Paying off mortgage early - am I thinking about this right?

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Miguelito
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Re: Paying off mortgage early - am I thinking about this right?

Post by Miguelito » Wed Sep 04, 2019 11:32 am

Interesting and well-timed discussion. Not to humble brag, but I was just realizing that, hypothetically, if we were to liquidate all taxable accounts and throw in all savings, we could probably just barely pay off the mortgage balance. As a result, all sorts of thought exercises started coming to mind.

The most obvious one is that given that I feel we are a bit heavy on stocks and we should probably invest in bonds to get to the right AA over time, instead of debating what bond fund to buy into, should we not just put the money towards the mortgage? It's at 3% but we do standard deduction and have 7 years left on the loan. Am I not effectively buying a 7-year, 3% tax-free bond when I pay down the mortgage? Why would I not do that? I do have a car loan at 1.9%, but that interest rate is not all that different from a savings account yield.

Admiral
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Re: Paying off mortgage early - am I thinking about this right?

Post by Admiral » Wed Sep 04, 2019 11:45 am

Miguelito wrote:
Wed Sep 04, 2019 11:32 am
Interesting and well-timed discussion. Not to humble brag, but I was just realizing that, hypothetically, if we were to liquidate all taxable accounts and throw in all savings, we could probably just barely pay off the mortgage balance. As a result, all sorts of thought exercises started coming to mind.

The most obvious one is that given that I feel we are a bit heavy on stocks and we should probably invest in bonds to get to the right AA over time, instead of debating what bond fund to buy into, should we not just put the money towards the mortgage? It's at 3% but we do standard deduction and have 7 years left on the loan. Am I not effectively buying a 7-year, 3% tax-free bond when I pay down the mortgage? Why would I not do that? I do have a car loan at 1.9%, but that interest rate is not all that different from a savings account yield.
No, you're not. A bond (or bond fund) is not the same as a house, regardless of whether the mortgage rate and the yield of the bond/fund are equivalent. This is a misconception. One is a cash equivalent, one is not. It's possible to lose a small amount of principal if one is forced to sell a bond/fund early. That is not the same as a house.

If you need liquidity, and have no savings but a paid off house, you require a loan based on your equity, at prevailing interest rates. If I told you that prevailing rates would be higher than your current mortgage rate, the payoff doesn't look like a great strategy. We have no way of knowing what rates will be in the future. But you know your mortgage rate today.

If you don't require any liquidity, and/or your cash flow would improve such that you could re-create liquidity very quickly, then it might make some sense.

Stormbringer
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Re: Paying off mortgage early - am I thinking about this right?

Post by Stormbringer » Wed Sep 04, 2019 12:02 pm

I feel like all these "pay off mortgage vs. invest" threads are overly focused on the balance sheet (e.g. maximizing net worth) while generally ignoring the cash flow statement, which is how we actually experience our lives.

Paying off your mortgage eliminates a substantial cash flow risk. I think that is an especially important consideration since the largest job losses often correlate with the worst markets, when liquidating assets to cover expenses is going to be most painful.

Any decision to leverage your home (or keep it leveraged) to invest should take into account your human capital. Maybe it's fine for an early-career doctor, but not such a good idea for a 50-something blue collar worker in an industry prone to layoffs. For the latter, doing this seems to me like picking up nickels in front of a steamroller.
"Compound interest is the most powerful force in the universe." - Albert Einstein

Admiral
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Re: Paying off mortgage early - am I thinking about this right?

Post by Admiral » Wed Sep 04, 2019 12:07 pm

Stormbringer wrote:
Wed Sep 04, 2019 12:02 pm
I feel like all these "pay off mortgage vs. invest" threads are overly focused on the balance sheet (e.g. maximizing net worth) while generally ignoring the cash flow statement, which is how we actually experience our lives.

Paying off your mortgage eliminates a substantial cash flow risk. I think that is an especially important consideration since the largest job losses often correlate with the worst markets, when liquidating assets to cover expenses is going to be most painful.

Any decision to leverage your home (or keep it leveraged) to invest should take into account your human capital. Maybe it's fine for an early-career doctor, but not such a good idea for a 50-something blue collar worker in an industry prone to layoffs. For the latter, doing this seems to me like picking up nickels in front of a steamroller.
If that's the case, when I am jobless I'd rather have a pile of money to pay my mortgage than a paid off house and no pile of money. :wink:

7eight9
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Re: Paying off mortgage early - am I thinking about this right?

Post by 7eight9 » Wed Sep 04, 2019 12:22 pm

The way I looked at it (which was no doubt very simplistic) was that I might as well pay off my mortgage if I couldn't get a better rate of return on a risk-free investment. I couldn't beat the standard deduction so mortgage interest didn't play into tax considerations. I couldn't get a better rate of return so I paid it off (circa 2005 - mortgage was a 15 year note at 4.875%). Would I have made more money by investing in the stock market? Probably. But that would have been a gamble. Paying off the mortgage was a sure thing.

What I should have done in 20/20 hindsight is put down the bare minimum - do a non-recourse cash-out refi in late 2007/early 2008 - and first payment default. I probably could have stayed for a couple of years like some of my friends did before I was foreclosed upon. Then buy something else for half the price - cash. In my opinion that was my error.
I guess it all could be much worse. | They could be warming up my hearse.

Miguelito
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Re: Paying off mortgage early - am I thinking about this right?

Post by Miguelito » Wed Sep 04, 2019 1:01 pm

Admiral wrote:
Wed Sep 04, 2019 11:45 am
No, you're not. A bond (or bond fund) is not the same as a house, regardless of whether the mortgage rate and the yield of the bond/fund are equivalent. This is a misconception. One is a cash equivalent, one is not. It's possible to lose a small amount of principal if one is forced to sell a bond/fund early. That is not the same as a house.

If you need liquidity, and have no savings but a paid off house, you require a loan based on your equity, at prevailing interest rates. If I told you that prevailing rates would be higher than your current mortgage rate, the payoff doesn't look like a great strategy. We have no way of knowing what rates will be in the future. But you know your mortgage rate today.

If you don't require any liquidity, and/or your cash flow would improve such that you could re-create liquidity very quickly, then it might make some sense.
I understand that the liquidity issue. In our case that can be ignored as we have sufficient cash and taxable account reserves. Also, as I mentioned, if push came to shove, the whole mortgage could be paid off with no penalties.

A big drawback, and a reason I would not consider it, would be if the mortgage payoff were many years away (15+). But if you are less than 10 years away, that can really start to make a lot of sense, since your cash flow will free up massively in only a few years.

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willthrill81
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Re: Paying off mortgage early - am I thinking about this right?

Post by willthrill81 » Wed Sep 04, 2019 1:25 pm

Admiral wrote:
Wed Sep 04, 2019 11:17 am
willthrill81 wrote:
Wed Sep 04, 2019 11:07 am
Admiral wrote:
Wed Sep 04, 2019 10:48 am
willthrill81 wrote:
Wed Sep 04, 2019 10:45 am
Admiral wrote:
Wed Sep 04, 2019 10:39 am


How do you propose that the average investor who hold bonds (wisely) in a tax-sheltered account sell those bonds and use the proceeds to pay off the mortgage?
There are some plausible and efficient options. The simplest is for the investor to simply direct future contributions that would have gone to buy bonds to pay down the mortgage. If the investor has a taxable account and would not encounter significant capital gains from selling, those funds could be used to pay down the mortgage; if stocks were sold to do this, then a corresponding quantity of bonds in the tax-advantaged account(s) could be exchanged for stocks with no tax implications.

Note that it is not necessary to pay off the mortgage entirely. Simply paying it down still takes advantage of the difference in interest rates/yields.
What you propose is a) a pay down not a pay off and b) sacrifices a tax deduction at one's prevailing federal rate for a minuscule interest savings.
There's nothing wrong with paying down and not paying off.

Whether one gets a tax deduction is very specific to the individual. For instance, we haven't been able to deduct mortgage interest for years. And the difference between a mortgage rate and bond yields may not be minuscule.
I would say saving 4% on a mortgage vs saving 24% on one's taxes counts as a minuscule savings, by comparison. You get a tax deduction [savings]when you contribute to a pretax account. I'm not speaking of the mortgage interest deduction. What you wrote is that one can use pre-tax savings to instead pre-pay a mortgage. That is a bad idea in most if not all cases. Right? Or you disagree?
You don't necessarily save your marginal tax rate when you contribute to a tax-deferred account. It's tax-deferment. It depends on how much tax arbitrage you are able to take advantage of later.

Let's look at a simple example. You start with $1,000 and place this in a tax-deferred account and invest it in bonds paying 2%. After 20 years, the value is $1,485.95. Taxes must then be paid on withdrawals at your marginal rate.

Alternatively, you pay 24% taxes on the $1,000, leaving you with $760, and you use it to pay down your mortgage rate at the OP's 3.875%. After 20 years, the compounded after-tax value is $1,647.59.

So even if you paid no taxes at all on the tax-deferred withdrawals in the above example, paying down the higher rate mortgage was the better route to take.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

EnjoyIt
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Re: Paying off mortgage early - am I thinking about this right?

Post by EnjoyIt » Wed Sep 04, 2019 1:29 pm

Admiral wrote:
Wed Sep 04, 2019 12:07 pm
Stormbringer wrote:
Wed Sep 04, 2019 12:02 pm
I feel like all these "pay off mortgage vs. invest" threads are overly focused on the balance sheet (e.g. maximizing net worth) while generally ignoring the cash flow statement, which is how we actually experience our lives.

Paying off your mortgage eliminates a substantial cash flow risk. I think that is an especially important consideration since the largest job losses often correlate with the worst markets, when liquidating assets to cover expenses is going to be most painful.

Any decision to leverage your home (or keep it leveraged) to invest should take into account your human capital. Maybe it's fine for an early-career doctor, but not such a good idea for a 50-something blue collar worker in an industry prone to layoffs. For the latter, doing this seems to me like picking up nickels in front of a steamroller.
If that's the case, when I am jobless I'd rather have a pile of money to pay my mortgage than a paid off house and no pile of money. :wink:
Precisely. In the accumulation phase having a mortgage and cash decreases your risk compared to less of a mortgage and less cash.
Miguelito wrote:
Wed Sep 04, 2019 1:01 pm
I understand that the liquidity issue. In our case that can be ignored as we have sufficient cash and taxable account reserves. Also, as I mentioned, if push came to shove, the whole mortgage could be paid off with no penalties.

A big drawback, and a reason I would not consider it, would be if the mortgage payoff were many years away (15+). But if you are less than 10 years away, that can really start to make a lot of sense, since your cash flow will free up massively in only a few years.
Basically what you are saying is that the remaining mortgage is relatively small compared to your net worth and at this point in your life you are OK with losing some potential growth on that small amount so that you can have an increase in cashflow. You are rich enough to forgo some small gains. I can understand that.

EnjoyIt
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Re: Paying off mortgage early - am I thinking about this right?

Post by EnjoyIt » Wed Sep 04, 2019 1:34 pm

willthrill81 wrote:
Wed Sep 04, 2019 1:25 pm
Admiral wrote:
Wed Sep 04, 2019 11:17 am
willthrill81 wrote:
Wed Sep 04, 2019 11:07 am
Admiral wrote:
Wed Sep 04, 2019 10:48 am
willthrill81 wrote:
Wed Sep 04, 2019 10:45 am


There are some plausible and efficient options. The simplest is for the investor to simply direct future contributions that would have gone to buy bonds to pay down the mortgage. If the investor has a taxable account and would not encounter significant capital gains from selling, those funds could be used to pay down the mortgage; if stocks were sold to do this, then a corresponding quantity of bonds in the tax-advantaged account(s) could be exchanged for stocks with no tax implications.

Note that it is not necessary to pay off the mortgage entirely. Simply paying it down still takes advantage of the difference in interest rates/yields.
What you propose is a) a pay down not a pay off and b) sacrifices a tax deduction at one's prevailing federal rate for a minuscule interest savings.
There's nothing wrong with paying down and not paying off.

Whether one gets a tax deduction is very specific to the individual. For instance, we haven't been able to deduct mortgage interest for years. And the difference between a mortgage rate and bond yields may not be minuscule.
I would say saving 4% on a mortgage vs saving 24% on one's taxes counts as a minuscule savings, by comparison. You get a tax deduction [savings]when you contribute to a pretax account. I'm not speaking of the mortgage interest deduction. What you wrote is that one can use pre-tax savings to instead pre-pay a mortgage. That is a bad idea in most if not all cases. Right? Or you disagree?
You don't necessarily save your marginal tax rate when you contribute to a tax-deferred account. It's tax-deferment. It depends on how much tax arbitrage you are able to take advantage of later.

Let's look at a simple example. You start with $1,000 and place this in a tax-deferred account and invest it in bonds paying 2%. After 20 years, the value is $1,485.95. Taxes must then be paid on withdrawals at your marginal rate.

Alternatively, you pay 24% taxes on the $1,000, leaving you with $760, and you use it to pay down your mortgage rate at the OP's 3.875%. After 20 years, the compounded after-tax value is $1,647.59.

So even if you paid no taxes at all on the tax-deferred withdrawals in the above example, paying down the higher rate mortgage was the better route to take.
Or you can invest that $1000 as per your asset allocation at the time and make 8.7% a year over 20 years. Yes you take on some risk doing so, but you have already agreed with yourself that this asset allocation is appropriate for your risk tolerance and you accept the extra $1000 which after 20 years is worth $5,303.85. But, I know you already know that.

stan1
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Re: Paying off mortgage early - am I thinking about this right?

Post by stan1 » Wed Sep 04, 2019 1:36 pm

Stormbringer wrote:
Wed Sep 04, 2019 12:02 pm
I feel like all these "pay off mortgage vs. invest" threads are overly focused on the balance sheet (e.g. maximizing net worth) while generally ignoring the cash flow statement, which is how we actually experience our lives.

Paying off your mortgage eliminates a substantial cash flow risk. I think that is an especially important consideration since the largest job losses often correlate with the worst markets, when liquidating assets to cover expenses is going to be most painful.

Any decision to leverage your home (or keep it leveraged) to invest should take into account your human capital. Maybe it's fine for an early-career doctor, but not such a good idea for a 50-something blue collar worker in an industry prone to layoffs. For the latter, doing this seems to me like picking up nickels in front of a steamroller.
Actually I think these factors always come up in pay off the mortgage threads and its why there is no consensus. It is an individual decision based on risk and a formula driven answer.

One could argue a 30 year old working in an industry or city prone to layoffs should keep a strategic default in their hip pocket. Some feel that's legal but unethical. Others say the big cats take advantage of the laws without ethical qualms so why not the little cats too. So again personal preferences come into play.

wandering_aimlessly
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Re: Paying off mortgage early - am I thinking about this right?

Post by wandering_aimlessly » Wed Sep 04, 2019 1:52 pm

whodidntante wrote:
Tue Sep 03, 2019 12:17 pm
We are going to figure out the correct answer to this question someday, I just know it. :happy
Gosh I hope not...that would mean we have all lost our individuality and are now using some universal formula to make decisions...too high a price to pay to just all think the same.

skp
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Re: Paying off mortgage early - am I thinking about this right?

Post by skp » Wed Sep 04, 2019 1:53 pm

I paid off my house. I am debt adverse, it made me less tense about money, and it made our lives more flexible. My husband was able to take a job he liked instead of one that made the most money. We could have lived on one income easily with our house paid off. Amy Dacycyn, the frugal zealot's, philosophy is that expenses matter more than savings. You have control over your expenses. You don't have control over where the stock market is going or the job market. In an economic downturn, you still have to have some place to live. Having two incomes helps.

Miguelito
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Re: Paying off mortgage early - am I thinking about this right?

Post by Miguelito » Wed Sep 04, 2019 2:13 pm

EnjoyIt wrote:
Wed Sep 04, 2019 1:29 pm
Basically what you are saying is that the remaining mortgage is relatively small compared to your net worth and at this point in your life you are OK with losing some potential growth on that small amount so that you can have an increase in cashflow. You are rich enough to forgo some small gains. I can understand that.
I would not characterize it quite like that, but that may be semantics.

Here is a scenario not too far from reality. Suppose that we have enough in an EF and tax-advantaged retirement accounts maxed and with healthy balances (let's say $1M for the sake of argument). We also have $200k in a taxable account. I now feel perhaps I'm a bit aggressive in my AA. Hypothetically, I have $2k leftover every month with which I can do one of two things:

1) I can buy bonds in my taxable account to get my AA to my desired, less-aggressive target over time.

2) I can put those funds towards pre-paying a 3% mortgage (that I cannot deduct) that has 8 years left and say $350k.

I'm having trouble, under that scenario, choosing 1).

EnjoyIt
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Re: Paying off mortgage early - am I thinking about this right?

Post by EnjoyIt » Wed Sep 04, 2019 2:21 pm

Miguelito wrote:
Wed Sep 04, 2019 2:13 pm
EnjoyIt wrote:
Wed Sep 04, 2019 1:29 pm
Basically what you are saying is that the remaining mortgage is relatively small compared to your net worth and at this point in your life you are OK with losing some potential growth on that small amount so that you can have an increase in cashflow. You are rich enough to forgo some small gains. I can understand that.
I would not characterize it quite like that, but that may be semantics.

Here is a scenario not too far from reality. Suppose that we have enough in an EF and tax-advantaged retirement accounts maxed and with healthy balances (let's say $1M for the sake of argument). We also have $200k in a taxable account. I now feel perhaps I'm a bit aggressive in my AA. Hypothetically, I have $2k leftover every month with which I can do one of two things:

1) I can buy bonds in my taxable account to get my AA to my desired, less-aggressive target over time.

2) I can put those funds towards pre-paying a 3% mortgage (that I cannot deduct) that has 8 years left and say $350k.

I'm having trouble, under that scenario, choosing 1).
The problem in your example is that your house is not a bond, your asset allocation has not changed, and you're just as aggressive as before, but with less debt and less money. You are playing mind tricks with yourself. Frankly, it is possible you are increasing your risk. Your AA has not changed and now a larger percentage of your net worth is stuck in a house as opposed to diversified over thousands of companies and bonds.

On the other hand in your example, if your goal is to retire spending $50k/yr and you have $1 million already, then maybe paying down that debt with new money is a good idea giving your $1 million to grow into what it needs to support $50k/yr and be debt free at the same time in retirement. This will decrease your sequence of return risk since you will be mortgage free in retirement.

Admiral
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Re: Paying off mortgage early - am I thinking about this right?

Post by Admiral » Wed Sep 04, 2019 2:37 pm

willthrill81 wrote:
Wed Sep 04, 2019 1:25 pm
Admiral wrote:
Wed Sep 04, 2019 11:17 am
willthrill81 wrote:
Wed Sep 04, 2019 11:07 am
Admiral wrote:
Wed Sep 04, 2019 10:48 am
willthrill81 wrote:
Wed Sep 04, 2019 10:45 am


There are some plausible and efficient options. The simplest is for the investor to simply direct future contributions that would have gone to buy bonds to pay down the mortgage. If the investor has a taxable account and would not encounter significant capital gains from selling, those funds could be used to pay down the mortgage; if stocks were sold to do this, then a corresponding quantity of bonds in the tax-advantaged account(s) could be exchanged for stocks with no tax implications.

Note that it is not necessary to pay off the mortgage entirely. Simply paying it down still takes advantage of the difference in interest rates/yields.
What you propose is a) a pay down not a pay off and b) sacrifices a tax deduction at one's prevailing federal rate for a minuscule interest savings.
There's nothing wrong with paying down and not paying off.

Whether one gets a tax deduction is very specific to the individual. For instance, we haven't been able to deduct mortgage interest for years. And the difference between a mortgage rate and bond yields may not be minuscule.
I would say saving 4% on a mortgage vs saving 24% on one's taxes counts as a minuscule savings, by comparison. You get a tax deduction [savings]when you contribute to a pretax account. I'm not speaking of the mortgage interest deduction. What you wrote is that one can use pre-tax savings to instead pre-pay a mortgage. That is a bad idea in most if not all cases. Right? Or you disagree?
You don't necessarily save your marginal tax rate when you contribute to a tax-deferred account. It's tax-deferment. It depends on how much tax arbitrage you are able to take advantage of later.

Let's look at a simple example. You start with $1,000 and place this in a tax-deferred account and invest it in bonds paying 2%. After 20 years, the value is $1,485.95. Taxes must then be paid on withdrawals at your marginal rate.

Alternatively, you pay 24% taxes on the $1,000, leaving you with $760, and you use it to pay down your mortgage rate at the OP's 3.875%. After 20 years, the compounded after-tax value is $1,647.59.

So even if you paid no taxes at all on the tax-deferred withdrawals in the above example, paying down the higher rate mortgage was the better route to take.
What if I don't have 20 years left on my mortgage and my $1000 can be converted to Roth at 0% and grow for 50 years?

Sure, in very specific circumstances with some specific assumptions the math may work. We could just as easily make the assumption that when rates rise my $1000 can be rolled tax free into a bond paying 5% for 20 years. Or 30 years. Or forever.

7eight9
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Re: Paying off mortgage early - am I thinking about this right?

Post by 7eight9 » Wed Sep 04, 2019 2:54 pm

Admiral wrote:
Wed Sep 04, 2019 2:37 pm
willthrill81 wrote:
Wed Sep 04, 2019 1:25 pm
Admiral wrote:
Wed Sep 04, 2019 11:17 am
willthrill81 wrote:
Wed Sep 04, 2019 11:07 am
Admiral wrote:
Wed Sep 04, 2019 10:48 am


What you propose is a) a pay down not a pay off and b) sacrifices a tax deduction at one's prevailing federal rate for a minuscule interest savings.
There's nothing wrong with paying down and not paying off.

Whether one gets a tax deduction is very specific to the individual. For instance, we haven't been able to deduct mortgage interest for years. And the difference between a mortgage rate and bond yields may not be minuscule.
I would say saving 4% on a mortgage vs saving 24% on one's taxes counts as a minuscule savings, by comparison. You get a tax deduction [savings]when you contribute to a pretax account. I'm not speaking of the mortgage interest deduction. What you wrote is that one can use pre-tax savings to instead pre-pay a mortgage. That is a bad idea in most if not all cases. Right? Or you disagree?
You don't necessarily save your marginal tax rate when you contribute to a tax-deferred account. It's tax-deferment. It depends on how much tax arbitrage you are able to take advantage of later.

Let's look at a simple example. You start with $1,000 and place this in a tax-deferred account and invest it in bonds paying 2%. After 20 years, the value is $1,485.95. Taxes must then be paid on withdrawals at your marginal rate.

Alternatively, you pay 24% taxes on the $1,000, leaving you with $760, and you use it to pay down your mortgage rate at the OP's 3.875%. After 20 years, the compounded after-tax value is $1,647.59.

So even if you paid no taxes at all on the tax-deferred withdrawals in the above example, paying down the higher rate mortgage was the better route to take.
What if I don't have 20 years left on my mortgage and my $1000 can be converted to Roth at 0% and grow for 50 years?

Sure, in very specific circumstances with some specific assumptions the math may work. We could just as easily make the assumption that when rates rise my $1000 can be rolled tax free into a bond paying 5% for 20 years. Or 30 years. Or forever.
The problem with personal finance is it is personal. Everyone has to make the best decision they can at the time. It is necessarily the optimal decision? Likely people won't know for a number of years. And have no way of knowing in advance.

i paid off a mortgage in 2005. Took it in 2004. Put down 50%. Paid the rest off next year. It was 4.875% for 15 years. I couldn't beat the rate risk free (no tax benefit to me from the mortgage) so I paid it off.

I'm risk adverse. Currently at 20/80 and frankly would prefer to be 0/100. I wouldn't have been putting the money in the stock market anyway. For me paying off the mortgage made good sense. Others who want to gamble on the stock market might disagree.
I guess it all could be much worse. | They could be warming up my hearse.

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willthrill81
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Re: Paying off mortgage early - am I thinking about this right?

Post by willthrill81 » Wed Sep 04, 2019 4:01 pm

EnjoyIt wrote:
Wed Sep 04, 2019 1:34 pm
willthrill81 wrote:
Wed Sep 04, 2019 1:25 pm
Admiral wrote:
Wed Sep 04, 2019 11:17 am
willthrill81 wrote:
Wed Sep 04, 2019 11:07 am
Admiral wrote:
Wed Sep 04, 2019 10:48 am


What you propose is a) a pay down not a pay off and b) sacrifices a tax deduction at one's prevailing federal rate for a minuscule interest savings.
There's nothing wrong with paying down and not paying off.

Whether one gets a tax deduction is very specific to the individual. For instance, we haven't been able to deduct mortgage interest for years. And the difference between a mortgage rate and bond yields may not be minuscule.
I would say saving 4% on a mortgage vs saving 24% on one's taxes counts as a minuscule savings, by comparison. You get a tax deduction [savings]when you contribute to a pretax account. I'm not speaking of the mortgage interest deduction. What you wrote is that one can use pre-tax savings to instead pre-pay a mortgage. That is a bad idea in most if not all cases. Right? Or you disagree?
You don't necessarily save your marginal tax rate when you contribute to a tax-deferred account. It's tax-deferment. It depends on how much tax arbitrage you are able to take advantage of later.

Let's look at a simple example. You start with $1,000 and place this in a tax-deferred account and invest it in bonds paying 2%. After 20 years, the value is $1,485.95. Taxes must then be paid on withdrawals at your marginal rate.

Alternatively, you pay 24% taxes on the $1,000, leaving you with $760, and you use it to pay down your mortgage rate at the OP's 3.875%. After 20 years, the compounded after-tax value is $1,647.59.

So even if you paid no taxes at all on the tax-deferred withdrawals in the above example, paying down the higher rate mortgage was the better route to take.
Or you can invest that $1000 as per your asset allocation at the time and make 8.7% a year over 20 years. Yes you take on some risk doing so, but you have already agreed with yourself that this asset allocation is appropriate for your risk tolerance and you accept the extra $1000 which after 20 years is worth $5,303.85. But, I know you already know that.
The likelihood of bonds outperforming 3.875% over at least the next decade is, historically speaking, very small given current yields, so that leaves us with stocks. Yes, the historical likelihood of stocks beating 3.875% over 20 year period is high, but by the same logic, accumulators should be 100% stock. Risk tolerance frequently gets in the way of that though.

However, my point was only that tax-deferment does not represent a universal 'win' compared to using after-tax dollars to pay down a higher rate debt.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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willthrill81
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Re: Paying off mortgage early - am I thinking about this right?

Post by willthrill81 » Wed Sep 04, 2019 4:04 pm

Admiral wrote:
Wed Sep 04, 2019 2:37 pm
What if I don't have 20 years left on my mortgage and my $1000 can be converted to Roth at 0% and grow for 50 years?

Sure, in very specific circumstances with some specific assumptions the math may work. We could just as easily make the assumption that when rates rise my $1000 can be rolled tax free into a bond paying 5% for 20 years. Or 30 years. Or forever.
Yes, tax-deferment is usually better, but my point was that it isn't always better.

I'm curious. If you're in the 24% bracket now, how do you plan on converting to Roth at 0%? Do you anticipate your taxable income falling that much?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Paying off mortgage early - am I thinking about this right?

Post by SovereignInvestor » Wed Sep 04, 2019 5:01 pm

Many goood points on both sides which is why those saying non absolutes may be spot on. PartI ally pay off mortgage and keep some cash perhaps.

HELOCS can be cut in a crisis as others have mentioned
I prefer the mortgage because it's not the debt that's issue it's cash flow that affects our lives as others mentioned. Would rather have a pile of cash and owe a lot on mortgage amortized over 30 years than no cash and no mortgage.

At around 3% interest rates a 30YR FRM net of assumed small tax deduction requires about 5% of principal paid each year.

If one owes 100K extra in a mortgage...it saves them $5K/year cash flow loss, but they have 95K of extra lump sum cash to use for other purposes. Seems like having the cash makes on much more stable.

AA is a separate issue as thst can determine risk level overall.

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Re: Paying off mortgage early - am I thinking about this right?

Post by j0nnyg1984 » Wed Sep 04, 2019 5:09 pm

I only read the first few replies, but mhalley is absolutely on the money. You cannot make this strictly about the numbers - your personal feeling, tolerance, what have you needs to be the lions share of the decision.

I was in a similar boat recently. 35, single, no debt except mortgage, maxing my 401k / IRA / HSA. I decided that I didn’t want a taxable investment account and I wanted the mortgage gone ASAP. Less than two years later, it’s gone, and I’m just stockpiling cash again.

Do what makes YOU feel comfortable.

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Re: Paying off mortgage early - am I thinking about this right?

Post by grabiner » Wed Sep 04, 2019 8:22 pm

Admiral wrote:
Wed Sep 04, 2019 10:39 am
grabiner wrote:
Tue Sep 03, 2019 8:50 pm
For the OP, the proper mortgage rate to use for comparison is probably not the current rate, but the 3.25% that he could get by refinancing to a 15-year mortgage; since he is already paying off the mortgage at a 15-year rate and has no liquidity issues, it is worth refinancing rather than keeping the old mortgage. A 15-year mortgage has a 7-year duration, so the bond fund to use for comparison is Admiral shares of Vanguard Long-Term Tax-Exempt, yielding 1.86%.

So this is a net gain of 1.39% annualized for paying off the mortgage if the interest is not deductible, or 0.61% if it is all deductible at a 24% rate (which would require a married couple to be contributing $14,400 to charity). With no need for liquidity, I would take the 1.39% gain easily, and probably even the 0.61%.
How do you propose that the average investor who hold bonds (wisely) in a tax-sheltered account sell those bonds and use the proceeds to pay off the mortgage? I realize that you do, but most people don't have hundreds of thousands of dollars sitting in a taxable account, just waiting to pay a mortgage. Their investments are mostly tax sheltered.
The OP is considering paying off the mortgage from a taxable account. If the bonds are in a tax-deferred account, it is still possible to sell the bonds to pay off the mortgage: sell the taxable stocks, and move an equal amount from bonds to stock in the tax-deferred account. That is also what I will do if I pay mine off (currently deterred only by the capital-gains tax).

For investors who can't max out a 401(k) and IRA, the proper comparison is bond rates in the 401(k) or IRA versus mortgage rates, and if this is close, the tax-deferral on the 401(k) or IRA makes keeping the mortgage more attractive. But with the new tax laws, and the recent decline in bond yields, paying down a mortgage may be a better deal than unmatched contributions to a 401(k).
Wiki David Grabiner

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Re: Paying off mortgage early - am I thinking about this right?

Post by EnjoyIt » Wed Sep 04, 2019 9:45 pm

j0nnyg1984 wrote:
Wed Sep 04, 2019 5:09 pm
I only read the first few replies, but mhalley is absolutely on the money. You cannot make this strictly about the numbers - your personal feeling, tolerance, what have you needs to be the lions share of the decision.

I was in a similar boat recently. 35, single, no debt except mortgage, maxing my 401k / IRA / HSA. I decided that I didn’t want a taxable investment account and I wanted the mortgage gone ASAP. Less than two years later, it’s gone, and I’m just stockpiling cash again.

Do what makes YOU feel comfortable.
Can I please change your bolder quote?

Do what make you feel comfortable after understanding the implications of that decision.

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Re: Paying off mortgage early - am I thinking about this right?

Post by Admiral » Thu Sep 05, 2019 7:14 am

willthrill81 wrote:
Wed Sep 04, 2019 4:04 pm
Admiral wrote:
Wed Sep 04, 2019 2:37 pm
What if I don't have 20 years left on my mortgage and my $1000 can be converted to Roth at 0% and grow for 50 years?

Sure, in very specific circumstances with some specific assumptions the math may work. We could just as easily make the assumption that when rates rise my $1000 can be rolled tax free into a bond paying 5% for 20 years. Or 30 years. Or forever.
Yes, tax-deferment is usually better, but my point was that it isn't always better.

I'm curious. If you're in the 24% bracket now, how do you plan on converting to Roth at 0%? Do you anticipate your taxable income falling that much?
That was a hypothetical to make a point

That said, many people have low or no income if they retire before taking SS.

At age 60, assuming retired, pension income would put us in 12% bracket before standard deduction.

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Re: Paying off mortgage early - am I thinking about this right?

Post by wolf359 » Thu Sep 05, 2019 8:49 am

Miguelito wrote:
Wed Sep 04, 2019 2:13 pm
EnjoyIt wrote:
Wed Sep 04, 2019 1:29 pm
Basically what you are saying is that the remaining mortgage is relatively small compared to your net worth and at this point in your life you are OK with losing some potential growth on that small amount so that you can have an increase in cashflow. You are rich enough to forgo some small gains. I can understand that.
I would not characterize it quite like that, but that may be semantics.

Here is a scenario not too far from reality. Suppose that we have enough in an EF and tax-advantaged retirement accounts maxed and with healthy balances (let's say $1M for the sake of argument). We also have $200k in a taxable account. I now feel perhaps I'm a bit aggressive in my AA. Hypothetically, I have $2k leftover every month with which I can do one of two things:

1) I can buy bonds in my taxable account to get my AA to my desired, less-aggressive target over time.

2) I can put those funds towards pre-paying a 3% mortgage (that I cannot deduct) that has 8 years left and say $350k.

I'm having trouble, under that scenario, choosing 1).
Option 2 does not reduce your risk. What happens if the market drops? You can't rebalance from your home equity. If your AA is too aggressive, then adjust your AA.

Why don't you take all $200K in your taxable account and pay down your mortgage? Now you have only $150K left on the mortgage! Well, no. This is a bad move because you're only paying down the mortgage, and not paying it off. You still have the monthly expense, but no longer have any liquidity.

Alternately, why don't you buy stocks with your extra 2K/month? The expected return for stocks over the next 8 years is higher than 3%. Putting the extra money into a sinking fund gives you the benefit of superior equity returns without losing liquidity. When you have a sufficient balance, you can choose to pay off the remainder of the mortgage, thus reducing your monthly expenses.

Paying OFF your mortgage has a bigger benefit than merely paying it DOWN. And having a larger pot of taxable money is a better cure for financial anxiety than keeping your mortgage expenses while locking up excess cash into your house.

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Re: Paying off mortgage early - am I thinking about this right?

Post by wolf359 » Thu Sep 05, 2019 9:05 am

Miguelito wrote:
Wed Sep 04, 2019 11:32 am
Interesting and well-timed discussion. Not to humble brag, but I was just realizing that, hypothetically, if we were to liquidate all taxable accounts and throw in all savings, we could probably just barely pay off the mortgage balance. As a result, all sorts of thought exercises started coming to mind.

The most obvious one is that given that I feel we are a bit heavy on stocks and we should probably invest in bonds to get to the right AA over time, instead of debating what bond fund to buy into, should we not just put the money towards the mortgage? It's at 3% but we do standard deduction and have 7 years left on the loan. Am I not effectively buying a 7-year, 3% tax-free bond when I pay down the mortgage? Why would I not do that? I do have a car loan at 1.9%, but that interest rate is not all that different from a savings account yield.
If you feel that your asset allocation is too aggressive, then you pick a more appropriate asset allocation so that your overall portfolio is less volatile. The bonds are for ballast, not for return. You need to focus on the blended return of the overall asset allocation, not the individual parts. If you cannot do this, you may want to consider a target date or a life strategy fund so that you don't see the individual components.

Brakes are used to slow down your car. The fact that brakes make you go slower than your gas pedal doesn't mean you should strip the brakes out of your car. Both brakes and gas pedal should be considered together as part of your overall car system.

Similarly, stocks and bonds are used in combination. Believe me, if we have another 2008-level market crash, you will find lots of comfort in owning bonds. Meanwhile, many people who simply had more equity in their homes couldn't take out home equity loans, couldn't pay their mortgages (because they lost their jobs), and couldn't sell their homes (because their mortgages went underwater and the housing market collapsed.)

Bonds are not the same as paying down your mortgage.

Adjust your AA to match your risk level, then use extra payments towards a sinking fund. At the end of 7 years you will have more money. With only 7 years left, your current payments are going more to principal now anyways. You'll see that balance drop quickly, and eventually get to the point where you'll just pay off the remainder with your sinking fund.

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Re: Paying off mortgage early - am I thinking about this right?

Post by international001 » Thu Sep 05, 2019 6:54 pm

wolf359 wrote:
Thu Sep 05, 2019 9:05 am

Bonds are not the same as paying down your mortgage.
Once you have a mortgage (assume 30 years left, 3% rate), investing X on a 30 year bonds at 3% is exactly the same as adding X to the payment of the mortgage

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Re: Paying off mortgage early - am I thinking about this right?

Post by international001 » Thu Sep 05, 2019 7:02 pm

Admiral wrote:
Wed Sep 04, 2019 11:45 am

No, you're not. A bond (or bond fund) is not the same as a house, regardless of whether the mortgage rate and the yield of the bond/fund are equivalent. This is a misconception. One is a cash equivalent, one is not. It's possible to lose a small amount of principal if one is forced to sell a bond/fund early. That is not the same as a house.
Houses can go up and down as well in price at a given moment.
Housing returns are historically like stocks and with less volatility. More difficult to replicate the performance, though.

From an approximate point of view, I see the house as a bond. Imagine no mortgage, living in an area with stable prices and easy to sell/buy. You invest an amount and you get a periodic cash flow. Of course, it's not very liquid.

But I consider it part of my bond allocation. Since I wouldn't want to be 100% of stocks if I was renting, that's why I paid it off.

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Re: Paying off mortgage early - am I thinking about this right?

Post by Miguelito » Thu Sep 05, 2019 7:43 pm

wolf359 wrote:
Thu Sep 05, 2019 8:49 am
Option 2 does not reduce your risk. What happens if the market drops? You can't rebalance from your home equity. If your AA is too aggressive, then adjust your AA.
Fair enough, but we contribute a lot of money into the market every year. I don't have to use my house equity to rebalance. All I have to do is designate all new funds to correct the AA. But sure, I get your point in general.
wolf359 wrote:Why don't you take all $200K in your taxable account and pay down your mortgage? Now you have only $150K left on the mortgage! Well, no. This is a bad move because you're only paying down the mortgage, and not paying it off. You still have the monthly expense, but no longer have any liquidity.
Agreed. That makes no sense. I never suggested taking a large chunk of taxable assets to pay a portion of the mortgage. Also, as I mentioned, in my case I could conceivably pay off the whole thing. Freeing up a LOT of cash flow.
wolf359 wrote:Alternately, why don't you buy stocks with your extra 2K/month? The expected return for stocks over the next 8 years is higher than 3%. Putting the extra money into a sinking fund gives you the benefit of superior equity returns without losing liquidity. When you have a sufficient balance, you can choose to pay off the remainder of the mortgage, thus reducing your monthly expenses.

Paying OFF your mortgage has a bigger benefit than merely paying it DOWN. And having a larger pot of taxable money is a better cure for financial anxiety than keeping your mortgage expenses while locking up excess cash into your house.
No guarantees on stock return though.

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Re: Paying off mortgage early - am I thinking about this right?

Post by EnjoyIt » Thu Sep 05, 2019 9:51 pm

international001 wrote:
Thu Sep 05, 2019 7:02 pm
Admiral wrote:
Wed Sep 04, 2019 11:45 am

No, you're not. A bond (or bond fund) is not the same as a house, regardless of whether the mortgage rate and the yield of the bond/fund are equivalent. This is a misconception. One is a cash equivalent, one is not. It's possible to lose a small amount of principal if one is forced to sell a bond/fund early. That is not the same as a house.
Houses can go up and down as well in price at a given moment.
Housing returns are historically like stocks and with less volatility. More difficult to replicate the performance, though.

From an approximate point of view, I see the house as a bond. Imagine no mortgage, living in an area with stable prices and easy to sell/buy. You invest an amount and you get a periodic cash flow. Of course, it's not very liquid.

But I consider it part of my bond allocation. Since I wouldn't want to be 100% of stocks if I was renting, that's why I paid it off.
You can consider your home whatever you feel since it is your home but, let me ask you some follow up question:
1) You have $80k and a $100k home with an $80k mortgage how do you invest that $80k to stay at a 60/40 portfolio?

2) If I instead used that 80k and payed off the mortgage, I now have a $100k home and no money. If I acquired another $10k how should I invest it to stay in a 60/40 portfolio?

3) which portfolio is higher risk?
A) $1 million dollars invested in an AA of 60/40 and a $400k mortgage on a $500k home.
B) $600k portfolio invested 100% in equites and a $500k paid off house?

I hope my extreme examples shows you that a house is never a bond and considering your mortgage a negative bond can be a mistake in managing one’s risk.

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Re: Paying off mortgage early - am I thinking about this right?

Post by Admiral » Fri Sep 06, 2019 7:04 am

international001 wrote:
Thu Sep 05, 2019 7:02 pm
Admiral wrote:
Wed Sep 04, 2019 11:45 am

No, you're not. A bond (or bond fund) is not the same as a house, regardless of whether the mortgage rate and the yield of the bond/fund are equivalent. This is a misconception. One is a cash equivalent, one is not. It's possible to lose a small amount of principal if one is forced to sell a bond/fund early. That is not the same as a house.
Houses can go up and down as well in price at a given moment.
Housing returns are historically like stocks and with less volatility. More difficult to replicate the performance, though.

From an approximate point of view, I see the house as a bond. Imagine no mortgage, living in an area with stable prices and easy to sell/buy. You invest an amount and you get a periodic cash flow. Of course, it's not very liquid.

But I consider it part of my bond allocation. Since I wouldn't want to be 100% of stocks if I was renting, that's why I paid it off.
Housing returns are historically NOT like stocks in any way (save perhaps volatility). Shiller has shown convincingly that homes have appreciated only 1-2% above inflation, historically, in the US. You can’t claim a house is like a bond and then also claim “of course, it’s not very liquid.”

It can be one or the other but not both. In 2008 many homes lost 40-50% of their value. Does that sound like bonds to you? Perhaps in THAT they are indeed like stocks.

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Re: Paying off mortgage early - am I thinking about this right?

Post by wolf359 » Fri Sep 06, 2019 2:38 pm

international001 wrote:
Thu Sep 05, 2019 6:54 pm
wolf359 wrote:
Thu Sep 05, 2019 9:05 am

Bonds are not the same as paying down your mortgage.
Once you have a mortgage (assume 30 years left, 3% rate), investing X on a 30 year bonds at 3% is exactly the same as adding X to the payment of the mortgage
Although the math is correct in terms of your return, the underlying assets are not.

I can sell my existing bonds in order to raise money. When you pay down a mortgage, the money is locked up in home equity. Yes, you can get it back out, but there are fees and interest to do so. And you may have to sell your house.

Bonds are backed by companies, governments, or even lots of companies (in the case of a bond fund). Your home equity is tied to the value of a single asset in a single location.

The behavior of bonds as an investment is not the same as the behavior of your home equity (paying down your mortgage.)

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Re: Paying off mortgage early - am I thinking about this right?

Post by international001 » Sun Sep 08, 2019 3:03 pm

Admiral wrote:
Fri Sep 06, 2019 7:04 am
international001 wrote:
Thu Sep 05, 2019 7:02 pm
Admiral wrote:
Wed Sep 04, 2019 11:45 am

No, you're not. A bond (or bond fund) is not the same as a house, regardless of whether the mortgage rate and the yield of the bond/fund are equivalent. This is a misconception. One is a cash equivalent, one is not. It's possible to lose a small amount of principal if one is forced to sell a bond/fund early. That is not the same as a house.
Houses can go up and down as well in price at a given moment.
Housing returns are historically like stocks and with less volatility. More difficult to replicate the performance, though.

From an approximate point of view, I see the house as a bond. Imagine no mortgage, living in an area with stable prices and easy to sell/buy. You invest an amount and you get a periodic cash flow. Of course, it's not very liquid.

But I consider it part of my bond allocation. Since I wouldn't want to be 100% of stocks if I was renting, that's why I paid it off.
Housing returns are historically NOT like stocks in any way (save perhaps volatility). Shiller has shown convincingly that homes have appreciated only 1-2% above inflation, historically, in the US. You can’t claim a house is like a bond and then also claim “of course, it’s not very liquid.”

It can be one or the other but not both. In 2008 many homes lost 40-50% of their value. Does that sound like bonds to you? Perhaps in THAT they are indeed like stocks.
I'm talking total return, including rental (imputed) income

https://www.frbsf.org/economic-research ... 017-25.pdf

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Re: Paying off mortgage early - am I thinking about this right?

Post by international001 » Sun Sep 08, 2019 3:06 pm

wolf359 wrote:
Fri Sep 06, 2019 2:38 pm
international001 wrote:
Thu Sep 05, 2019 6:54 pm
wolf359 wrote:
Thu Sep 05, 2019 9:05 am

Bonds are not the same as paying down your mortgage.
Once you have a mortgage (assume 30 years left, 3% rate), investing X on a 30 year bonds at 3% is exactly the same as adding X to the payment of the mortgage
Although the math is correct in terms of your return, the underlying assets are not.

I can sell my existing bonds in order to raise money. When you pay down a mortgage, the money is locked up in home equity. Yes, you can get it back out, but there are fees and interest to do so. And you may have to sell your house.

Bonds are backed by companies, governments, or even lots of companies (in the case of a bond fund). Your home equity is tied to the value of a single asset in a single location.

The behavior of bonds as an investment is not the same as the behavior of your home equity (paying down your mortgage.)
I thought I mentioned before. I'm not making assuming liquidity or risk issues
I think if it's better to have some liquid $ for emergencies. HELOC may become too expensive if you are fired, for instance
If there is risk of you defaulting in your mortgage (imagine a junk a bond defaulting), it's also better to have some liquid assets that you cannot loose

YMMV

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Re: Paying off mortgage early - am I thinking about this right?

Post by willthrill81 » Sun Sep 08, 2019 3:14 pm

international001 wrote:
Sun Sep 08, 2019 3:03 pm
Admiral wrote:
Fri Sep 06, 2019 7:04 am
international001 wrote:
Thu Sep 05, 2019 7:02 pm
Admiral wrote:
Wed Sep 04, 2019 11:45 am

No, you're not. A bond (or bond fund) is not the same as a house, regardless of whether the mortgage rate and the yield of the bond/fund are equivalent. This is a misconception. One is a cash equivalent, one is not. It's possible to lose a small amount of principal if one is forced to sell a bond/fund early. That is not the same as a house.
Houses can go up and down as well in price at a given moment.
Housing returns are historically like stocks and with less volatility. More difficult to replicate the performance, though.

From an approximate point of view, I see the house as a bond. Imagine no mortgage, living in an area with stable prices and easy to sell/buy. You invest an amount and you get a periodic cash flow. Of course, it's not very liquid.

But I consider it part of my bond allocation. Since I wouldn't want to be 100% of stocks if I was renting, that's why I paid it off.
Housing returns are historically NOT like stocks in any way (save perhaps volatility). Shiller has shown convincingly that homes have appreciated only 1-2% above inflation, historically, in the US. You can’t claim a house is like a bond and then also claim “of course, it’s not very liquid.”

It can be one or the other but not both. In 2008 many homes lost 40-50% of their value. Does that sound like bonds to you? Perhaps in THAT they are indeed like stocks.
I'm talking total return, including rental (imputed) income

https://www.frbsf.org/economic-research ... 017-25.pdf
Based on the market value of our home and rents on very similar properties, the imputed return on our home, inclusive of all expenses except mortgage interest, is about 5% annually, which I'm quite happy with. Mortgage interest obviously reduces that return.

However, I don't personally believe that treating a paid-off house as a bond is appropriate. It simply reduces one's need for income.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Paying off mortgage early - am I thinking about this right?

Post by international001 » Sun Sep 08, 2019 3:39 pm


You can consider your home whatever you feel since it is your home but, let me ask you some follow up question:
1) You have $80k and a $100k home with an $80k mortgage how do you invest that $80k to stay at a 60/40 portfolio?

2) If I instead used that 80k and payed off the mortgage, I now have a $100k home and no money. If I acquired another $10k how should I invest it to stay in a 60/40 portfolio?
You can't, obviously, since you are considering house value as part of the portfolio.
If you are renting and you have a 60/40 portfolio, when you buy you are kind of acquiring a bond. You cannot get back to a 60/40. I think that's fine because it's a high yield bond and you have leverage to buy it. You can invest the rest on stocks.

3) which portfolio is higher risk?
A) $1 million dollars invested in an AA of 60/40 and a $400k mortgage on a $500k home.
B) $600k portfolio invested 100% in equites and a $500k paid off house?

I hope my extreme examples shows you that a house is never a bond and considering your mortgage a negative bond can be a mistake in managing one’s risk.
Once you could model as a 60/90/-40 , the other a 60/50 (third number is your cash position - in this case borrowed money -, and of course you'd have to weight it to 100%

PV tells me that first option is better
https://www.portfoliovisualizer.com/bac ... 0&total3=0

There is lots of people discussing some leverage in your portfolio.

Of course, the specifics would be different depending on how you model having an asset as a house. In a LCOL area if you are financially good, I think you can model it as a bond, but other situations may require different considerations. For instance, historic house appreciation, and historic rental equivalent. It would be an interesting research.

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Re: Paying off mortgage early - am I thinking about this right?

Post by EnjoyIt » Sun Sep 08, 2019 4:00 pm

international001 wrote:
Sun Sep 08, 2019 3:39 pm

You can consider your home whatever you feel since it is your home but, let me ask you some follow up question:
1) You have $80k and a $100k home with an $80k mortgage how do you invest that $80k to stay at a 60/40 portfolio?

2) If I instead used that 80k and payed off the mortgage, I now have a $100k home and no money. If I acquired another $10k how should I invest it to stay in a 60/40 portfolio?
You can't, obviously, since you are considering house value as part of the portfolio.
If you are renting and you have a 60/40 portfolio, when you buy you are kind of acquiring a bond. You cannot get back to a 60/40. I think that's fine because it's a high yield bond and you have leverage to buy it. You can invest the rest on stocks.

3) which portfolio is higher risk?
A) $1 million dollars invested in an AA of 60/40 and a $400k mortgage on a $500k home.
B) $600k portfolio invested 100% in equites and a $500k paid off house?

I hope my extreme examples shows you that a house is never a bond and considering your mortgage a negative bond can be a mistake in managing one’s risk.
Once you could model as a 60/90/-40 , the other a 60/50 (third number is your cash position - in this case borrowed money -, and of course you'd have to weight it to 100%

PV tells me that first option is better
https://www.portfoliovisualizer.com/bac ... 0&total3=0

There is lots of people discussing some leverage in your portfolio.

Of course, the specifics would be different depending on how you model having an asset as a house. In a LCOL area if you are financially good, I think you can model it as a bond, but other situations may require different considerations. For instance, historic house appreciation, and historic rental equivalent. It would be an interesting research.
Personally, my house is an expense. I need a place to live and I pay to live there. I pay via a mortgage, property tax, utilities, maintenance, whatever. My home is not an investment and is not calculated into my portfolio. It does have some value and therefor adds to my net worth which is a meaningless value for me. I don't care what my net worth is. I need to know what my expenses are and if my invested assets are going to cover those expenses. For me, a mortgage being paid off just lowers my expenses some. Nothing more, nothing less. Using my home as some form of bond or bond derivate makes no sense because my home is not an investment, it does not give me dividends, I can't rebalance with it. But, I have to keep throwing more and more money at it till the day I die.

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Re: Paying off mortgage early - am I thinking about this right?

Post by international001 » Sun Sep 08, 2019 6:09 pm



Based on the market value of our home and rents on very similar properties, the imputed return on our home, inclusive of all expenses except mortgage interest, is about 5% annually, which I'm quite happy with. Mortgage interest obviously reduces that return.

However, I don't personally believe that treating a paid-off house as a bond is appropriate. It simply reduces one's need for income.
Mortgage interest increases as leverage always does. Imagine paying 0% down and paying only interests. The total return is the amount you'd need to rent - amount you are paying in interests (assumption is that it would be positive). Return is infinite.
Reducing one's need for income (two negatives) is the same than having income (one positive)
You have to think how much better off you are by buying than renting. Consider the expense (if you rent) and the imputed expense (if you buy an equivalent property).

international001
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Re: Paying off mortgage early - am I thinking about this right?

Post by international001 » Sun Sep 08, 2019 6:13 pm

EnjoyIt wrote:
Sun Sep 08, 2019 4:00 pm


Personally, my house is an expense. I need a place to live and I pay to live there. I pay via a mortgage, property tax, utilities, maintenance, whatever. My home is not an investment and is not calculated into my portfolio. It does have some value and therefor adds to my net worth which is a meaningless value for me. I don't care what my net worth is. I need to know what my expenses are and if my invested assets are going to cover those expenses. For me, a mortgage being paid off just lowers my expenses some. Nothing more, nothing less. Using my home as some form of bond or bond derivate makes no sense because my home is not an investment, it does not give me dividends, I can't rebalance with it. But, I have to keep throwing more and more money at it till the day I die.

I don't have all the answers, but what you said can be proven false by reductio ad absurdum.

If you make this mathematical assumption, if one day you decide to sell and live by renting, what would you do with the money of the sell to be in the same financial situation (meaning about the same return and risk?)

EnjoyIt
Posts: 2883
Joined: Sun Dec 29, 2013 8:06 pm

Re: Paying off mortgage early - am I thinking about this right?

Post by EnjoyIt » Sun Sep 08, 2019 7:47 pm

international001 wrote:
Sun Sep 08, 2019 6:13 pm
EnjoyIt wrote:
Sun Sep 08, 2019 4:00 pm


Personally, my house is an expense. I need a place to live and I pay to live there. I pay via a mortgage, property tax, utilities, maintenance, whatever. My home is not an investment and is not calculated into my portfolio. It does have some value and therefor adds to my net worth which is a meaningless value for me. I don't care what my net worth is. I need to know what my expenses are and if my invested assets are going to cover those expenses. For me, a mortgage being paid off just lowers my expenses some. Nothing more, nothing less. Using my home as some form of bond or bond derivate makes no sense because my home is not an investment, it does not give me dividends, I can't rebalance with it. But, I have to keep throwing more and more money at it till the day I die.

I don't have all the answers, but what you said can be proven false by reductio ad absurdum.

If you make this mathematical assumption, if one day you decide to sell and live by renting, what would you do with the money of the sell to be in the same financial situation (meaning about the same return and risk?)
simple, put it in my taxable account at my current AA.
If you think a home that you live in is some kind of investment, you are sadly mistaken. Sure you may get lucky or unlucky in your valuations, but at the end of the day you must live somewhere and you must pay for said expense. We choose to own a home because it gives us some freedom and potentially decreases living expenses which in retirement could decrease risk for yourself.

Let me phrase it a little differently. Sure on a balance sheet we have the home in there, but in day to day life it doesn't matter. I have investments that create an income for me. My home is an expense. At the day to day I don't care if my home is worth $250k or $500k. Actually, I prefer it valued as little as possible since it will decrease my property tax and lower my expenses. Yes, if I hit rough times, I can sell that home and capture that money, but on a day to day, week to week, month to month the value of my home is meaningless.

Basically, a house is not a bond and therefor a mortgage does not go into my asset allocation decisions.

international001
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Re: Paying off mortgage early - am I thinking about this right?

Post by international001 » Mon Sep 09, 2019 4:08 am

EnjoyIt wrote:
Sun Sep 08, 2019 7:47 pm
international001 wrote:
Sun Sep 08, 2019 6:13 pm
EnjoyIt wrote:
Sun Sep 08, 2019 4:00 pm


Personally, my house is an expense. I need a place to live and I pay to live there. I pay via a mortgage, property tax, utilities, maintenance, whatever. My home is not an investment and is not calculated into my portfolio. It does have some value and therefor adds to my net worth which is a meaningless value for me. I don't care what my net worth is. I need to know what my expenses are and if my invested assets are going to cover those expenses. For me, a mortgage being paid off just lowers my expenses some. Nothing more, nothing less. Using my home as some form of bond or bond derivate makes no sense because my home is not an investment, it does not give me dividends, I can't rebalance with it. But, I have to keep throwing more and more money at it till the day I die.

I don't have all the answers, but what you said can be proven false by reductio ad absurdum.

If you make this mathematical assumption, if one day you decide to sell and live by renting, what would you do with the money of the sell to be in the same financial situation (meaning about the same return and risk?)
simple, put it in my taxable account at my current AA.
If you think a home that you live in is some kind of investment, you are sadly mistaken. Sure you may get lucky or unlucky in your valuations, but at the end of the day you must live somewhere and you must pay for said expense. We choose to own a home because it gives us some freedom and potentially decreases living expenses which in retirement could decrease risk for yourself.

Let me phrase it a little differently. Sure on a balance sheet we have the home in there, but in day to day life it doesn't matter. I have investments that create an income for me. My home is an expense. At the day to day I don't care if my home is worth $250k or $500k. Actually, I prefer it valued as little as possible since it will decrease my property tax and lower my expenses. Yes, if I hit rough times, I can sell that home and capture that money, but on a day to day, week to week, month to month the value of my home is meaningless.

Basically, a house is not a bond and therefor a mortgage does not go into my asset allocation decisions.
IF you put the money in your taxable account, either your AA is equivalent than the house in terms of risk/returns, or you are increasing/decreasing overall risk/returns equation.

Even if you have to live somewhere, renting is also an option and has value. Buying a house generates year after year imputed income for that rental than you are using. This is an investment.

If you pay mental tricks to convince you a house it's not an investment, it's a dangerous path and you cannot even consider how good of an investment it will be.

hudson
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Re: Paying off mortgage early - am I thinking about this right?

Post by hudson » Mon Sep 09, 2019 6:19 am

Variant wrote:
Tue Sep 03, 2019 1:25 am

Am currently seven years in to a 30-year fixed @ 3.875% w/ original principal at $334,900. .... remaining loan balance to about $260K.
Am I thinking about this in the right way? Trying to be as apples to apples as possible.

Notes:
  • I'm already maxing out my 401K, working on getting Backdoor Roth going, etc.
  • I have no other debt
  • Even if I paid off the house, I could generate an additional $250K of liquidity short notice from taxable brokerage account while I rebuilt my emergency fund
  • I used Excel's FV() function for my investment return calculations
Variant, if you are still there....
If I were in your shoes....
I wouldn't touch your piles of money to pay off this loan.
I would attempt to pay it off early with current income....then no more debt.
Last edited by hudson on Mon Sep 09, 2019 11:11 am, edited 1 time in total.

EnjoyIt
Posts: 2883
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Re: Paying off mortgage early - am I thinking about this right?

Post by EnjoyIt » Mon Sep 09, 2019 8:12 am

international001 wrote:
Mon Sep 09, 2019 4:08 am
EnjoyIt wrote:
Sun Sep 08, 2019 7:47 pm
international001 wrote:
Sun Sep 08, 2019 6:13 pm
EnjoyIt wrote:
Sun Sep 08, 2019 4:00 pm


Personally, my house is an expense. I need a place to live and I pay to live there. I pay via a mortgage, property tax, utilities, maintenance, whatever. My home is not an investment and is not calculated into my portfolio. It does have some value and therefor adds to my net worth which is a meaningless value for me. I don't care what my net worth is. I need to know what my expenses are and if my invested assets are going to cover those expenses. For me, a mortgage being paid off just lowers my expenses some. Nothing more, nothing less. Using my home as some form of bond or bond derivate makes no sense because my home is not an investment, it does not give me dividends, I can't rebalance with it. But, I have to keep throwing more and more money at it till the day I die.

I don't have all the answers, but what you said can be proven false by reductio ad absurdum.

If you make this mathematical assumption, if one day you decide to sell and live by renting, what would you do with the money of the sell to be in the same financial situation (meaning about the same return and risk?)
simple, put it in my taxable account at my current AA.
If you think a home that you live in is some kind of investment, you are sadly mistaken. Sure you may get lucky or unlucky in your valuations, but at the end of the day you must live somewhere and you must pay for said expense. We choose to own a home because it gives us some freedom and potentially decreases living expenses which in retirement could decrease risk for yourself.

Let me phrase it a little differently. Sure on a balance sheet we have the home in there, but in day to day life it doesn't matter. I have investments that create an income for me. My home is an expense. At the day to day I don't care if my home is worth $250k or $500k. Actually, I prefer it valued as little as possible since it will decrease my property tax and lower my expenses. Yes, if I hit rough times, I can sell that home and capture that money, but on a day to day, week to week, month to month the value of my home is meaningless.

Basically, a house is not a bond and therefor a mortgage does not go into my asset allocation decisions.
IF you put the money in your taxable account, either your AA is equivalent than the house in terms of risk/returns, or you are increasing/decreasing overall risk/returns equation.

Even if you have to live somewhere, renting is also an option and has value. Buying a house generates year after year imputed income for that rental than you are using. This is an investment.

If you pay mental tricks to convince you a house it's not an investment, it's a dangerous path and you cannot even consider how good of an investment it will be.
It is not a mental trick. Yes, a house has value, and when I sell I get value from it. No one will deny that. But, as I said in a day to day, month to month look, the house is an expense that you must cover from your income. In retirement that income comes from your assets and/or pensions/SS/annuity. During that time it makes no difference what your house is worth. What matters is that you must pay every month and every year to live there. It is an expense. In retirement all I care about is being able to pay my expenses and enjoy life and not what my net worth is.

Personal finance is not the same as a corporate balance sheet. There are some similarities but it is not a 1 to 1 comparison.

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willthrill81
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Re: Paying off mortgage early - am I thinking about this right?

Post by willthrill81 » Mon Sep 09, 2019 10:06 am

EnjoyIt wrote:
Mon Sep 09, 2019 8:12 am
international001 wrote:
Mon Sep 09, 2019 4:08 am
EnjoyIt wrote:
Sun Sep 08, 2019 7:47 pm
international001 wrote:
Sun Sep 08, 2019 6:13 pm
EnjoyIt wrote:
Sun Sep 08, 2019 4:00 pm


Personally, my house is an expense. I need a place to live and I pay to live there. I pay via a mortgage, property tax, utilities, maintenance, whatever. My home is not an investment and is not calculated into my portfolio. It does have some value and therefor adds to my net worth which is a meaningless value for me. I don't care what my net worth is. I need to know what my expenses are and if my invested assets are going to cover those expenses. For me, a mortgage being paid off just lowers my expenses some. Nothing more, nothing less. Using my home as some form of bond or bond derivate makes no sense because my home is not an investment, it does not give me dividends, I can't rebalance with it. But, I have to keep throwing more and more money at it till the day I die.

I don't have all the answers, but what you said can be proven false by reductio ad absurdum.

If you make this mathematical assumption, if one day you decide to sell and live by renting, what would you do with the money of the sell to be in the same financial situation (meaning about the same return and risk?)
simple, put it in my taxable account at my current AA.
If you think a home that you live in is some kind of investment, you are sadly mistaken. Sure you may get lucky or unlucky in your valuations, but at the end of the day you must live somewhere and you must pay for said expense. We choose to own a home because it gives us some freedom and potentially decreases living expenses which in retirement could decrease risk for yourself.

Let me phrase it a little differently. Sure on a balance sheet we have the home in there, but in day to day life it doesn't matter. I have investments that create an income for me. My home is an expense. At the day to day I don't care if my home is worth $250k or $500k. Actually, I prefer it valued as little as possible since it will decrease my property tax and lower my expenses. Yes, if I hit rough times, I can sell that home and capture that money, but on a day to day, week to week, month to month the value of my home is meaningless.

Basically, a house is not a bond and therefor a mortgage does not go into my asset allocation decisions.
IF you put the money in your taxable account, either your AA is equivalent than the house in terms of risk/returns, or you are increasing/decreasing overall risk/returns equation.

Even if you have to live somewhere, renting is also an option and has value. Buying a house generates year after year imputed income for that rental than you are using. This is an investment.

If you pay mental tricks to convince you a house it's not an investment, it's a dangerous path and you cannot even consider how good of an investment it will be.
It is not a mental trick. Yes, a house has value, and when I sell I get value from it. No one will deny that. But, as I said in a day to day, month to month look, the house is an expense that you must cover from your income. In retirement that income comes from your assets and/or pensions/SS/annuity. During that time it makes no difference what your house is worth. What matters is that you must pay every month and every year to live there. It is an expense. In retirement all I care about is being able to pay my expenses and enjoy life and not what my net worth is.

Personal finance is not the same as a corporate balance sheet. There are some similarities but it is not a 1 to 1 comparison.
Both of you are correct. Owning a home is less costly than renting, which is valuable since 'ya gotta live somewhere'. But there are still ongoing expenses associated with owning a home.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

IMO
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Re: Paying off mortgage early - am I thinking about this right?

Post by IMO » Mon Sep 09, 2019 11:58 pm

EnjoyIt wrote:
Sun Sep 08, 2019 4:00 pm
international001 wrote:
Sun Sep 08, 2019 3:39 pm

You can consider your home whatever you feel since it is your home but, let me ask you some follow up question:
1) You have $80k and a $100k home with an $80k mortgage how do you invest that $80k to stay at a 60/40 portfolio?

2) If I instead used that 80k and payed off the mortgage, I now have a $100k home and no money. If I acquired another $10k how should I invest it to stay in a 60/40 portfolio?
You can't, obviously, since you are considering house value as part of the portfolio.
If you are renting and you have a 60/40 portfolio, when you buy you are kind of acquiring a bond. You cannot get back to a 60/40. I think that's fine because it's a high yield bond and you have leverage to buy it. You can invest the rest on stocks.

3) which portfolio is higher risk?
A) $1 million dollars invested in an AA of 60/40 and a $400k mortgage on a $500k home.
B) $600k portfolio invested 100% in equites and a $500k paid off house?

I hope my extreme examples shows you that a house is never a bond and considering your mortgage a negative bond can be a mistake in managing one’s risk.
Once you could model as a 60/90/-40 , the other a 60/50 (third number is your cash position - in this case borrowed money -, and of course you'd have to weight it to 100%

PV tells me that first option is better
https://www.portfoliovisualizer.com/bac ... 0&total3=0

There is lots of people discussing some leverage in your portfolio.

Of course, the specifics would be different depending on how you model having an asset as a house. In a LCOL area if you are financially good, I think you can model it as a bond, but other situations may require different considerations. For instance, historic house appreciation, and historic rental equivalent. It would be an interesting research.
Personally, my house is an expense. I need a place to live and I pay to live there. I pay via a mortgage, property tax, utilities, maintenance, whatever. My home is not an investment and is not calculated into my portfolio. It does have some value and therefor adds to my net worth which is a meaningless value for me. I don't care what my net worth is. I need to know what my expenses are and if my invested assets are going to cover those expenses. For me, a mortgage being paid off just lowers my expenses some. Nothing more, nothing less. Using my home as some form of bond or bond derivate makes no sense because my home is not an investment, it does not give me dividends, I can't rebalance with it. But, I have to keep throwing more and more money at it till the day I die.
For many people, a paid off mortgage (the P&I part) lowers their expenses considerably. Essentially, it lowers your expenses by the amount of your mortgage (the P&I part). When you have a mortgage and when you don't have a mortgage, you still are always paying property tax, utilities, maintenance and other capital expenses. The latter expenses were there before a mortgage is paid off and they are there after the mortgage is paid off, and of course one has to keep throwing money at it until the day one dies. The thing most people hope in their "forever home" is that year after year for the rest of one's life the taxes and maintenance costs will be less than they would be paying for rent.

So for our family, our expenses after we paid off our mortgage are $2,000/month or $24,000 year less. That's an after tax $24K year savings.
Rent would be $2250/month, so as long as property taxes and maintenance are less than that per month, I'm happy and don't lose sleep in my early retirement. And in one sense, like you, it really doesn't matter what my home is worth from the investment sense treating it as some sort of bond/bond derivative. Also, I'm not into calculating my net worth with various assets because really what matters is if income > expenses.

I wonder, am I typical or atypical because having $24,000 less in annual after tax expenses is more than "some" and is a significant amount of money to us. Sure many have mortgages less than that, but apparently many have ones more than that.

We don't plan to get a reverse mortgage, but that option exists that would allow us to throw less money at it in our lives. Or of course we could sell it, downsize, etc with the funds.

However, after reading many posts on this topic, I do think in the long term, for most people it is financially advantageous to hold onto the mortgage and invest otherwise with those funds. I'm good with taking the long term loss and with the lowered expenses that let me enjoying things more now while I'm still young (relatively of course). I'm okay with thought that in the future hopefully in my 60's/70's and beyond that I would have done better not paying off the mortgage.

Admiral
Posts: 2476
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Re: Paying off mortgage early - am I thinking about this right?

Post by Admiral » Tue Sep 10, 2019 6:33 am

IMO wrote:
Mon Sep 09, 2019 11:58 pm
EnjoyIt wrote:
Sun Sep 08, 2019 4:00 pm
international001 wrote:
Sun Sep 08, 2019 3:39 pm

You can consider your home whatever you feel since it is your home but, let me ask you some follow up question:
1) You have $80k and a $100k home with an $80k mortgage how do you invest that $80k to stay at a 60/40 portfolio?

2) If I instead used that 80k and payed off the mortgage, I now have a $100k home and no money. If I acquired another $10k how should I invest it to stay in a 60/40 portfolio?
You can't, obviously, since you are considering house value as part of the portfolio.
If you are renting and you have a 60/40 portfolio, when you buy you are kind of acquiring a bond. You cannot get back to a 60/40. I think that's fine because it's a high yield bond and you have leverage to buy it. You can invest the rest on stocks.

3) which portfolio is higher risk?
A) $1 million dollars invested in an AA of 60/40 and a $400k mortgage on a $500k home.
B) $600k portfolio invested 100% in equites and a $500k paid off house?

I hope my extreme examples shows you that a house is never a bond and considering your mortgage a negative bond can be a mistake in managing one’s risk.
Once you could model as a 60/90/-40 , the other a 60/50 (third number is your cash position - in this case borrowed money -, and of course you'd have to weight it to 100%

PV tells me that first option is better
https://www.portfoliovisualizer.com/bac ... 0&total3=0

There is lots of people discussing some leverage in your portfolio.

Of course, the specifics would be different depending on how you model having an asset as a house. In a LCOL area if you are financially good, I think you can model it as a bond, but other situations may require different considerations. For instance, historic house appreciation, and historic rental equivalent. It would be an interesting research.
Personally, my house is an expense. I need a place to live and I pay to live there. I pay via a mortgage, property tax, utilities, maintenance, whatever. My home is not an investment and is not calculated into my portfolio. It does have some value and therefor adds to my net worth which is a meaningless value for me. I don't care what my net worth is. I need to know what my expenses are and if my invested assets are going to cover those expenses. For me, a mortgage being paid off just lowers my expenses some. Nothing more, nothing less. Using my home as some form of bond or bond derivate makes no sense because my home is not an investment, it does not give me dividends, I can't rebalance with it. But, I have to keep throwing more and more money at it till the day I die.
For many people, a paid off mortgage (the P&I part) lowers their expenses considerably. Essentially, it lowers your expenses by the amount of your mortgage (the P&I part). When you have a mortgage and when you don't have a mortgage, you still are always paying property tax, utilities, maintenance and other capital expenses. The latter expenses were there before a mortgage is paid off and they are there after the mortgage is paid off, and of course one has to keep throwing money at it until the day one dies. The thing most people hope in their "forever home" is that year after year for the rest of one's life the taxes and maintenance costs will be less than they would be paying for rent.

So for our family, our expenses after we paid off our mortgage are $2,000/month or $24,000 year less. That's an after tax $24K year savings.
Rent would be $2250/month, so as long as property taxes and maintenance are less than that per month, I'm happy and don't lose sleep in my early retirement. And in one sense, like you, it really doesn't matter what my home is worth from the investment sense treating it as some sort of bond/bond derivative. Also, I'm not into calculating my net worth with various assets because really what matters is if income > expenses.

I wonder, am I typical or atypical because having $24,000 less in annual after tax expenses is more than "some" and is a significant amount of money to us. Sure many have mortgages less than that, but apparently many have ones more than that.

We don't plan to get a reverse mortgage, but that option exists that would allow us to throw less money at it in our lives. Or of course we could sell it, downsize, etc with the funds.

However, after reading many posts on this topic, I do think in the long term, for most people it is financially advantageous to hold onto the mortgage and invest otherwise with those funds. I'm good with taking the long term loss and with the lowered expenses that let me enjoying things more now while I'm still young (relatively of course). I'm okay with thought that in the future hopefully in my 60's/70's and beyond that I would have done better not paying off the mortgage.
I think it just depends on what percentage of one's monthly budget the mortgage payment represents. Our P+I payment too is about 2k. However our monthly budget is about 15k. So the payment, while annoying, yes, is barely 13% of our budget. On top of that, our principal portion of that 2k is about $1550. I consider that "forced savings" and it goes as such on the balance sheet. So, the true "cost" is the $450 in interest. For perspective, that's a hundred bucks more than I pay for my kid's braces each month. The taxes and insurance cost $9500/year. The equivalent rental is $4,000/mo or more.

So, while the mortgage is not something I love, and eliminating it would free up some cash, it's not life changing one way or the other (having vs not having.) That said, it will be paid off before retirement.

international001
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Re: Paying off mortgage early - am I thinking about this right?

Post by international001 » Tue Sep 10, 2019 1:27 pm

EnjoyIt wrote:
Mon Sep 09, 2019 8:12 am

It is not a mental trick. Yes, a house has value, and when I sell I get value from it. No one will deny that. But, as I said in a day to day, month to month look, the house is an expense that you must cover from your income. In retirement that income comes from your assets and/or pensions/SS/annuity. During that time it makes no difference what your house is worth. What matters is that you must pay every month and every year to live there. It is an expense. In retirement all I care about is being able to pay my expenses and enjoy life and not what my net worth is.

Personal finance is not the same as a corporate balance sheet. There are some similarities but it is not a 1 to 1 comparison.
Value of the house has meaning if you keep track of all the variables
If value increases and rent in your area increases.. your assets increase and so your expenses.
If value increases and rent in your area is the same.. your have an assets with a lower yield.

In normal cases, the value doesn't change (just by inflation) and its yield is about constant. This is why it is like a bond.

You can do whatever you want with your asset. Keep it if 'you must leave there'. You just have to accept the new yield. But you can also sell it if you find renting in the same area or someplace else is a better deal.

Some old school folks keep stocks or bonds for sentimental reasons. This doesn't mean they don't belong to their balance sheet and that they don't have to adjust the rest of the portfolio accordingly.

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UpsetRaptor
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Re: Paying off mortgage early - am I thinking about this right?

Post by UpsetRaptor » Tue Sep 10, 2019 2:03 pm

OP, another consideration in all of this is that a mortgage can be a type of inflation hedge, which is typically lacking in a normal 2 or 3-fund portfolio.

EnjoyIt
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Re: Paying off mortgage early - am I thinking about this right?

Post by EnjoyIt » Tue Sep 10, 2019 4:06 pm

international001 wrote:
Tue Sep 10, 2019 1:27 pm
EnjoyIt wrote:
Mon Sep 09, 2019 8:12 am

It is not a mental trick. Yes, a house has value, and when I sell I get value from it. No one will deny that. But, as I said in a day to day, month to month look, the house is an expense that you must cover from your income. In retirement that income comes from your assets and/or pensions/SS/annuity. During that time it makes no difference what your house is worth. What matters is that you must pay every month and every year to live there. It is an expense. In retirement all I care about is being able to pay my expenses and enjoy life and not what my net worth is.

Personal finance is not the same as a corporate balance sheet. There are some similarities but it is not a 1 to 1 comparison.
Value of the house has meaning if you keep track of all the variables
If value increases and rent in your area increases.. your assets increase and so your expenses.
If value increases and rent in your area is the same.. your have an assets with a lower yield.

In normal cases, the value doesn't change (just by inflation) and its yield is about constant. This is why it is like a bond.

You can do whatever you want with your asset. Keep it if 'you must leave there'. You just have to accept the new yield. But you can also sell it if you find renting in the same area or someplace else is a better deal.

Some old school folks keep stocks or bonds for sentimental reasons. This doesn't mean they don't belong to their balance sheet and that they don't have to adjust the rest of the portfolio accordingly.
There is nothing that you say that I disagree with. Yes, if things change dramatically the person can sell their home and move, utilizing the cash for expenses. That is why the value of the home has meaning and is worth knowing. But, it does not change day to day expenses for a retiree. Most people don't wake up in the morning and think to themselves "I'm going to sell my house to increase my cashflow." They use the assets they have invested to pay for their expenses. You can't deny that. When you look how much you need to retire, you don't add the value of your home to it do you? You just have a lower expense as compared to renting (ideally) and then calculate 25x or 33x of expenses.

If I choose to stay in the same home, when I retire, the value of my home plays no bearing on if I can pull the plug. It doesn't come into any consideration. I have X expenses and I need 25x in investments. Period.

When I am early in a 30 year mortgage, I have X expenses and the mortgage is part of those expenses. If I want to retire in 30 years, I am going to need 25 * (X - mortgage). Period.

The value of my home does nothing in evaluating my asset allocation or my ability to buy groceries and put food on the table.

If we are to move, now the value of the home is important as it may alter our expenses as well as gives us direction on what we can afford. This is why adding the value of one's home is necessary when calculating net worth.

BTW, my wife and I have considered moving to a higher cost of land but a lower property tax location in retirement. If we subscribe to the 25x retirement plan, I gather we can sell the house, buy something $250k more expensive but pay $10k less in property tax and likely be in the same position we are today. Actually we would potentially be in a better position by paying $250k we are lowering our fixed expenses by $10k/yr and therefor decreasing our sequence of return risk. The value of the home is very important in creating this scenario. In addition, if we do choose to follow this route we will not be changing our asset allocation just because we have $250k tied up in a house. We plan on retiring at 60/40 no matter how much house we own. All that matters is that we have 25x expenses at a 60/40 portfolio. Period.

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Re: Paying off mortgage early - am I thinking about this right?

Post by Pudge » Tue Sep 10, 2019 6:58 pm

We recently paid off our mortgage in full. We did it in chunks - tax refunds, annual bonuses, gifts, and the like. Whenever we had some unexpected money, we threw it at the house mortgage. Unexpected check from a relative? Throw it at the house. When rates plummeted, we changed our 30 year mortgage down to 15 years and cut the rate to the bare bones minimum, even throwing more money at it just before the refinance closed so we could amortize a lower principal balance. We were very aggressive about getting this monkey off our back. At the same time, however, we were also aggressive about funding our retirement, investing maximum contributions to our 401k plans.

If your house was paid in full, would you pull all of your cash equity out of the house and invest in the stock market? If the answer is no, then pay off the mortgage early.

You are a human being, not a math formula. That means that life happens. Job losses happen. Sickness happens. Stock market crashes happen. Real estate market crashes happen. Huge medical bills happen.

Of this you can be certain: Some unknown, bad event is bound to happen to you or your loved ones in the next 10 years, and you will bear the brunt of it. It will be devastating and test you considerably. It's a lot easier to handle if you are debt-free and you have one less worry to keep you up at night.

nolesrule
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Re: Paying off mortgage early - am I thinking about this right?

Post by nolesrule » Tue Sep 10, 2019 7:48 pm

Pudge wrote:
Tue Sep 10, 2019 6:58 pm

If your house was paid in full, would you pull all of your cash equity out of the house and invest in the stock market? If the answer is no, then pay off the mortgage early.
Why does this keep getting repeated? It's not equivalent.

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