Pay off mortgage

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Topic Author
Flynow7
Posts: 71
Joined: Thu Mar 25, 2021 11:06 am

Pay off mortgage

Post by Flynow7 »

Hello I’m wondering whether I should pay off my mortgage early or invest the difference every month?

$291,000 30year fixed loan 5.875% interest.
31 years old, no kids, single.
100k in income right now should double in the next two years.

The way I’m thinking if I should pay to the bank 5.875 % interest and the house appreciates 3% a year that’s like 8.875% return on my money if the house is paid for.

Some investing books say to invest 60% towards mortgage repayment and 40% towards investing. Higher towards a higher mortgage.
Looking for your input.
Hyperchicken
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Joined: Mon Mar 02, 2020 4:33 pm

Re: Pay off mortgage

Post by Hyperchicken »

House appreciation has nothing to do with the mortgage - you are exposed to your house's value changes regardless.
Goal33
Posts: 1959
Joined: Sun Apr 12, 2015 12:30 pm

Re: Pay off mortgage

Post by Goal33 »

Did you just recently buy? Wondering why you missed the much lower rates recently.

You haven't shared the rest of your financial picture, so its hard to even offer an opinion.

If you do decide to pay off faster, consider a 15 year at a lower rate to get you there.
chassis
Posts: 1181
Joined: Tue Mar 24, 2020 4:28 pm

Re: Pay off mortgage

Post by chassis »

Flynow7 wrote: Tue Aug 16, 2022 5:28 pm Hello I’m wondering whether I should pay off my mortgage early or invest the difference every month?

$291,000 30year fixed loan 5.875% interest.
31 years old, no kids, single.
100k in income right now should double in the next two years.

The way I’m thinking if I should pay to the bank 5.875 % interest and the house appreciates 3% a year that’s like 8.875% return on my money if the house is paid for.

Some investing books say to invest 60% towards mortgage repayment and 40% towards investing. Higher towards a higher mortgage.
Looking for your input.
I like liquidity. Where is the cash to pay off the mortgage? Taxable brokerage or checking account? Or would you increase monthly payments out of cash flow/paycheck? It sounds like the latter.

What are your other obligations? Other debt? College tuition? Are you maximizing retirement contributions to capture the lax explorer benefit, if any.

If you are wondering what to do with money from cash flow (paycheck) I would put it into taxable investments for growth and liquidity purposes, if you are capturing complainer 401k match.
stoptothink
Posts: 12851
Joined: Fri Dec 31, 2010 8:53 am

Re: Pay off mortgage

Post by stoptothink »

chassis wrote: Tue Aug 16, 2022 5:38 pm
Flynow7 wrote: Tue Aug 16, 2022 5:28 pm Hello I’m wondering whether I should pay off my mortgage early or invest the difference every month?

$291,000 30year fixed loan 5.875% interest.
31 years old, no kids, single.
100k in income right now should double in the next two years.

The way I’m thinking if I should pay to the bank 5.875 % interest and the house appreciates 3% a year that’s like 8.875% return on my money if the house is paid for.

Some investing books say to invest 60% towards mortgage repayment and 40% towards investing. Higher towards a higher mortgage.
Looking for your input.
I like liquidity. Where is the cash to pay off the mortgage? Taxable brokerage or checking account? Or would you increase monthly payments out of cash flow/paycheck? It sounds like the latter.

What are your other obligations? Other debt? College tuition? Are you maximizing retirement contributions to capture the lax explorer benefit, if any.

If you are wondering what to do with money from cash flow (paycheck) I would put it into taxable investments for liquidity purposes, if you are capturing complainer 401k match.
This. Way too little information to offer any sort of advice.
Topic Author
Flynow7
Posts: 71
Joined: Thu Mar 25, 2021 11:06 am

Re: Pay off mortgage

Post by Flynow7 »

chassis wrote: Tue Aug 16, 2022 5:38 pm
Flynow7 wrote: Tue Aug 16, 2022 5:28 pm Hello I’m wondering whether I should pay off my mortgage early or invest the difference every month?

$291,000 30year fixed loan 5.875% interest.
31 years old, no kids, single.
100k in income right now should double in the next two years.

The way I’m thinking if I should pay to the bank 5.875 % interest and the house appreciates 3% a year that’s like 8.875% return on my money if the house is paid for.

Some investing books say to invest 60% towards mortgage repayment and 40% towards investing. Higher towards a higher mortgage.
Looking for your input.
I like liquidity. Where is the cash to pay off the mortgage? Taxable brokerage or checking account? Or would you increase monthly payments out of cash flow/paycheck? It sounds like the latter.

What are your other obligations? Other debt? College tuition? Are you maximizing retirement contributions to capture the lax explorer benefit, if any.

If you are wondering what to do with money from cash flow (paycheck) I would put it into taxable investments for growth and liquidity purposes, if you are capturing complainer 401k match.
Cash to pay off mortgage is comming from
Monthly cash flow, about $3,000 a month. I could put it all towards investing or just put 60% if it towards mortgage and 40% of it in investments.

The money in the brokerage is like to keep in the market.
stoptothink
Posts: 12851
Joined: Fri Dec 31, 2010 8:53 am

Re: Pay off mortgage

Post by stoptothink »

Flynow7 wrote: Tue Aug 16, 2022 5:47 pm
chassis wrote: Tue Aug 16, 2022 5:38 pm
Flynow7 wrote: Tue Aug 16, 2022 5:28 pm Hello I’m wondering whether I should pay off my mortgage early or invest the difference every month?

$291,000 30year fixed loan 5.875% interest.
31 years old, no kids, single.
100k in income right now should double in the next two years.

The way I’m thinking if I should pay to the bank 5.875 % interest and the house appreciates 3% a year that’s like 8.875% return on my money if the house is paid for.

Some investing books say to invest 60% towards mortgage repayment and 40% towards investing. Higher towards a higher mortgage.
Looking for your input.
I like liquidity. Where is the cash to pay off the mortgage? Taxable brokerage or checking account? Or would you increase monthly payments out of cash flow/paycheck? It sounds like the latter.

What are your other obligations? Other debt? College tuition? Are you maximizing retirement contributions to capture the lax explorer benefit, if any.

If you are wondering what to do with money from cash flow (paycheck) I would put it into taxable investments for growth and liquidity purposes, if you are capturing complainer 401k match.
Cash to pay off mortgage is comming from
Monthly cash flow, about $3,000 a month. I could put it all towards investing or just put 60% if it towards mortgage and 40% of it in investments.

The money in the brokerage is like to keep in the market.
What is your current situation (ie. investments, other debt)?

I sure as heck wouldn't calculate home appreciation into this decision.
chassis
Posts: 1181
Joined: Tue Mar 24, 2020 4:28 pm

Re: Pay off mortgage

Post by chassis »

Flynow7 wrote: Tue Aug 16, 2022 5:47 pm
chassis wrote: Tue Aug 16, 2022 5:38 pm
Flynow7 wrote: Tue Aug 16, 2022 5:28 pm Hello I’m wondering whether I should pay off my mortgage early or invest the difference every month?

$291,000 30year fixed loan 5.875% interest.
31 years old, no kids, single.
100k in income right now should double in the next two years.

The way I’m thinking if I should pay to the bank 5.875 % interest and the house appreciates 3% a year that’s like 8.875% return on my money if the house is paid for.

Some investing books say to invest 60% towards mortgage repayment and 40% towards investing. Higher towards a higher mortgage.
Looking for your input.
I like liquidity. Where is the cash to pay off the mortgage? Taxable brokerage or checking account? Or would you increase monthly payments out of cash flow/paycheck? It sounds like the latter.

What are your other obligations? Other debt? College tuition? Are you maximizing retirement contributions to capture the lax explorer benefit, if any.

If you are wondering what to do with money from cash flow (paycheck) I would put it into taxable investments for growth and liquidity purposes, if you are capturing complainer 401k match.
Cash to pay off mortgage is comming from
Monthly cash flow, about $3,000 a month. I could put it all towards investing or just put 60% if it towards mortgage and 40% of it in investments.

The money in the brokerage is like to keep in the market.
Are you maximizing employer 401k matching contributions?

If yes, put the cash flow into taxable investments. If not, capture max employer match then into taxable investment.

Payments to mortgage principal become illiquid home equity. Personally I shun illiquidity.

Please answer the questions on other obligations (debt, tuition, etc).
Topic Author
Flynow7
Posts: 71
Joined: Thu Mar 25, 2021 11:06 am

Re: Pay off mortgage

Post by Flynow7 »

I max out my 401k.
Debt house mortgage $291,000
No other debt
350k in taxable
100k in retirement accounts
mortfree
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Joined: Mon Sep 12, 2016 7:06 pm

Re: Pay off mortgage

Post by mortfree »

You aren’t paying off your mortgage.

You are paying it down.

That’s a huge difference.

The balance is too high for my liking to think about paying it down.
Mid-40’s
chassis
Posts: 1181
Joined: Tue Mar 24, 2020 4:28 pm

Re: Pay off mortgage

Post by chassis »

Flynow7 wrote: Tue Aug 16, 2022 6:39 pm I max out my 401k.
Debt house mortgage $291,000
No other debt
350k in taxable
100k in retirement accounts
Good that you max 401k.

Regarding the mortgage, refinance to a lower interest rate if possible.

I woud invest in taxable securities. I like stocks. If you don't like stocks, second suggestion would be equity index etfs.
Topic Author
Flynow7
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Joined: Thu Mar 25, 2021 11:06 am

Re: Pay off mortgage

Post by Flynow7 »

mortfree wrote: Tue Aug 16, 2022 7:27 pm You aren’t paying off your mortgage.

You are paying it down.

That’s a huge difference.

The balance is too high for my liking to think about paying it down.
So
What would you do? Pay it down or just invest ?
mortfree
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Re: Pay off mortgage

Post by mortfree »

Flynow7 wrote: Tue Aug 16, 2022 8:00 pm
mortfree wrote: Tue Aug 16, 2022 7:27 pm You aren’t paying off your mortgage.

You are paying it down.

That’s a huge difference.

The balance is too high for my liking to think about paying it down.
So
What would you do? Pay it down or just invest ?
What I have done is build up a decent pile of cash. I’m at around 50k there. Figure out what number works for you.

Invest the extra money in VTI or VTSAX or equivalent in a taxable account. Keep piling it in there.

Think about this. Your investments can grow in one year what you will pay in interest over the life of the mortgage. And you have 30 years and more for investments to grow, shrink, stay the same in whatever order that might occur.

That’s where the pile of cash comes in so you can just ignore the market ups and downs.
Mid-40’s
lakpr
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Joined: Fri Mar 18, 2011 9:59 am

Re: Pay off mortgage

Post by lakpr »

@Flynow7,

If I were you, I would liquidate the $350k brokerage account and payoff the mortgage in full. That 5.875% rate is quite high.

You need to view the $290k mortgage principal as consisting of two separate components: on $160k, you are paying an AFTER-TAX 5.875% rate, and just to break even you need to earn 7.53% guaranteed rate of return on a before-tax basis (in a 22% tax bracket), or 8.64% guaranteed rate of return on a before-tax basis (in a 32% tax bracket). On the remaining $130k, you are paying a BEFORE-TAX 5.875% rate.

You said your current income is $100k, single, with a kid. That's Head-of-Household tax filing status. Even fully maximizing the 401(k) contribution, that puts you in a 22% tax bracket. Next year, when your income "doubles", it will vault you straight into a 32% tax bracket, skipping the entire 24% bracket.

That's why I calculated the "before-tax-equivalents" in both 22% and 32% tax brackets.

Those are pretty high rates of return you will be "earning" by paying off the mortgage (8.64% or 7.53% or 5.875%).
protagonist
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Re: Pay off mortgage

Post by protagonist »

Though others here may disagree, I would almost always opt for paying off the mortgage first and get out of debt....especially as your mortgage rate is fairly high. Would you come out ahead in the long run? Maybe, maybe not....depends what happens with the stock market or whatever, and you have no way of knowing that. But there is also the intangible psychological benefit of knowing you are out of debt and you really own your house.
Last edited by protagonist on Tue Aug 16, 2022 8:33 pm, edited 2 times in total.
stoptothink
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Joined: Fri Dec 31, 2010 8:53 am

Re: Pay off mortgage

Post by stoptothink »

lakpr wrote: Tue Aug 16, 2022 8:11 pm
You said your current income is $100k, single, with a kid. That's Head-of-Household tax filing status. Even fully maximizing the 401(k) contribution, that puts you in a 22% tax bracket. Next year, when your income "doubles", it will vault you straight into a 32% tax bracket, skipping the entire 24% bracket.

That's why I calculated the "before-tax-equivalents" in both 22% and 32% tax brackets.

Those are pretty high rates of return you will be "earning" by paying off the mortgage (8.64% or 7.53% or 5.875%).
FYI, OP says "NO kids, single"
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grabiner
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Re: Pay off mortgage

Post by grabiner »

Flynow7 wrote: Tue Aug 16, 2022 5:28 pm Hello I’m wondering whether I should pay off my mortgage early or invest the difference every month?

$291,000 30year fixed loan 5.875% interest.
31 years old, no kids, single.
100k in income right now should double in the next two years.

The way I’m thinking if I should pay to the bank 5.875 % interest and the house appreciates 3% a year that’s like 8.875% return on my money if the house is paid for.
The house isn't part of the calculation. If your house appreciates by $20K in one year, your net worth increases by $20K regardless of how much you pay on the mortgage. If you pay $10K on the mortgage, your net worth increases by $588.

lakpr wrote: Tue Aug 16, 2022 8:11 pm You need to view the $290k mortgage principal as consisting of two separate components: on $160k, you are paying an AFTER-TAX 5.875% rate, and just to break even you need to earn 7.53% guaranteed rate of return on a before-tax basis (in a 22% tax bracket), or 8.64% guaranteed rate of return on a before-tax basis (in a 32% tax bracket). On the remaining $130k, you are paying a BEFORE-TAX 5.875% rate.


The exact split of before-tax and after-tax depends on your other deductions, such as how much you donate to charity. But the non-deductible portion is probably smaller since you are single; the SALT limit of $10K is already close to the standard deduction.

I prefer to view everything as after-tax, so a partial paydown would be 4.68% after tax since it is paying down the deductible portion. But even a risk-free, after-tax 4.68% is a good return. Thus, unless you need the money for liquidity, it's probably worth paying down your mortgage once you max out your tax-deferred accounts. However, I wouldn't sell stock for a significant capital gain, since you have enough cash flow to pay off the mortgage quickly; paying a few extra years of 5.875% isn't worth the cost of the capital-gains tax.
Wiki David Grabiner
cbs2002
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Re: Pay off mortgage

Post by cbs2002 »

OP you are not getting sound advice in this thread. Post your whole financial picture per the forum guidelines if you want meaningful guidance. No one can answer your question in a vacuum.

What I can say is that market value appreciation of your primary residence is not something to consider in your calculations unless you have a clear plan to use that value for something else in the future. Otherwise it’s just a number that you live in.
protagonist
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Re: Pay off mortgage

Post by protagonist »

cbs2002 wrote: Tue Aug 16, 2022 9:30 pm OP you are not getting sound advice in this thread. Post your whole financial picture per the forum guidelines if you want meaningful guidance. No one can answer your question in a vacuum.

What I can say is that market value appreciation of your primary residence is not something to consider in your calculations unless you have a clear plan to use that value for something else in the future. Otherwise it’s just a number that you live in.
Does everybody here have a "clear plan to use the value" of their stocks and bonds "for something else in the future"?

I would guess that a large number of us have no plans to necessarily sell our index funds during our lifetimes. We will if we want to or have to, but we fully intend to leave them for our heirs if that need or desire does not arise.

Similarly, we may have no clear plan to sell our primary residence, but will if we want to or have to in the future....otherwise we will leave it to our heirs.

And just like our stocks, the value of our house in the future is unknown....it is similarly subject to unpredictable fluctuations in the market....but we hope its value increases. The option is always there to sell or borrow against it.

So of course your primary residence is an investment. In the case of many (if not most) homeowners it is the most valuable asset they own. and in addition to a roof over their heads it is a big part of their financial security. If you own a home worth a million dollars and otherwise only have $10K in other investments, you have similar assets as one who has $1,010,000 in stocks and bonds. To not use your home in your calculations, compared with somebody who has only $10K in investments and nothing else, makes no sense to me.
Topic Author
Flynow7
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Joined: Thu Mar 25, 2021 11:06 am

Re: Pay off mortgage

Post by Flynow7 »

Makes sense so, basically invest in stocks and don’t pay off the mortgage early. I just hate paying 5.875% interest even after deduction it’s like 4.5% effective rate. Housing generally appreciates at 2-3% a year. So 4.5% + 2% appreciation is 6.5% return on money if I have this mortgage paid off. It’s as almost the house is acting like a bond that nets 6.5%. I can always get a mortgage in a house to pull the equity out. Just was wondering what the fellow boggleheads would recommend.
KlangFool
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Re: Pay off mortgage

Post by KlangFool »

Flynow7 wrote: Tue Aug 16, 2022 10:13 pm
I can always get a mortgage in a house to pull the equity out.
Flynow7,

When someone is unemployed in a recession, they could not get a mortgage. And, that is usually when both the stock and the housing market go down at the same time too. So, please do not assume that you could always get a mortgage.

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Hyperchicken
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Re: Pay off mortgage

Post by Hyperchicken »

Flynow7 wrote: Tue Aug 16, 2022 10:13 pm Makes sense so, basically invest in stocks and don’t pay off the mortgage early. I just hate paying 5.875% interest even after deduction it’s like 4.5% effective rate. Housing generally appreciates at 2-3% a year. So 4.5% + 2% appreciation is 6.5% return on money if I have this mortgage paid off. It’s as almost the house is acting like a bond that nets 6.5%. I can always get a mortgage in a house to pull the equity out. Just was wondering what the fellow boggleheads would recommend.
You keep making the same mistake. I suggest you get this part straight, as a step in making an informed decision.
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Watty
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Re: Pay off mortgage

Post by Watty »

Flynow7 wrote: Tue Aug 16, 2022 6:39 pm I max out my 401k.
Debt house mortgage $291,000
No other debt
350k in taxable
100k in retirement accounts
I would pay it off, but that is just me.

I like to turn this question around and ask it this way, "I have a paid off house, should I take out a new mortgage to invest the money?" When you ask it that way few people would suggest that you do that but it is really the same question.

You can then invest your freed up mortgage payment each month and get the benefits of dollar cost averaging.

https://www.bogleheads.org/wiki/Dollar_cost_averaging

Deciding to pay off a mortgage or not often boils down to if you can invest the money and earn a higher return on not. You don't have a great interest rate but even if you did investing the money and earning a higher investment return is harder than it sounds because you have a sequence of returns risk. Here is a simplistic example of that which I have posted before, you might want to look at your actual number this way.
If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To pay off the mortgage at the end of the second year you would need about $96.5K so you would need to gain back $12.5K and another $6,000 for the next years mortgage payments which combined is $18.5K. That would take a 22% return on the remaining $84K to get back to the point where you could pay off the mortgage.

In the past portfolios have declined in roughly one of four or five years depending on the asset allocation. (20 to 25 percent of the time)

https://investor.vanguard.com/investing ... allocation

The sequence of returns risk can also go the other way and you could get lucky and have the first couple of years get good returns that would put you on the path for large gains over the years. There will sometimes be very optimistic projections on just how much better not paying off the mortgage could be but one limiting factor that needs to be considered is that few people actually keep a 30 year mortgage for the full 30 years. It is difficult to put a number on it but many people who own a home will sell it in less than 10 years.
exodusNH
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Re: Pay off mortgage

Post by exodusNH »

Flynow7 wrote: Tue Aug 16, 2022 10:13 pm Makes sense so, basically invest in stocks and don’t pay off the mortgage early. I just hate paying 5.875% interest even after deduction it’s like 4.5% effective rate. Housing generally appreciates at 2-3% a year. So 4.5% + 2% appreciation is 6.5% return on money if I have this mortgage paid off. It’s as almost the house is acting like a bond that nets 6.5%. I can always get a mortgage in a house to pull the equity out. Just was wondering what the fellow boggleheads would recommend.
The long-term return on housing is, in general, about 1% above inflation. It is, however, volatile. And like the stock market, can have a decade of no returns. E.g., my house, which I bought in August 2005 and dropped during the GFC. It did not recover to my original purchase price (in 2005 dollars) until the COVID run up. If you factor in inflation over that period, I am still very much in the red.

Paying down your mortgage locks up liquidity. Your mortgage payment doesn't get smaller. You just shorten the duration. (Though if you have paid a substantial amount down, you can call your mortgage company and ask if they will recast your mortgage.)

Do you hold bonds as part of your AA? If so, and if your mortgage company will recast, consider moving that bond allocation to equities in your tax deferred and sell and equivalent amount equities in taxable; apply that cash to your mortgage. You'll benefit by a lower payment and a 5%+ return on your money, which will blow your bond returns out of the water.
sureshoe
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Re: Pay off mortgage

Post by sureshoe »

Maybe I missed it, but how long ago did you take out this mortgage? I'm surprised the rate is that awful.

at nearly 6%, I start thinking about paying off early. However, the beauty of a mortgage is that you have an interest rate hedge that you fully control.

For example, my mortgage on nearly $500k is at 2.5%. Sounds like an incredible deal now since interest rates have gone up.

With you at 6%, interest rates might go up to 10% (I doubt it, but maybe). At that point 6% would sounds like an amazing rate. Bonds and other items would be paying higher amounts. If rates go down to 4%, you can refinance.

It looks like you are maxing out your 401k, HSA, Roth - I might suggest paying down before keeping that taxable, but even then... not sure I would. If you have bond funds, I'd pay the mortgage off and go more stock.
sureshoe
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Re: Pay off mortgage

Post by sureshoe »

Watty wrote: Tue Aug 16, 2022 10:35 pm I like to turn this question around and ask it this way, "I have a paid off house, should I take out a new mortgage to invest the money?" When you ask it that way few people would suggest that you do that but it is really the same question.
It depends on your age and investments. It is somewhat the same question, and if a 30 year old told me they had a paid off house worth $500k, I would question the wisdom of sitting on all that equity.
260chrisb
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Re: Pay off mortgage

Post by 260chrisb »

Flynow7 wrote: Tue Aug 16, 2022 6:39 pm I max out my 401k.
Debt house mortgage $291,000
No other debt
350k in taxable
100k in retirement accounts
All this said, I'd be looking into a 15 year refi, hitting my mortgage with a lump sum the next day of at least 100K, and hitting it again over the next two years as your income doubles and be done with it.
cbs2002
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Re: Pay off mortgage

Post by cbs2002 »

protagonist wrote: Tue Aug 16, 2022 9:54 pm
cbs2002 wrote: Tue Aug 16, 2022 9:30 pm OP you are not getting sound advice in this thread. Post your whole financial picture per the forum guidelines if you want meaningful guidance. No one can answer your question in a vacuum.

What I can say is that market value appreciation of your primary residence is not something to consider in your calculations unless you have a clear plan to use that value for something else in the future. Otherwise it’s just a number that you live in.
Does everybody here have a "clear plan to use the value" of their stocks and bonds "for something else in the future"?

I would guess that a large number of us have no plans to necessarily sell our index funds during our lifetimes. We will if we want to or have to, but we fully intend to leave them for our heirs if that need or desire does not arise.

Similarly, we may have no clear plan to sell our primary residence, but will if we want to or have to in the future....otherwise we will leave it to our heirs.

And just like our stocks, the value of our house in the future is unknown....it is similarly subject to unpredictable fluctuations in the market....but we hope its value increases. The option is always there to sell or borrow against it.

So of course your primary residence is an investment. In the case of many (if not most) homeowners it is the most valuable asset they own. and in addition to a roof over their heads it is a big part of their financial security. If you own a home worth a million dollars and otherwise only have $10K in other investments, you have similar assets as one who has $1,010,000 in stocks and bonds. To not use your home in your calculations, compared with somebody who has only $10K in investments and nothing else, makes no sense to me.
I did not say not to count your primary residence in your NW, which would be silly. Stocks and bonds create revenue without being sold or increasing one's liabilities. Your primary residence cannot do either of these things, unless you start renting out rooms.

Future primary residence value is not "just like our stocks." It is extremely variable based on location, illiquid and costs a high percentage of value just to hold. A diverse stock portfolio is none of these things.

While a house may be the most valuable asset many homeowners in the U.S. own, that is not the same as a good financial planning recommendation. I'd take the $1MM in equities over the $1MM house 7 days a week and twice on Sundays.

I do have a plan to use the value of my investments for something else in the future. I guess that's a personal planning choice.

I acknowledge a nice thing about owning and appreciating in a HCOL/VHCOL is that you can eventually sell and go live like royalty in a less costly location. But again, there's several types of uncertainty there, not all of them financial.

I get that home value appreciation is a bet some people like to make. I would just think that if that's your focus, you'd have a plan to use that "investment" for something besides sitting in and spending money on, or have a long-term plan for other ways to generate revenue with or without your primary residence.
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beernutz
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Re: Pay off mortgage

Post by beernutz »

With $1,500 a month as principal reduction prepayment I believe you'd pay off your mortgage in less than 10 years so you'd be 41 with a paid off house.
Flynow7 wrote: Tue Aug 16, 2022 5:47 pm
chassis wrote: Tue Aug 16, 2022 5:38 pm
Flynow7 wrote: Tue Aug 16, 2022 5:28 pm Hello I’m wondering whether I should pay off my mortgage early or invest the difference every month?

$291,000 30year fixed loan 5.875% interest.
31 years old, no kids, single.
100k in income right now should double in the next two years.

The way I’m thinking if I should pay to the bank 5.875 % interest and the house appreciates 3% a year that’s like 8.875% return on my money if the house is paid for.

Some investing books say to invest 60% towards mortgage repayment and 40% towards investing. Higher towards a higher mortgage.
Looking for your input.
I like liquidity. Where is the cash to pay off the mortgage? Taxable brokerage or checking account? Or would you increase monthly payments out of cash flow/paycheck? It sounds like the latter.

What are your other obligations? Other debt? College tuition? Are you maximizing retirement contributions to capture the lax explorer benefit, if any.

If you are wondering what to do with money from cash flow (paycheck) I would put it into taxable investments for growth and liquidity purposes, if you are capturing complainer 401k match.
Cash to pay off mortgage is comming from
Monthly cash flow, about $3,000 a month. I could put it all towards investing or just put 60% if it towards mortgage and 40% of it in investments.

The money in the brokerage is like to keep in the market.
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. --Will Rogers
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Flynow7
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Re: Pay off mortgage

Post by Flynow7 »

thank you for all the input, looks like I should just save my free cashflow per month and keep my mortgage payment and not pre pay and just invest the money. Refinance the mortgage when rates drop. I took out the mortgage about two months ago.
DVMResident
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Re: Pay off mortgage

Post by DVMResident »

This is not the question you asked, but you should look into a refi. I just did an Aimloans quote, guessing at some/lack of detail/unknowns, and I was seeing refi around 5% on a 30 year fixed. You could just shorten the duration to 15 years, get a <5% rate, and a get similar effect to what you’re proposing.

Deciding to put extra money into the mortgage is very personal. At 30 years old with an income that’s doubling, I would not pay down the loan with current money. I prize liquidity while other reasonable people prize lower market volatility and certainty and the feeling of being debt free. This is why you see such a diversity of approaches and robust debates on this topic.
Jonbuck
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Re: Pay off mortgage

Post by Jonbuck »

This is a great example of how personal finances are PERSONAL! There is a mathematical component, but also an emotional component to this question. In my opinion what my be optimal mathematically may not be the optimal thing emotionally. We tend to think of these scenarios as "either or" options. Either I invest in the market or I pay off the mortgage early. I like to think of these scenarios when I don't feel that I have a clear cut solution that I am at peace with as taking a "both and" approach. I would consider the following scenarios.

1) Put extra on your mortgage each month, but also invest. Split the difference down the middle of the extra cash flow that you have. Then, when you can refinance to a lower interest rate take advantage and do it.

2) Take a brokerage account and make extra payments into it, but designate that account as a mortgage account. Do this until you have enough to pay off your mortgage. When you are done doing this you can then decide if you want to pay the mortgage off or just continue on the path you are currently taking. Often when people do this they end up keeping the mortgage and the investment account. I know this is a little mental accounting going on, but it does seem to help people work through the mathematical and emotional components of these types of decisions.
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HMSVictory
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Re: Pay off mortgage

Post by HMSVictory »

Speaking as someone who is debt free totally (mortgage and all) it is more than dollars and cents involved here.

If you can save 15% of your gross income AND knock down the mortgage early I would. I was able to do both and then when I had the mortgage zeroed out I upped my savings rate to 30% which has worked out well for me. As good as it feels to have a huge account balance in your investing account it feels even better to have very low monthly expenses and no payments. Very good.
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Wiggums
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Re: Pay off mortgage

Post by Wiggums »

Flynow7 wrote: Tue Aug 16, 2022 10:13 pm Makes sense so, basically invest in stocks and don’t pay off the mortgage early. I just hate paying 5.875% interest even after deduction it’s like 4.5% effective rate. Housing generally appreciates at 2-3% a year. So 4.5% + 2% appreciation is 6.5% return on money if I have this mortgage paid off. It’s as almost the house is acting like a bond that nets 6.5%. I can always get a mortgage in a house to pull the equity out. Just was wondering what the fellow boggleheads would recommend.
5.875% rate is high compare to years of much lower mortgage rates. You can pay off or aggressively pay down the mortgage and recast the loan. Then use your cash flow to buy more stock and/or rebuild your accounts. Yes, you can have your cake and eat it too. We paid off our 5.25% mortgage and then rebuilt our accounts. I’m a pay off or pay down the mortgage type, so take that into consideration. I have no regrets being debt free and retiring early.
"I started with nothing and I still have most of it left."
exodusNH
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Re: Pay off mortgage

Post by exodusNH »

HMSVictory wrote: Wed Aug 17, 2022 8:54 am Speaking as someone who is debt free totally (mortgage and all) it is more than dollars and cents involved here.

If you can save 15% of your gross income AND knock down the mortgage early I would. I was able to do both and then when I had the mortgage zeroed out I upped my savings rate to 30% which has worked out well for me. As good as it feels to have a huge account balance in your investing account it feels even better to have very low monthly expenses and no payments. Very good.
Depending on what your property taxes are like, you may never be free of a large-ish housing payment.

My P&I is now $890/mo. (After 17 years and a handful of refis.) Taxes & insurance is $550. The taxes have about doubled in 17 years. No reason to assume they won't again. Even if I paid my mortgage off now, in 17 years, I'd have a bigger payment just for taxes and insurance than I do for P&I.

I spent many years paying down the principal. I had only a small taxable account. I can't access the equity in my house without taking a 5%+ loan (after the HELOC teaser expires anyway.) Having that principal prepayment in the market would have been a better choice.

Prepaying wasn't a *bad* choice, just not optimal. (Of course, the least optimal choice was buying at the local market peak in 2005 and being underwater in nominal dollars until 2020, and still well underwater in inflation-adjusted dollars. On the flip side, I would never live in the kind of apartment I could get for $1000/mo (interest + taxes + insurance).)
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Elsebet
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Re: Pay off mortgage

Post by Elsebet »

I like the ideas of refinancing into a 15 year mortgage with a lower interest rate, or you can pay your 30 year mortgage on a 15 year schedule like I do. Then I put the same dollar amount that I am paying extra on my mortgage in taxable. I prefer doing a little of both than doing only one or the other. However my 30 year mortgage rate is much lower than yours at 3.5%.
"...the man who adapts himself to his slender means and makes himself wealthy on a little sum, is the truly rich man..." ~Seneca
protagonist
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Re: Pay off mortgage

Post by protagonist »

cbs2002 wrote: Wed Aug 17, 2022 7:34 am
protagonist wrote: Tue Aug 16, 2022 9:54 pm
cbs2002 wrote: Tue Aug 16, 2022 9:30 pm OP you are not getting sound advice in this thread. Post your whole financial picture per the forum guidelines if you want meaningful guidance. No one can answer your question in a vacuum.

What I can say is that market value appreciation of your primary residence is not something to consider in your calculations unless you have a clear plan to use that value for something else in the future. Otherwise it’s just a number that you live in.
Does everybody here have a "clear plan to use the value" of their stocks and bonds "for something else in the future"?

I would guess that a large number of us have no plans to necessarily sell our index funds during our lifetimes. We will if we want to or have to, but we fully intend to leave them for our heirs if that need or desire does not arise.

Similarly, we may have no clear plan to sell our primary residence, but will if we want to or have to in the future....otherwise we will leave it to our heirs.

And just like our stocks, the value of our house in the future is unknown....it is similarly subject to unpredictable fluctuations in the market....but we hope its value increases. The option is always there to sell or borrow against it.

So of course your primary residence is an investment. In the case of many (if not most) homeowners it is the most valuable asset they own. and in addition to a roof over their heads it is a big part of their financial security. If you own a home worth a million dollars and otherwise only have $10K in other investments, you have similar assets as one who has $1,010,000 in stocks and bonds. To not use your home in your calculations, compared with somebody who has only $10K in investments and nothing else, makes no sense to me.
I did not say not to count your primary residence in your NW, which would be silly. Stocks and bonds create revenue without being sold or increasing one's liabilities. Your primary residence cannot do either of these things, unless you start renting out rooms.
Passively creating revenue is not a criterion for an investment (though, as you mention, you can rent out your home, as I have done when going away for the winter). Do you think gold qualifies as an investment?
Future primary residence value is not "just like our stocks." It is extremely variable based on location, illiquid and costs a high percentage of value just to hold. A diverse stock portfolio is none of these things.
I agree that your primary residence is not a "diverse" investment. Neither is a single stock, but it is still an investment. I would argue that many investments cost a high percentage of value to hold, and some are much more illiquid than a home. My first (stupid) investment was a "limited partnership", sold to me by a financial advisor....I was trapped in it for about seven years, and the advisor was the only one that made money. It was a very bad investment, but it was an investment. Plus, there is "value" in an asset that you can live in and enjoy. Maybe it is hard to place a number on that, but it is definitely "value".
While a house may be the most valuable asset many homeowners in the U.S. own, that is not the same as a good financial planning recommendation. I'd take the $1MM in equities over the $1MM house 7 days a week and twice on Sundays.
I agree that owning a million dollar house and having no other assets is a bad investment. Owning a million dollar house as part of a diverse portfolio, on the other hand, might be a good investment, and add to your diversity while offering the security of owning the place you live. If the market crashes you still have your home.
I get that home value appreciation is a bet some people like to make.
I can't speak for others, but I would suspect that it is a bet that most people make when they choose to buy a home rather than rent.
Last edited by protagonist on Wed Aug 17, 2022 11:05 am, edited 1 time in total.
cbs2002
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Re: Pay off mortgage

Post by cbs2002 »

Jonbuck wrote: Wed Aug 17, 2022 8:50 am This is a great example of how personal finances are PERSONAL! There is a mathematical component, but also an emotional component to this question. In my opinion what my be optimal mathematically may not be the optimal thing emotionally. We tend to think of these scenarios as "either or" options. Either I invest in the market or I pay off the mortgage early. I like to think of these scenarios when I don't feel that I have a clear cut solution that I am at peace with as taking a "both and" approach. I would consider the following scenarios.

1) Put extra on your mortgage each month, but also invest. Split the difference down the middle of the extra cash flow that you have. Then, when you can refinance to a lower interest rate take advantage and do it.

2) Take a brokerage account and make extra payments into it, but designate that account as a mortgage account. Do this until you have enough to pay off your mortgage. When you are done doing this you can then decide if you want to pay the mortgage off or just continue on the path you are currently taking. Often when people do this they end up keeping the mortgage and the investment account. I know this is a little mental accounting going on, but it does seem to help people work through the mathematical and emotional components of these types of decisions.
These are great suggestions to manage the psychology of home ownership. I especially like #2 (which is basically what we have done so far).

And I'll admit I'm biased by what has worked for us. We entered 2008 with about 20% equity in our primary residence, which was also about 20% of our NW at the time, and serially refinanced over the next decade. Meanwhile, our portfolio roughly quintupled and now home equity is down to less than 10% of our NW even though nominally it has increased substantially. And the property, while it is worth more today than in 2008, has been a terrible investment. Probably if I lived in California I'd feel differently.
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Re: Pay off mortgage

Post by cbs2002 »

protagonist wrote: Wed Aug 17, 2022 10:28 am
cbs2002 wrote: Wed Aug 17, 2022 7:34 am
I get that home value appreciation is a bet some people like to make.
I can't speak for others, but I would suspect that it is a bet that most people make when they choose to buy a home rather than rent.
Yeah, I'm realizing I may be weird on this front. If it were not for my spouse's preferences, I'd probably choose to rent again. I have zero expectation that the value of my residence will even keep up with inflation.
go2run
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Re: Pay off mortgage

Post by go2run »

Flynow7 wrote: Wed Aug 17, 2022 8:17 am thank you for all the input, looks like I should just save my free cashflow per month and keep my mortgage payment and not pre pay and just invest the money. Refinance the mortgage when rates drop. I took out the mortgage about two months ago.
OP, you have been given good suggestion in the threads here. You either already had your mind made up what you should do, or are just flat out missing the point.

Your question of taking existing cash flow to either pay down principal or invest comes down to a pure numbers game. lakpr put together a good analysis of what returns you would need in your investments to be better than what you are paying in your mortgage. Others have suggested at looking to refinance and to me that is one of the quickest ways you can improve your situation. Going to a 15 yr mortgage will likely yield a better rate and will allow you pay down your debt quicker. You can have best of both worlds..yield a better rate and continue to invest extra cash flow in your taxable account. Why would you not consider that?
protagonist
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Re: Pay off mortgage

Post by protagonist »

cbs2002 wrote: Wed Aug 17, 2022 10:48 am
protagonist wrote: Wed Aug 17, 2022 10:28 am
cbs2002 wrote: Wed Aug 17, 2022 7:34 am
I get that home value appreciation is a bet some people like to make.
I can't speak for others, but I would suspect that it is a bet that most people make when they choose to buy a home rather than rent.
Yeah, I'm realizing I may be weird on this front. If it were not for my spouse's preferences, I'd probably choose to rent again. I have zero expectation that the value of my residence will even keep up with inflation.
I bought a vacation home (winter escape) last year during astronomical rising prices. I, too, do not expect to make money on this, though I might...I have no idea really. It (as well as my primary residence) seems to have appreciated quite a bit since I bought it last summer, based on current sales prices, while the stock market faltered. And I have no intention of selling it, though I can. That said, I am 70 years old and have enough other resources to fund my retirement, so I don't consider it a bad "investment"....if anything it diversifies my portfolio and gives me added security if the stock market crashes. I still consider this vacation home, as well as my primary residence, part of my "portfolio", since they can increase in value, they are liquid (I CAN sell them, rent them or borrow against them), and together they are a substantial fraction of what I own so cannot be ignored in financial planning (especially when one adds my wife's primary residence- a New York apartment that she owns- to our joint household portfolio). For example, I can theoretically have a larger allocation of resources in the stock market without worrying that I might be destitute if the stock market crashes. That makes my home different from my other possessions, like my car, which I KNOW will depreciate and I KNOW I will have to replace at some point and spend a lot more money to replace. Unless a collectible, a car is not an investment...it is just a possession. Selling two prior primary residences at a profit (neither of which I purchased with the intent to sell) has substantially contributed to my net worth over my lifetime.

If I was younger and had less additional resources I would take home appreciation potential more seriously when house shopping or weighing buying against renting. Moving and selling a primary residence, though not planned, over the course of a lifetime is very common (job change, divorce, marriage, larger or smaller family size, change in neighborhood, whim, whatever). Renting definitely has many advantages over buying, and vice versa. It's difficult to predict which is a better financial choice, especially without knowledge of the local market (since in some areas rents may be inflated way beyond what is expected compared with home prices). And it is even harder to know what is a better fit for a particular person's needs without knowing that person.

And as a 70 yo, I can definitely confirm that people (and their circumstances) change over the course of a lifetime, more than they can often imagine. If at any point previously in my life somebody with a crystal ball told me accurately what my life would be like 20 years into the future I would not have been able to hold back my uncontrollable laughter.
Last edited by protagonist on Wed Aug 17, 2022 11:42 am, edited 3 times in total.
exodusNH
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Re: Pay off mortgage

Post by exodusNH »

cbs2002 wrote: Wed Aug 17, 2022 10:48 am
protagonist wrote: Wed Aug 17, 2022 10:28 am
cbs2002 wrote: Wed Aug 17, 2022 7:34 am
I get that home value appreciation is a bet some people like to make.
I can't speak for others, but I would suspect that it is a bet that most people make when they choose to buy a home rather than rent.
Yeah, I'm realizing I may be weird on this front. If it were not for my spouse's preferences, I'd probably choose to rent again. I have zero expectation that the value of my residence will even keep up with inflation.
As I've said in many different threads, the owning vs renting is likely to be a wash over one's life. During your life, one or the other will be objectively better (from a strictly financial position), but you don't know how often or when that changes. By the time you can figure it all out, it will no longer matter.

The US has a general bias against renting, as if it's somehow an inferior choice for an adult to make.
protagonist
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Re: Pay off mortgage

Post by protagonist »

exodusNH wrote: Wed Aug 17, 2022 11:39 am
cbs2002 wrote: Wed Aug 17, 2022 10:48 am
protagonist wrote: Wed Aug 17, 2022 10:28 am
cbs2002 wrote: Wed Aug 17, 2022 7:34 am
I get that home value appreciation is a bet some people like to make.
I can't speak for others, but I would suspect that it is a bet that most people make when they choose to buy a home rather than rent.
Yeah, I'm realizing I may be weird on this front. If it were not for my spouse's preferences, I'd probably choose to rent again. I have zero expectation that the value of my residence will even keep up with inflation.
As I've said in many different threads, the owning vs renting is likely to be a wash over one's life. During your life, one or the other will be objectively better (from a strictly financial position), but you don't know how often or when that changes. By the time you can figure it all out, it will no longer matter.

The US has a general bias against renting, as if it's somehow an inferior choice for an adult to make.
I agree with you. In keeping with your last comment, owning a home in the US has a certain cache of status, which is ridiculous. Unless you live in an area with a large "rent vs buy" market inefficiency, the decision really should come down to lifestyle and what you want (freedom, mobility and minimal maintenance responsibility vs. control over your environment, stability, and freedom to create your home in your image). Both have significant advantages and disadvantages.
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Re: Pay off mortgage

Post by Jags4186 »

exodusNH wrote: Wed Aug 17, 2022 11:39 am
cbs2002 wrote: Wed Aug 17, 2022 10:48 am
protagonist wrote: Wed Aug 17, 2022 10:28 am
cbs2002 wrote: Wed Aug 17, 2022 7:34 am
I get that home value appreciation is a bet some people like to make.
I can't speak for others, but I would suspect that it is a bet that most people make when they choose to buy a home rather than rent.
Yeah, I'm realizing I may be weird on this front. If it were not for my spouse's preferences, I'd probably choose to rent again. I have zero expectation that the value of my residence will even keep up with inflation.
As I've said in many different threads, the owning vs renting is likely to be a wash over one's life. During your life, one or the other will be objectively better (from a strictly financial position), but you don't know how often or when that changes. By the time you can figure it all out, it will no longer matter.

The US has a general bias against renting, as if it's somehow an inferior choice for an adult to make.
The US has a general bias towards home ownership because the government has stacked the deck in favor of home ownership. Can you name any other country in the world that offers fixed rate, tax deductible, 30 year mortgages?
exodusNH
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Re: Pay off mortgage

Post by exodusNH »

Jags4186 wrote: Wed Aug 17, 2022 12:00 pm The US has a general bias towards home ownership because the government has stacked the deck in favor of home ownership. Can you name any other country in the world that offers fixed rate, tax deductible, 30 year mortgages?
I don't know enough about world mortgages to comment. My entire mortgage history has been in NH.

It's one thing for the tax code to favor one or the other, but I'm speaking of the general public perception that renting is always an inferior choice and indicates some sort of moral failing. (Similar to how second mortgages were seen as an indication of moral and financial failure, which is why they're now called home equity loans or lines of credit and totally normal things. Hopefully a similar pivot will happen with renting.)
Jags4186
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Re: Pay off mortgage

Post by Jags4186 »

exodusNH wrote: Wed Aug 17, 2022 12:21 pm
Jags4186 wrote: Wed Aug 17, 2022 12:00 pm The US has a general bias towards home ownership because the government has stacked the deck in favor of home ownership. Can you name any other country in the world that offers fixed rate, tax deductible, 30 year mortgages?
I don't know enough about world mortgages to comment. My entire mortgage history has been in NH.

It's one thing for the tax code to favor one or the other, but I'm speaking of the general public perception that renting is always an inferior choice and indicates some sort of moral failing. (Similar to how second mortgages were seen as an indication of moral and financial failure, which is why they're now called home equity loans or lines of credit and totally normal things. Hopefully a similar pivot will happen with renting.)
My question was somewhat rhetorical — there are no other countries that offer fixed rate, tax deductible, 30-year mortgages. Because it is “easy” to get a house in the US, it has the general perception of being what you should do. This is by design of the government. Long ago it was decided that having a nation of home owners was preferential to a nation of landlords and tenants. And that is why the US has incredible programs and policies, at least compared to the rest of the world, in place to encourage home ownership. Whether they have been effective or not is another matter.

That feeling of moral and financial failure for not owning a home is on purpose.
aristotelian
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Re: Pay off mortgage

Post by aristotelian »

Your thinking is flawed - your home appreciates (or depreciates) whether you pay off the mortgage or not - but paying off your mortgage is a great idea. The real question is whether you prefer to put extra dollars toward investing in risk assets for a higher expected return or take the guaranteed return from reducing debt. In this case, I would max out retirement accounts first but after that the guaranteed 5.875% guaranteed return sounds pretty good (30Y Treasuries currently yield just over 3% so that is a nice premium).
deikel
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Re: Pay off mortgage

Post by deikel »

Jags4186 wrote: Wed Aug 17, 2022 12:00 pm
exodusNH wrote: Wed Aug 17, 2022 11:39 am
cbs2002 wrote: Wed Aug 17, 2022 10:48 am
protagonist wrote: Wed Aug 17, 2022 10:28 am
cbs2002 wrote: Wed Aug 17, 2022 7:34 am
I get that home value appreciation is a bet some people like to make.
I can't speak for others, but I would suspect that it is a bet that most people make when they choose to buy a home rather than rent.
Yeah, I'm realizing I may be weird on this front. If it were not for my spouse's preferences, I'd probably choose to rent again. I have zero expectation that the value of my residence will even keep up with inflation.
As I've said in many different threads, the owning vs renting is likely to be a wash over one's life. During your life, one or the other will be objectively better (from a strictly financial position), but you don't know how often or when that changes. By the time you can figure it all out, it will no longer matter.

The US has a general bias against renting, as if it's somehow an inferior choice for an adult to make.
The US has a general bias towards home ownership because the government has stacked the deck in favor of home ownership. Can you name any other country in the world that offers fixed rate, tax deductible, 30 year mortgages?
.....Germany....?

plus the property tax on the house is non existent - in sharp contrast to some US states, where the combination of school tax and county tax is hefty and actually penalized ownership....Its hard in the US to build your refuge and never come out again - property taxes are hefty and will case you to loose the home if you can not find some sort of income - not exactly a homeowner friendly policy

Sure, a country of homeowners may be politically desired (along the lines of freedom and independence and self actualization), but if that is the goal, some states are doing it all wrong
Everything you read in this post is my personal opinion. If you disagree with this disclaimer, please un-read the text immediately and destroy any copy or remembrance of it.
deikel
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Re: Pay off mortgage

Post by deikel »

OP, what you pay off on the mortgage has a guaranteed 5.875 return....that's hard to beat with bonds these days and approaches the average return of stocks

You loose the inflation hedge, but investment wise, this seems a good way to go (compared to putting the money in some other form of investment)
Everything you read in this post is my personal opinion. If you disagree with this disclaimer, please un-read the text immediately and destroy any copy or remembrance of it.
Apathizer
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Re: Pay off mortgage

Post by Apathizer »

Flynow7 wrote: Tue Aug 16, 2022 5:28 pm $291,000 30year fixed loan 5.875% interest.
In a taxable account even an aggressive portfolio is unlikely to have higher after-tax long-term returns, and having that much debt significantly increases risk. I think it makes sense to max-out tax advantaged accounts and aggressively pay down the mortgage rather have significant taxable investments.
ROTH: 35% AVGE, 20% AVUS, 15% DFAX, 30% BNDW. Taxable: 50% BNDW, 25% AVGE, 15% AVUS, 10% DFAX
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