

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

Post by scophreak » Fri Oct 19, 2018 2:35 pm

NextMil wrote:
Fri Oct 19, 2018 11:14 am
You don't pay less money. You pay the exact same amount, which is the fixed cost based on an amortization schedule that you agreed to at the time of purchase. The fact that you locked in your cost is the only thing that matters - at the point when you put a contract on your house to buy - Not how you finance it. Inflation only drives up the costs of items, and therefore devalues the dollar, which is why you are happy that you locked in your cost - regardless of how you paid for it. If your employer does not increase your salary to keep up with inflation you are actually worse off, and for a number of years that can and actually has happened.

My point is, its just a silly argument to keep a mortgage. Maybe this hypothetical will articulate it more clearly.

You purchase a house for $500k today.
Inflation kicks in, and your salary of $200k has a yearly increase of 2%.

Your monthly payment is lets say $3,000.

Year 1 $200,000
Year 2 $204,000
Year 3 $208,080

So because your employer is keeping your salary up with inflation because everything is getting more expensive you make more money and therefore your $3k payment seems to cost less than that it did when you made less money, because why? Because you locked in your housing cost.

What if you paid off your mortgage in year three? Do you all of a sudden stop getting increases in salary? Of course not. Inflation and wage growth isn't some magic reason to keep your mortgage longer because it feels like you are paying less of a percentage of your take home pay.

This is why I think inflation is a bogus argument to keep a mortgage.

There are other valid reasons to keep a mortgage such as you can outperform your mortgage rate in the market and so cash above and beyond what is required dropped into the market could very well outperform the guaranteed rate of return of paying down prinicpal.
Perhaps if we think about it in a slightly different way the argument becomes a little clearer (at least to me). Let's say I purchase a home you are selling for $500K. You have two options to choose from: I can either pay you $500K now or $500K 10 years from now. Which one do you choose? It's a no-brainer that you want the $500K now as that same $500K will not have the same purchasing power 10 years from now (assuming any amount of inflation), so you're absolutely in a better spot. As a buyer, I would choose the $500K payment delayed by 10 years every day and twice on Sunday. A fixed mortgage payment is affected in exactly the same way. Even though they're the same in nominal dollars, a $3K per month payment now is a higher percentage of your take-home pay than a $3K per month payment 30 years from now (even assuming raises that only keep up with inflation). In those terms, that $3K per month payment 30 years from now is significantly more attractive.

Sure a mortgage also has interest to factor into the equation, which depending on the rate of inflation can and will mute any "gains" of inflation, however the underlying principle still stands. That point is that one should not simply ignore the consideration of inflation in the overall equation. After all, we're all comfortable with factoring in inflation when we're talking about accumulating for retirement or evaluating retirement scenarios (e.g. evaluating funds in present-day vs. future value). This is simply applying the inflation effects to a different scenario.

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

Post by DJN » Fri Oct 19, 2018 9:21 pm

edge wrote:
Thu Oct 18, 2018 9:47 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!
this does not lock in any gains. it reduces debt.
I would think that in the event of such a market decline and should the op have decided not to reduce his mortgage then the "lost opportunity" to reduce the mortgage amount wouldn't present itself for some considerable time. For me this represents a loss of repayment that cannot be availed of again.

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

Post by edge » Tue Oct 30, 2018 5:17 am

Ok. That is an unintuitive way to think about things. Bottom line is that paying down a mortgage is separate and unrelated to the house/land gaining or losing value.

DJN wrote:
Fri Oct 19, 2018 9:21 pm
edge wrote:
Thu Oct 18, 2018 9:47 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!
this does not lock in any gains. it reduces debt.
I would think that in the event of such a market decline and should the op have decided not to reduce his mortgage then the "lost opportunity" to reduce the mortgage amount wouldn't present itself for some considerable time. For me this represents a loss of repayment that cannot be availed of again.

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

Post by Jimsad » Tue Oct 30, 2018 6:24 pm

I am curious to know if I did the right thing .
Please review and let me know what you think.

I bought a house in 2005 for 467k . Then I moved out of area and converted it to rental in 2008 when housing market crashed .
It had 5.75% interest in mortgage .
I paid off the mortgage in 2014 when I had extra cash and there was a 300k balance left on loan .

I tried to sell house now but I am not getting any offers for more than 380k and I have to pay realtor commission and other costs and will net about 345k if I sell it .

I am wondering if I did the right thing by paying it off in 2014.

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

Post by leeks » Tue Oct 30, 2018 6:44 pm

Jimsad wrote:
Tue Oct 30, 2018 6:24 pm
I am curious to know if I did the right thing .
Please review and let me know what you think.

I bought a house in 2005 for 467k . Then I moved out of area and converted it to rental in 2008 when housing market crashed .
It had 5.75% interest in mortgage .
I paid off the mortgage in 2014 when I had extra cash and there was a 300k balance left on loan .

I tried to sell house now but I am not getting any offers for more than 380k and I have to pay realtor commission and other costs and will net about 345k if I sell it .

I am wondering if I did the right thing by paying it off in 2014.
The market value of the house is not related to whether or not you have a mortgage. Hopefully it has been yielding consistent income as a rental. If you wish you still had a mortgage - ie you want a lump of cash out of that equity and you don't want to sell at current price - couldn't you just get a mortgage on it now? Interest rates are lower than 5.75%, aren't they?

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

Post by Jimsad » Tue Oct 30, 2018 6:59 pm

I tried to sell the house last year too but put it back as a Rental when I did not get any good offers .
I am not able to stomach the idea of selling it at a loss compared to what I originally bought it for .
So I feel like I am stuck .

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

Post by leeks » Tue Oct 30, 2018 7:13 pm

Jimsad wrote:
Tue Oct 30, 2018 6:59 pm
I tried to sell the house last year too but put it back as a Rental when I did not get any good offers .
I am not able to stomach the idea of selling it at a loss compared to what I originally bought it for .
So I feel like I am stuck .
It sounds like the decision you are questioning is whether you should have sold it at some earlier time vs keeping it as a rental. I don't see how you would be any less stuck if you still had a mortgage on it.

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

Post by unclescrooge » Wed Oct 31, 2018 12:10 am

software wrote:
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.
You do not win emotional arguments with logic and math.

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

Post by Elbukari » Wed Oct 31, 2018 2:13 am

Show me the man who is certain the stock market will return x % over x amount of years and I'll show you a fool not worth his salt.

We are passive investors, therefore we don't expect to make great returns on our investments. We don't analyze stocks and buy companies at a "bargain price". We don't read income statements, quarterly reports, watch/listen or discuss with managers of companies to understand their philosophy in order to make intelligent investing decisions. For all these reasons and others our returns have to be reasonably less. While the stock market has returned about 4% after inflation over the long term there is nothing that says it should or will continue to produce the same results. In other words, you can certainly lose money over 30 years, and its even more certain that you may not make more than the $250,000 you will save on interest payment over those years.

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

Post by Admiral » Wed Oct 31, 2018 6:24 am

Elbukari wrote:
Wed Oct 31, 2018 2:13 am
Show me the man who is certain the stock market will return x % over x amount of years and I'll show you a fool not worth his salt.

We are passive investors, therefore we don't expect to make great returns on our investments. We don't analyze stocks and buy companies at a "bargain price". We don't read income statements, quarterly reports, watch/listen or discuss with managers of companies to understand their philosophy in order to make intelligent investing decisions. For all these reasons and others our returns have to be reasonably less. While the stock market has returned about 4% after inflation over the long term there is nothing that says it should or will continue to produce the same results. In other words, you can certainly lose money over 30 years, and its even more certain that you may not make more than the $250,000 you will save on interest payment over those years.
What does being a passive investor have to do with low expectations? Define "great." I expect my portfolio return to be about what the average has been, historically. Which is not, as you state, 4%, after inflation. The S&P has returned 9.8% before inflation, and approximately 7% after. I would be thrilled with those returns. However, I also hold bonds, so I am not expecting them for my entire portfolio.

Certainly no one is claiming that investing in the stock market is guaranteed to beat a mortgage rate. However, many of us have mortgages that are very low and thus CAN be beaten by fixed income like bonds or CDs. And don't assume that investing in real estate is a guaranteed return. In fact, Shiller has shown that over time, on average, housing returns have barely beaten inflation.

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

Post by KlangFool » Wed Oct 31, 2018 8:22 am

Elbukari wrote:
Wed Oct 31, 2018 2:13 am
Show me the man who is certain the stock market will return x % over x amount of years and I'll show you a fool not worth his salt.

We are passive investors, therefore we don't expect to make great returns on our investments. We don't analyze stocks and buy companies at a "bargain price". We don't read income statements, quarterly reports, watch/listen or discuss with managers of companies to understand their philosophy in order to make intelligent investing decisions. For all these reasons and others our returns have to be reasonably less. While the stock market has returned about 4% after inflation over the long term there is nothing that says it should or will continue to produce the same results. In other words, you can certainly lose money over 30 years, and its even more certain that you may not make more than the $250,000 you will save on interest payment over those years.
Elbukari,

My mortgage is 3.49%. The inflation is about 3%. I only need my 60/40 portfolio to return about 5% nominal in order to break even. The money market fund is paying about 2% now. It is not out of the question that the money market fund will pay more than 3.49% over the next few years.

This is a good bet.

KlangFool

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

Post by Elbukari » Wed Oct 31, 2018 11:00 pm

Admiral wrote:
Wed Oct 31, 2018 6:24 am
Elbukari wrote:
Wed Oct 31, 2018 2:13 am
Show me the man who is certain the stock market will return x % over x amount of years and I'll show you a fool not worth his salt.

We are passive investors, therefore we don't expect to make great returns on our investments. We don't analyze stocks and buy companies at a "bargain price". We don't read income statements, quarterly reports, watch/listen or discuss with managers of companies to understand their philosophy in order to make intelligent investing decisions. For all these reasons and others our returns have to be reasonably less. While the stock market has returned about 4% after inflation over the long term there is nothing that says it should or will continue to produce the same results. In other words, you can certainly lose money over 30 years, and its even more certain that you may not make more than the $250,000 you will save on interest payment over those years.
What does being a passive investor have to do with low expectations? Define "great." I expect my portfolio return to be about what the average has been, historically. Which is not, as you state, 4%, after inflation. The S&P has returned 9.8% before inflation, and approximately 7% after. I would be thrilled with those returns. However, I also hold bonds, so I am not expecting them for my entire portfolio.

Certainly no one is claiming that investing in the stock market is guaranteed to beat a mortgage rate. However, many of us have mortgages that are very low and thus CAN be beaten by fixed income like bonds or CDs. And don't assume that investing in real estate is a guaranteed return. In fact, Shiller has shown that over time, on average, housing returns have barely beaten inflation.
By great I mean you can't beat the market as a passive investor (by passive I mean index investor). You can't even average the market because of expenses, however minuscule they are you will always come out just under the benchmark which you are following. An active investor, on the other hand, one that analyzes the business in which he hopes to invest in, reads balance sheets, reports, etc., should- because of his effort- expect higher returns than a passive investor.

Why do you expect your portfolio to return what the average has been historically considering that everything we've learned and studied has shown that the future is uncertain and past performance does not dictate future returns? It's a rough index at best, but to assume you'll get 6% by retirement is optimistic. Dividends are not 4%-5%, they are just under 2%; anyways, things are different that's for sure.

2015
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Re: Paying off the mortgage early - Isn't this the opposite of "putting more money into your house"?

Post by 2015 » Thu Nov 01, 2018 12:05 am

I call these "cha-cha" threads, people doing the cha-cha on the head of a pin while arguing past each other. Reminds me of the old Janet Jackson song, "Who's right? Who's wrong?" The overconfident will always argue most veraciously amongst themselves, with little or no resolution.

OP, remember the old Taylor line, "when experts disagree, it probably doesn't matter."

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

Post by cjking » Thu Nov 01, 2018 5:37 am

When a lender lends money on terms that mean they aren't entitled to get a return that adequately exceeds inflation, that's a gamble that can work out badly for them, to the benefit of the borrower.

Let me construct an artificial scenario to illustrate why holding a mortgage can allow you to benefit from inflation.

In 1978, two Zimbabwean siblings buy identical houses next door to each other, using equal inheritances that are exactly enough to pay cash for the houses. One pays cash and the other takes out an interest-only mortgage in the Zimbabwe 1978 equivalent of 100K of 2018 US dollars. Now, 40 years later, they both still own their houses, and the full balance of the original mortgage needs to be paid off. The one with the mortgage pays the equivalent of one 2018 US dollar to get rid of what was originally a 100K 2018 US dollar debt. (Don't know that it would be as little as one dollar, but you get the picture.)

Let's further assume that the mortgagee invested the 100K he had in the bank at the start in a global 50:50 portfolio, from which he took withdrawals to pay the mortgage interest. Do we think he came out ahead of his sibling? I would guess he did, by a lot. And not just because the global portfolio went up, that part isn't the point here, but because the debt dropped from 100K to one 2018 dollar, without him actually paying a single dollar of it off.

Obviously this an extreme scenario, but the logic still applies in more stable countries, the numbers are just less dramatic. Since 2008 I have paid interest each year on a UK interest-only mortgage at 1.5% less than the rate of inflation. In real terms the mortgage lender has been paying me to borrow from them, rather than me paying them. They couldn't do anything to get out of this, the contract terms were set in 2003 when what subsequently happened was unimaginable. (I haven't benefited as much as it might appear, I'd paid of 99% my balance before this unusual period in financial history.)

I'm guessing someone is going to think that this kind of benefit couldn't happen as easily in the US. In fact I think the opposite is true, you guys can get long-term fixed rate mortgages, which are not something a free market provides, they are a consequence of government involvement in the market. So I'd guess you are more likely than mortgagees elsewhere to be able to get terms that would benefit you in a scenario of unexpected inflation. (In the UK mortgage interest rates are variable, so generally over the full mortgage term lenders can raise rates to deal with circumstances. But, as in my case, some variable rate mortgages were tied to government interest rates, and it wasn't anticipated that those rates could be so far below inflation for so long.)

I'm not saying the possibility of benefiting from an unexpected inflation scenario is a good enough reason to hold a mortgage, just explaining that it can happen.

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

Post by Admiral » Thu Nov 01, 2018 9:23 am

Elbukari wrote:
Wed Oct 31, 2018 11:00 pm
Admiral wrote:
Wed Oct 31, 2018 6:24 am
Elbukari wrote:
Wed Oct 31, 2018 2:13 am
Show me the man who is certain the stock market will return x % over x amount of years and I'll show you a fool not worth his salt.

We are passive investors, therefore we don't expect to make great returns on our investments. We don't analyze stocks and buy companies at a "bargain price". We don't read income statements, quarterly reports, watch/listen or discuss with managers of companies to understand their philosophy in order to make intelligent investing decisions. For all these reasons and others our returns have to be reasonably less. While the stock market has returned about 4% after inflation over the long term there is nothing that says it should or will continue to produce the same results. In other words, you can certainly lose money over 30 years, and its even more certain that you may not make more than the $250,000 you will save on interest payment over those years.
What does being a passive investor have to do with low expectations? Define "great." I expect my portfolio return to be about what the average has been, historically. Which is not, as you state, 4%, after inflation. The S&P has returned 9.8% before inflation, and approximately 7% after. I would be thrilled with those returns. However, I also hold bonds, so I am not expecting them for my entire portfolio.

Certainly no one is claiming that investing in the stock market is guaranteed to beat a mortgage rate. However, many of us have mortgages that are very low and thus CAN be beaten by fixed income like bonds or CDs. And don't assume that investing in real estate is a guaranteed return. In fact, Shiller has shown that over time, on average, housing returns have barely beaten inflation.
By great I mean you can't beat the market as a passive investor (by passive I mean index investor). You can't even average the market because of expenses, however minuscule they are you will always come out just under the benchmark which you are following. An active investor, on the other hand, one that analyzes the business in which he hopes to invest in, reads balance sheets, reports, etc., should- because of his effort- expect higher returns than a passive investor.

Why do you expect your portfolio to return what the average has been historically considering that everything we've learned and studied has shown that the future is uncertain and past performance does not dictate future returns? It's a rough index at best, but to assume you'll get 6% by retirement is optimistic. Dividends are not 4%-5%, they are just under 2%; anyways, things are different that's for sure.
This is so wrong for so many reasons I can't even begin to address all of them, maybe someone else will. But here is one: There is absolutely no proof, historically, that over long periods an active investor will outperform a passive index investor. Zero. Sure, you can cherry pick time periods or particular funds or stocks. But last year's leader is often this year's laggard. All available information is already priced into the market. So unless this careful "analysis" includes inside information, there is no advantage.

Elbukari
Posts: 31
Joined: Fri Mar 09, 2018 6:01 am

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

Post by Elbukari » Thu Nov 01, 2018 3:38 pm

No, you certainly won't if you're trading. An active investor that I speak of is not someone that picks a stock today and sells it tomorrow, or in a month or a year. This active investor has invested into a business and he stays with the business for the long haul. If you buy a great business at a fair price you can surely outperform the market more times than under perform it.

Is it inconceivable to have bought either Google, Amazon, or FB in their infancy and stuck with them? Would you not have made more money for yourself than as an index investor?

I am not comparing fund managers to index investors here...I am well aware they don't make money for their clients. I am talking about individual investors like Warren and Charlie and the philosophy of Ben Graham. Forget about day trading, high turnover rates, watching the daily stocks...that is not the active investor i am referring to.

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