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Re: Paying off sub 4% mortgage interest rate early

Posted: Sun Sep 13, 2020 11:58 am
by EnjoyIt
geerhardusvos wrote: Sun Sep 13, 2020 11:44 am
EnjoyIt wrote: Sun Sep 13, 2020 11:31 am Unless the plan is to let the bank take your house, you must pay the debt. This is why it is risk free. Sure there may be some rare circumstances where there is risk such as your houses gets flooded and you don’t have flood insurance therefor walking away may be the beat option. It could happen, but we have flood insurance.

At the end of the day you have a debt to pay which is irrespective of the value of the collateral you used to secure that loan.
I don’t think you understand the scope. You are zeroed in on your own property. How many millions of Americans have been “underwater“ on their house for an extended period of time over the last 50 years? People have had to sell during those times of being underwater. including retirees who wanted to move to a different area. The value of the home has everything to do with whether borrowing the money to get that home was worth it. Economic cost is being ignored in your analysis. Holding the property after it’s paid off and living in it is another way to reduce this risk.

Depending on where you live, the risk of losing your house isn’t so rare. There are thousands and thousands of homes being burnt down right now in Oregon and California. Hurricanes are extremely real. Floods all over the nation each year. Wouldn’t be fun to roll the dice with those home insurance companies! It’s a reality depending on where you live.
Two things:
1) I said if one has the liquidity to do so, paying down a mortgage can be a great option in lieu of buying bonds. I have said nothing more or nothing less

2) again, it makes no difference what your collateral is when you owe money. Unless you plan on going into bankruptcy or walking away. With that I point you back to item #1 above.

Re: Paying off sub 4% mortgage interest rate early

Posted: Sun Sep 13, 2020 2:54 pm
by geerhardusvos
EnjoyIt wrote: Sun Sep 13, 2020 11:55 am Unless you are walking away from your home, the value of your collateral has no difference on what you won to the bank.

Also that is not my analysis for my house but a simple analysis to make my point which you still miss.
You are totally missing the point. Let’s say you purchase a car worth $40,000 and you put $10,000 down so you owe $30,000. If the car gets in an accident and is now worth $20,000, even though it has been restored to a working condition... you now owe $30,000 on a $20,000 car. Even if your rate is super low, and even if you owe the same amount to the bank, you have found yourself underwater. Does having more debt than the value of the asset really makes no economic difference?

If you don’t want to see this, that’s fine, but most of us are concerned with understanding the economic value and cost of our debt and our assets.

Re: Paying off sub 4% mortgage interest rate early

Posted: Sun Sep 13, 2020 3:04 pm
by EnjoyIt
geerhardusvos wrote: Sun Sep 13, 2020 2:54 pm
EnjoyIt wrote: Sun Sep 13, 2020 11:55 am Unless you are walking away from your home, the value of your collateral has no difference on what you won to the bank.

Also that is not my analysis for my house but a simple analysis to make my point which you still miss.
You are totally missing the point. Let’s say you purchase a car worth $40,000 and you put $10,000 down so you owe $30,000. If the car gets in an accident and is now worth $20,000, even though it has been restored to a working condition, do you know oh $30,000 on a $20,000 car. Even if your rate is super low, and even if you owe the same amount to the bank, you have found yourself underwater. Does having more debt than the value of the asset really make no economic difference?

If you don’t want to see this, that’s fine, but most of us are concerned with understanding the economic value and cost of our debt and our assets.
Dude, seriously. The trashed car has nothing to do if you owe money on it or not. Don’t you get it. The car is trashed either way and the bank still wants it’s debt paid either way. The only time it makes a difference is if you are willing to trash your credit and walk away.

The value of your collateral plays no bearing on you needing to pay interest on your debt. Your collateral can burn to the ground but the value will still want what’s theirs. I’m honestly surprised you don’t see that. Just run the math for your trashed car example.

Being underwater plays no bearing on still needing to owe the bank money. Again it only plays a role if you are willing to walk away and take the credit hit.

Re: Paying off sub 4% mortgage interest rate early

Posted: Sun Sep 13, 2020 3:23 pm
by geerhardusvos
EnjoyIt wrote: Sun Sep 13, 2020 3:04 pm
geerhardusvos wrote: Sun Sep 13, 2020 2:54 pm
EnjoyIt wrote: Sun Sep 13, 2020 11:55 am Unless you are walking away from your home, the value of your collateral has no difference on what you won to the bank.

Also that is not my analysis for my house but a simple analysis to make my point which you still miss.
You are totally missing the point. Let’s say you purchase a car worth $40,000 and you put $10,000 down so you owe $30,000. If the car gets in an accident and is now worth $20,000, even though it has been restored to a working condition, do you know oh $30,000 on a $20,000 car. Even if your rate is super low, and even if you owe the same amount to the bank, you have found yourself underwater. Does having more debt than the value of the asset really make no economic difference?

If you don’t want to see this, that’s fine, but most of us are concerned with understanding the economic value and cost of our debt and our assets.
Dude, seriously. The trashed car has nothing to do if you owe money on it or not. Don’t you get it. The car is trashed either way and the bank still wants it’s debt paid either way. The only time it makes a difference is if you are willing to trash your credit and walk away.

The value of your collateral plays no bearing on you needing to pay interest on your debt. Your collateral can burn to the ground but the value will still want what’s theirs. I’m honestly surprised you don’t see that. Just run the math for your trashed car example.

Being underwater plays no bearing on still needing to owe the bank money. Again it only plays a role if you are willing to walk away and take the credit hit.
:oops:

Re: Paying off sub 4% mortgage interest rate early

Posted: Sun Sep 13, 2020 3:42 pm
by EnjoyIt
geerhardusvos wrote: Sun Sep 13, 2020 3:23 pm
EnjoyIt wrote: Sun Sep 13, 2020 3:04 pm
geerhardusvos wrote: Sun Sep 13, 2020 2:54 pm
EnjoyIt wrote: Sun Sep 13, 2020 11:55 am Unless you are walking away from your home, the value of your collateral has no difference on what you won to the bank.

Also that is not my analysis for my house but a simple analysis to make my point which you still miss.
You are totally missing the point. Let’s say you purchase a car worth $40,000 and you put $10,000 down so you owe $30,000. If the car gets in an accident and is now worth $20,000, even though it has been restored to a working condition, do you know oh $30,000 on a $20,000 car. Even if your rate is super low, and even if you owe the same amount to the bank, you have found yourself underwater. Does having more debt than the value of the asset really make no economic difference?

If you don’t want to see this, that’s fine, but most of us are concerned with understanding the economic value and cost of our debt and our assets.
Dude, seriously. The trashed car has nothing to do if you owe money on it or not. Don’t you get it. The car is trashed either way and the bank still wants it’s debt paid either way. The only time it makes a difference is if you are willing to trash your credit and walk away.

The value of your collateral plays no bearing on you needing to pay interest on your debt. Your collateral can burn to the ground but the value will still want what’s theirs. I’m honestly surprised you don’t see that. Just run the math for your trashed car example.

Being underwater plays no bearing on still needing to owe the bank money. Again it only plays a role if you are willing to walk away and take the credit hit.
:oops:
So your saying oops because now you get it?

Maybe we agree and just talking past each other. I dunno.

Re: Paying off sub 4% mortgage interest rate early

Posted: Sun Sep 13, 2020 4:22 pm
by grabiner
geerhardusvos wrote: Sun Sep 13, 2020 2:54 pm
EnjoyIt wrote: Sun Sep 13, 2020 11:55 am Unless you are walking away from your home, the value of your collateral has no difference on what you won to the bank.

Also that is not my analysis for my house but a simple analysis to make my point which you still miss.
You are totally missing the point. Let’s say you purchase a car worth $40,000 and you put $10,000 down so you owe $30,000. If the car gets in an accident and is now worth $20,000, even though it has been restored to a working condition... you now owe $30,000 on a $20,000 car. Even if your rate is super low, and even if you owe the same amount to the bank, you have found yourself underwater. Does having more debt than the value of the asset really makes no economic difference?

If you don’t want to see this, that’s fine, but most of us are concerned with understanding the economic value and cost of our debt and our assets.
Debt doesn't exist independently. When you pay down debt, you use up assets, so the issue is whether to pay down the debt or do something with the assets.

Consider an example with home loans. Alice and Bob both buy $500K homes with $400K loans. Both accumulate $200K in case. Alice pays $200K against her home; Bob invests $200K in bonds. Alice and Bob thus have the same net worth of $300K.

Now, suppose the housing market crashes, and the homes are worth $300K. Alice and Bob still have the same net worth, which is now $100K rather than $300K. Bob is underwater, but this doesn't really hurt him; if he needs to sell his home, he has bonds to sell which will make up the difference, so he doesn't need to sell short.

The people who were hurt by the housing crash are those who spent everything except what they needed to make the mortgage payments, and, to a lesser extent, those who took too much investment risk and had their homes decline in value at the same time their stocks did. The second group is the reason I suggest using bond rates for comparison when deciding whether to pay off a loan; if you buy stocks rather than paying off a loan, you increase your risk.

Re: Paying off sub 4% mortgage interest rate early

Posted: Sun Sep 13, 2020 4:33 pm
by MathIsMyWayr
grabiner wrote: Sun Sep 13, 2020 4:22 pm
geerhardusvos wrote: Sun Sep 13, 2020 2:54 pm
EnjoyIt wrote: Sun Sep 13, 2020 11:55 am Unless you are walking away from your home, the value of your collateral has no difference on what you won to the bank.

Also that is not my analysis for my house but a simple analysis to make my point which you still miss.
You are totally missing the point. Let’s say you purchase a car worth $40,000 and you put $10,000 down so you owe $30,000. If the car gets in an accident and is now worth $20,000, even though it has been restored to a working condition... you now owe $30,000 on a $20,000 car. Even if your rate is super low, and even if you owe the same amount to the bank, you have found yourself underwater. Does having more debt than the value of the asset really makes no economic difference?

If you don’t want to see this, that’s fine, but most of us are concerned with understanding the economic value and cost of our debt and our assets.
Debt doesn't exist independently. When you pay down debt, you use up assets, so the issue is whether to pay down the debt or do something with the assets.

Consider an example with home loans. Alice and Bob both buy $500K homes with $400K loans. Both accumulate $200K in case. Alice pays $200K against her home; Bob invests $200K in bonds. Alice and Bob thus have the same net worth of $300K.

Now, suppose the housing market crashes, and the homes are worth $300K. Alice and Bob still have the same net worth, which is now $100K rather than $300K. Bob is underwater, but this doesn't really hurt him; if he needs to sell his home, he has bonds to sell which will make up the difference, so he doesn't need to sell short.

The people who were hurt by the housing crash are those who spent everything except what they needed to make the mortgage payments, and, to a lesser extent, those who took too much investment risk and had their homes decline in value at the same time their stocks did. The second group is the reason I suggest using bond rates for comparison when deciding whether to pay off a loan; if you buy stocks rather than paying off a loan, you increase your risk.
Thank you for the nice explanation. It is based on the equality assumption of
1) reduction of a debt (fixed, -(-x)=+x)
2) value of bond (hopefully close to fixed)

Re: Paying off sub 4% mortgage interest rate early

Posted: Sun Sep 13, 2020 4:53 pm
by geerhardusvos
grabiner wrote: Sun Sep 13, 2020 4:22 pm Debt doesn't exist independently. When you pay down debt, you use up assets, so the issue is whether to pay down the debt or do something with the assets.

Right, which is why I suggest early accumulators invest in stocks instead of buying a home, and if they do buy a home, not to overbuy and to invest in stocks instead of paying down the mortgage quickly.

Consider an example with home loans. Alice and Bob both buy $500K homes with $400K loans. Both accumulate $200K in case. Alice pays $200K against her home; Bob invests $200K in bonds. Alice and Bob thus have the same net worth of $300K.

Now, suppose the housing market crashes, and the homes are worth $300K. Alice and Bob still have the same net worth, which is now $100K rather than $300K. Bob is underwater, but this doesn't really hurt him; if he needs to sell his home, he has bonds to sell which will make up the difference, so he doesn't need to sell short.

The people who were hurt by the housing crash are those who spent everything except what they needed to make the mortgage payments, and, to a lesser extent, those who took too much investment risk and had their homes decline in value at the same time their stocks did. The second group is the reason I suggest using bond rates for comparison when deciding whether to pay off a loan; if you buy stocks rather than paying off a loan, you increase your risk.

This scenario assumes that these people purchased homes in similar markets. This scenario looks different if Alice and Bob purchased homes in different markets. That shouldn’t be overlooked. When having to sell the house at a loss, it makes the home a worse “investment”, and it impacts the total return on the debt taken on and dollars put into the house.

In the long term, investing in stocks earlier rather than paying down the mortgage earlier, is less risky. Early dollars go into Stocks. Late dollars pay off mortgages. If the person is staying employed through this scenario, the risk is holding bonds and a mortgage. Why would someone need both? Why would someone want to hold either of those long term?
See inline

It’s all about opportunity and economic costs.

Re: Paying off sub 4% mortgage interest rate early

Posted: Sun Sep 13, 2020 7:26 pm
by Frugalbear
geerhardusvos wrote: Sun Sep 13, 2020 12:00 am
Frugalbear wrote: Fri Sep 11, 2020 12:34 am Is anyone who has a sub 4% fixed mortgage interest rate paying it off aggressively early? If you are, why?
If you are nowhere near retirement, I would personally not pay off any debt under 5%, but would rather invest aggressively. Pay off the mortgage in the last 5-10 years of your career. Get your investments growing early!
32 years old... My problem or maybe it's not a problem depending who you ask lol.... I get a lot of enjoyment from maximizing my money earned.

I've really enjoyed reading your posts on this thread, sincerely. I would be interested to hear your thoughts on my financial picture..... If you are willing of course.

viewtopic.php?f=1&t=324897

Re: Paying off sub 4% mortgage interest rate early

Posted: Sun Sep 13, 2020 8:46 pm
by hornet96
EnjoyIt wrote: Sun Sep 13, 2020 3:42 pm
geerhardusvos wrote: Sun Sep 13, 2020 3:23 pm
EnjoyIt wrote: Sun Sep 13, 2020 3:04 pm
geerhardusvos wrote: Sun Sep 13, 2020 2:54 pm
EnjoyIt wrote: Sun Sep 13, 2020 11:55 am Unless you are walking away from your home, the value of your collateral has no difference on what you won to the bank.

Also that is not my analysis for my house but a simple analysis to make my point which you still miss.
You are totally missing the point. Let’s say you purchase a car worth $40,000 and you put $10,000 down so you owe $30,000. If the car gets in an accident and is now worth $20,000, even though it has been restored to a working condition, do you know oh $30,000 on a $20,000 car. Even if your rate is super low, and even if you owe the same amount to the bank, you have found yourself underwater. Does having more debt than the value of the asset really make no economic difference?

If you don’t want to see this, that’s fine, but most of us are concerned with understanding the economic value and cost of our debt and our assets.
Dude, seriously. The trashed car has nothing to do if you owe money on it or not. Don’t you get it. The car is trashed either way and the bank still wants it’s debt paid either way. The only time it makes a difference is if you are willing to trash your credit and walk away.

The value of your collateral plays no bearing on you needing to pay interest on your debt. Your collateral can burn to the ground but the value will still want what’s theirs. I’m honestly surprised you don’t see that. Just run the math for your trashed car example.

Being underwater plays no bearing on still needing to owe the bank money. Again it only plays a role if you are willing to walk away and take the credit hit.
:oops:
So your saying oops because now you get it?

Maybe we agree and just talking past each other. I dunno.
I think geerhardusvos is basically talking about the embedded option value associated with collateralized debt. If the fair value of the collateral exceeds the loan balance, the put option is “out of the money” since you can just sell the asset (underlying) to raise the funds needed to payoff the loan.

If the fair value of the collateral is less than the loan balance, the put option’s “moneyness” depends on whether you’re in a recourse or a non-recourse state. If in a recourse state, you can’t just walk away from the house and will still owe the bank even after a short sale - so the value of the put option is still essentially worthless if the sale price is less than the mortgage balance. In non-recourse states, however, the option is now “in the money” whereas the borrower can just walk away and “put” the house to the bank with no further obligation - in this case, the option value is the difference between the short sale price and the remaining mortgage balance. For these reasons, properties with fair values at or around the mortgage balance (“at the money”) would technically exhibit a high “gamma,” as the option’s moneyness could swing in or out of the money depending on the market circumstances and localized volatility in home prices.

Thus, depending on the circumstances, I think he’s trying to point out that pumping cash into a mortgage isn’t necessarily “risk free” as is often suggested. Happy to be corrected though if I’m missing something.

Re: Paying off sub 4% mortgage interest rate early

Posted: Sun Sep 13, 2020 9:26 pm
by John Doe 123
hornet96 wrote: Sun Sep 13, 2020 8:46 pm
EnjoyIt wrote: Sun Sep 13, 2020 3:42 pm
geerhardusvos wrote: Sun Sep 13, 2020 3:23 pm
EnjoyIt wrote: Sun Sep 13, 2020 3:04 pm
geerhardusvos wrote: Sun Sep 13, 2020 2:54 pm

You are totally missing the point. Let’s say you purchase a car worth $40,000 and you put $10,000 down so you owe $30,000. If the car gets in an accident and is now worth $20,000, even though it has been restored to a working condition, do you know oh $30,000 on a $20,000 car. Even if your rate is super low, and even if you owe the same amount to the bank, you have found yourself underwater. Does having more debt than the value of the asset really make no economic difference?

If you don’t want to see this, that’s fine, but most of us are concerned with understanding the economic value and cost of our debt and our assets.
Dude, seriously. The trashed car has nothing to do if you owe money on it or not. Don’t you get it. The car is trashed either way and the bank still wants it’s debt paid either way. The only time it makes a difference is if you are willing to trash your credit and walk away.

The value of your collateral plays no bearing on you needing to pay interest on your debt. Your collateral can burn to the ground but the value will still want what’s theirs. I’m honestly surprised you don’t see that. Just run the math for your trashed car example.

Being underwater plays no bearing on still needing to owe the bank money. Again it only plays a role if you are willing to walk away and take the credit hit.
:oops:
So your saying oops because now you get it?

Maybe we agree and just talking past each other. I dunno.
I think geerhardusvos is basically talking about the embedded option value associated with collateralized debt. If the fair value of the collateral exceeds the loan balance, the put option is “out of the money” since you can just sell the asset (underlying) to raise the funds needed to payoff the loan.

If the fair value of the collateral is less than the loan balance, the put option’s “moneyness” depends on whether you’re in a recourse or a non-recourse state. If in a recourse state, you can’t just walk away from the house and will still owe the bank even after a short sale - so the value of the put option is still essentially worthless if the sale price is less than the mortgage balance. In non-recourse states, however, the option is now “in the money” whereas the borrower can just walk away and “put” the house to the bank with no further obligation - in this case, the option value is the difference between the short sale price and the remaining mortgage balance. For these reasons, properties with fair values at or around the mortgage balance (“at the money”) would technically exhibit a high “gamma,” as the option’s moneyness could swing in or out of the money depending on the market circumstances and localized volatility in home prices.

Thus, depending on the circumstances, I think he’s trying to point out that pumping cash into a mortgage isn’t necessarily “risk free” as is often suggested. Happy to be corrected though if I’m missing something.
Others have pointed out that the point doesn't hold if your plan is to walk away from the house.

I think geerhard just doesn't grasp the fact that the debt is still owed even if the value of the house goes down. I don't think hes talking about being so underwater that you just walk away from the house.

He's also been pretty brash and cocky in his position, which makes it kind of comical in my opinion.

One should always stay humble and open to listen to others. Nobody knows everything.

Re: Paying off sub 4% mortgage interest rate early

Posted: Sun Sep 13, 2020 10:33 pm
by hornet96
John Doe 123 wrote: Sun Sep 13, 2020 9:26 pm
hornet96 wrote: Sun Sep 13, 2020 8:46 pm
EnjoyIt wrote: Sun Sep 13, 2020 3:42 pm
geerhardusvos wrote: Sun Sep 13, 2020 3:23 pm
EnjoyIt wrote: Sun Sep 13, 2020 3:04 pm

Dude, seriously. The trashed car has nothing to do if you owe money on it or not. Don’t you get it. The car is trashed either way and the bank still wants it’s debt paid either way. The only time it makes a difference is if you are willing to trash your credit and walk away.

The value of your collateral plays no bearing on you needing to pay interest on your debt. Your collateral can burn to the ground but the value will still want what’s theirs. I’m honestly surprised you don’t see that. Just run the math for your trashed car example.

Being underwater plays no bearing on still needing to owe the bank money. Again it only plays a role if you are willing to walk away and take the credit hit.
:oops:
So your saying oops because now you get it?

Maybe we agree and just talking past each other. I dunno.
I think geerhardusvos is basically talking about the embedded option value associated with collateralized debt. If the fair value of the collateral exceeds the loan balance, the put option is “out of the money” since you can just sell the asset (underlying) to raise the funds needed to payoff the loan.

If the fair value of the collateral is less than the loan balance, the put option’s “moneyness” depends on whether you’re in a recourse or a non-recourse state. If in a recourse state, you can’t just walk away from the house and will still owe the bank even after a short sale - so the value of the put option is still essentially worthless if the sale price is less than the mortgage balance. In non-recourse states, however, the option is now “in the money” whereas the borrower can just walk away and “put” the house to the bank with no further obligation - in this case, the option value is the difference between the short sale price and the remaining mortgage balance. For these reasons, properties with fair values at or around the mortgage balance (“at the money”) would technically exhibit a high “gamma,” as the option’s moneyness could swing in or out of the money depending on the market circumstances and localized volatility in home prices.

Thus, depending on the circumstances, I think he’s trying to point out that pumping cash into a mortgage isn’t necessarily “risk free” as is often suggested. Happy to be corrected though if I’m missing something.
Others have pointed out that the point doesn't hold if your plan is to walk away from the house.

I think geerhard just doesn't grasp the fact that the debt is still owed even if the value of the house goes down. I don't think hes talking about being so underwater that you just walk away from the house.

He's also been pretty brash and cocky in his position, which makes it kind of comical in my opinion.

One should always stay humble and open to listen to others. Nobody knows everything.
Yeah, I think the confusion is that gearhead seems to imply that all deficiencies upon a short sale or foreclosure are forgiven, and the cash “saved” by not paying down the mortgage is always protected (not necessarily true). Enjoyit seems to imply the opposite, that all deficiencies generally have to be repaid, although he/she does note the possibility of walking away in some circumstances.

Where I get hung up a bit is on the fact that a house is not a risk-free asset, and it is one that is almost always owned via leverage. Thus, paying down the mortgage isn’t necessarily a “risk free” proposition in terms of ultimately realizing the return on your investment, which only happens after you sell the house. Even if you pay cash for a house, and some time later sell the house for less than you bought it for, you will realize a loss. Thus, the “extra” mortgage payment (in the form of an all cash offer) can experience a loss, which is obviously not a “risk free” use of cash. The risk is not entirely known until the house is sold, which is kind of what I think gearhead is trying to get at, and I tried to articulate with my fancy-pants explanation of option values and gamma. :D

And most definitely agree with your last point. I’m sure I’m probably missing or misstating something here as my own theta decay seems to be picking up a bit these days. :beer

Re: Paying off sub 4% mortgage interest rate early

Posted: Sun Sep 13, 2020 11:36 pm
by EnjoyIt
hornet96 wrote: Sun Sep 13, 2020 10:33 pm
John Doe 123 wrote: Sun Sep 13, 2020 9:26 pm
hornet96 wrote: Sun Sep 13, 2020 8:46 pm
EnjoyIt wrote: Sun Sep 13, 2020 3:42 pm
geerhardusvos wrote: Sun Sep 13, 2020 3:23 pm

:oops:
So your saying oops because now you get it?

Maybe we agree and just talking past each other. I dunno.
I think geerhardusvos is basically talking about the embedded option value associated with collateralized debt. If the fair value of the collateral exceeds the loan balance, the put option is “out of the money” since you can just sell the asset (underlying) to raise the funds needed to payoff the loan.

If the fair value of the collateral is less than the loan balance, the put option’s “moneyness” depends on whether you’re in a recourse or a non-recourse state. If in a recourse state, you can’t just walk away from the house and will still owe the bank even after a short sale - so the value of the put option is still essentially worthless if the sale price is less than the mortgage balance. In non-recourse states, however, the option is now “in the money” whereas the borrower can just walk away and “put” the house to the bank with no further obligation - in this case, the option value is the difference between the short sale price and the remaining mortgage balance. For these reasons, properties with fair values at or around the mortgage balance (“at the money”) would technically exhibit a high “gamma,” as the option’s moneyness could swing in or out of the money depending on the market circumstances and localized volatility in home prices.

Thus, depending on the circumstances, I think he’s trying to point out that pumping cash into a mortgage isn’t necessarily “risk free” as is often suggested. Happy to be corrected though if I’m missing something.
Others have pointed out that the point doesn't hold if your plan is to walk away from the house.

I think geerhard just doesn't grasp the fact that the debt is still owed even if the value of the house goes down. I don't think hes talking about being so underwater that you just walk away from the house.

He's also been pretty brash and cocky in his position, which makes it kind of comical in my opinion.

One should always stay humble and open to listen to others. Nobody knows everything.
Yeah, I think the confusion is that gearhead seems to imply that all deficiencies upon a short sale or foreclosure are forgiven, and the cash “saved” by not paying down the mortgage is always protected (not necessarily true). Enjoyit seems to imply the opposite, that all deficiencies generally have to be repaid, although he/she does note the possibility of walking away in some circumstances.

Where I get hung up a bit is on the fact that a house is not a risk-free asset, and it is one that is almost always owned via leverage. Thus, paying down the mortgage isn’t necessarily a “risk free” proposition in terms of ultimately realizing the return on your investment, which only happens after you sell the house. Even if you pay cash for a house, and some time later sell the house for less than you bought it for, you will realize a loss. Thus, the “extra” mortgage payment (in the form of an all cash offer) can experience a loss, which is obviously not a “risk free” use of cash. The risk is not entirely known until the house is sold, which is kind of what I think gearhead is trying to get at, and I tried to articulate with my fancy-pants explanation of option values and gamma. :D

And most definitely agree with your last point. I’m sure I’m probably missing or misstating something here as my own theta decay seems to be picking up a bit these days. :beer
Our discussion was in regards to selling a house within a few years and not in some distant future. I also agree with you that paying down a mortgage is not necessarily risk free because anything can happen to that house.

My basic point you described pretty well is that unless one is willing to walk away from the house and leave it to the bank, the debt will need to be paid. The bank does not care what the value of their collateral is unless you walk away. So if I was to sell a house for less than what I still owe, I would need to bring cash to the deal to cover bank. In the interim, I can have that cash invested elsewhere or I can put it towards the mortgage. I honestly don’t know how else to explain it to geerhardusov to get him/her to understand. Unless I’m missing something but I have yet seen a reasonable explanation telling me otherwise.

Re: Paying off sub 4% mortgage interest rate early

Posted: Mon Sep 14, 2020 3:28 am
by TropikThunder
EnjoyIt wrote: Sun Sep 13, 2020 11:36 pm I honestly don’t know how else to explain it to geerhardusov to get him/her to understand. Unless I’m missing something but I have yet seen a reasonable explanation telling me otherwise.
Honestly the two of you were having different conversations. You are saying if you owe $300,000 on your mortgage, it doesn’t matter if the value of your house drops to $250,000. You still owe the mortgage.

Geerhard on the other hand is commenting on whether the mortgage was still a good idea in that scenario:
geerhardusvos wrote: Sun Sep 13, 2020 11:44 am The value of the home has everything to do with whether borrowing the money to get that home was worth it.
You made no comment about that aspect one way or the other, which is why IMO you both kept saying “you don’t get it”. Because you weren’t having the same conversation. He (I assume it’s a he) has a very strong and persistent anti-home purchase point of view though, so I filter everything he says through that lens.

Re: Paying off sub 4% mortgage interest rate early

Posted: Mon Sep 14, 2020 9:45 am
by 3funder
MrJedi wrote: Sat Sep 12, 2020 12:59 pm
3funder wrote: Sat Sep 12, 2020 11:25 am
Goal33 wrote: Sat Sep 12, 2020 10:30 am
3funder wrote: Sat Sep 12, 2020 10:22 am
Goal33 wrote: Fri Sep 11, 2020 2:32 am Start by paying it off in full with a no cost refinance under 3%, then decide.
How did you obtain a no-cost refi? My wife and I are in the market for one (well, a cash-out refi).
Got the advice from the mega refinance thread. Used LenderFi.
When did you do this?
You have to ask for lender credits that cover closing costs (sections A, B, C, and E).

This will make your rate go up, it's essentially like buying "negative" points. Instead of paying up front to lower the rate, you are increasing the rate to receive credits toward closing costs. Larger loan balances usually can get more credits as they are more profitable for the lender. The really great no cost rates you see are for like 300-400k balances. Less than 1500-200k or so it will be tough to get 30 year fixed below 3% with enough lender credits.

Cash out refinances will not be as good either, as they are considered more risky than a plain rate and term refinance, and thus that will bring up the rate and/or closing costs.
Thank you for this information.

Re: Paying off sub 4% mortgage interest rate early

Posted: Mon Sep 14, 2020 9:46 am
by 3funder
Goal33 wrote: Sat Sep 12, 2020 4:46 pm
3funder wrote: Sat Sep 12, 2020 11:25 am
Goal33 wrote: Sat Sep 12, 2020 10:30 am
3funder wrote: Sat Sep 12, 2020 10:22 am
Goal33 wrote: Fri Sep 11, 2020 2:32 am Start by paying it off in full with a no cost refinance under 3%, then decide.
How did you obtain a no-cost refi? My wife and I are in the market for one (well, a cash-out refi).
Got the advice from the mega refinance thread. Used LenderFi.
When did you do this?
I’m in the process now. I’m getting 2.5% but I locked on the lowest date. Depending on your circumstances you can likely get 3% or lower, though.
Is yours a standard refi or a cash-out?

Re: Paying off sub 4% mortgage interest rate early

Posted: Mon Sep 14, 2020 10:50 am
by FIREmeup
I have a 3.875% mortgage that is about 10 years old. I came out of college with a high risk, high earning potential job that could be legislated out of existence and if current polls and campaign promises hold, will be pretty soon. My highest earning year so far, was followed with two successive 50% pay cuts. My wife and I have set our spending to levels that ended up matching that doldrum.

My bond allocation was put towards the mortgage with the hopes of paying it off before what I expected would be the type of majority we may see in 2021. Now with kids and a very happy, and still low cost lifestyle relative to earnings, my hope was to have my spending, which I always included the added housing cost, would drop significantly once paid off. I suppose it was a way for me to acknowledge that the amount of money I was making wouldn't last forever so prepare for a more normal salary and be a little closer to FI and not wasting the opportunity I was given. If I am wrong, great! Then I will have even more liquid monthly earnings left over to plow into VTSAX.

Re: Paying off sub 4% mortgage interest rate early

Posted: Mon Sep 14, 2020 11:28 am
by Admiral
Here’s a different (and my) perspective. Many, even most on the board do a simple comparison: if bond return is lower than the mortgage rate, the math says pre pay the mortgage. The logic is seemingly infallible: why lend money (bonds) at a lower rate then you can get paying off debt (mortgage) when the risks are basically the same?

There are always tax and liquidity considerations that might make one or the other more appealing based on circumstances.

With all that said, I do not compare my mortgage rate to bond or bond fund returns. I compare it to my expected total portfolio return. There are many reasons for this. First, risk: once I’ve determined the allocation that meets my risk tolerance, then I am in it for the long haul. Realizing that some years will be way down and some way up, I don’t sweat that over a year or even a few years, the money I’ve invested that I might have used to pre pay my mortgage might have lost a little instead of gained a little. I’m very confident that over 15 years (mortgage duration) I will come out ahead.

Two, the risk is a matter of degree. With very low rates (say below 4%) a well diversified portfolio can have middling or even low returns over long periods and still beat the mortgage. Further, it only takes one or two years of outsized returns (and we’ve now had them for a decade) to make up for any small savings in interest one might get by pre paying.

And, finally, the lower the loan amount the less interest, and the less interest saved by pre paying, there is. Obviously this last point may be less relevant to someone originating a very large loan amount. But for those refinancing smaller balances with 3% (or now much lower) rates, over 10, 20, or 30 years you just don’t need massive gains to beat the small amount of interest the loan is costing you. And of course the gains compound.

Anyway that’s how I see it. Some people just can’t stand debt, which is a valid emotion. It’s just not something that bothers me at all. Money is the cheapest it’s been, ever.

Re: Paying off sub 4% mortgage interest rate early

Posted: Mon Sep 14, 2020 12:35 pm
by Goal33
3funder wrote: Mon Sep 14, 2020 9:46 am
Goal33 wrote: Sat Sep 12, 2020 4:46 pm
3funder wrote: Sat Sep 12, 2020 11:25 am
Goal33 wrote: Sat Sep 12, 2020 10:30 am
3funder wrote: Sat Sep 12, 2020 10:22 am

How did you obtain a no-cost refi? My wife and I are in the market for one (well, a cash-out refi).
Got the advice from the mega refinance thread. Used LenderFi.
When did you do this?
I’m in the process now. I’m getting 2.5% but I locked on the lowest date. Depending on your circumstances you can likely get 3% or lower, though.
Is yours a standard refi or a cash-out?
standard... however since this thread is about paying down a mortgage, why would you want a cash out? :wink:

Re: Paying off sub 4% mortgage interest rate early

Posted: Mon Sep 14, 2020 7:37 pm
by grabiner
hornet96 wrote: Sun Sep 13, 2020 10:33 pm Where I get hung up a bit is on the fact that a house is not a risk-free asset, and it is one that is almost always owned via leverage. Thus, paying down the mortgage isn’t necessarily a “risk free” proposition in terms of ultimately realizing the return on your investment, which only happens after you sell the house. Even if you pay cash for a house, and some time later sell the house for less than you bought it for, you will realize a loss. Thus, the “extra” mortgage payment (in the form of an all cash offer) can experience a loss, which is obviously not a “risk free” use of cash.
What you miss here is that the benefit from the mortgage prepayment is independent of the house. If you pay $10,000 extra on a 3% mortgage with ten years left, you will eliminate $13,439 of payments in the tenth year. This is a risk-free return, because you have more cash in the bank than if you had not made the prepayment, and the same house whether you make the prepayment or not.

Alternatively, if you sell, you realize the same benefit regardless of what happens to the house. Your mortgage balance will be $10,609 less in two years. If you then sell your house, you will have $10,609 more in the bank after closing than if you had not made the prepayment. The $10,000 prepayment either increased your gain or decreased your loss by $10,609, which is a risk-free return.

The same thing applies to a balanced portfolio. If you buy $60,000 in stock and $40,000 in Treasury bonds, the bond return is risk-free, while the overall portfolio could easily have a loss. If you buy a single fund for $100,000 which is 60% stock and 40% bonds, you still get the same risk-free return on the bond portion of the fund, even if you eventually sell the fund for a loss.

Another way to see that the discussion is independent of the house is to compare different types of loans. Suppose you have a 10-year mortgage at 3% and a 10-year student loan at 3%. The student loan has no collateral, so it is clear that you get a 3% return on any prepayment. But you will have the same number of dollars no matter which loan you prepay.

Re: Paying off sub 4% mortgage interest rate early

Posted: Mon Sep 14, 2020 8:35 pm
by bitdocmd
Frugalbear wrote: Fri Sep 11, 2020 12:34 am Is anyone who has a sub 4% fixed mortgage interest rate paying it off aggressively early? If you are, why?
Closed on a home loan last week, 2.75% 30-yr fixed, and was about to ask the same question.

But I guess I had a similar decision in the past when deciding whether to pay off my medical school loans. Around $200k at just over 3%. I was just getting my first real paycheck, dabbling in sports cars and nice watches, and knew myself, that if I rationalized the arbitrage and kept the debt, that instead of investing I would just buy an even nicer watch... hedonic treadmill is a hell of a drug.

I'm glad I payed off the med school debt but occasionally think about how ahead I would be IF I invested it instead.

My current plan on my new pile of debt, $1,000,000 mortage at 2.75% for 30 years, is to keep it as long as possible. As long as the lifestyle creep is reasonable then I think we'll be fine.

Re: Paying off sub 4% mortgage interest rate early

Posted: Mon Sep 14, 2020 9:43 pm
by hornet96
grabiner wrote: Mon Sep 14, 2020 7:37 pm
hornet96 wrote: Sun Sep 13, 2020 10:33 pm Where I get hung up a bit is on the fact that a house is not a risk-free asset, and it is one that is almost always owned via leverage. Thus, paying down the mortgage isn’t necessarily a “risk free” proposition in terms of ultimately realizing the return on your investment, which only happens after you sell the house. Even if you pay cash for a house, and some time later sell the house for less than you bought it for, you will realize a loss. Thus, the “extra” mortgage payment (in the form of an all cash offer) can experience a loss, which is obviously not a “risk free” use of cash.
What you miss here is that the benefit from the mortgage prepayment is independent of the house. If you pay $10,000 extra on a 3% mortgage with ten years left, you will eliminate $13,439 of payments in the tenth year. This is a risk-free return, because you have more cash in the bank than if you had not made the prepayment, and the same house whether you make the prepayment or not.

Alternatively, if you sell, you realize the same benefit regardless of what happens to the house. Your mortgage balance will be $10,609 less in two years. If you then sell your house, you will have $10,609 more in the bank after closing than if you had not made the prepayment. The $10,000 prepayment either increased your gain or decreased your loss by $10,609, which is a risk-free return.

The same thing applies to a balanced portfolio. If you buy $60,000 in stock and $40,000 in Treasury bonds, the bond return is risk-free, while the overall portfolio could easily have a loss. If you buy a single fund for $100,000 which is 60% stock and 40% bonds, you still get the same risk-free return on the bond portion of the fund, even if you eventually sell the fund for a loss.

Another way to see that the discussion is independent of the house is to compare different types of loans. Suppose you have a 10-year mortgage at 3% and a 10-year student loan at 3%. The student loan has no collateral, so it is clear that you get a 3% return on any prepayment. But you will have the same number of dollars no matter which loan you prepay.
Right, and I should note that I generally share the view that paying off interest bearing debt is a risk free return to the individual in “most” circumstances. However, the mortgage doesn’t exist in a vacuum that is completely separated from the asset it purchased - the house. Mortgage liabilities are a special animal that are inexorably linked to the house and all of the legal parameters surrounding ownership of residential real estate, which makes it more similar to an asset backed security or a collateralized debt obligation than a treasury bond.

Changes in the fair value of the collateral underlying an asset backed security “normally” have no effect on the fair value of the bond - however, upon the occurrence of a credit event (downgrade, default, etc), the fair value of the bond becomes more directly correlated with the fair value in the underlying collateral as it becomes more likely that the collateral will be used to settle the obligation (rather than cash from normal periodic payments). This effect is akin to my discussion of option values and “gamma” above, where the fair value of the house starts to become more relevant upon the prospect of default on the mortgage as the likelihood of the mortgage balance being settled from the sale of collateral (the house) increases.

It is thus the purchase of the house itself that gives rise to the “risk” in this equation - i.e. my example of paying cash for the house, but later selling it for a loss. According to the common view here, it would be implied that an all-cash home purchase immediately “earns” a risk free return equal to the then prevailing mortgage rate of your choice, effectively paying off a zero duration mortgage and “avoiding” the interest expense that would have otherwise been incurred. However, while this is generally true for the liability side of the equation, the risks associated with holding the underlying asset continue until the house is eventually sold, gifted, foreclosed, destroyed by natural disaster, rendered uninhabitable by new regulations, etc. As noted above, in some cases a valuable put option may exist if the mortgage is non-recourse, if one doesn’t care about ruining their credit and is willing to “put” an underwater house back to the bank in lieu of making mortgage payments.

What I (and I believe geerhard) am trying to do, is to illustrate that there may be a more comprehensive way to view this financial arrangement as a leveraged real estate investment, rather than completely bifurcating the asset from the liability and viewing associated returns on each in isolation - which can give rise to a simplistic form of mental accounting if some of these potential factors (e.g. put option) are ignored.

With all that said, I do believe it is likely prudent in most cases to pay down a mortgage early if you have the means to do so, and it is “ok” to mentally simplify all of this and think of this as a near risk-free return in 99% of situations (particularly for Bogleheads, a self-selecting group not representative of the overall population). But I also do believe the discussion of whether it is “risk free” or not is technically more nuanced than a statement in absolute terms saying “paying off a mortgage early ALWAYS results in a risk-free return.” There are scenarios where the amount of interest saved from prepayments may not exceed or only marginally reduce a loss on sale of the associated property, or the prepayments may be lost entirely in the event of foreclosure, short sale, etc. Thus, prepaying a mortgage cannot necessarily be said to be completely risk-free, as “risk-free” is a financial term that is generally defined in valuation methodology to mean a guaranteed rate of return on a financial instrument where the risk of loss is zero if held to maturity.

Re: Paying off sub 4% mortgage interest rate early

Posted: Mon Sep 14, 2020 10:17 pm
by MathIsMyWayr
grabiner wrote: Mon Sep 14, 2020 7:37 pm
hornet96 wrote: Sun Sep 13, 2020 10:33 pm Where I get hung up a bit is on the fact that a house is not a risk-free asset, and it is one that is almost always owned via leverage. Thus, paying down the mortgage isn’t necessarily a “risk free” proposition in terms of ultimately realizing the return on your investment, which only happens after you sell the house. Even if you pay cash for a house, and some time later sell the house for less than you bought it for, you will realize a loss. Thus, the “extra” mortgage payment (in the form of an all cash offer) can experience a loss, which is obviously not a “risk free” use of cash.
What you miss here is that the benefit from the mortgage prepayment is independent of the house. If you pay $10,000 extra on a 3% mortgage with ten years left, you will eliminate $13,439 of payments in the tenth year. This is a risk-free return, because you have more cash in the bank than if you had not made the prepayment, and the same house whether you make the prepayment or not.

Alternatively, if you sell, you realize the same benefit regardless of what happens to the house. Your mortgage balance will be $10,609 less in two years. If you then sell your house, you will have $10,609 more in the bank after closing than if you had not made the prepayment. The $10,000 prepayment either increased your gain or decreased your loss by $10,609, which is a risk-free return.

The same thing applies to a balanced portfolio. If you buy $60,000 in stock and $40,000 in Treasury bonds, the bond return is risk-free, while the overall portfolio could easily have a loss. If you buy a single fund for $100,000 which is 60% stock and 40% bonds, you still get the same risk-free return on the bond portion of the fund, even if you eventually sell the fund for a loss.

Another way to see that the discussion is independent of the house is to compare different types of loans. Suppose you have a 10-year mortgage at 3% and a 10-year student loan at 3%. The student loan has no collateral, so it is clear that you get a 3% return on any prepayment. But you will have the same number of dollars no matter which loan you prepay.
(A+X)+(B-X)=(A)+(B) for any A, B, or X.

Re: Paying off sub 4% mortgage interest rate early

Posted: Mon Sep 14, 2020 10:23 pm
by hornet96
MathIsMyWayr wrote: Mon Sep 14, 2020 10:17 pm (A+X)+(B-X)=(A)+(B) for any A, B, or X.
Except for the value of any embedded put option, which makes the equation non-linear. :wink: :sharebeer

Re: Paying off sub 4% mortgage interest rate early

Posted: Tue Sep 15, 2020 5:40 am
by 3funder
Goal33 wrote: Mon Sep 14, 2020 12:35 pm
3funder wrote: Mon Sep 14, 2020 9:46 am
Goal33 wrote: Sat Sep 12, 2020 4:46 pm
3funder wrote: Sat Sep 12, 2020 11:25 am
Goal33 wrote: Sat Sep 12, 2020 10:30 am

Got the advice from the mega refinance thread. Used LenderFi.
When did you do this?
I’m in the process now. I’m getting 2.5% but I locked on the lowest date. Depending on your circumstances you can likely get 3% or lower, though.
Is yours a standard refi or a cash-out?
standard... however since this thread is about paying down a mortgage, why would you want a cash out? :wink:
Our remaining balance is $39,000, and we’d like to build an addition for lifestyle purposes.

Re: Paying off sub 4% mortgage interest rate early

Posted: Tue Sep 15, 2020 4:39 pm
by perceptionist
I've been asking myself the same question over the past several weeks. I am in the process of refinancing. Will be getting a 30 year @ 2.5%. We already max out retirement, contribute to a 529 plan and invest a little with taxable income. Also no debt, inflated emergency fund and enough cash to cover a big purchase (new SUV, home reno, etc). I can comfortably put down enough to pay the house down in 15 years if I wanted to, but if that was the case I would have just done a 15 year refi at the time @ 1.99%.

Anyway still on the fence if I should put a little more towards principal (at least get it to be paid off in 25 years) or zero and just put it towards something like VOO/VTI or VSTAX/VFIAX (or save as cash until the end of the year since the market is pretty crazy right now with the elections coming up).

Re: Paying off sub 4% mortgage interest rate early

Posted: Tue Sep 15, 2020 5:50 pm
by EnjoyIt
perceptionist wrote: Tue Sep 15, 2020 4:39 pm I've been asking myself the same question over the past several weeks. I am in the process of refinancing. Will be getting a 30 year @ 2.5%. We already max out retirement, contribute to a 529 plan and invest a little with taxable income. Also no debt, inflated emergency fund and enough cash to cover a big purchase (new SUV, home reno, etc). I can comfortably put down enough to pay the house down in 15 years if I wanted to, but if that was the case I would have just done a 15 year refi at the time @ 1.99%.

Anyway still on the fence if I should put a little more towards principal (at least get it to be paid off in 25 years) or zero and just put it towards something like VOO/VTI or VSTAX/VFIAX (or save as cash until the end of the year since the market is pretty crazy right now with the elections coming up).
This is how we handled it and what I would recommend.
Hold onto the mortgage until you have a pretty sizable nest egg if you are comfortable enough with the debt and the rate. Then once you have plenty of liquidity in your taxable account, go ahead and pay down that mortgage. Hopefully by then your taxable will be pretty large and your income will increase making that decision easy.

If you hate debt so much then yeah pay it down faster.

My reasoning is that a balanced portfolio should outperform your mortgage interest over long term. Once your mortgage is a small percentage of your wealth the outperformance won’t matter that much and you can afford the luxury of being debt free.

Re: Paying off sub 4% mortgage interest rate early

Posted: Tue Sep 15, 2020 6:28 pm
by Hiker-Biker
This thread inspired me to initiate a payoff to our 3.5% 30 year mortgage that we obtained in 2013. Our muni bonds are not earning much so I decided that a portion in Hi-yield (VWALX) would be used to payoff the loan to decrease our bond risk. By tomorrow, we will be debt free!

Re: Paying off sub 4% mortgage interest rate early

Posted: Wed Sep 16, 2020 11:31 am
by LiterallyIronic
hornet96 wrote: Fri Sep 11, 2020 7:16 am I am wondering why all the folks with 3.5% - 3.75% mortgages aren’t doing a no cost refi down to 2.75% or so, unless you’re planning to pay it off completely in 2 years or so.
I'm at 3.875%, 3 years into a 30 year fixed, and I haven't refinanced because my bank is only offering 3.25% with nearly $4k in closing costs. I have seen better offers at other places, but they can never tell me to whom they sell the mortgage servicing.

Re: Paying off sub 4% mortgage interest rate early

Posted: Wed Sep 16, 2020 11:54 am
by willthrill81
LiterallyIronic wrote: Wed Sep 16, 2020 11:31 am
hornet96 wrote: Fri Sep 11, 2020 7:16 am I am wondering why all the folks with 3.5% - 3.75% mortgages aren’t doing a no cost refi down to 2.75% or so, unless you’re planning to pay it off completely in 2 years or so.
I'm at 3.875%, 3 years into a 30 year fixed, and I haven't refinanced because my bank is only offering 3.25% with nearly $4k in closing costs. I have seen better offers at other places, but they can never tell me to whom they sell the mortgage servicing.
You might want to contact an independent mortgage broker. If you have good credit, you should be able to refi under 3%.

Re: Paying off sub 4% mortgage interest rate early

Posted: Wed Sep 16, 2020 11:54 am
by surfstar
LiterallyIronic wrote: Wed Sep 16, 2020 11:31 am
hornet96 wrote: Fri Sep 11, 2020 7:16 am I am wondering why all the folks with 3.5% - 3.75% mortgages aren’t doing a no cost refi down to 2.75% or so, unless you’re planning to pay it off completely in 2 years or so.
I'm at 3.875%, 3 years into a 30 year fixed, and I haven't refinanced because my bank is only offering 3.25% with nearly $4k in closing costs. I have seen better offers at other places, but they can never tell me to whom they sell the mortgage servicing.
Who cares?
You can save quite a bit of money. Look at the refi mega-thread. Do some shopping around.
They can't tell you about the servicing b/c it will get sold almost immediately, and sometimes the servicing changes, sometimes it doesn't.
Doesn't matter to me. I'll take the hundreds in interest savings each month. You are really missing out.

Re: Paying off sub 4% mortgage interest rate early

Posted: Wed Sep 16, 2020 12:20 pm
by LiterallyIronic
surfstar wrote: Wed Sep 16, 2020 11:54 am
LiterallyIronic wrote: Wed Sep 16, 2020 11:31 am
hornet96 wrote: Fri Sep 11, 2020 7:16 am I am wondering why all the folks with 3.5% - 3.75% mortgages aren’t doing a no cost refi down to 2.75% or so, unless you’re planning to pay it off completely in 2 years or so.
I'm at 3.875%, 3 years into a 30 year fixed, and I haven't refinanced because my bank is only offering 3.25% with nearly $4k in closing costs. I have seen better offers at other places, but they can never tell me to whom they sell the mortgage servicing.
Who cares?
You can save quite a bit of money. Look at the refi mega-thread. Do some shopping around.
They can't tell you about the servicing b/c it will get sold almost immediately, and sometimes the servicing changes, sometimes it doesn't.
Doesn't matter to me. I'll take the hundreds in interest savings each month. You are really missing out.
You must have a huge mortgage if the difference will save you hundreds in interest every month. My balance is $131,999, after a starting value of $149,000 three years ago. Median credit score about 800. I called a local credit union and they said they can drop me from 3.875% to 3% for $2,566, or to 2.875% for $3,250, or to 2.75% for $4,119, which give me a break-even of about 27, 29, and 33 months, respectively. They said they keep the servicing in-house, but that's still a fairly long time before I even save a single dollar. Doesn't really seem like I'm missing out.

I can call around, but I don't really have a reason to suspect that the numbers would be vastly different.

Edit: Just checked the website of a local broker that puts up a ton of billboards. They offered 2.875% for $2,496, which makes for a break-even of 22 months, so that's better.

Re: Paying off sub 4% mortgage interest rate early

Posted: Wed Sep 16, 2020 12:37 pm
by BrandonBogle
LiterallyIronic wrote: Wed Sep 16, 2020 12:20 pm
surfstar wrote: Wed Sep 16, 2020 11:54 am
LiterallyIronic wrote: Wed Sep 16, 2020 11:31 am
hornet96 wrote: Fri Sep 11, 2020 7:16 am I am wondering why all the folks with 3.5% - 3.75% mortgages aren’t doing a no cost refi down to 2.75% or so, unless you’re planning to pay it off completely in 2 years or so.
I'm at 3.875%, 3 years into a 30 year fixed, and I haven't refinanced because my bank is only offering 3.25% with nearly $4k in closing costs. I have seen better offers at other places, but they can never tell me to whom they sell the mortgage servicing.
Who cares?
You can save quite a bit of money. Look at the refi mega-thread. Do some shopping around.
They can't tell you about the servicing b/c it will get sold almost immediately, and sometimes the servicing changes, sometimes it doesn't.
Doesn't matter to me. I'll take the hundreds in interest savings each month. You are really missing out.
You must have a huge mortgage if the difference will save you hundreds in interest every month. Mine balance is $131,999, after a starting value of $149,000 three years ago. Median credit score about 800. I called a local credit union and they said they can drop me from 3.875% to 3% for $2,566, or to 2.875% for $3,250, or to 2.75% for $4,119, which give me a break-even of about 27, 29, and 33 months, respectively. They said they keep the servicing in-house, but that's still a fairly long time before I even save a single dollar. Doesn't really seem like I'm missing out.

I can call around, but I don't really have a reason to suspect that the numbers would be vastly different.
My loan is not much bigger than yours (under $150k) and even ignoring the $2,500 promotional credit (since you can't get that now), I have available to me a 2.875% 30-year at no-cost, a 2.625% 20-year at no-cost, a 2.625% 15-year with more credits than closing costs. These were all without escrow. If I opt for an escrow account, I would either get cash back to me, or pay less than $250 to get 0.125% less of a rate. So shopping around and hustling between lenders to get the best deal still provides much better results.

I can tell you that almost none of the lenders I worked with service their own loans. And of those that don't, NONE of them would be able to tell me who servicing would go to since it is a rather large list and there is no direct info about who of them will buy the servicing prior to the loan consummation.

Re: Paying off sub 4% mortgage interest rate early

Posted: Wed Sep 16, 2020 12:38 pm
by surfstar
LiterallyIronic wrote: Wed Sep 16, 2020 12:20 pm
surfstar wrote: Wed Sep 16, 2020 11:54 am
LiterallyIronic wrote: Wed Sep 16, 2020 11:31 am
hornet96 wrote: Fri Sep 11, 2020 7:16 am I am wondering why all the folks with 3.5% - 3.75% mortgages aren’t doing a no cost refi down to 2.75% or so, unless you’re planning to pay it off completely in 2 years or so.
I'm at 3.875%, 3 years into a 30 year fixed, and I haven't refinanced because my bank is only offering 3.25% with nearly $4k in closing costs. I have seen better offers at other places, but they can never tell me to whom they sell the mortgage servicing.
Who cares?
You can save quite a bit of money. Look at the refi mega-thread. Do some shopping around.
They can't tell you about the servicing b/c it will get sold almost immediately, and sometimes the servicing changes, sometimes it doesn't.
Doesn't matter to me. I'll take the hundreds in interest savings each month. You are really missing out.
You must have a huge mortgage if the difference will save you hundreds in interest every month. My balance is $131,999, after a starting value of $149,000 three years ago. Median credit score about 800. I called a local credit union and they said they can drop me from 3.875% to 3% for $2,566, or to 2.875% for $3,250, or to 2.75% for $4,119, which give me a break-even of about 27, 29, and 33 months, respectively. They said they keep the servicing in-house, but that's still a fairly long time before I even save a single dollar. Doesn't really seem like I'm missing out.

I can call around, but I don't really have a reason to suspect that the numbers would be vastly different.

Edit: Just checked the website of a local broker that puts up a ton of billboards. They offered 2.875% for $2,496, which makes for a break-even of 22 months, so that's better.
Yeah, unfortunately due to where we live, you are kinda required to have a large mortgage.
That's a good rate for a low balance - still a bummer to have a 22 month break even on a refi, but if you don't plan on moving, it can be worthwhile (or see what rate they will give you for a "no-cost" - maybe you can get 3.0% with lender credits that cover it and break even is 1 month)

Re: Paying off sub 4% mortgage interest rate early

Posted: Wed Sep 16, 2020 12:52 pm
by LiterallyIronic
BrandonBogle wrote: Wed Sep 16, 2020 12:37 pm
LiterallyIronic wrote: Wed Sep 16, 2020 12:20 pm
surfstar wrote: Wed Sep 16, 2020 11:54 am
LiterallyIronic wrote: Wed Sep 16, 2020 11:31 am
hornet96 wrote: Fri Sep 11, 2020 7:16 am I am wondering why all the folks with 3.5% - 3.75% mortgages aren’t doing a no cost refi down to 2.75% or so, unless you’re planning to pay it off completely in 2 years or so.
I'm at 3.875%, 3 years into a 30 year fixed, and I haven't refinanced because my bank is only offering 3.25% with nearly $4k in closing costs. I have seen better offers at other places, but they can never tell me to whom they sell the mortgage servicing.
Who cares?
You can save quite a bit of money. Look at the refi mega-thread. Do some shopping around.
They can't tell you about the servicing b/c it will get sold almost immediately, and sometimes the servicing changes, sometimes it doesn't.
Doesn't matter to me. I'll take the hundreds in interest savings each month. You are really missing out.
You must have a huge mortgage if the difference will save you hundreds in interest every month. Mine balance is $131,999, after a starting value of $149,000 three years ago. Median credit score about 800. I called a local credit union and they said they can drop me from 3.875% to 3% for $2,566, or to 2.875% for $3,250, or to 2.75% for $4,119, which give me a break-even of about 27, 29, and 33 months, respectively. They said they keep the servicing in-house, but that's still a fairly long time before I even save a single dollar. Doesn't really seem like I'm missing out.

I can call around, but I don't really have a reason to suspect that the numbers would be vastly different.
My loan is not much bigger than yours (under $150k) and even ignoring the $2,500 promotional credit (since you can't get that now), I have available to me a 2.875% 30-year at no-cost, a 2.625% 20-year at no-cost, a 2.625% 15-year with more credits than closing costs. These were all without escrow. If I opt for an escrow account, I would either get cash back to me, or pay less than $250 to get 0.125% less of a rate. So shopping around and hustling between lenders to get the best deal still provides much better results.

I can tell you that almost none of the lenders I worked with service their own loans. And of those that don't, NONE of them would be able to tell me who servicing would go to since it is a rather large list and there is no direct info about who of them will buy the servicing prior to the loan consummation.
People keep saying to "shop around", but I don't know what that means. To me, "shop around" means check the price at Walmart and check the price at Target.

When I got my original mortgage, I just walked into my bank and got a mortgage. I know of other banks, and I've seen some billboards that say, "Paying more than X% for your mortgage? Call us!" but I don't know some list of random mortgage offices to go visit or call. If I Google "mortgage refinance" or whatever, I get what appears to be as many results are there are houses in the country, so I can't wade through that mess.

Re: Paying off sub 4% mortgage interest rate early

Posted: Wed Sep 16, 2020 12:59 pm
by EnjoyIt
LiterallyIronic wrote: Wed Sep 16, 2020 12:52 pm
BrandonBogle wrote: Wed Sep 16, 2020 12:37 pm
LiterallyIronic wrote: Wed Sep 16, 2020 12:20 pm
surfstar wrote: Wed Sep 16, 2020 11:54 am
LiterallyIronic wrote: Wed Sep 16, 2020 11:31 am

I'm at 3.875%, 3 years into a 30 year fixed, and I haven't refinanced because my bank is only offering 3.25% with nearly $4k in closing costs. I have seen better offers at other places, but they can never tell me to whom they sell the mortgage servicing.
Who cares?
You can save quite a bit of money. Look at the refi mega-thread. Do some shopping around.
They can't tell you about the servicing b/c it will get sold almost immediately, and sometimes the servicing changes, sometimes it doesn't.
Doesn't matter to me. I'll take the hundreds in interest savings each month. You are really missing out.
You must have a huge mortgage if the difference will save you hundreds in interest every month. Mine balance is $131,999, after a starting value of $149,000 three years ago. Median credit score about 800. I called a local credit union and they said they can drop me from 3.875% to 3% for $2,566, or to 2.875% for $3,250, or to 2.75% for $4,119, which give me a break-even of about 27, 29, and 33 months, respectively. They said they keep the servicing in-house, but that's still a fairly long time before I even save a single dollar. Doesn't really seem like I'm missing out.

I can call around, but I don't really have a reason to suspect that the numbers would be vastly different.
My loan is not much bigger than yours (under $150k) and even ignoring the $2,500 promotional credit (since you can't get that now), I have available to me a 2.875% 30-year at no-cost, a 2.625% 20-year at no-cost, a 2.625% 15-year with more credits than closing costs. These were all without escrow. If I opt for an escrow account, I would either get cash back to me, or pay less than $250 to get 0.125% less of a rate. So shopping around and hustling between lenders to get the best deal still provides much better results.

I can tell you that almost none of the lenders I worked with service their own loans. And of those that don't, NONE of them would be able to tell me who servicing would go to since it is a rather large list and there is no direct info about who of them will buy the servicing prior to the loan consummation.
People keep saying to "shop around", but I don't know what that means. To me, "shop around" means check the price at Walmart and check the price at Target.

When I got my original mortgage, I just walked into my bank and got a mortgage. I know of other banks, and I've seen some billboards that say, "Paying more than X% for your mortgage? Call us!" but I don't know some list of random mortgage offices to go visit or call. If I Google "mortgage refinance" or whatever, I get what appears to be as many results are there are houses in the country, so I can't wade through that mess.
I guess it all depends how much you value your time and your money. If taking a few hours gets you to save thousands if not tens of thousands then being bothered is worth it. I guess it all depends how much you value your time on the couch with a laptop vs doing something else.

Re: Paying off sub 4% mortgage interest rate early

Posted: Wed Sep 16, 2020 5:12 pm
by BrandonBogle
LiterallyIronic wrote: Wed Sep 16, 2020 12:52 pm People keep saying to "shop around", but I don't know what that means. To me, "shop around" means check the price at Walmart and check the price at Target.
The first time around this year (I’m on my third refi this year), I started with the Refi Mega Thread here, the thread on Slickdeals about Better Mortgage, and Zillow.com. I also checked the websites of my local credit unions.

The second time I used the lenders listed in the mega thread that I didn’t reach out to on the first refi, Zillow.com again, and Reddit using the search term “mortgage” sorted by the most recent posts. I then noted when someone mentioned the name of the lender for a good deal. This is how I found Watermark.

This third time around I went with companies that Facebook had decided to start advertising to me. Also, on the Slickdeals thread about Better Mortgage, people have shared who they cross-shopped and I got two lenders from there too.

I would probably say I spent 10 hours on it between all three refis. That sounds like a lot, but this was also the time I was otherwise sitting on the couch watching tv, so it didn’t take away any time from my day.

Re: Paying off sub 4% mortgage interest rate early

Posted: Wed Sep 16, 2020 5:56 pm
by frugalecon
I am 8 years into a 15 year mortgage at 3.125%. Early on, I made small extra payments, with the eye to having it paid off at my planned retirement date. I would have made substantially greater returns investing in stocks, but I was already investing a lot in stocks, so I was willing to diversify into what is similar to a zero coupon bond. Because it is no longer in my interest to itemize, the after tax return of the zero coupon bond, with shorter duration as every month passes, is becoming more compelling, and I may accelerate the prepayment even more. To me, the attractiveness of prepayment has increased as I have gotten near the end, since short term interest rates on fixed income investments are so low and the liquidity issues are less important.

Re: Paying off sub 4% mortgage interest rate early

Posted: Wed Sep 16, 2020 6:19 pm
by willthrill81
EnjoyIt wrote: Wed Sep 16, 2020 12:59 pm
LiterallyIronic wrote: Wed Sep 16, 2020 12:52 pm
BrandonBogle wrote: Wed Sep 16, 2020 12:37 pm
LiterallyIronic wrote: Wed Sep 16, 2020 12:20 pm
surfstar wrote: Wed Sep 16, 2020 11:54 am

Who cares?
You can save quite a bit of money. Look at the refi mega-thread. Do some shopping around.
They can't tell you about the servicing b/c it will get sold almost immediately, and sometimes the servicing changes, sometimes it doesn't.
Doesn't matter to me. I'll take the hundreds in interest savings each month. You are really missing out.
You must have a huge mortgage if the difference will save you hundreds in interest every month. Mine balance is $131,999, after a starting value of $149,000 three years ago. Median credit score about 800. I called a local credit union and they said they can drop me from 3.875% to 3% for $2,566, or to 2.875% for $3,250, or to 2.75% for $4,119, which give me a break-even of about 27, 29, and 33 months, respectively. They said they keep the servicing in-house, but that's still a fairly long time before I even save a single dollar. Doesn't really seem like I'm missing out.

I can call around, but I don't really have a reason to suspect that the numbers would be vastly different.
My loan is not much bigger than yours (under $150k) and even ignoring the $2,500 promotional credit (since you can't get that now), I have available to me a 2.875% 30-year at no-cost, a 2.625% 20-year at no-cost, a 2.625% 15-year with more credits than closing costs. These were all without escrow. If I opt for an escrow account, I would either get cash back to me, or pay less than $250 to get 0.125% less of a rate. So shopping around and hustling between lenders to get the best deal still provides much better results.

I can tell you that almost none of the lenders I worked with service their own loans. And of those that don't, NONE of them would be able to tell me who servicing would go to since it is a rather large list and there is no direct info about who of them will buy the servicing prior to the loan consummation.
People keep saying to "shop around", but I don't know what that means. To me, "shop around" means check the price at Walmart and check the price at Target.

When I got my original mortgage, I just walked into my bank and got a mortgage. I know of other banks, and I've seen some billboards that say, "Paying more than X% for your mortgage? Call us!" but I don't know some list of random mortgage offices to go visit or call. If I Google "mortgage refinance" or whatever, I get what appears to be as many results are there are houses in the country, so I can't wade through that mess.
I guess it all depends how much you value your time and your money. If taking a few hours gets you to save thousands if not tens of thousands then being bothered is worth it. I guess it all depends how much you value your time on the couch with a laptop vs doing something else.
If you're time is that valuable, you probably shouldn't be posting on this board. :mrgreen:

Re: Paying off sub 4% mortgage interest rate early

Posted: Wed Sep 16, 2020 7:51 pm
by hornet96
LiterallyIronic wrote: Wed Sep 16, 2020 12:52 pm
People keep saying to "shop around", but I don't know what that means. To me, "shop around" means check the price at Walmart and check the price at Target.
Well, you can start by reviewing the mega refinance thread here, and narrow it down to a half dozen potential options or so. For the most part, if a good deal is to be found, chances are that a Boglehead has probably already found it. :sharebeer

Re: Paying off sub 4% mortgage interest rate early

Posted: Wed Sep 16, 2020 8:06 pm
by arsenalfan
Psychologic peace of mind vs mathematical optimization. And everyone's situation is different.

Here's mine:
23 years left on 30 year fixed 3.35%. 2MM home, 1.3 original loan, now 700k. VHCOL, due to SALT elimination don't itemize.
I am now refinancing to a 15 year 2.85% loan at a $7000 cost.
Have other rental properties that cashflow positive. Major one I know I will keep for 30+ years has 4.3% rate 20yr term.
IPS says to take surplus cash and invest 2/3 in aftertax account, and 1/3 towards a mortgage.
Lately I've been paying down the rental principle. Once that's dead and cashflowing even more positively, will pay down the primary home.
Not sure if we will downsize in 10 years is the kicker...

Re: Paying off sub 4% mortgage interest rate early

Posted: Wed Sep 16, 2020 8:35 pm
by Tdubs
hornet96 wrote: Fri Sep 11, 2020 7:22 am
petulant wrote: Fri Sep 11, 2020 7:19 am
hornet96 wrote: Fri Sep 11, 2020 7:16 am I am wondering why all the folks with 3.5% - 3.75% mortgages aren’t doing a no cost refi down to 2.75% or so, unless you’re planning to pay it off completely in 2 years or so.
Not everybody has access to those rates, whether due to state/market, credit score, or smaller mortgage balance.
Seems like almost everyone on Bogleheads does, judging by the Refinance Mega Thread.
I have a 3.375 rate and 16 years left, but with my extra payments I will pay off in seven years. When I look at LenderFi for MD, I can get 2.5% on a 10 year with $4,350 in fees or a 2.875% with about $1,900 in fees. 15-year refi has similar numbers and saves me about $50/mo in interest. So, I'd break even in about 3 years. As long as I don't move out, a refi will pay off but not by much. Where are these no-cost mortgages? That would certainly make it worthwhile.

Re: Paying off sub 4% mortgage interest rate early

Posted: Wed Sep 16, 2020 8:58 pm
by macheta
We paid off the 2.99% mortgage for a couple reasons. First, we felt like the retirement bucket was large enough to coast into retirement. Any additional savings would allow for early retirement which would go into full bore after paying off the house. Second, I felt like there was a fifty percent chance of having problems with losing my high paying job within the next ten years. Not having a mortgage would allow us to live off my wife's paycheck while I was searching for another job. Third, the opportunity cost was only 33k. Lastly, it just feels good to not have a house payment. I don't regret the decision.

Re: Paying off sub 4% mortgage interest rate early

Posted: Sun Sep 20, 2020 7:22 am
by mass_biker
To the poster who paid of the mortgage with proceeds from VWALX...did you still retain the "stub" position of VWALX post-mortgage pay-off?
Considering the same strategy and wondering who else out there utilizes VWALX as part of their long term taxable AA (and what the optimal % exposure ought to be given other options)

m_b

Re: Paying off sub 4% mortgage interest rate early

Posted: Sun Sep 20, 2020 11:10 pm
by LTCM
I just did a quick google...so I'm not an expert here... but since retirements accounts are protected from bankruptcy creditors: paying off a 3.5% mortgage is not as good as getting 3.5% from the federal government in a retirement account. If you can buy $10,000 of EE bonds or pay off $10,000 extra in mortgage it seems like you're better taking the bonds to me. The mortgage is also callable if things change. The government is stuck paying you 3.5%.

I couldn't find this on google but what is the approximate S&P style credit rating for an 800 individual credit score? BBB? AA? A 3.5% bond from anyone with a higher credit rating than you seems like a great deal. No?

Re: Paying off sub 4% mortgage interest rate early

Posted: Sun Sep 20, 2020 11:45 pm
by Hiker-Biker
mass_biker wrote: Sun Sep 20, 2020 7:22 am To the poster who paid of the mortgage with proceeds from VWALX...did you still retain the "stub" position of VWALX post-mortgage pay-off?
Considering the same strategy and wondering who else out there utilizes VWALX as part of their long term taxable AA (and what the optimal % exposure ought to be given other options)

m_b
Not sure what you mean by “stub” portion of VWALX. After the mortgage payoff, my muni bond position is now about 50/50 VWUIX AND VWALX. What’s interesting is VG’s portfolio visualizer had our stock/bond distribution for all accounts as 60/40 and after the mortgage payoff, it’s 80/20!

I’m trying to figure out whether to rebalance since there are 6 different accounts (2 Roth, Roll-over IRA, Taxable, and 2 401(k)). Perhaps a topic for a separate thread. :mrgreen:

Re: Paying off sub 4% mortgage interest rate early

Posted: Mon Sep 21, 2020 12:00 am
by unclescrooge
vineviz wrote: Fri Sep 11, 2020 6:41 am
Frugalbear wrote: Fri Sep 11, 2020 12:34 am Is anyone who has a sub 4% fixed mortgage interest rate paying it off aggressively early? If you are, why?
At 4%-ish, there is absolutely no better fixed income investment you can make than paying down a mortgage.

Certainly no investor should be holding bonds in any taxable account while carrying a mortgage at rates above 2.75%.
So what should you use for your emergency fund?

Re: Paying off sub 4% mortgage interest rate early

Posted: Mon Sep 21, 2020 12:28 am
by BF2011
arsenalfan wrote: Wed Sep 16, 2020 8:06 pm Psychologic peace of mind vs mathematical optimization. And everyone's situation is different.

Here's mine:
23 years left on 30 year fixed 3.35%. 2MM home, 1.3 original loan, now 700k. VHCOL, due to SALT elimination don't itemize.
I am now refinancing to a 15 year 2.85% loan at a $7000 cost.
Have other rental properties that cashflow positive. Major one I know I will keep for 30+ years has 4.3% rate 20yr term.
IPS says to take surplus cash and invest 2/3 in aftertax account, and 1/3 towards a mortgage.
Lately I've been paying down the rental principle. Once that's dead and cashflowing even more positively, will pay down the primary home.
Not sure if we will downsize in 10 years is the kicker...
curious why are you choosing to pay off rental first instead of primary. especially since you no longer itemize, wouldn't interest on rental give you more tax advantage? I paid off my primary first, and the only reason I am paying off my investment property loan now is because I am having a hard time finding anyone willing to do a refi for investment properties, and the few that do don't offer that good of a rate. my current rate is 4.625%. so with tax benefits, it's like paying 3% or so interest. I might be able to refi it down to 4%, but probably not worth the trouble. 3% is still a pretty good return at the moment...

Re: Paying off sub 4% mortgage interest rate early

Posted: Mon Sep 21, 2020 8:03 am
by mass_biker
We refi'd our investment property into a HELOC.

The new rate was less than the original (30 year fixed), and obviously interest only.

We may chose to pay if off in full in the next year or so depending on liquidity needs (but keep the HELOC open in case liquidity needs emerge).

Re: Paying off sub 4% mortgage interest rate early

Posted: Mon Sep 21, 2020 8:43 am
by vineviz
unclescrooge wrote: Mon Sep 21, 2020 12:00 am
vineviz wrote: Fri Sep 11, 2020 6:41 am
Frugalbear wrote: Fri Sep 11, 2020 12:34 am Is anyone who has a sub 4% fixed mortgage interest rate paying it off aggressively early? If you are, why?
At 4%-ish, there is absolutely no better fixed income investment you can make than paying down a mortgage.

Certainly no investor should be holding bonds in any taxable account while carrying a mortgage at rates above 2.75%.
So what should you use for your emergency fund?
Good catch. I should have specified that I was speaking specifically about long-term investments (e.g. retirement accounts).

Bonds can certainly play an important role in emergency funds and other short-term savings goals.