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

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

Post by international001 » Wed Sep 11, 2019 3:23 am

EnjoyIt wrote:
Tue Sep 10, 2019 4:06 pm




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

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

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

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

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

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

But 60/40 in all situations doesn't make sense. It depends on whether you are renting or buying. The equation may change if the imputed rent has lots of volatility because your total expenses are volatile. But if it's fairly stable, you can target your overall portfolio to have a given AA, no matter if you buy or rent.

As nolesrule points out, it doesn't make sense to have a house + $100k in stocks (AA 100/0), and then sell your house for $500k, rent, and have $600k in stocks (keep AA 100/0)

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

Post by EnjoyIt » Wed Sep 11, 2019 10:47 am

international001 wrote:
Wed Sep 11, 2019 3:23 am
EnjoyIt wrote:
Tue Sep 10, 2019 4:06 pm




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

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

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

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

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

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

But 60/40 in all situations doesn't make sense. It depends on whether you are renting or buying. The equation may change if the imputed rent has lots of volatility because your total expenses are volatile. But if it's fairly stable, you can target your overall portfolio to have a given AA, no matter if you buy or rent.

As nolesrule points out, it doesn't make sense to have a house + $100k in stocks (AA 100/0), and then sell your house for $500k, rent, and have $600k in stocks (keep AA 100/0)
The bolded above: You just explained why it is silly to consider a house as a bond or a mortgage as a negative bond.

We agree on just about everything but a few minor details which I think are very important to a retiree and the retiree's risk tolerance / AA.

When looking at one's asset allocation, the decision is very person particularly in the accumulation phase. At what AA will this family be able to sleep well, and not risk selling everything in a down market. Outside of extreme examples, the value of the home or the mortgage does not matter. All that matters is the value of the portfolio and possibly all fixed expenses (which we do agree paying off a mortgage would lower.) As I said in my example, my IPS states to be in 60/40 when I retire and 70/30 while I accumulate. The word mortgage does not exist in that calculation nor does it for the vast majority of investors out there.

Mako52
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Re: Paying off mortgage early - am I thinking about this right?

Post by Mako52 » Wed Sep 11, 2019 11:31 am

I'm wondering about the following.

There is principal and interest in a mortgage payment. If I'm moving cash from one asset (such as a bank account or taxable brokerage account) to pay off a liability, my net worth is the same.

In these decisions, why don't we look more at what our monthly interest payment is instead of the total P&I?

Let's say you took out a $300k 15-year mortgage in summer 2016 at 2.75%. Your monthly payment has been $2036.

3 years into it, of that $2036, $572 now goes to interest, and $1464 goes to principal on a balance of $250k. If you pay off the mortgage now, you're tying up $250,000 to save $6,900 in annual interest- and a lower amount in subsequent years.

Today, one can easily earn 2% - or $417 per month in interest- in a very liquid money market account with $250k.

I completely understand people who are close to retirement in their forever home wanting to pay off a mortgage, but if you're not going to be there for more than 5-10 years, is interest the primary component we should be looking at in these decisions? Where everyone got crushed in interest is early on in 30 year mortgages at 4%+ rates.

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

Post by ray.james » Wed Sep 11, 2019 2:54 pm

Mako52 wrote:
Wed Sep 11, 2019 11:31 am
I'm wondering about the following.

There is principal and interest in a mortgage payment. If I'm moving cash from one asset (such as a bank account or taxable brokerage account) to pay off a liability, my net worth is the same.

In these decisions, why don't we look more at what our monthly interest payment is instead of the total P&I?

Let's say you took out a $300k 15-year mortgage in summer 2016 at 2.75%. Your monthly payment has been $2036.

3 years into it, of that $2036, $572 now goes to interest, and $1464 goes to principal on a balance of $250k. If you pay off the mortgage now, you're tying up $250,000 to save $6,900 in annual interest- and a lower amount in subsequent years.

Today, one can easily earn 2% - or $417 per month in interest- in a very liquid money market account with $250k.

I completely understand people who are close to retirement in their forever home wanting to pay off a mortgage, but if you're not going to be there for more than 5-10 years, is interest the primary component we should be looking at in these decisions? Where everyone got crushed in interest is early on in 30 year mortgages at 4%+ rates.
There is no magic to interest number. It is just the interest on higher balance. 120K at 4% is 100 interest per month. 240k at 4% is 200 interest per month. There is no difference other than balance mortgage ampount. I think what you are trying to arrive at is cashflow. If one has 5K expenses per month, is the interest portion 10% of it or 2% of it.

I personally use what I call needle to haystack ratio. If I have 1K free cash flow, I will look at how many years for paying off total debt. If it is more than 20, I will pay off as soon as I can and recast/refinance/consolidate etc., to reach that. The ratios can get wacky at extremes or being a student/resident doctor/ST debt but accounting for that it is my risk personal management measure.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

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

Post by willthrill81 » Wed Sep 11, 2019 3:05 pm

Mako52 wrote:
Wed Sep 11, 2019 11:31 am
I'm wondering about the following.

There is principal and interest in a mortgage payment. If I'm moving cash from one asset (such as a bank account or taxable brokerage account) to pay off a liability, my net worth is the same.

In these decisions, why don't we look more at what our monthly interest payment is instead of the total P&I?

Let's say you took out a $300k 15-year mortgage in summer 2016 at 2.75%. Your monthly payment has been $2036.

3 years into it, of that $2036, $572 now goes to interest, and $1464 goes to principal on a balance of $250k. If you pay off the mortgage now, you're tying up $250,000 to save $6,900 in annual interest- and a lower amount in subsequent years.

Today, one can easily earn 2% - or $417 per month in interest- in a very liquid money market account with $250k.

I completely understand people who are close to retirement in their forever home wanting to pay off a mortgage, but if you're not going to be there for more than 5-10 years, is interest the primary component we should be looking at in these decisions? Where everyone got crushed in interest is early on in 30 year mortgages at 4%+ rates.
You're getting confused.

At least with a standard mortgage, every month you pay 1/12th of the product of your current mortgage balance and your annual interest rate. So if your balance is $250k and your interest rate is 4%, that works out to $833.33 in interest for that month. The interest you pay next month will be less because your mortgage balance will be lower, but you are still paying 4% interest on your mortgage balance all the way until it is paid.

People don't 'get crushed' 'early on' in 30 year mortgages by interest. It's just the way that debt is amortized. The reason that that paying down a mortgage has a bigger impact if done early in the mortgage term is because the interest being saved has longer to compound in your favor. This is why paying down seemingly small amounts in the first year of a 30 year mortgage can shave years off of the amortization schedule. But if there are only five years left, for instance, there isn't much time for the interest saved to compound in your favor.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by Mako52 » Wed Sep 11, 2019 5:03 pm

willthrill81 wrote:
Wed Sep 11, 2019 3:05 pm
Mako52 wrote:
Wed Sep 11, 2019 11:31 am
I'm wondering about the following.

There is principal and interest in a mortgage payment. If I'm moving cash from one asset (such as a bank account or taxable brokerage account) to pay off a liability, my net worth is the same.

In these decisions, why don't we look more at what our monthly interest payment is instead of the total P&I?

Let's say you took out a $300k 15-year mortgage in summer 2016 at 2.75%. Your monthly payment has been $2036.

3 years into it, of that $2036, $572 now goes to interest, and $1464 goes to principal on a balance of $250k. If you pay off the mortgage now, you're tying up $250,000 to save $6,900 in annual interest- and a lower amount in subsequent years.

Today, one can easily earn 2% - or $417 per month in interest- in a very liquid money market account with $250k.

I completely understand people who are close to retirement in their forever home wanting to pay off a mortgage, but if you're not going to be there for more than 5-10 years, is interest the primary component we should be looking at in these decisions? Where everyone got crushed in interest is early on in 30 year mortgages at 4%+ rates.
You're getting confused.

At least with a standard mortgage, every month you pay 1/12th of the product of your current mortgage balance and your annual interest rate. So if your balance is $250k and your interest rate is 4%, that works out to $833.33 in interest for that month. The interest you pay next month will be less because your mortgage balance will be lower, but you are still paying 4% interest on your mortgage balance all the way until it is paid.

People don't 'get crushed' 'early on' in 30 year mortgages by interest. It's just the way that debt is amortized. The reason that that paying down a mortgage has a bigger impact if done early in the mortgage term is because the interest being saved has longer to compound in your favor. This is why paying down seemingly small amounts in the first year of a 30 year mortgage can shave years off of the amortization schedule. But if there are only five years left, for instance, there isn't much time for the interest saved to compound in your favor.
I'm talking about people who are 8-10 years into a mortgage and decide whether to keep it or pay it off. Obviously 8 years into a 30 year vs 8 years into a 15 will be a different scenario.

If you run an amortization schedule for a 15-year, $300,000 mortgage at 2.75%, the P&I is $2036. At the outset, interest is $688. Payment 36 is still $2036, but the interest amount at payment #36 on the $250k remaining balance is $572 (vs the original $688).

Incremental paydowns can shave years off the amortization schedule, but that only matters (IMHO) if you're planning to still be in the house by the time it's paid off. Otherwise you're just locking the additional principal in at the mortgage rate, right?

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

Post by willthrill81 » Wed Sep 11, 2019 6:51 pm

Mako52 wrote:
Wed Sep 11, 2019 5:03 pm
Incremental paydowns can shave years off the amortization schedule, but that only matters (IMHO) if you're planning to still be in the house by the time it's paid off. Otherwise you're just locking the additional principal in at the mortgage rate, right?
Basically yes.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by Mako52 » Thu Sep 12, 2019 9:33 am

The other thing I'd say on mortgage payoffs to consider is what % of your total annual expenditure is your mortgage P&I? If it's 25% I can see the desire to pay it off right away, but if it's 10%....or 15%?

There are other big recurring expenses that won't go away: Federal tax, state income tax, local property tax, health insurance, car payments/maintenance/tax/insurance, etc.

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

Post by willthrill81 » Thu Sep 12, 2019 9:43 am

Mako52 wrote:
Thu Sep 12, 2019 9:33 am
There are other big recurring expenses that won't go away: Federal tax, state income tax, local property tax, health insurance, car payments/maintenance/tax/insurance, etc.
Just because you will always have some expenses does not mean that you should not seek to reduce or eliminate some of them if you can.

Paying off a mortgage reduces your need for liquidity, generally provides you with a higher return than fixed income instruments, and reduces your sequence of returns risk in retirement.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by abuss368 » Thu Sep 12, 2019 2:45 pm

Mako52 wrote:
Thu Sep 12, 2019 9:33 am
The other thing I'd say on mortgage payoffs to consider is what % of your total annual expenditure is your mortgage P&I? If it's 25% I can see the desire to pay it off right away, but if it's 10%....or 15%?

There are other big recurring expenses that won't go away: Federal tax, state income tax, local property tax, health insurance, car payments/maintenance/tax/insurance, etc.
Not having a mortgage frees up cash flows. One may need less liquidity if overall cash outflow is lower. In addition, this would help a portfolio in times of market duress.
John C. Bogle: "Simplicity is the master key to financial success."

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

Post by international001 » Fri Sep 13, 2019 7:06 am

EnjoyIt wrote:
Wed Sep 11, 2019 10:47 am


The bolded above: You just explained why it is silly to consider a house as a bond or a mortgage as a negative bond.

We agree on just about everything but a few minor details which I think are very important to a retiree and the retiree's risk tolerance / AA.

When looking at one's asset allocation, the decision is very person particularly in the accumulation phase. At what AA will this family be able to sleep well, and not risk selling everything in a down market. Outside of extreme examples, the value of the home or the mortgage does not matter. All that matters is the value of the portfolio and possibly all fixed expenses (which we do agree paying off a mortgage would lower.) As I said in my example, my IPS states to be in 60/40 when I retire and 70/30 while I accumulate. The word mortgage does not exist in that calculation nor does it for the vast majority of investors out there.
Those are 2 very different things

Once you have a house and a mortgage, paying the mortgage in advance is *exactly* as investing in a bond. That's math

The issue of how to consider the value of the house in your AA portfolio is not trivial. This is why I simplify for a stable house price with a stable imputed rent income. Then you sort of can equate the house to a bond
For the general case, you have to model the yield that the house gives you (in imputed rent) and the appreciation on the house. And you also have to consider your expenses (imputed rent) volatility. This may help to calculate your desired global AA. If you decide to rent, you also need to calculate the AA you need, and consider the volatility of the rent your paying as a expense. Things can get complicated, but in general, if you move from owning to renting you want to increase the portion of bonds in your brokerage account

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

Post by Miguelito » Fri Sep 13, 2019 7:22 am

Mako52 wrote:
Thu Sep 12, 2019 9:33 am
The other thing I'd say on mortgage payoffs to consider is what % of your total annual expenditure is your mortgage P&I? If it's 25% I can see the desire to pay it off right away, but if it's 10%....or 15%?

There are other big recurring expenses that won't go away: Federal tax, state income tax, local property tax, health insurance, car payments/maintenance/tax/insurance, etc.
I'm not sure that matters. I'm wondering if people are approaching the question through the lens of their own circumstances.

Let's say you are well-off and only have 5 years left on that mortgage that represents a small percentage of your expenditures. You have lots of monthly leftover funds that you invest. Why would you pay 3-4% on a loan when your bonds are giving you less? In addition, because you are well-off, your mortgage is likely many thousands a month. Many thousands that can be freed up by paying this loan off. To say nothing of the intangible benefits of knowing you own your home. I'm not sure the answer is obvious in certain cases.

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

Post by EnjoyIt » Fri Sep 13, 2019 7:44 am

international001 wrote:
Fri Sep 13, 2019 7:06 am
EnjoyIt wrote:
Wed Sep 11, 2019 10:47 am


The bolded above: You just explained why it is silly to consider a house as a bond or a mortgage as a negative bond.

We agree on just about everything but a few minor details which I think are very important to a retiree and the retiree's risk tolerance / AA.

When looking at one's asset allocation, the decision is very person particularly in the accumulation phase. At what AA will this family be able to sleep well, and not risk selling everything in a down market. Outside of extreme examples, the value of the home or the mortgage does not matter. All that matters is the value of the portfolio and possibly all fixed expenses (which we do agree paying off a mortgage would lower.) As I said in my example, my IPS states to be in 60/40 when I retire and 70/30 while I accumulate. The word mortgage does not exist in that calculation nor does it for the vast majority of investors out there.
Those are 2 very different things

Once you have a house and a mortgage, paying the mortgage in advance is *exactly* as investing in a bond. That's math

The issue of how to consider the value of the house in your AA portfolio is not trivial. This is why I simplify for a stable house price with a stable imputed rent income. Then you sort of can equate the house to a bond
For the general case, you have to model the yield that the house gives you (in imputed rent) and the appreciation on the house. And you also have to consider your expenses (imputed rent) volatility. This may help to calculate your desired global AA. If you decide to rent, you also need to calculate the AA you need, and consider the volatility of the rent your paying as a expense. Things can get complicated, but in general, if you move from owning to renting you want to increase the portion of bonds in your brokerage account
So much unneeded complexity with no reasonable benefit to one’s life. As I said before, life is not a corporate balance sheet.
Keep it simple.

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

Post by international001 » Wed Sep 18, 2019 10:48 am

When a house may be half of my assets, I don't want to keep it simple. I want to keep it as accurate as I can. Same when deciding what percentage of bonds or stocks I could have in my portfolio. I paid off my house when I realized I was investing in bonds, anyway. But that's just me. :happy

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

Post by EnjoyIt » Wed Sep 18, 2019 11:38 am

international001 wrote:
Wed Sep 18, 2019 10:48 am
When a house may be half of my assets, I don't want to keep it simple. I want to keep it as accurate as I can. Same when deciding what percentage of bonds or stocks I could have in my portfolio. I paid off my house when I realized I was investing in bonds, anyway. But that's just me. :happy
I'm different, I let my AA float around and I kind of rebalance only with new contributions. Currently I want to be 70/30 but recently am likely closer to 65/35 (probably about 66/34.) I am adding to my equities with every contribution. I have no idea what my home is really worth though I guess maybe 20% or less of our net worth. Our LTV again I have no clue but would assume somewhere between 30-45%. Those numbers mean nothing to my day to day spending, my asset allocation, or how much money I need to have available for expenses this year.

At my last job, before I was an index investor, I met with the 401k plan manager at our company. He was very nice and we agreed to be on the aggressive side due to my young age and job security. My home never came into question.
I suspect, most FA do not evaluate your mortgage level to decide on one's AA and do not adjust dynamically based on LTV or mortgage value. Around 2012/14 one of my buddies had an FA recommend refinancing to 15 year lower rate mortgage which was a great idea.

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

Post by abuss368 » Wed Sep 18, 2019 12:21 pm

EnjoyIt wrote:
Wed Sep 18, 2019 11:38 am
At my last job, before I was an index investor, I met with the 401k plan manager at our company. He was very nice and we agreed to be on the aggressive side due to my young age and job security. My home never came into question.
I suspect, most FA do not evaluate your mortgage level to decide on one's AA and do not adjust dynamically based on LTV or mortgage value. Around 2012/14 one of my buddies had an FA recommend refinancing to 15 year lower rate mortgage which was a great idea.
I keep and consider our home and portfolio separate. One can not rebalance in our out of a home.
John C. Bogle: "Simplicity is the master key to financial success."

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

Post by international001 » Thu Sep 19, 2019 9:25 am

I think many are missing the point

You can consider the house as a part of you global AA and don't have to rebalance in and out in the house. You can rebalance with the rest of your stocks/bonds
I'm not saying is easy to model the value/yield of your house and the expenses that you save, but it's worth making it an approximation

If you don't consider house as part of your AA, you can fall in an absurd situation, of not modifying your AA if you move from/to owning to/from rental.

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

Post by EnjoyIt » Thu Sep 19, 2019 9:33 am

international001 wrote:
Thu Sep 19, 2019 9:25 am
I think many are missing the point

You can consider the house as a part of you global AA and don't have to rebalance in and out in the house. You can rebalance with the rest of your stocks/bonds
I'm not saying is easy to model the value/yield of your house and the expenses that you save, but it's worth making it an approximation

If you don't consider house as part of your AA, you can fall in an absurd situation, of not modifying your AA if you move from/to owning to/from rental.
Unless one is house poor making that family cashflow deprived, I think making this approximation is a complete waste of time, adds no value to my day to day and month to month spending, does not come into play when evaluating my risk tolerance or my asset allocation.

If a family is house poor and their home is basically all of their wealth, then yeah that mortgage is a big deal and the risk of being unable to pay the bank needs to be taken into account in their budgeting and risk tolerance. This is the family that would strongly benefit from a sizable emergency fund and nest egg to weather a loss in wages.

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

Post by willthrill81 » Thu Sep 19, 2019 9:34 am

international001 wrote:
Thu Sep 19, 2019 9:25 am
I'm not saying is easy to model the value/yield of your house and the expenses that you save, but it's worth making it an approximation
To do so, I compare annualized rents on nearly identical properties to ours and subtract what we spend on property taxes, insurance, mortgage interest (almost zero now, thankfully) and maintenance. After doing so, I divide the difference by the market value of the home (i.e. no real estate fees since we would do a FSBO). As of now, we are currently getting a 5% return, which I'm quite happy with. This is beside the 35% appreciation we've experienced in the last almost five years.
EnjoyIt wrote:
Thu Sep 19, 2019 9:33 am
Unless one is house poor making that family cashflow deprived, I think making this approximation is a complete waste of time, adds no value to my day to day and month to month spending, does not come into play when evaluating my risk tolerance or my asset allocation.
I'm very satisfied with the 5% return via imputed rent that we're getting on our home. If it was 1%, I'd be much less satisfied, and we might consider renting instead. So for us, it's relevant.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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

Post by abuss368 » Thu Sep 19, 2019 12:08 pm

Goal is to pay down mortgage and have no mortgage at retirement. That provides a lot more financial flexibility and less demands on the portfolio.
John C. Bogle: "Simplicity is the master key to financial success."

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

Post by EnjoyIt » Thu Sep 19, 2019 12:25 pm

abuss368 wrote:
Thu Sep 19, 2019 12:08 pm
Goal is to pay down mortgage and have no mortgage at retirement. That provides a lot more financial flexibility and less demands on the portfolio.
That is our goal as well. To have the mortgage paid off the same year we retire. At sub 3% I am in no rush.

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

Post by abuss368 » Thu Sep 19, 2019 12:32 pm

EnjoyIt wrote:
Thu Sep 19, 2019 12:25 pm
abuss368 wrote:
Thu Sep 19, 2019 12:08 pm
Goal is to pay down mortgage and have no mortgage at retirement. That provides a lot more financial flexibility and less demands on the portfolio.
That is our goal as well. To have the mortgage paid off the same year we retire. At sub 3% I am in no rush.
Agree. Our rate is not much different.
John C. Bogle: "Simplicity is the master key to financial success."

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

Post by international001 » Thu Sep 19, 2019 5:13 pm

willthrill81 wrote:
Thu Sep 19, 2019 9:34 am
international001 wrote:
Thu Sep 19, 2019 9:25 am
I'm not saying is easy to model the value/yield of your house and the expenses that you save, but it's worth making it an approximation
To do so, I compare annualized rents on nearly identical properties to ours and subtract what we spend on property taxes, insurance, mortgage interest (almost zero now, thankfully) and maintenance. After doing so, I divide the difference by the market value of the home (i.e. no real estate fees since we would do a FSBO). As of now, we are currently getting a 5% return, which I'm quite happy with. This is beside the 35% appreciation we've experienced in the last almost five years.
EnjoyIt wrote:
Thu Sep 19, 2019 9:33 am
Unless one is house poor making that family cashflow deprived, I think making this approximation is a complete waste of time, adds no value to my day to day and month to month spending, does not come into play when evaluating my risk tolerance or my asset allocation.
I'm very satisfied with the 5% return via imputed rent that we're getting on our home. If it was 1%, I'd be much less satisfied, and we might consider renting instead. So for us, it's relevant.
You would also have to sustract the other closing costs (besides Reator), and the expected time the house would be on the market. But that's not the bigger point
5% is good return, and I agree with you it's a good investment.
But if I was in my 20's, perhaps I would like to have more via stocks, adding the leverage that a mortgage gives me

In a LCOL area, your model is proably good. In a not so stable area, you'd have to consider the overall return variation and the rent variation to compute how good is holding the house. They tend to be more return & volatility, so it's more towards a stock. All this assuming you are not willing to move. Porfolios assume your expenses are independent of the AA, but in this case is not; so it becomes more difficult to model.

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

Post by international001 » Thu Sep 19, 2019 5:15 pm

abuss368 wrote:
Thu Sep 19, 2019 12:32 pm
EnjoyIt wrote:
Thu Sep 19, 2019 12:25 pm
abuss368 wrote:
Thu Sep 19, 2019 12:08 pm
Goal is to pay down mortgage and have no mortgage at retirement. That provides a lot more financial flexibility and less demands on the portfolio.
That is our goal as well. To have the mortgage paid off the same year we retire. At sub 3% I am in no rush.
Agree. Our rate is not much different.
By retirement you have a bunch of bonds, so owning the house is good. Getting a 3% return on a bond without taxes (assuming you don't have a chance of default) is good nowadays. So reconsider to pay it off by selling some of your bonds. If you can

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

Post by abuss368 » Thu Sep 19, 2019 5:19 pm

international001 wrote:
Thu Sep 19, 2019 5:15 pm
abuss368 wrote:
Thu Sep 19, 2019 12:32 pm
EnjoyIt wrote:
Thu Sep 19, 2019 12:25 pm
abuss368 wrote:
Thu Sep 19, 2019 12:08 pm
Goal is to pay down mortgage and have no mortgage at retirement. That provides a lot more financial flexibility and less demands on the portfolio.
That is our goal as well. To have the mortgage paid off the same year we retire. At sub 3% I am in no rush.
Agree. Our rate is not much different.
By retirement you have a bunch of bonds, so owning the house is good. Getting a 3% return on a bond without taxes (assuming you don't have a chance of default) is good nowadays. So reconsider to pay it off by selling some of your bonds. If you can
Makes sense.
John C. Bogle: "Simplicity is the master key to financial success."

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

Post by EnjoyIt » Thu Sep 19, 2019 7:34 pm

international001 wrote:
Thu Sep 19, 2019 5:15 pm
abuss368 wrote:
Thu Sep 19, 2019 12:32 pm
EnjoyIt wrote:
Thu Sep 19, 2019 12:25 pm
abuss368 wrote:
Thu Sep 19, 2019 12:08 pm
Goal is to pay down mortgage and have no mortgage at retirement. That provides a lot more financial flexibility and less demands on the portfolio.
That is our goal as well. To have the mortgage paid off the same year we retire. At sub 3% I am in no rush.
Agree. Our rate is not much different.
By retirement you have a bunch of bonds, so owning the house is good. Getting a 3% return on a bond without taxes (assuming you don't have a chance of default) is good nowadays. So reconsider to pay it off by selling some of your bonds. If you can
Circular.

But if I sold my bonds I would have a higher percent in equities making my AA out of wack forcing me to sell equities to bring me back.

I don’t like you suggestion.

Also what does it matter what the effective return on my home is? It’s not like I’m going to sell in and live on the streets, am I? I can rent I guess, but I enjoy the freedom of ownership so that’s not for me.

Circular again, my home is an expense I am willing to pay to have the luxury of living there. Maybe if I was house poor and cash flow was an issue I would need to strongly evaluate all my options and consider moving into something small. I wonder if this type of mortgage/gone accounting is necessary for those in VHCOL areas where people are spending 4-5x wages on housing. In that situation I thing I would agree with pretty much all your analysis.

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