Anyone regret paying off mortgage early?

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Walkure
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Re: Anyone regret paying off mortgage early?

Post by Walkure »

HootingSloth wrote: Fri May 13, 2022 12:54 pm Interesting. I think it is typical to calculate net worth as assets minus liabilities and so decreasing a liability, e.g. a mortgage, by $100k increases net worth by $100k. The prepayment saves additional interest and so in the future further increases net worth by the accumulated amount of saved interest. Or, in other words, the prepayment increases your net worth at a given time by the difference between what your mortgage balance actually is at such time from what it would have been under the original amortization schedule. Seems much more straightforward and more consistent with how net worth is typically defined than this very complex suggestion.
It may be straightforward but it's incorrect because it ignores fact that the time value of the liability may not equal the mortgage rate. When you add up your net worth today, you are counting a dollar of present assets as offset by a dollar of future principal liability. Instead, you should be offsetting your assets today by the present value of your total future liabilities (principal + interest), which requires a discount rate. Prepaying the mortgage / exercising the "optionality" locks in that discount rate at your mortgage rate. So the future "saved interest" which prepayment avoids is exactly equal to the difference between your nominal future payments (P+I) and their present value. Thus, whether your net worth comes out ahead "at a given time" depends principally (pun intended) on whether the discounted future payments are valued at more or less than the outstanding principal at the time of payoff. Functionally, this is determined by the difference between the mortgage rate and the actual discount rate (i.e. the return you could have gotten had you invested the funds instead of paying down the mortgage) which is of course only knowable in hindsight. I believe this is what NiceUnparticularMan was referring to when he said:
NiceUnparticularMan wrote: Fri May 13, 2022 9:36 am Paying off long-term fixed-rate debt has the same returns risk as investing in matching nominal bonds, and then adds in the risks involved in lack of liquidity.
Last edited by Walkure on Fri May 13, 2022 4:02 pm, edited 1 time in total.
Grt2bOutdoors
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Re: Anyone regret paying off mortgage early?

Post by Grt2bOutdoors »

Apathizer wrote: Fri May 13, 2022 3:07 pm
JoeRetire wrote: Fri May 13, 2022 2:31 pm
Apathizer wrote: Fri May 13, 2022 1:47 pmConsider someone with a mortgage balance of say $300K on a home valued at $400K. In some areas property values fell by as much as 50% or more. Their previously $400K home is now only worth $200K, and they still owe $300K, so their home equity is now -$100K :shock:

Now consider someone with a paid for or mostly paid for home. Even though a 50% home equity decrease sucks, at least they don't have negative equity. Their home equity is $200K rather than -$100K. That's the risk of holding significant debt.
If you could snap your fingers and make your mortgage disappear, then everyone would do it.

But in this scenario, there's the little matter of the $300k it cost you to pay off the mortgage. That has to come from somewhere...
But if you pay off the mortgage risk is decreased. With significant mortgage debt there's more potential deputy. You have to pay interest on a potentially deprecating asset (house), and your portfolio might also depreciate. That's why debt is risky.
Debt is even riskier if you hold a floating rate instrument like an ARM (5/1 or 7/1, etc) in a rising rate environment that you have no control over. I'd like to know how those holding ARM's are feeling right now knowing the loan resets. Now lose your job to add to it.
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Goldilocks
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Re: Anyone regret paying off mortgage early?

Post by Goldilocks »

NAVigator wrote: Sat Jun 02, 2012 6:58 pm My only regret about paying off my mortgage early was that I didn't do it earlier. :)

Jerry
Same here :sharebeer
The 1st mix was too volatile, and the 2nd was too idle. But the 3rd allocation was just right!
HootingSloth
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Re: Anyone regret paying off mortgage early?

Post by HootingSloth »

Walkure wrote: Fri May 13, 2022 3:53 pm
HootingSloth wrote: Fri May 13, 2022 12:54 pm Interesting. I think it is typical to calculate net worth as assets minus liabilities and so decreasing a liability, e.g. a mortgage, by $100k increases net worth by $100k. The prepayment saves additional interest and so in the future further increases net worth by the accumulated amount of saved interest. Or, in other words, the prepayment increases your net worth at a given time by the difference between what your mortgage balance actually is at such time from what it would have been under the original amortization schedule. Seems much more straightforward and more consistent with how net worth is typically defined than this very complex suggestion.
It may be straightforward but it's incorrect because it ignores fact that the time value of the liability may not equal the mortgage rate. When you add up your net worth today, you are counting a dollar of present assets as offset by a dollar of future principal liability. Instead, you should be offsetting your assets today by the present value of your total future liabilities (principal + interest), which requires a discount rate. Prepaying the mortgage / exercising the "optionality" locks in that discount rate at your mortgage rate. So the future "saved interest" which prepayment avoids is exactly equal to the difference between your nominal future payments (P+I) and their present value. Thus, whether your net worth comes out ahead "at a given time" depends principally (pun intended) on whether the discounted future payments are valued at more or less than the outstanding principal at the time of payoff. Functionally, this is determined by the difference between the mortgage rate and the actual discount rate (i.e. the return you could have gotten had you invested the funds instead of paying down the mortgage) which is of course only knowable in hindsight. I believe this is what NiceUnparticularMan was referring to when he said:
NiceUnparticularMan wrote: Fri May 13, 2022 9:36 am Paying off long-term fixed-rate debt has the same returns risk as investing in matching nominal bonds, and then adds in the risks involved in lack of liquidity.
This makes a lot of sense. Thanks.
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harikaried
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Re: Anyone regret paying off mortgage early?

Post by harikaried »

Grt2bOutdoors wrote: Fri May 13, 2022 3:57 pmDebt is even riskier if you hold a floating rate instrument like an ARM (5/1 or 7/1, etc) in a rising rate environment that you have no control over
If we got our 5/5 ARM a year earlier, it seems like our rate would have dropped by 1% or even a few months earlier would have still been lower. Instead it'll adjust soon probably increasing by at least 1%, so we'll be paying off our mortgage early as it'll be more expensive than whatever comparable bonds would yield.
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Re: Anyone regret paying off mortgage early?

Post by bluebolt »

Apathizer wrote: Fri May 13, 2022 1:47 pm True, but paying off the mortgage reduces risk and uncertainty. Debt always increases risk. By paying off the mortgage you're creating a floor for potential losses.
It's difficult to be wrong three times in three sentences, but you've managed to do it.

Paying off a mortgage reduces certain risks and increases others (like liquidity risk, inflation risk).

Debt is a tool. It can increase risk, but it doesn't *always* increase risk. If I had a $500K 30 year 2.5% mortgage and a $500K 5% 30 year bond, that debt is not increasing my risk.

The last one is a strange statement. If you're looking for principal protection, US Treasuries are surely a safer bet than real estate from a downside protection perspective (as are lots of other investments). Otherwise, the floor for losses is of course the entirety of your principal, whether it's your home or your VTSAX. "But wait!" you say, the likelihood of your home going to zero is far less than VTSAX! Which of course means that you're looking at risk-adjusted likelihood. But then the risk-adjusted likelihood of paying off your historically low-rate mortgage is a much worse bet than investing in a pretty conservative asset allocation. Or, at this point, a principal-protected bond ladder.
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grabiner
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Re: Anyone regret paying off mortgage early?

Post by grabiner »

Grt2bOutdoors wrote: Fri May 13, 2022 3:57 pm
Apathizer wrote: Fri May 13, 2022 3:07 pm But if you pay off the mortgage risk is decreased. With significant mortgage debt there's more potential deputy. You have to pay interest on a potentially deprecating asset (house), and your portfolio might also depreciate. That's why debt is risky.
Debt is even riskier if you hold a floating rate instrument like an ARM (5/1 or 7/1, etc) in a rising rate environment that you have no control over. I'd like to know how those holding ARM's are feeling right now knowing the loan resets. Now lose your job to add to it.
This is the reason that the fair bond comparison for an ARM is the time until the next rate resets, rather than the full term. If you have a 5-year ARM, you will be forced to refinance in five years, either according to the original ARM terms which will give you a new rate (and new payment amount), or according to whatever terms you can get in a refinance. Therefore, you get the full benefit from any prepayment in five years, as this reduces the amount you need to borrow at the then-current rate.

If you have a 5/1 ARM that you don't want to pay off but want to liability-match, you can hold an amount equal to the principal in five-year bonds. When those mature, you can decide whether to pay off the mortgage; if you don't, the comparable investment becomes short-term bonds.
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Apathizer
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Re: Anyone regret paying off mortgage early?

Post by Apathizer »

bluebolt wrote: Fri May 13, 2022 7:23 pm
Apathizer wrote: Fri May 13, 2022 1:47 pm True, but paying off the mortgage reduces risk and uncertainty. Debt always increases risk. By paying off the mortgage you're creating a floor for potential losses.
It's difficult to be wrong three times in three sentences, but you've managed to do it.

Paying off a mortgage reduces certain risks and increases others (like liquidity risk, inflation risk).

Debt is a tool. It can increase risk, but it doesn't *always* increase risk. If I had a $500K 30 year 2.5% mortgage and a $500K 5% 30 year bond, that debt is not increasing my risk.

The last one is a strange statement. If you're looking for principal protection, US Treasuries are surely a safer bet than real estate from a downside protection perspective (as are lots of other investments). Otherwise, the floor for losses is of course the entirety of your principal, whether it's your home or your VTSAX. "But wait!" you say, the likelihood of your home going to zero is far less than VTSAX! Which of course means that you're looking at risk-adjusted likelihood. But then the risk-adjusted likelihood of paying off your historically low-rate mortgage is a much worse bet than investing in a pretty conservative asset allocation. Or, at this point, a principal-protected bond ladder.
That assumes you hold the bond to maturity which might not be the case. 30 years is a long time and lots can happen.

Paying off the mortgage eliminates known expenses. That in and of itself is simpler and reduces risk. Whenever you have significant debt there is a greater chance of negative equity whereas with no debt or very minimal debt there's no chance of significant negative equity.
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bling
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Re: Anyone regret paying off mortgage early?

Post by bling »

really glad i refinanced (twice!) during the pandemic. locked in a 30 year 2.5%. i have enough in my investments to pay off the balance, but with inflation being 8+% right now i'm practically being paid to hold the mortgage.
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Re: Anyone regret paying off mortgage early?

Post by Admiral »

Apathizer wrote: Fri May 13, 2022 10:47 pm
bluebolt wrote: Fri May 13, 2022 7:23 pm
Apathizer wrote: Fri May 13, 2022 1:47 pm True, but paying off the mortgage reduces risk and uncertainty. Debt always increases risk. By paying off the mortgage you're creating a floor for potential losses.
It's difficult to be wrong three times in three sentences, but you've managed to do it.

Paying off a mortgage reduces certain risks and increases others (like liquidity risk, inflation risk).

Debt is a tool. It can increase risk, but it doesn't *always* increase risk. If I had a $500K 30 year 2.5% mortgage and a $500K 5% 30 year bond, that debt is not increasing my risk.

The last one is a strange statement. If you're looking for principal protection, US Treasuries are surely a safer bet than real estate from a downside protection perspective (as are lots of other investments). Otherwise, the floor for losses is of course the entirety of your principal, whether it's your home or your VTSAX. "But wait!" you say, the likelihood of your home going to zero is far less than VTSAX! Which of course means that you're looking at risk-adjusted likelihood. But then the risk-adjusted likelihood of paying off your historically low-rate mortgage is a much worse bet than investing in a pretty conservative asset allocation. Or, at this point, a principal-protected bond ladder.
That assumes you hold the bond to maturity which might not be the case. 30 years is a long time and lots can happen.

Paying off the mortgage eliminates known expenses. That in and of itself is simpler and reduces risk. Whenever you have significant debt there is a greater chance of negative equity whereas with no debt or very minimal debt there's no chance of significant negative equity.
"Negative equity" is based on market forces in real estate, and only applies if/when you plan to sell. If you're not selling, the market value of your home is irrelevant to you (with the exception of using it for loan collateral). Sure, you can use it to track your net worth, if that matters to you, but that's just paper wealth until you actually sell.

You continue to talk about "paying off the mortgage" as if that money just comes out of thin air, and using it to pay off a debt "eliminates risk" and has nothing but positive consequences. As I've noted many times on this thread, if you already have the money to pay off your mortgage, you have no risk: default risk, or market risk. You are simply moving the money from one pocket to another, except that one pocket is spendable dollars and the other is non-spendable dollars (save a collateralized debt like a HELOC.) "Eliminating known expenses" does not help you in any way if you have the money to pay those expenses just sitting around.

The only thing that's relevant is the interest savings on the pre-payment. During inflationary periods, you are using present, more valuable dollars to save future, less valuable dollars. You continue to (seemingly) not understand this concept after weeks of people trying to explain it. I do understand that many people (including Bhs) have an almost illogical aversion to debt, pushed by the Dave Ramseys of the world. But debt is a tool that has been used for centuries to create wealth. Like any tool, if you don't handle it properly it can hurt you. If you know how to use it, it can be quite useful.
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Re: Anyone regret paying off mortgage early?

Post by bling »

Admiral wrote: Sat May 14, 2022 7:50 am But debt is a tool that has been used for centuries to create wealth. Like any tool, if you don't handle it properly it can hurt you. If you know how to use it, it can be quite useful.
one day i hope to be so wealthy that all of my spending will be borrowed debt against my portfolio. and when i pass, my heirs will get a step-up cost basis on unrealized gains to pay off that debt for free. :sharebeer
Ivygirl
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Re: Anyone regret paying off mortgage early?

Post by Ivygirl »

Admiral wrote: Sat May 14, 2022 7:50 am I do understand that many people (including Bhs) have an almost illogical aversion to debt, pushed by the Dave Ramseys of the world. But debt is a tool that has been used for centuries to create wealth. Like any tool, if you don't handle it properly it can hurt you. If you know how to use it, it can be quite useful.
Whatever the merits are of paying off a mortgage early, I just have to say, saying debt is a tool is inaccurate. It implies that debt will do what you tell it to. A tool is inert and your hand wields it as you will. A debt has a banker on the other end of it. So it's like two of you are using the "tool."
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Re: Anyone regret paying off mortgage early?

Post by Admiral »

Ivygirl wrote: Sat May 14, 2022 8:03 am
Admiral wrote: Sat May 14, 2022 7:50 am I do understand that many people (including Bhs) have an almost illogical aversion to debt, pushed by the Dave Ramseys of the world. But debt is a tool that has been used for centuries to create wealth. Like any tool, if you don't handle it properly it can hurt you. If you know how to use it, it can be quite useful.
Whatever the merits are of paying off a mortgage early, I just have to say, saying debt is a tool is inaccurate. It implies that debt will do what you tell it to. A tool is inert and your hand wields it as you will. A debt has a banker on the other end of it. So it's like two of you are using the "tool."
Eh? What does the banker have to do with my decision to pay off my non-callable debt? Zero. But for the grammar police: some tools are complicated and have many moving parts. How’s that?
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Re: Anyone regret paying off mortgage early?

Post by Ivygirl »

Admiral wrote: Sat May 14, 2022 8:08 am
Ivygirl wrote: Sat May 14, 2022 8:03 am
Admiral wrote: Sat May 14, 2022 7:50 am I do understand that many people (including Bhs) have an almost illogical aversion to debt, pushed by the Dave Ramseys of the world. But debt is a tool that has been used for centuries to create wealth. Like any tool, if you don't handle it properly it can hurt you. If you know how to use it, it can be quite useful.
Whatever the merits are of paying off a mortgage early, I just have to say, saying debt is a tool is inaccurate. It implies that debt will do what you tell it to. A tool is inert and your hand wields it as you will. A debt has a banker on the other end of it. So it's like two of you are using the "tool."
Eh? What does the banker have to do with my decision to pay off my non-callable debt? Zero. But for the grammar police: some tools are complicated and have many moving parts. How’s that?
I'm not the grammar police, I am (for this instance) the metaphor police. Debt is not a tool. it is an agreement between you and a creditor. Creditors have agendas, and tools do not. So tool is an inaccurate metaphor and may mislead the conversation as it implies debt is completely under your control. A creditor may tell you debt is a tool.
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Re: Anyone regret paying off mortgage early?

Post by Admiral »

Ivygirl wrote: Sat May 14, 2022 8:16 am
Admiral wrote: Sat May 14, 2022 8:08 am
Ivygirl wrote: Sat May 14, 2022 8:03 am
Admiral wrote: Sat May 14, 2022 7:50 am I do understand that many people (including Bhs) have an almost illogical aversion to debt, pushed by the Dave Ramseys of the world. But debt is a tool that has been used for centuries to create wealth. Like any tool, if you don't handle it properly it can hurt you. If you know how to use it, it can be quite useful.
Whatever the merits are of paying off a mortgage early, I just have to say, saying debt is a tool is inaccurate. It implies that debt will do what you tell it to. A tool is inert and your hand wields it as you will. A debt has a banker on the other end of it. So it's like two of you are using the "tool."
Eh? What does the banker have to do with my decision to pay off my non-callable debt? Zero. But for the grammar police: some tools are complicated and have many moving parts. How’s that?
I'm not the grammar police, I am (for this instance) the metaphor police. Debt is not a tool. it is an agreement between you and a creditor. Creditors have agendas, and tools do not. So tool is an inaccurate metaphor and may mislead the conversation as it implies debt is completely under your control. A creditor may tell you debt is a tool.
Give me a break. Of course the lender is using the debt as a tool for their own ends. So what? That does nothing to negate the borrower’s ability to use debt as they please, as long as the terms are known and agreed to. No one has claimed that a lending agreement does not have contingencies.

I’d prefer to stay on topic and not waste others’ time debating shades of gray. If you want to address the substance of my point, have at it. Otherwise let’s move on.
Ivygirl
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Re: Anyone regret paying off mortgage early?

Post by Ivygirl »

Admiral wrote: Sat May 14, 2022 8:27 am
Ivygirl wrote: Sat May 14, 2022 8:16 am
Admiral wrote: Sat May 14, 2022 8:08 am
Ivygirl wrote: Sat May 14, 2022 8:03 am
Admiral wrote: Sat May 14, 2022 7:50 am I do understand that many people (including Bhs) have an almost illogical aversion to debt, pushed by the Dave Ramseys of the world. But debt is a tool that has been used for centuries to create wealth. Like any tool, if you don't handle it properly it can hurt you. If you know how to use it, it can be quite useful.
Whatever the merits are of paying off a mortgage early, I just have to say, saying debt is a tool is inaccurate. It implies that debt will do what you tell it to. A tool is inert and your hand wields it as you will. A debt has a banker on the other end of it. So it's like two of you are using the "tool."
Eh? What does the banker have to do with my decision to pay off my non-callable debt? Zero. But for the grammar police: some tools are complicated and have many moving parts. How’s that?
I'm not the grammar police, I am (for this instance) the metaphor police. Debt is not a tool. it is an agreement between you and a creditor. Creditors have agendas, and tools do not. So tool is an inaccurate metaphor and may mislead the conversation as it implies debt is completely under your control. A creditor may tell you debt is a tool.
Give me a break. Of course the lender is using the debt as a tool for their own ends. So what? That does nothing to negate the borrower’s ability to use debt as they please, as long as the terms are known and agreed to. No one has claimed that a lending agreement does not have contingencies.

I’d prefer to stay on topic and not waste others’ time debating shades of gray. If you want to address the substance of my point, have at it. Otherwise let’s move on.
Sure. I already said everything I wanted.
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corn18
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Re: Anyone regret paying off mortgage early?

Post by corn18 »

Ivygirl wrote: Sat May 14, 2022 8:16 am
Admiral wrote: Sat May 14, 2022 8:08 am
Ivygirl wrote: Sat May 14, 2022 8:03 am
Admiral wrote: Sat May 14, 2022 7:50 am I do understand that many people (including Bhs) have an almost illogical aversion to debt, pushed by the Dave Ramseys of the world. But debt is a tool that has been used for centuries to create wealth. Like any tool, if you don't handle it properly it can hurt you. If you know how to use it, it can be quite useful.
Whatever the merits are of paying off a mortgage early, I just have to say, saying debt is a tool is inaccurate. It implies that debt will do what you tell it to. A tool is inert and your hand wields it as you will. A debt has a banker on the other end of it. So it's like two of you are using the "tool."
Eh? What does the banker have to do with my decision to pay off my non-callable debt? Zero. But for the grammar police: some tools are complicated and have many moving parts. How’s that?
I'm not the grammar police, I am (for this instance) the metaphor police. Debt is not a tool. it is an agreement between you and a creditor. Creditors have agendas, and tools do not. So tool is an inaccurate metaphor and may mislead the conversation as it implies debt is completely under your control. A creditor may tell you debt is a tool.
I wonder if my mortgage holder enjoys holding a note for 2.25% nominal fixed rate for 29 more years?
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Re: Anyone regret paying off mortgage early?

Post by coachd50 »

Apathizer wrote: Fri May 13, 2022 1:47 pm
HootingSloth wrote: Fri May 13, 2022 1:22 pm
ScubaHogg wrote: Fri May 13, 2022 1:18 pm
HootingSloth wrote: Fri May 13, 2022 12:54 pm
Interesting. I think it is typical to calculate net worth as assets minus liabilities and so decreasing a liability, e.g. a mortgage, by $100k increases net worth by $100k.
Never minding the complex solution above, i don’t think what you said is accurate. If you use assets to pay off $100k mortgage your net worth has not changed at all. You’ve just decreased both your assets and liabilities by $100k.
Sure. If you spend, say, $100k you were already holding in cash then your assets decrease by $100k and your liabilities decrease by $100k, leaving your net worth unchanged. Same thing, though, if you spend $100k in cash to buy $100k in bonds. But, with the bonds your future changes in net worth are exposed to fluctuations in interest rates while we would not normally say the same with the prepayment (unless we calculate net worth using NiceUnparticularMan's method). Just an observation that either the way he is viewing things is a bit odd or the way we normally calculate net worth is a bit odd (or both).
True, but paying off the mortgage reduces risk and uncertainty. Debt always increases risk. By paying off the mortgage you're creating a floor for potential losses.

Think about the 2008-2009 financial crisis when home values plummeted. Consider someone with a mortgage balance of say $300K on a home valued at $400K. In some areas property values fell by as much as 50% or more. Their previously $400K home is now only worth $200K, and they still owe $300K, so their home equity is now -$100K :shock:

Now consider someone with a paid for or mostly paid for home. Even though a 50% home equity decrease sucks, at least they don't have negative equity. Their home equity is $200K rather than -$100K. That's the risk of holding significant debt.
but that person ALSO doesn't have whatever cash/assets they used to pay for or mostly pay for that home.

In this thread, there has been an odd trend of those advocating for paying off a mortgage to seemingly never consider the funds used to pay off that mortgage. I don't understand how one can point to one side of the balance sheet and say "LOOK THATS NEGATIVE EQUITY' and not realize there is another side of the equation where someone can say "Look, that's 'large' balance"
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Re: Anyone regret paying off mortgage early?

Post by Tom_T »

Once someone says "paying off the mortgage makes me feel better", then the discussion is over, and that's fine. How many times has it been said around here that when Bogleheads disagree on something, then it probably doesn't matter much one way or the other? Paying off the mortgage early isn't going to ruin one's financial life. I prefer to keep mine, and that's not going to ruin my life, either. Sometimes it feels like certain threads are arguing just for the sake of arguing. :happy
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Re: Anyone regret paying off mortgage early?

Post by Apathizer »

Ivygirl wrote: Sat May 14, 2022 8:16 am
Admiral wrote: Sat May 14, 2022 8:08 am
Ivygirl wrote: Sat May 14, 2022 8:03 am
Admiral wrote: Sat May 14, 2022 7:50 am I do understand that many people (including Bhs) have an almost illogical aversion to debt, pushed by the Dave Ramseys of the world. But debt is a tool that has been used for centuries to create wealth. Like any tool, if you don't handle it properly it can hurt you. If you know how to use it, it can be quite useful.
Whatever the merits are of paying off a mortgage early, I just have to say, saying debt is a tool is inaccurate. It implies that debt will do what you tell it to. A tool is inert and your hand wields it as you will. A debt has a banker on the other end of it. So it's like two of you are using the "tool."
Eh? What does the banker have to do with my decision to pay off my non-callable debt? Zero. But for the grammar police: some tools are complicated and have many moving parts. How’s that?
I'm not the grammar police, I am (for this instance) the metaphor police. Debt is not a tool. it is an agreement between you and a creditor. Creditors have agendas, and tools do not. So tool is an inaccurate metaphor and may mislead the conversation as it implies debt is completely under your control. A creditor may tell you debt is a tool.
I doubt those advocating for holding mortgage debt advocate holding other forms of debt like car loans or cc debt, but the principles are the same even if the interest rate is different. While you can treat borrowed money as an investment tool, doing so is inherently riskier for reason we've discussed ad nauseum.
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Apathizer
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Re: Anyone regret paying off mortgage early?

Post by Apathizer »

coachd50 wrote: Sat May 14, 2022 9:32 am
Apathizer wrote: Fri May 13, 2022 1:47 pm
HootingSloth wrote: Fri May 13, 2022 1:22 pm
ScubaHogg wrote: Fri May 13, 2022 1:18 pm
HootingSloth wrote: Fri May 13, 2022 12:54 pm
Interesting. I think it is typical to calculate net worth as assets minus liabilities and so decreasing a liability, e.g. a mortgage, by $100k increases net worth by $100k.
Never minding the complex solution above, i don’t think what you said is accurate. If you use assets to pay off $100k mortgage your net worth has not changed at all. You’ve just decreased both your assets and liabilities by $100k.
Sure. If you spend, say, $100k you were already holding in cash then your assets decrease by $100k and your liabilities decrease by $100k, leaving your net worth unchanged. Same thing, though, if you spend $100k in cash to buy $100k in bonds. But, with the bonds your future changes in net worth are exposed to fluctuations in interest rates while we would not normally say the same with the prepayment (unless we calculate net worth using NiceUnparticularMan's method). Just an observation that either the way he is viewing things is a bit odd or the way we normally calculate net worth is a bit odd (or both).
True, but paying off the mortgage reduces risk and uncertainty. Debt always increases risk. By paying off the mortgage you're creating a floor for potential losses.

Think about the 2008-2009 financial crisis when home values plummeted. Consider someone with a mortgage balance of say $300K on a home valued at $400K. In some areas property values fell by as much as 50% or more. Their previously $400K home is now only worth $200K, and they still owe $300K, so their home equity is now -$100K :shock:

Now consider someone with a paid for or mostly paid for home. Even though a 50% home equity decrease sucks, at least they don't have negative equity. Their home equity is $200K rather than -$100K. That's the risk of holding significant debt.
but that person ALSO doesn't have whatever cash/assets they used to pay for or mostly pay for that home.

In this thread, there has been an odd trend of those advocating for paying off a mortgage to seemingly never consider the funds used to pay off that mortgage. I don't understand how one can point to one side of the balance sheet and say "LOOK THATS NEGATIVE EQUITY' and not realize there is another side of the equation where someone can say "Look, that's 'large' balance"
I get that, but you don't seem to understand borrowing to invest is doubly riskier due to the interest factor. When you invest with a mortgage that's essentially what you're doing. If you have a mortgage balance of $100K at 2.5% and $150K in taxable investment, in practical terms you're taking a $100K loan to use for investing.

So the practical question you need to ask is: Would you borrow $100K at 2.5% to use for investing? If the answer is yes, then you should keep the mortgage. If no, then pay it off. Under those terms my answer is maybe. I'm really not sure. My mortgage interest rate is 4.2%. No way would I borrow at that rate for investing, so to me paying off the mortgage sooner rather than later makes sense.
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Re: Anyone regret paying off mortgage early?

Post by CletusCaddy »

Apathizer wrote: Sat May 14, 2022 12:16 pm
coachd50 wrote: Sat May 14, 2022 9:32 am
Apathizer wrote: Fri May 13, 2022 1:47 pm
HootingSloth wrote: Fri May 13, 2022 1:22 pm
ScubaHogg wrote: Fri May 13, 2022 1:18 pm

Never minding the complex solution above, i don’t think what you said is accurate. If you use assets to pay off $100k mortgage your net worth has not changed at all. You’ve just decreased both your assets and liabilities by $100k.
Sure. If you spend, say, $100k you were already holding in cash then your assets decrease by $100k and your liabilities decrease by $100k, leaving your net worth unchanged. Same thing, though, if you spend $100k in cash to buy $100k in bonds. But, with the bonds your future changes in net worth are exposed to fluctuations in interest rates while we would not normally say the same with the prepayment (unless we calculate net worth using NiceUnparticularMan's method). Just an observation that either the way he is viewing things is a bit odd or the way we normally calculate net worth is a bit odd (or both).
True, but paying off the mortgage reduces risk and uncertainty. Debt always increases risk. By paying off the mortgage you're creating a floor for potential losses.

Think about the 2008-2009 financial crisis when home values plummeted. Consider someone with a mortgage balance of say $300K on a home valued at $400K. In some areas property values fell by as much as 50% or more. Their previously $400K home is now only worth $200K, and they still owe $300K, so their home equity is now -$100K :shock:

Now consider someone with a paid for or mostly paid for home. Even though a 50% home equity decrease sucks, at least they don't have negative equity. Their home equity is $200K rather than -$100K. That's the risk of holding significant debt.
but that person ALSO doesn't have whatever cash/assets they used to pay for or mostly pay for that home.

In this thread, there has been an odd trend of those advocating for paying off a mortgage to seemingly never consider the funds used to pay off that mortgage. I don't understand how one can point to one side of the balance sheet and say "LOOK THATS NEGATIVE EQUITY' and not realize there is another side of the equation where someone can say "Look, that's 'large' balance"
I get that, but you don't seem to understand borrowing to invest is doubly riskier due to the interest factor. When you invest with a mortgage that's essentially what you're doing. If you have a mortgage balance of $100K at 2.5% and $150K in taxable investment, in practical terms you're taking a $100K loan to use for investing.

So the practical question you need to ask is: Would you borrow $100K at 2.5% to use for investing? If the answer is yes, then you should keep the mortgage. If no, then pay it off. Under those terms my answer is maybe. I'm really not sure. My mortgage interest rate is 4.2%. No way would I borrow at that rate for investing, so to me paying off the mortgage sooner rather than later makes sense.
My mortgage rate is 1.5%, would you change your mind if it were that low?
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Re: Anyone regret paying off mortgage early?

Post by queso »

Apathizer wrote: Sat May 14, 2022 12:12 pm
Ivygirl wrote: Sat May 14, 2022 8:16 am
Admiral wrote: Sat May 14, 2022 8:08 am
Ivygirl wrote: Sat May 14, 2022 8:03 am
Admiral wrote: Sat May 14, 2022 7:50 am I do understand that many people (including Bhs) have an almost illogical aversion to debt, pushed by the Dave Ramseys of the world. But debt is a tool that has been used for centuries to create wealth. Like any tool, if you don't handle it properly it can hurt you. If you know how to use it, it can be quite useful.
Whatever the merits are of paying off a mortgage early, I just have to say, saying debt is a tool is inaccurate. It implies that debt will do what you tell it to. A tool is inert and your hand wields it as you will. A debt has a banker on the other end of it. So it's like two of you are using the "tool."
Eh? What does the banker have to do with my decision to pay off my non-callable debt? Zero. But for the grammar police: some tools are complicated and have many moving parts. How’s that?
I'm not the grammar police, I am (for this instance) the metaphor police. Debt is not a tool. it is an agreement between you and a creditor. Creditors have agendas, and tools do not. So tool is an inaccurate metaphor and may mislead the conversation as it implies debt is completely under your control. A creditor may tell you debt is a tool.
I doubt those advocating for holding mortgage debt advocate holding other forms of debt like car loans or cc debt, but the principles are the same even if the interest rate is different. While you can treat borrowed money as an investment tool, doing so is inherently riskier for reason we've discussed ad nauseum.
I'm prob an outlier, but am holding a 15 year mortgage at 2% and a 3 year auto loan at 2.1%. We're usually cash people, but for me it came down to the rate. I just wasn't willing to part with cash when they were offering 2% rates.
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Re: Anyone regret paying off mortgage early?

Post by Apathizer »

CletusCaddy wrote: Sat May 14, 2022 12:35 pmMy mortgage rate is 1.5%, would you change your mind if it were that low?
Hmm. At that rate I'd probably be more inclined to. But once I got to the point my taxable investments are worth significantly more than my mortgage balance I'd probably pay it off just to be done with it. If I had say a $50K mortgage balance and $100K investments I'd probably just pay it off. That would leave plenty for other expenses.
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Re: Anyone regret paying off mortgage early?

Post by Apathizer »

queso wrote: Sat May 14, 2022 12:43 pmI'm prob an outlier, but am holding a 15 year mortgage at 2% and a 3 year auto loan at 2.1%. We're usually cash people, but for me it came down to the rate. I just wasn't willing to part with cash when they were offering 2% rates.
The mortgage I understand, but not the car. A house is much more likely to appreciate while in the long-term a car invariably depreciates. Holding a loan on a depreciating asset doesn't make sense.
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Re: Anyone regret paying off mortgage early?

Post by queso »

Apathizer wrote: Sat May 14, 2022 12:51 pm
queso wrote: Sat May 14, 2022 12:43 pmI'm prob an outlier, but am holding a 15 year mortgage at 2% and a 3 year auto loan at 2.1%. We're usually cash people, but for me it came down to the rate. I just wasn't willing to part with cash when they were offering 2% rates.
The mortgage I understand, but not the car. A house is much more likely to appreciate while in the long-term a car invariably depreciates. Holding a loan on a depreciating asset doesn't make sense.
I was willing to pay 2% for the ability to deploy the cash elsewhere.
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Re: Anyone regret paying off mortgage early?

Post by Apathizer »

queso wrote: Sat May 14, 2022 12:55 pm
Apathizer wrote: Sat May 14, 2022 12:51 pm
queso wrote: Sat May 14, 2022 12:43 pmI'm prob an outlier, but am holding a 15 year mortgage at 2% and a 3 year auto loan at 2.1%. We're usually cash people, but for me it came down to the rate. I just wasn't willing to part with cash when they were offering 2% rates.
The mortgage I understand, but not the car. A house is much more likely to appreciate while in the long-term a car invariably depreciates. Holding a loan on a depreciating asset doesn't make sense.
I was willing to pay 2% for the ability to deploy the cash elsewhere.
That still doesn't really make sense considering the double-jeopardy of a car loan. You're paying loan interest and you're also losing money on car equity depreciation. That's why a car loan is one of the worst loans you can take.
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Re: Anyone regret paying off mortgage early?

Post by coachd50 »

Apathizer wrote: Sat May 14, 2022 12:16 pm
coachd50 wrote: Sat May 14, 2022 9:32 am
Apathizer wrote: Fri May 13, 2022 1:47 pm
HootingSloth wrote: Fri May 13, 2022 1:22 pm
ScubaHogg wrote: Fri May 13, 2022 1:18 pm

Never minding the complex solution above, i don’t think what you said is accurate. If you use assets to pay off $100k mortgage your net worth has not changed at all. You’ve just decreased both your assets and liabilities by $100k.
Sure. If you spend, say, $100k you were already holding in cash then your assets decrease by $100k and your liabilities decrease by $100k, leaving your net worth unchanged. Same thing, though, if you spend $100k in cash to buy $100k in bonds. But, with the bonds your future changes in net worth are exposed to fluctuations in interest rates while we would not normally say the same with the prepayment (unless we calculate net worth using NiceUnparticularMan's method). Just an observation that either the way he is viewing things is a bit odd or the way we normally calculate net worth is a bit odd (or both).
True, but paying off the mortgage reduces risk and uncertainty. Debt always increases risk. By paying off the mortgage you're creating a floor for potential losses.

Think about the 2008-2009 financial crisis when home values plummeted. Consider someone with a mortgage balance of say $300K on a home valued at $400K. In some areas property values fell by as much as 50% or more. Their previously $400K home is now only worth $200K, and they still owe $300K, so their home equity is now -$100K :shock:

Now consider someone with a paid for or mostly paid for home. Even though a 50% home equity decrease sucks, at least they don't have negative equity. Their home equity is $200K rather than -$100K. That's the risk of holding significant debt.
but that person ALSO doesn't have whatever cash/assets they used to pay for or mostly pay for that home.

In this thread, there has been an odd trend of those advocating for paying off a mortgage to seemingly never consider the funds used to pay off that mortgage. I don't understand how one can point to one side of the balance sheet and say "LOOK THATS NEGATIVE EQUITY' and not realize there is another side of the equation where someone can say "Look, that's 'large' balance"
I get that, but you don't seem to understand borrowing to invest is doubly riskier due to the interest factor. When you invest with a mortgage that's essentially what you're doing. If you have a mortgage balance of $100K at 2.5% and $150K in taxable investment, in practical terms you're taking a $100K loan to use for investing.

So the practical question you need to ask is: Would you borrow $100K at 2.5% to use for investing? If the answer is yes, then you should keep the mortgage. If no, then pay it off. Under those terms my answer is maybe. I'm really not sure. My mortgage interest rate is 4.2%. No way would I borrow at that rate for investing, so to me paying off the mortgage sooner rather than later makes sense.
Respectfully, I think almost everyone who has been supporting a different viewpoint here understands that, and that idea is referenced in their comments. What seems to often be missing is the math that I pointed out.

I think the biggest reason for so much back and forth is that things aren't well defined in much of the discussion. A big generic term like "risk" is often used, but in reality the various risks are different for different individuals. For some, the risk of having to work more years is a big factor. For others, eh, not a big deal. For some, the risk of increasing the chance of losing a home and having to uproot a family is huge. For others, not so much. For some, the end goal seems to be winning on paper. For some, that isn't as important as having "enough" and the best life possible.
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Re: Anyone regret paying off mortgage early?

Post by queso »

Apathizer wrote: Sat May 14, 2022 1:04 pm
queso wrote: Sat May 14, 2022 12:55 pm
Apathizer wrote: Sat May 14, 2022 12:51 pm
queso wrote: Sat May 14, 2022 12:43 pmI'm prob an outlier, but am holding a 15 year mortgage at 2% and a 3 year auto loan at 2.1%. We're usually cash people, but for me it came down to the rate. I just wasn't willing to part with cash when they were offering 2% rates.
The mortgage I understand, but not the car. A house is much more likely to appreciate while in the long-term a car invariably depreciates. Holding a loan on a depreciating asset doesn't make sense.
I was willing to pay 2% for the ability to deploy the cash elsewhere.
That still doesn't really make sense considering the double-jeopardy of a car loan. You're paying loan interest and you're also losing money on car equity depreciation. That's why a car loan is one of the worst loans you can take.
Interesting how people see things differently. I guess that's why it's "personal" finance. For me the depreciating aspect of the asset didn't enter into it. It's going to depreciate whether or not I pay cash or finance it. Financing it didn't affect how much car I bought - I was going to buy the same car whether or not I paid cash or financed it. Mortgage plus car loan are less than 1 year annual income and NW is roughly 25-30x spending. I didn't feel there was much risk/jeopardy involved.
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Re: Anyone regret paying off mortgage early?

Post by Apathizer »

queso wrote: Sat May 14, 2022 1:20 pm
Apathizer wrote: Sat May 14, 2022 1:04 pm
queso wrote: Sat May 14, 2022 12:55 pm
Apathizer wrote: Sat May 14, 2022 12:51 pm
queso wrote: Sat May 14, 2022 12:43 pmI'm prob an outlier, but am holding a 15 year mortgage at 2% and a 3 year auto loan at 2.1%. We're usually cash people, but for me it came down to the rate. I just wasn't willing to part with cash when they were offering 2% rates.
The mortgage I understand, but not the car. A house is much more likely to appreciate while in the long-term a car invariably depreciates. Holding a loan on a depreciating asset doesn't make sense.
I was willing to pay 2% for the ability to deploy the cash elsewhere.
That still doesn't really make sense considering the double-jeopardy of a car loan. You're paying loan interest and you're also losing money on car equity depreciation. That's why a car loan is one of the worst loans you can take.
Interesting how people see things differently. I guess that's why it's "personal" finance. For me the depreciating aspect of the asset didn't enter into it. It's going to depreciate whether or not I pay cash or finance it. Financing it didn't affect how much car I bought - I was going to buy the same car whether or not I paid cash or financed it. Mortgage plus car loan are less than 1 year annual income and NW is roughly 25-30x spending. I didn't feel there was much risk/jeopardy involved.
With those resources I don't see any benefit in financing a car. Borrowing to pay for depreciating consumer items is always less efficient than just paying outright. Then again, with your resources it probably won't make much difference.
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AnEngineer
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Re: Anyone regret paying off mortgage early?

Post by AnEngineer »

Tom_T wrote: Sat May 14, 2022 9:54 am Once someone says "paying off the mortgage makes me feel better", then the discussion is over, and that's fine. How many times has it been said around here that when Bogleheads disagree on something, then it probably doesn't matter much one way or the other? Paying off the mortgage early isn't going to ruin one's financial life. I prefer to keep mine, and that's not going to ruin my life, either. Sometimes it feels like certain threads are arguing just for the sake of arguing. :happy
It's fair to ask how much that feeling is worth. If it cost $1 or $1M there wouldn't be much discussion. If you came in and said that you estimated the cost at $20,000 and are happy to pay it I agree there'd be little discussion (assuming the numbers are reasonable). But if you say that it makes you feel better so you don't care about the numbers that means you're willing to pay $1M, I don't believe that's actually true.
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Re: Anyone regret paying off mortgage early?

Post by Apathizer »

AnEngineer wrote: Sat May 14, 2022 2:45 pm
Tom_T wrote: Sat May 14, 2022 9:54 am Once someone says "paying off the mortgage makes me feel better", then the discussion is over, and that's fine. How many times has it been said around here that when Bogleheads disagree on something, then it probably doesn't matter much one way or the other? Paying off the mortgage early isn't going to ruin one's financial life. I prefer to keep mine, and that's not going to ruin my life, either. Sometimes it feels like certain threads are arguing just for the sake of arguing. :happy
It's fair to ask how much that feeling is worth. If it cost $1 or $1M there wouldn't be much discussion. If you came in and said that you estimated the cost at $20,000 and are happy to pay it I agree there'd be little discussion (assuming the numbers are reasonable). But if you say that it makes you feel better so you don't care about the numbers that means you're willing to pay $1M, I don't believe that's actually true.
Since there's no evidence clairvoyance is real we can't know in advance. We only know our balance and interest rate, and from that can extrapolate total interest paid.

As it transpired, selling most of my taxable assets earlier this year to pay off most of my mortgage worked out really well for me. Previously about 80% of my mortgage payment was interest; now it's only about 8% and the total remaining interest is only about $700. That means I didn't lose nearly as much when the markets plummeted a few weeks later, I'm building equity much more quickly, and I've greatly reduced negative equity potential.

Of course none of this was inevitable or expected, but illustrates how significant debt significantly increases risk. And yes, being debt free also has significant psychological benefits that shouldn't be dismissed either.
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Re: Anyone regret paying off mortgage early?

Post by coachd50 »

Apathizer wrote: Sat May 14, 2022 3:01 pm
AnEngineer wrote: Sat May 14, 2022 2:45 pm
Tom_T wrote: Sat May 14, 2022 9:54 am Once someone says "paying off the mortgage makes me feel better", then the discussion is over, and that's fine. How many times has it been said around here that when Bogleheads disagree on something, then it probably doesn't matter much one way or the other? Paying off the mortgage early isn't going to ruin one's financial life. I prefer to keep mine, and that's not going to ruin my life, either. Sometimes it feels like certain threads are arguing just for the sake of arguing. :happy
It's fair to ask how much that feeling is worth. If it cost $1 or $1M there wouldn't be much discussion. If you came in and said that you estimated the cost at $20,000 and are happy to pay it I agree there'd be little discussion (assuming the numbers are reasonable). But if you say that it makes you feel better so you don't care about the numbers that means you're willing to pay $1M, I don't believe that's actually true.
Since there's no evidence clairvoyance is real we can't know in advance. We only know our balance and interest rate, and from that can extrapolate total interest paid.appro

As it transpired, selling most of my taxable assets earlier this year to pay off most of my mortgage worked out really well for me. Previously about 80% of my mortgage payment was interest; now it's only about 8% and the total remaining interest is only about $1K. That means I didn't lose nearly as much when the markets plummeted a few weeks later, I'm building equity much more quickly, and I've greatly reduced negative equity potential.

Of course none of this was inevitable or expected, but illustrates how significant debt significantly increases risk. And yes, being debt free also has significant psychological benefits that shouldn't be dismissed either.
For fun, couldn't one say that someone who sold most of their taxable assets earlier in say 2017 would have missed out on those assets experiencing just under a 70% return--so that would not have worked out real well for them? Essentially, what worked out was the timing, not necessarily the plan right?
Apathizer
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Re: Anyone regret paying off mortgage early?

Post by Apathizer »

coachd50 wrote: Sat May 14, 2022 4:06 pm
Apathizer wrote: Sat May 14, 2022 3:01 pm
AnEngineer wrote: Sat May 14, 2022 2:45 pm
Tom_T wrote: Sat May 14, 2022 9:54 am Once someone says "paying off the mortgage makes me feel better", then the discussion is over, and that's fine. How many times has it been said around here that when Bogleheads disagree on something, then it probably doesn't matter much one way or the other? Paying off the mortgage early isn't going to ruin one's financial life. I prefer to keep mine, and that's not going to ruin my life, either. Sometimes it feels like certain threads are arguing just for the sake of arguing. :happy
It's fair to ask how much that feeling is worth. If it cost $1 or $1M there wouldn't be much discussion. If you came in and said that you estimated the cost at $20,000 and are happy to pay it I agree there'd be little discussion (assuming the numbers are reasonable). But if you say that it makes you feel better so you don't care about the numbers that means you're willing to pay $1M, I don't believe that's actually true.
Since there's no evidence clairvoyance is real we can't know in advance. We only know our balance and interest rate, and from that can extrapolate total interest paid.appro

As it transpired, selling most of my taxable assets earlier this year to pay off most of my mortgage worked out really well for me. Previously about 80% of my mortgage payment was interest; now it's only about 8% and the total remaining interest is only about $1K. That means I didn't lose nearly as much when the markets plummeted a few weeks later, I'm building equity much more quickly, and I've greatly reduced negative equity potential.

Of course none of this was inevitable or expected, but illustrates how significant debt significantly increases risk. And yes, being debt free also has significant psychological benefits that shouldn't be dismissed either.
For fun, couldn't one say that someone who sold most of their taxable assets earlier in say 2017 would have missed out on those assets experiencing just under a 70% return--so that would not have worked out real well for them? Essentially, what worked out was the timing, not necessarily the plan right?
Oh sure, there was no planning involved. My motivations were simplicity and debt/risk reduction. Both situations illustrate how unpredictable the future, esp near-term is. Eliminating mortgage debt reduces risk by eliminating known expenses of a mortgage and interest.
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Admiral
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Re: Anyone regret paying off mortgage early?

Post by Admiral »

Apathizer wrote: Sat May 14, 2022 2:23 pm
queso wrote: Sat May 14, 2022 1:20 pm
Apathizer wrote: Sat May 14, 2022 1:04 pm
queso wrote: Sat May 14, 2022 12:55 pm
Apathizer wrote: Sat May 14, 2022 12:51 pm
The mortgage I understand, but not the car. A house is much more likely to appreciate while in the long-term a car invariably depreciates. Holding a loan on a depreciating asset doesn't make sense.
I was willing to pay 2% for the ability to deploy the cash elsewhere.
That still doesn't really make sense considering the double-jeopardy of a car loan. You're paying loan interest and you're also losing money on car equity depreciation. That's why a car loan is one of the worst loans you can take.
Interesting how people see things differently. I guess that's why it's "personal" finance. For me the depreciating aspect of the asset didn't enter into it. It's going to depreciate whether or not I pay cash or finance it. Financing it didn't affect how much car I bought - I was going to buy the same car whether or not I paid cash or financed it. Mortgage plus car loan are less than 1 year annual income and NW is roughly 25-30x spending. I didn't feel there was much risk/jeopardy involved.
With those resources I don't see any benefit in financing a car. Borrowing to pay for depreciating consumer items is always less efficient than just paying outright. Then again, with your resources it probably won't make much difference.
What's the meaning of your use of "efficient"? All that matters is the interest rate spread. That is the benefit. It's math. I could pay $30k for a car in cash, or I could get a car loan at x% and invest the $30k of cash at x+1%. If it's a CD, or some other form of fixed income, the risk is zero and I have made money by not paying cash. Lots of people take loans when they are not forced to. That's the point of arbitrage.
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Re: Anyone regret paying off mortgage early?

Post by Apathizer »

Admiral wrote: Sat May 14, 2022 4:49 pm
Apathizer wrote: Sat May 14, 2022 2:23 pm
queso wrote: Sat May 14, 2022 1:20 pm
Apathizer wrote: Sat May 14, 2022 1:04 pm
queso wrote: Sat May 14, 2022 12:55 pm
I was willing to pay 2% for the ability to deploy the cash elsewhere.
That still doesn't really make sense considering the double-jeopardy of a car loan. You're paying loan interest and you're also losing money on car equity depreciation. That's why a car loan is one of the worst loans you can take.
Interesting how people see things differently. I guess that's why it's "personal" finance. For me the depreciating aspect of the asset didn't enter into it. It's going to depreciate whether or not I pay cash or finance it. Financing it didn't affect how much car I bought - I was going to buy the same car whether or not I paid cash or financed it. Mortgage plus car loan are less than 1 year annual income and NW is roughly 25-30x spending. I didn't feel there was much risk/jeopardy involved.
With those resources I don't see any benefit in financing a car. Borrowing to pay for depreciating consumer items is always less efficient than just paying outright. Then again, with your resources it probably won't make much difference.
What's the meaning of your use of "efficient"? All that matters is the interest rate spread. That is the benefit. It's math. I could pay $30k for a car in cash, or I could get a car loan at x% and invest the $30k of cash at x+1%. If it's a CD, or some other form of fixed income, the risk is zero and I have made money by not paying cash. Lots of people take loans when they are not forced to. That's the point of arbitrage.
That doesn't account for car depreciation. Cars typically depreciate about 50% in the first 5 years. Also, depending on circumstance, there's also potential repossession if the loan become delinquent. These are all things to consider, and why borrowing is more complicated than just paying outright.
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Admiral
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Re: Anyone regret paying off mortgage early?

Post by Admiral »

Apathizer wrote: Sat May 14, 2022 4:56 pm
Admiral wrote: Sat May 14, 2022 4:49 pm
Apathizer wrote: Sat May 14, 2022 2:23 pm
queso wrote: Sat May 14, 2022 1:20 pm
Apathizer wrote: Sat May 14, 2022 1:04 pm
That still doesn't really make sense considering the double-jeopardy of a car loan. You're paying loan interest and you're also losing money on car equity depreciation. That's why a car loan is one of the worst loans you can take.
Interesting how people see things differently. I guess that's why it's "personal" finance. For me the depreciating aspect of the asset didn't enter into it. It's going to depreciate whether or not I pay cash or finance it. Financing it didn't affect how much car I bought - I was going to buy the same car whether or not I paid cash or financed it. Mortgage plus car loan are less than 1 year annual income and NW is roughly 25-30x spending. I didn't feel there was much risk/jeopardy involved.
With those resources I don't see any benefit in financing a car. Borrowing to pay for depreciating consumer items is always less efficient than just paying outright. Then again, with your resources it probably won't make much difference.
What's the meaning of your use of "efficient"? All that matters is the interest rate spread. That is the benefit. It's math. I could pay $30k for a car in cash, or I could get a car loan at x% and invest the $30k of cash at x+1%. If it's a CD, or some other form of fixed income, the risk is zero and I have made money by not paying cash. Lots of people take loans when they are not forced to. That's the point of arbitrage.
That doesn't account for car depreciation. Cars typically depreciate about 50% in the first 5 years. Also, depending on circumstance, there's also potential repossession if the loan become delinquent. These are all things to consider, and why borrowing is more complicated than just paying outright.
Depreciation has nothing to do with it. As another poster said, the car depreciates if you pay with cash, a loan, or jelly beans. Please explain how the loan becomes delinquent if you have the money in a CD.
Apathizer
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Re: Anyone regret paying off mortgage early?

Post by Apathizer »

Admiral wrote: Sat May 14, 2022 4:59 pm
Apathizer wrote: Sat May 14, 2022 4:56 pm
Admiral wrote: Sat May 14, 2022 4:49 pm
Apathizer wrote: Sat May 14, 2022 2:23 pm
queso wrote: Sat May 14, 2022 1:20 pm
Interesting how people see things differently. I guess that's why it's "personal" finance. For me the depreciating aspect of the asset didn't enter into it. It's going to depreciate whether or not I pay cash or finance it. Financing it didn't affect how much car I bought - I was going to buy the same car whether or not I paid cash or financed it. Mortgage plus car loan are less than 1 year annual income and NW is roughly 25-30x spending. I didn't feel there was much risk/jeopardy involved.
With those resources I don't see any benefit in financing a car. Borrowing to pay for depreciating consumer items is always less efficient than just paying outright. Then again, with your resources it probably won't make much difference.
What's the meaning of your use of "efficient"? All that matters is the interest rate spread. That is the benefit. It's math. I could pay $30k for a car in cash, or I could get a car loan at x% and invest the $30k of cash at x+1%. If it's a CD, or some other form of fixed income, the risk is zero and I have made money by not paying cash. Lots of people take loans when they are not forced to. That's the point of arbitrage.
That doesn't account for car depreciation. Cars typically depreciate about 50% in the first 5 years. Also, depending on circumstance, there's also potential repossession if the loan become delinquent. These are all things to consider, and why borrowing is more complicated than just paying outright.
Depreciation has nothing to do with it. As another poster said, the car depreciates if you pay with cash, a loan, or jelly beans. Please explain how the loan becomes delinquent if you have the money in a CD.
What is the CD duration? If you need the money before it retires don't you lose money?
ROTH: 40% AVUS, 35% DFAX, 25% BNDW. Taxable: 50% BNDW, 30% AVUS, 20% DFAX.
AnEngineer
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Re: Anyone regret paying off mortgage early?

Post by AnEngineer »

Apathizer wrote: Sat May 14, 2022 4:39 pmEliminating mortgage debt reduces risk by eliminating known expenses of a mortgage and interest.
Depends on the situation. You could have mortgage debt because (not an exhaustive list):
1) You spent more than you can safely afford. This is a risky situation.
2) You use the debt as leverage into risky investments.
3) You engage in interest rate arbitrage and have a treasury bond ladder that can make all your mortgage payments.

How does paying off the mortgage in 3 reduce risk?
Apathizer
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Re: Anyone regret paying off mortgage early?

Post by Apathizer »

AnEngineer wrote: Sat May 14, 2022 6:05 pm
Apathizer wrote: Sat May 14, 2022 4:39 pmEliminating mortgage debt reduces risk by eliminating known expenses of a mortgage and interest.
Depends on the situation. You could have mortgage debt because (not an exhaustive list):
1) You spent more than you can safely afford. This is a risky situation.
2) You use the debt as leverage into risky investments.
3) You engage in interest rate arbitrage and have a treasury bond ladder that can make all your mortgage payments.

How does paying off the mortgage in 3 reduce risk?
1) If you can't afford it, you probably can't pay it off.
2) You might be better off liquidating risky investments and paying off or down the mortgage instead.
3) I don't know much about that strategy, but it seems complicated.
ROTH: 40% AVUS, 35% DFAX, 25% BNDW. Taxable: 50% BNDW, 30% AVUS, 20% DFAX.
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corn18
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Re: Anyone regret paying off mortgage early?

Post by corn18 »

Apathizer wrote: Sat May 14, 2022 6:09 pm
AnEngineer wrote: Sat May 14, 2022 6:05 pm
Apathizer wrote: Sat May 14, 2022 4:39 pmEliminating mortgage debt reduces risk by eliminating known expenses of a mortgage and interest.
Depends on the situation. You could have mortgage debt because (not an exhaustive list):
1) You spent more than you can safely afford. This is a risky situation.
2) You use the debt as leverage into risky investments.
3) You engage in interest rate arbitrage and have a treasury bond ladder that can make all your mortgage payments.

How does paying off the mortgage in 3 reduce risk?
1) If you can't afford it, you probably can't pay it off.
2) You might be better off liquidating risky investments and paying off or down the mortgage instead.
3) I don't know much about that strategy, but it seems complicated.
I’m doing 3 now. 2.25% fixed rate mortgage with 29 years left. I could build a bond ladder at Fidelity with a 10 year duration (same as the mortgage) earning just over 3%. Not complicated at all. Not any more risky than having the mortgage.

Does not work at todays mortgage rates.
Consistently sets low goals and fails to achieve them.
Apathizer
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Re: Anyone regret paying off mortgage early?

Post by Apathizer »

corn18 wrote: Sat May 14, 2022 6:13 pm
Apathizer wrote: Sat May 14, 2022 6:09 pm
AnEngineer wrote: Sat May 14, 2022 6:05 pm
Apathizer wrote: Sat May 14, 2022 4:39 pmEliminating mortgage debt reduces risk by eliminating known expenses of a mortgage and interest.
Depends on the situation. You could have mortgage debt because (not an exhaustive list):
1) You spent more than you can safely afford. This is a risky situation.
2) You use the debt as leverage into risky investments.
3) You engage in interest rate arbitrage and have a treasury bond ladder that can make all your mortgage payments.

How does paying off the mortgage in 3 reduce risk?
1) If you can't afford it, you probably can't pay it off.
2) You might be better off liquidating risky investments and paying off or down the mortgage instead.
3) I don't know much about that strategy, but it seems complicated.
I’m doing 3 now. 2.25% fixed rate mortgage with 29 years left. I could build a bond ladder at Fidelity with a 10 year duration (same as the mortgage) earning just over 3%. Not complicated at all. Not any more risky than having the mortgage.

Does not work at todays mortgage rates.
That seems fairly involved for a 0.75% difference.
ROTH: 40% AVUS, 35% DFAX, 25% BNDW. Taxable: 50% BNDW, 30% AVUS, 20% DFAX.
flyingcows
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Re: Anyone regret paying off mortgage early?

Post by flyingcows »

corn18 wrote: Sat May 14, 2022 6:13 pm
Apathizer wrote: Sat May 14, 2022 6:09 pm
AnEngineer wrote: Sat May 14, 2022 6:05 pm
Apathizer wrote: Sat May 14, 2022 4:39 pmEliminating mortgage debt reduces risk by eliminating known expenses of a mortgage and interest.
Depends on the situation. You could have mortgage debt because (not an exhaustive list):
1) You spent more than you can safely afford. This is a risky situation.
2) You use the debt as leverage into risky investments.
3) You engage in interest rate arbitrage and have a treasury bond ladder that can make all your mortgage payments.

How does paying off the mortgage in 3 reduce risk?
1) If you can't afford it, you probably can't pay it off.
2) You might be better off liquidating risky investments and paying off or down the mortgage instead.
3) I don't know much about that strategy, but it seems complicated.
I’m doing 3 now. 2.25% fixed rate mortgage with 29 years left. I could build a bond ladder at Fidelity with a 10 year duration (same as the mortgage) earning just over 3%. Not complicated at all. Not any more risky than having the mortgage.

Does not work at todays mortgage rates.
Did you take out the mortgage and then hold cash for some period of time? Or did you invest the proceeds into something at the same time you took out the mortgage?
I have no idea what I am doing, my posts are all for entertainment purposes only
AnEngineer
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Re: Anyone regret paying off mortgage early?

Post by AnEngineer »

Apathizer wrote: Sat May 14, 2022 6:20 pm
corn18 wrote: Sat May 14, 2022 6:13 pm
Apathizer wrote: Sat May 14, 2022 6:09 pm
AnEngineer wrote: Sat May 14, 2022 6:05 pm
Apathizer wrote: Sat May 14, 2022 4:39 pmEliminating mortgage debt reduces risk by eliminating known expenses of a mortgage and interest.
Depends on the situation. You could have mortgage debt because (not an exhaustive list):
1) You spent more than you can safely afford. This is a risky situation.
2) You use the debt as leverage into risky investments.
3) You engage in interest rate arbitrage and have a treasury bond ladder that can make all your mortgage payments.

How does paying off the mortgage in 3 reduce risk?
1) If you can't afford it, you probably can't pay it off.
2) You might be better off liquidating risky investments and paying off or down the mortgage instead.
3) I don't know much about that strategy, but it seems complicated.
I’m doing 3 now. 2.25% fixed rate mortgage with 29 years left. I could build a bond ladder at Fidelity with a 10 year duration (same as the mortgage) earning just over 3%. Not complicated at all. Not any more risky than having the mortgage.

Does not work at todays mortgage rates.
That seems fairly involved for a 0.75% difference.
Involved or not, you think that selling the bonds to pay off the mortgage reduces risk?
international001
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Re: Anyone regret paying off mortgage early?

Post by international001 »

corn18 wrote: Sat May 14, 2022 6:13 pm

I’m doing 3 now. 2.25% fixed rate mortgage with 29 years left. I could build a bond ladder at Fidelity with a 10 year duration (same as the mortgage) earning just over 3%. Not complicated at all. Not any more risky than having the mortgage.

Does not work at todays mortgage rates.
How much of that 3% is after-tax?
Apathizer
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Re: Anyone regret paying off mortgage early?

Post by Apathizer »

international001 wrote: Sat May 14, 2022 6:51 pm
corn18 wrote: Sat May 14, 2022 6:13 pm

I’m doing 3 now. 2.25% fixed rate mortgage with 29 years left. I could build a bond ladder at Fidelity with a 10 year duration (same as the mortgage) earning just over 3%. Not complicated at all. Not any more risky than having the mortgage.

Does not work at todays mortgage rates.
How much of that 3% is after-tax?
Good point. As Felix says, 'when you hold bonds in a taxable account your interest is fully taxable.' I'm too lazy to figure out the exact figures, but would guess that would negate much of the benefit.
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JBTX
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Re: Anyone regret paying off mortgage early?

Post by JBTX »

Apathizer wrote: Sat May 14, 2022 6:09 pm
AnEngineer wrote: Sat May 14, 2022 6:05 pm
Apathizer wrote: Sat May 14, 2022 4:39 pmEliminating mortgage debt reduces risk by eliminating known expenses of a mortgage and interest.
Depends on the situation. You could have mortgage debt because (not an exhaustive list):
1) You spent more than you can safely afford. This is a risky situation.
2) You use the debt as leverage into risky investments.
3) You engage in interest rate arbitrage and have a treasury bond ladder that can make all your mortgage payments.

How does paying off the mortgage in 3 reduce risk?
1) If you can't afford it, you probably can't pay it off.
2) You might be better off liquidating risky investments and paying off or down the mortgage instead.
3) I don't know much about that strategy, but it seems complicated.
Keep the mortgage and invest the funds in ibonds or TIPS if in tax advantaged. There is zero risk in doing that.

This idea that debt by itself has risk doesn’t make sense. The risk is in how the funds are invested. If you put them in stocks, yes there is risk. If you put them in inflation adjusted bonds, there is no risk. Also the notion that you can reduce your risk by depleting your cash to pay off a low rate mortgage also doesn’t make any sense.

For an investor to be willing to invest in stocks elsewhere and take on that risk, but be unwilling to have a fixed rate mortgage with the funds invested in risk free bonds earning more than the mortgage interest due to perceived risk is rather illogical.
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corn18
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Re: Anyone regret paying off mortgage early?

Post by corn18 »

international001 wrote: Sat May 14, 2022 6:51 pm
corn18 wrote: Sat May 14, 2022 6:13 pm

I’m doing 3 now. 2.25% fixed rate mortgage with 29 years left. I could build a bond ladder at Fidelity with a 10 year duration (same as the mortgage) earning just over 3%. Not complicated at all. Not any more risky than having the mortgage.

Does not work at todays mortgage rates.
How much of that 3% is after-tax?
It sits in my 401k brokerage link account. It will get taxed at 12% when I withdraw it. I cannot deduct my mortgage interest. So I guess the comparison is 2.25% mortgage interest vs. 3% x .88 = 2.64% after tax in bond ladder.

But that's too much hassle to set up. Just like chasing 1 basis point of expense ratio is too much hassle (not meant for you international001).

I will never convince the pay off your mortgage mortgage crowd that maybe they shouldn't. Too much feel good emotion to fight.

And they will never convince me it is a good idea to pay off my mortgage today.

Facts and data cannot trump emotion.
Consistently sets low goals and fails to achieve them.
Starfish
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Re: Anyone regret paying off mortgage early?

Post by Starfish »

Tom_T wrote: Sat May 14, 2022 9:54 am Once someone says "paying off the mortgage makes me feel better", then the discussion is over, and that's fine. How many times has it been said around here that when Bogleheads disagree on something, then it probably doesn't matter much one way or the other? Paying off the mortgage early isn't going to ruin one's financial life. I prefer to keep mine, and that's not going to ruin my life, either. Sometimes it feels like certain threads are arguing just for the sake of arguing. :happy
Maybe it does not ruin one's life but one additional year of freedom has enormous value because life is short and precious.
Otherwise it's very hard to discuss with people who try contradict basic math because "they feel better".
CletusCaddy
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Re: Anyone regret paying off mortgage early?

Post by CletusCaddy »

If I paid off my mortgage early I would have literally no assets except home equity. No 401k, no IRA, no I bonds, etc…

Do I regret not doing this? Not a chance.
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