Mortgage as a negative bond...Don't pay down mortgage early...House is not a bond

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
swaption
Posts: 1235
Joined: Tue Jul 29, 2008 11:48 am

Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by swaption »

EnjoyIt wrote: Wed Aug 03, 2022 5:16 pm
vineviz wrote: Wed Aug 03, 2022 5:10 pm
EnjoyIt wrote: Wed Aug 03, 2022 3:59 pm For most it will lead to lower returns and lower wealth.
This kind of assumption seems to presuppose that most people lack the intellect to construct a household balance sheet. I'm not that pessimistic.
What does that have to do with anything?

When young, if you put a mortgage in your asset allocation and you will not be buying equities for a very long time. It is a mistake and it has nothing to do with a balance sheet.

And yes, most people have a very hard time creating and functioning on a budget let alone create an entire balance sheet. Also, life does not have to fit nicely on balance sheet. Again, that complexity may be a good idea for you, but totally unnecessary for most investors in particular early on in their wealth building.
For most young people, their biggest asset is their lifetime earning power. It’s actually very much like a bond. To some extent, it is what offsets the mortgage. Most young “workers” need the exposure to equity.
EnjoyIt
Posts: 6675
Joined: Sun Dec 29, 2013 8:06 pm

Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by EnjoyIt »

vineviz wrote: Wed Aug 03, 2022 6:11 pm
EnjoyIt wrote: Wed Aug 03, 2022 5:16 pm
When young, if you put a mortgage in your asset allocation and you will not be buying equities for a very long time. It is a mistake and it has nothing to do with a balance sheet.
What?

Why does acknowledging the mortgage as a liability prevent you from buying equities?

The point of properly accounting for assets and liabilities is that it allows investors to make better decisions by taking ALL their information into consideration.
It was answered very well in this post 2 pages back.

https://www.bogleheads.org/forum/viewt ... 2#p6805902

Life doesn’t have to belong on a balance sheet.
Although. I love the idea that future earning potential is also bond like. Maybe it should be added to your balance sheet as well and adjust your asset allocation accordingly.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
User avatar
vineviz
Posts: 12284
Joined: Tue May 15, 2018 1:55 pm
Location: Baltimore, MD

Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by vineviz »

EnjoyIt wrote: Thu Aug 04, 2022 2:00 am
vineviz wrote: Wed Aug 03, 2022 6:11 pm
EnjoyIt wrote: Wed Aug 03, 2022 5:16 pm
When young, if you put a mortgage in your asset allocation and you will not be buying equities for a very long time. It is a mistake and it has nothing to do with a balance sheet.
What?

Why does acknowledging the mortgage as a liability prevent you from buying equities?

The point of properly accounting for assets and liabilities is that it allows investors to make better decisions by taking ALL their information into consideration.
It was answered very well in this post 2 pages back.

https://www.bogleheads.org/forum/viewt ... 2#p6805902

Life doesn’t have to belong on a balance sheet.
Although. I love the idea that future earning potential is also bond like. Maybe it should be added to your balance sheet as well and adjust your asset allocation accordingly.
I think you misunderstand the post you linked to. There was no suggestion that any investor must not buy equities.

Life doesn’t belong in a balance sheet, it’s true. But assets and liabilities do.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
EnjoyIt
Posts: 6675
Joined: Sun Dec 29, 2013 8:06 pm

Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by EnjoyIt »

vineviz wrote: Thu Aug 04, 2022 6:25 am
EnjoyIt wrote: Thu Aug 04, 2022 2:00 am
vineviz wrote: Wed Aug 03, 2022 6:11 pm
EnjoyIt wrote: Wed Aug 03, 2022 5:16 pm
When young, if you put a mortgage in your asset allocation and you will not be buying equities for a very long time. It is a mistake and it has nothing to do with a balance sheet.
What?

Why does acknowledging the mortgage as a liability prevent you from buying equities?

The point of properly accounting for assets and liabilities is that it allows investors to make better decisions by taking ALL their information into consideration.
It was answered very well in this post 2 pages back.

https://www.bogleheads.org/forum/viewt ... 2#p6805902

Life doesn’t have to belong on a balance sheet.
Although. I love the idea that future earning potential is also bond like. Maybe it should be added to your balance sheet as well and adjust your asset allocation accordingly.
I think you misunderstand the post you linked to. There was no suggestion that any investor must not buy equities.

Life doesn’t belong in a balance sheet, it’s true. But assets and liabilities do.
I feel maybe you misunderstood the point. By adding one’s mortgage to their AA they end up very lopsided on negative bonds. If an investor would follow that AA they would have to buy bonds until they hit the range of their desired AA. Be removing the mortgage and accepting the AA is a self created construct. They can then decide what AA works for them while servicing that debt. That way the investor can comfortably by equities within the confines of their constructed AA.

I’m going to stop discussing balance sheets because it is not the discussion at hand. All I’ll say is that having a well designed balance sheet does not necessarily have to end up in some sort of AA design which is why I will stop mixing the two in this discussion.

Lastly, if you want to add all of your life’s assets and liabilities into your AA, then have it. It is your own personal choice as is your AA. I’m saying it isn’t necessary and for people who are not and the vineviz family it is very likely a mistake that will lead to lower expected returns. Keep things simple is very important for financial success.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
User avatar
vineviz
Posts: 12284
Joined: Tue May 15, 2018 1:55 pm
Location: Baltimore, MD

Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by vineviz »

EnjoyIt wrote: Thu Aug 04, 2022 6:59 am By adding one’s mortgage to their AA they end up very lopsided on negative bonds.
This is not correct.

If they are "lopsided on negative bonds", it is because they TOOK OUT the mortgage. The act of accounting for the mortgage didn't change their asset allocation. Accounting is basically just a recording an event that ACTUALLY happened in real life: the decision to take out a loan.

Please don't misinterpret me: I'm not saying mortgages are bad. I have a mortgage, and have had one for decades.

What I am saying is this: it's very difficult to make clear-headed financial decisions if you don't even know what your assets and liabilities ARE. This is all a household balance sheet does, and I can assure you that many households would benefit from taking a few minutes to build and contemplate one.
Last edited by vineviz on Thu Aug 04, 2022 7:20 am, edited 1 time in total.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
User avatar
LadyGeek
Site Admin
Posts: 83946
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Mortgage as a negative bond...Don't pay down mortgage early...House is not a bond

Post by LadyGeek »

Administrative - I fixed a minor typo in the thread's title "Mortgage negative bond..." to "Mortgage as a negative bond...".
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
HootingSloth
Posts: 954
Joined: Mon Jan 28, 2019 3:38 pm

Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by HootingSloth »

vineviz wrote: Wed Aug 03, 2022 6:11 pm
EnjoyIt wrote: Wed Aug 03, 2022 5:16 pm
When young, if you put a mortgage in your asset allocation and you will not be buying equities for a very long time. It is a mistake and it has nothing to do with a balance sheet.
What?

Why does acknowledging the mortgage as a liability prevent you from buying equities?

The point of properly accounting for assets and liabilities is that it allows investors to make better decisions by taking ALL their information into consideration.
I am a bit confused by what EnjoyIt is saying as well. I think he may be making an entirely noncontroversial point along the lines of: a young person shouldn't include their mortgage as a fixed liability that is subtracted from the fixed income side of their asset allocation while simultaneously relying on various rules of thumb or very rough proxies (e.g. age in bonds, or the AA glidepath used by life cycle funds, or "90/10 is aggressive," or whatever) that people often talk about that certainly do not account for a mortgage as a fixed liability. It seems clear that doing those two things at the same time would lead to some pretty bad decisions.

I would probably frame that as more of a problem with those rules of thumb, though, than an issue with recognizing that a mortgage is, in fact, a fixed liability. The most important thing seems to be to account for these things consistently and to make appropriate adjustments if and when you are changing "lenses."
Global Market Portfolio + modest tilt towards volatility (80/20->60/40 as approach FI) + modest tilt away from exchange rate risk (80% global+20% U.S. stocks; currency-hedge bonds) + tax optimization
toddthebod
Posts: 232
Joined: Wed May 18, 2022 12:42 pm

Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by toddthebod »

HootingSloth wrote: Thu Aug 04, 2022 7:37 am
vineviz wrote: Wed Aug 03, 2022 6:11 pm
EnjoyIt wrote: Wed Aug 03, 2022 5:16 pm
When young, if you put a mortgage in your asset allocation and you will not be buying equities for a very long time. It is a mistake and it has nothing to do with a balance sheet.
What?

Why does acknowledging the mortgage as a liability prevent you from buying equities?

The point of properly accounting for assets and liabilities is that it allows investors to make better decisions by taking ALL their information into consideration.
I am a bit confused by what EnjoyIt is saying as well. I think he may be making an entirely noncontroversial point along the lines of: a young person shouldn't include their mortgage as a fixed liability that is subtracted from the fixed income side of their asset allocation while simultaneously relying on various rules of thumb or very rough proxies (e.g. age in bonds, or the AA glidepath used by life cycle funds, or "90/10 is aggressive," or whatever) that people often talk about that certainly do not account for a mortgage as a fixed liability. It seems clear that doing those two things at the same time would lead to some pretty bad decisions.

I would probably frame that as more of a problem with those rules of thumb, though, than an issue with recognizing that a mortgage is, in fact, a fixed liability. The most important thing seems to be to account for these things consistently and to make appropriate adjustments if and when you are changing "lenses."
That is entirely the problem, especially considering the relative sizes of the retirement portfolio and the mortgage for a young person starting out. When I bought my first house at the age of 30, I had less than $100,000 saved and a $400,000 mortgage. There is no math that gets me to a reasonable asset allocation unless I spent the next ten years only buying bonds.

In that sense, while I agree that it is important to account for all your assets and liabilities, it is not necessarily helpful to consider your mortgage when deciding how to invest your meager 401(k) as a young adult.
HootingSloth
Posts: 954
Joined: Mon Jan 28, 2019 3:38 pm

Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by HootingSloth »

toddthebod wrote: Thu Aug 04, 2022 7:45 am
HootingSloth wrote: Thu Aug 04, 2022 7:37 am
vineviz wrote: Wed Aug 03, 2022 6:11 pm
EnjoyIt wrote: Wed Aug 03, 2022 5:16 pm
When young, if you put a mortgage in your asset allocation and you will not be buying equities for a very long time. It is a mistake and it has nothing to do with a balance sheet.
What?

Why does acknowledging the mortgage as a liability prevent you from buying equities?

The point of properly accounting for assets and liabilities is that it allows investors to make better decisions by taking ALL their information into consideration.
I am a bit confused by what EnjoyIt is saying as well. I think he may be making an entirely noncontroversial point along the lines of: a young person shouldn't include their mortgage as a fixed liability that is subtracted from the fixed income side of their asset allocation while simultaneously relying on various rules of thumb or very rough proxies (e.g. age in bonds, or the AA glidepath used by life cycle funds, or "90/10 is aggressive," or whatever) that people often talk about that certainly do not account for a mortgage as a fixed liability. It seems clear that doing those two things at the same time would lead to some pretty bad decisions.

I would probably frame that as more of a problem with those rules of thumb, though, than an issue with recognizing that a mortgage is, in fact, a fixed liability. The most important thing seems to be to account for these things consistently and to make appropriate adjustments if and when you are changing "lenses."
That is entirely the problem, especially considering the relative sizes of the retirement portfolio and the mortgage for a young person starting out. When I bought my first house at the age of 30, I had less than $100,000 saved and a $400,000 mortgage. There is no math that gets me to a reasonable asset allocation unless I spent the next ten years only buying bonds.

In that sense, while I agree that it is important to account for all your assets and liabilities, it is not necessarily helpful to consider your mortgage when deciding how to invest your meager 401(k) as a young adult.
Here is what I would say: if someone is at a stage in their life, regardless of age, where the only fixed income asset that they need or want is a small cash emergency fund, then there is no need to consider their mortgage or have an asset allocation at all. They can just have the emergency fund that they want and put the rest into stocks. Or, if they like the simplicity of something like a life cycle fund in a 401(k), where someone else determines an asset allocation glidepath for them, that is totally reasonable and does not require them to do anything special to account for their mortgage.

However, if they are actually going through the trouble of coming up with an asset allocation that is personalized to their own situation, and that asset allocation involves some non-trivial fixed income assets, I think they will do better for themselves by recognizing the basic fact that a mortgage is a fixed liability. There are lots of different ways to take this into account, and no one way is neccessarily better than the others. Several different ways of doing this have been discussed earlier in this thread (including my approach). But squeezing your eyes shut and pretending the mortgage isn't there is not ideal if you are going for a personalized approach.

Edited to be clear: Taking your mortgage into account as a fixed liability emphatically does not mean that you should make your investments more conservative and have to keep buying bonds so that, e.g., your net fixed income is a positive number. As far as I know, there is not a single person that has suggested that anyone do anything like that, and it would generally lead to bad decisions.
Global Market Portfolio + modest tilt towards volatility (80/20->60/40 as approach FI) + modest tilt away from exchange rate risk (80% global+20% U.S. stocks; currency-hedge bonds) + tax optimization
EnjoyIt
Posts: 6675
Joined: Sun Dec 29, 2013 8:06 pm

Re: Mortgage as a negative bond...Don't pay down mortgage early...House is not a bond

Post by EnjoyIt »

last 3 posts are all correct regarding what I am trying to convey. Sure everyone should understand what they have and what they owe. It would be foolish not to. But it doesn't mean they should be adding it to what is recommended as an asset allocation. Those recommendations exclude the mortgage such as Age -10 in bonds. Early on an investor should ignore their mortgage as part of their asset allocation. That doesn't mean they should get a mortgage that they can't service it means that they should still be investing in equities.

We keep forgetting that an AA has a strong emotional construct. It isn't a fact such as the balance sheet. Therefor once we recognize that an AA is emotional we can create an AA knowing we must service a debt and not bother to include the debt as a negative bond. This allows us to concentrate on more important things such as arguing with strangers on the internet about mortgages and negative bonds.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
User avatar
vineviz
Posts: 12284
Joined: Tue May 15, 2018 1:55 pm
Location: Baltimore, MD

Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by vineviz »

toddthebod wrote: Thu Aug 04, 2022 7:45 am
That is entirely the problem, especially considering the relative sizes of the retirement portfolio and the mortgage for a young person starting out. When I bought my first house at the age of 30, I had less than $100,000 saved and a $400,000 mortgage. There is no math that gets me to a reasonable asset allocation unless I spent the next ten years only buying bonds.
I don't necessarily agree with the last sentence.

There's no rule that says that having an entry for a mortgage liability (aka "negative bond") your household balance sheet is INHERENTlY a bad thing or one to be avoided at all costs. Nor does it imply that you should only buy marketable bonds until the two numbers offset.

For one thing, that's why I mentioned human capital earlier in the thread. For most young people this functions much like a huge "positive bond", which MORE THAN offsets the negative bond associated with the mortgage. If it didn't, there'd be no hope of every repaying the mortgage.

Any form of rational financial planning must take all these things into account (real estate values, loans, future earnings power, stocks, bonds, etc.).

It's possible to do that planning INFORMALLY (e.g. using rules of thumbs and/or moving some assets and liabilities into separate buckets) or FORMALLY (e.g. accounting for things using a household balance sheet or similar approaches). Either approach might work as long as the approach is using sensible and internally consistent information.

Obviously I have a preference for a relatively more formal approach. In part because I think that way and have the training to do so, but also in part because I see many people using the informal approach get tripped up by information they ignored or mentally accounted for in contradictory ways.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
HootingSloth
Posts: 954
Joined: Mon Jan 28, 2019 3:38 pm

Re: Mortgage as a negative bond...Don't pay down mortgage early...House is not a bond

Post by HootingSloth »

EnjoyIt wrote: Thu Aug 04, 2022 8:30 am last 3 posts are all correct regarding what I am trying to convey. Sure everyone should understand what they have and what they owe. It would be foolish not to. But it doesn't mean they should be adding it to what is recommended as an asset allocation. Those recommendations exclude the mortgage such as Age -10 in bonds. Early on an investor should ignore their mortgage as part of their asset allocation. That doesn't mean they should get a mortgage that they can't service it means that they should still be investing in equities.

We keep forgetting that an AA has a strong emotional construct. It isn't a fact such as the balance sheet. Therefor once we recognize that an AA is emotional we can create an AA knowing we must service a debt and not bother to include the debt as a negative bond. This allows us to concentrate on more important things such as arguing with strangers on the internet about mortgages and negative bonds.
I basically agree with this, but would put things a bit differently. A personalized asset allocation should account for your personal values, and your values are inherently subjective and have a very significant emotional component (e.g., "sleeping well at night" is an emotion and is one that many people, justifiably, put some value on in setting their asset allocation). But, an asset allocation is not something that is entirely arbitrary or simply a matter of preference--in, say, the way that your favorite color is simply a matter of preference. It is a tool for trying to make tradeoffs between various different things that you value. Some, but not all, of the things that we value, and so feed into an asset allocation, are quantifiable, including things like a higher expected return or a lower dispersion in possible outcomes over different time horizons. And, even for those of us who are pretty mathematically inclined, it is hard to informally take into account those quantitative tradeoffs in a way that is reliable. So, one approach (not the only one) is to try to introduce more precision about the things that we can quantify so that our remaining judgment calls can focus on those values and tradeoffs that are harder to quantify.

Your mortgage balance--and the effect is has on things like the expected growth in your net worth and the amount of dispersion in possible outcomes over different time horizons--is relatively easy to quantify, and recognizing that holding fixed income assets--and so being a lender--is a mirror image to holding a mortgage--and so being a borrower--is basically the key step in various different ways of quantifying the impact that holding a mortgage might have on these things that we value. Under this kind of approach (again, not the only valid approach), it makes sense, then, to take a mortgage into account quantitatively so that our subjective judgements can be focused on a narrower and more targeted set of tradeoffs.
Global Market Portfolio + modest tilt towards volatility (80/20->60/40 as approach FI) + modest tilt away from exchange rate risk (80% global+20% U.S. stocks; currency-hedge bonds) + tax optimization
toddthebod
Posts: 232
Joined: Wed May 18, 2022 12:42 pm

Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by toddthebod »

vineviz wrote: Thu Aug 04, 2022 8:42 am For one thing, that's why I mentioned human capital earlier in the thread. For most young people this functions much like a huge "positive bond", which MORE THAN offsets the negative bond associated with the mortgage. If it didn't, there'd be no hope of every repaying the mortgage.
This is a key point. If I operate under the assumption that my future earnings (a positive bond) will be sufficient to pay the mortgage (a negative bond), then at the very least it's a wash.
HootingSloth wrote: Thu Aug 04, 2022 8:08 am Edited to be clear: Taking your mortgage into account as a fixed liability emphatically does not mean that you should make your investments more conservative and have to keep buying bonds so that, e.g., your net fixed income is a positive number. As far as I know, there is not a single person that has suggested that anyone do anything like that, and it would generally lead to bad decisions.
Not explicitly, no. But there are plenty of people upthread arguing that if you have X amount of mortgage you are now "200% stocks". How is that helpful? What then is an appropriate asset allocation for a young investor? 200% equities? 150% equities?
User avatar
Topic Author
spdoublebass
Posts: 865
Joined: Thu Apr 27, 2017 10:04 pm
Location: NY

Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by spdoublebass »

will23 wrote: Wed Aug 03, 2022 7:20 pm
spdoublebass wrote: Sun Jul 10, 2022 5:46 pm
If we keep this really simple, Say a couple saves $20K a year, (they put $6k each in a Roth IRA and another $4k each in a Roth 401k), but also has a mortgage, how would they treat their mortgage as a negative bond with an 80/20 AA? Basically, I'm asking how to combine #1 and #2 above.

Thanks in advance.
I thought I'd try to answer your actual question, in a straightforward mathematical way.

Let's say you are 5 years into the mortgage (you've made 60 payments). You need to calculate how much lower your mortgage balance is due to your excess payments. You do this by either looking at the original mortgage amortization schedule that came in the ridiculous pile of papers you signed or with the formula '=PV(0.05/12,360-60,-123.45,,0)', where 123.45 is your schedule payment (principal and interest only, not escrow), the .05 is your interest rate. Then compare that to your actual mortgage balance (from a mortgage statement, web site), add that difference to your net worth and also your bond allocation.

You will need to make another adjustments if you don't want to 'cheat': after you pay off your mortgage you must take the monthly payment saved and apply it to your investment account (until the end of 30 years), so in this example contribute $123.45 to investments monthly. Even though you paid the mortgage off, you still adjust for the difference between your current balance and the amount on the amortization schedule.

If you pay the mortgage down too rapidly, you may not have enough in bonds to rebalance into stock.
Thanks for the information. I'm a little embarrassed to admit, I didn't follow all of that.

I guess I should have been more to the point in my OP. This forum makes you feel like a very small fish in a big pond. Ha!

Anyway. We save 20% for retirement. Let's just say that's a bout $2000 a month. I currently have been $1900 in stock and $100 in TIAA Trad fund. (I don't want to go down the TIAA rabbit hole here if possible).

Next month, we are starting a 25 year, bi weekly mortgage at 5%. Which means it is scheduled to be paid off in 21ish years due to the bi weekly schedule.

My thought process was we are currently at 95/5 (age 39/45). I know it's been said we could even 75/25 at our ages. I am ok with our AA and before the mortgage never thought of adding more bonds.

My thought now is what about taking $400 a month (about 20% of new money) and putting it on the mortgage. I would pay it off in under 13 years. This is very appealing to me on many levels.

That is what I was asking about. I think I would rather be 52/58 with a paid off mortgage, than waiting the full 21ish years.

I am just trying to figure out if I'd regret it or not. I do not think it's overkill, meaning I'm not putting all of my money towards the mortgage, I would obviously regret that.
At these rates too, I think I'd just buy Ibonds with the $400. Then redeem them when inflation drops under 5% and pay it towards the principal.
I'm trying to think, but nothing happens
HootingSloth
Posts: 954
Joined: Mon Jan 28, 2019 3:38 pm

Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by HootingSloth »

toddthebod wrote: Thu Aug 04, 2022 10:00 am
HootingSloth wrote: Thu Aug 04, 2022 8:08 am Edited to be clear: Taking your mortgage into account as a fixed liability emphatically does not mean that you should make your investments more conservative and have to keep buying bonds so that, e.g., your net fixed income is a positive number. As far as I know, there is not a single person that has suggested that anyone do anything like that, and it would generally lead to bad decisions.
Not explicitly, no. But there are plenty of people upthread arguing that if you have X amount of mortgage you are now "200% stocks". How is that helpful? What then is an appropriate asset allocation for a young investor? 200% equities? 150% equities?
I agree that an observation like "By taking into account a mortgage in manner X, you might view yourself as having a 200/-100 asset allocation" is not, on its own, a particularly helpful observation if it is not accompanied by an explanation for how you should determine what a good target asset allocation should be when accounting for your mortgage in manner X. In contrast, I tried, earlier in this thread, to describe how I take my mortgage into account and how that method for accounting for the mortgage is reflected in my target asset allocation in a consistent fashion.
Global Market Portfolio + modest tilt towards volatility (80/20->60/40 as approach FI) + modest tilt away from exchange rate risk (80% global+20% U.S. stocks; currency-hedge bonds) + tax optimization
harikaried
Posts: 2140
Joined: Fri Mar 09, 2012 3:47 pm

Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by harikaried »

toddthebod wrote: Thu Aug 04, 2022 7:45 amWhen I bought my first house at the age of 30, I had less than $100,000 saved and a $400,000 mortgage. There is no math that gets me to a reasonable asset allocation unless I spent the next ten years only buying bonds.
If we say the house was $500k with 20% downpayment and savings all in equities, the total net worth could have been $200k allocated 50% equities / -200% fixed income / 250% properties. I'm guessing those percentages in excess of ±100% is what makes you think it's not "a reasonable asset allocation," but it's actually fine and reasonable for many people and reflects that one is quite different from someone renting with 100% equities / 0% fixed income / 0% properties.

If one saves another $200k and put all into equities, the $400k net worth could then be viewed as 75% equities / -100% fixed income / 125% properties. This didn't require only paying down the mortgage or only buying bonds and still could be considered a reasonable asset allocation. Some might react to this situation by taking out more debt to buy rental properties, and others might decide to focus on the fixed income buying bonds or paying down debt depending on yields vs rates, or one could continue focusing on equities as was done for this example.

Of course, people have the choice to do some of each as well such as putting half towards mortgage prepayment and half towards equities all while having a reasonable asset allocation.
alluringreality
Posts: 787
Joined: Tue Nov 12, 2019 10:59 am

Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by alluringreality »

spdoublebass wrote: Thu Aug 04, 2022 10:18 am At these rates too, I think I'd just buy Ibonds with the $400. Then redeem them when inflation drops under 5% and pay it towards the principal.
Federal taxes are owed on I bond returns, so generally the I bond rate needed to break even is higher than the mortgage rate. I think it's roughly 5.68% in the 12% bracket or 5.88% for a 15% bracket. If redeemed before 5 years the last 3 months are not received, so that also potentially increases the I bond rate needed to break even.
toddthebod wrote: Thu Aug 04, 2022 10:00 am
HootingSloth wrote: Thu Aug 04, 2022 8:08 am Edited to be clear: Taking your mortgage into account as a fixed liability emphatically does not mean that you should make your investments more conservative and have to keep buying bonds so that, e.g., your net fixed income is a positive number. As far as I know, there is not a single person that has suggested that anyone do anything like that, and it would generally lead to bad decisions.
Not explicitly, no. But there are plenty of people upthread arguing that if you have X amount of mortgage you are now "200% stocks". How is that helpful? What then is an appropriate asset allocation for a young investor? 200% equities? 150% equities?
These sorts of questions may get into lifecycle investing. The book from Ayres and Nalebuff is generally beyond my own comfort zone, but I skimmed a few parts. The thread on their take indicates that they suggest 2x leverage, and eventually leverage reduces in their plan depending on portfolio value. I'm under the impression their book is based around borrowing at the risk free rate. I tend to usually interpret that as other forms of leverage instead of property, yet it looks like margin at InteractiveBrokers has increased enough to exceed my borrowing rate.
30% Savings Bonds, 45% US Indexes, 25% Ex-US Indexes - Buy & Hold
EnjoyIt
Posts: 6675
Joined: Sun Dec 29, 2013 8:06 pm

Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by EnjoyIt »

harikaried wrote: Thu Aug 04, 2022 11:36 am
toddthebod wrote: Thu Aug 04, 2022 7:45 amWhen I bought my first house at the age of 30, I had less than $100,000 saved and a $400,000 mortgage. There is no math that gets me to a reasonable asset allocation unless I spent the next ten years only buying bonds.
If we say the house was $500k with 20% downpayment and savings all in equities, the total net worth could have been $200k allocated 50% equities / -200% fixed income / 250% properties. I'm guessing those percentages in excess of ±100% is what makes you think it's not "a reasonable asset allocation," but it's actually fine and reasonable for many people and reflects that one is quite different from someone renting with 100% equities / 0% fixed income / 0% properties.

If one saves another $200k and put all into equities, the $400k net worth could then be viewed as 75% equities / -100% fixed income / 125% properties. This didn't require only paying down the mortgage or only buying bonds and still could be considered a reasonable asset allocation. Some might react to this situation by taking out more debt to buy rental properties, and others might decide to focus on the fixed income buying bonds or paying down debt depending on yields vs rates, or one could continue focusing on equities as was done for this example.

Of course, people have the choice to do some of each as well such as putting half towards mortgage prepayment and half towards equities all while having a reasonable asset allocation.
There is nothing wrong with taking debt into account like this. It is actually a very precise way of thinking. Though like vineviz stated if one is going to add a mortgage, they probably should also add their lifetime earning potential to the calculation as well. Some and I would say very few like and feel like they require such calculations. More power to them and have at it. I would without a doubt not recommend thinking like this for most people looking to build wealth. For them it is an unnecessary complexity that will only lead to confusion and decreased future growth either through an unnecessarily over conservative asset allocation or via making a mistake due to the added complexity. That is, with this qualifier: they understand that they must service the debt and don't over leverage themselves.

I function as a free financial advisor for many of my colleagues, friends, and family. I can tell you for a fact that there is no way in hell I would even think about adding a mortgage to their asset allocation. Just understanding the point of an asset allocation and how to manage it is complex enough for them. It is so complex that for most, it is far easier to just do target date funds which by the way never ask how much you still owe the bank in deciding how much bonds one should hold.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by willthrill81 »

EnjoyIt wrote: Thu Aug 04, 2022 3:05 pmIt is so complex that for most, it is far easier to just do target date funds which by the way never ask how much you still owe the bank in deciding how much bonds one should hold.
While TDFs have many 'quirks', to put it mildly, I firmly believe that the lion's share of investors are likely to be better served in total with them than much of what's discussed on the forum.

The BH forum is definitely not financial advice for John or Jane Doe.
User avatar
vineviz
Posts: 12284
Joined: Tue May 15, 2018 1:55 pm
Location: Baltimore, MD

Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by vineviz »

willthrill81 wrote: Thu Aug 04, 2022 4:04 pm While TDFs have many 'quirks', to put it mildly, I firmly believe that the lion's share of investors are likely to be better served in total with them than much of what's discussed on the forum.
I agree. It's not at all uncommon for me to recommend target date funds as part of client portfolio allocations, especially for tax-advantaged accounts.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
EnjoyIt
Posts: 6675
Joined: Sun Dec 29, 2013 8:06 pm

Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by EnjoyIt »

willthrill81 wrote: Thu Aug 04, 2022 4:04 pm
EnjoyIt wrote: Thu Aug 04, 2022 3:05 pmIt is so complex that for most, it is far easier to just do target date funds which by the way never ask how much you still owe the bank in deciding how much bonds one should hold.
While TDFs have many 'quirks', to put it mildly, I firmly believe that the lion's share of investors are likely to be better served in total with them than much of what's discussed on the forum.

The BH forum is definitely not financial advice for John or Jane Doe.
I believe there are plenty of boglheads who can and actually do worse than a simple target date fund. These mortgage as a negative bond calculations are far more geared towards the more "sophisticated" investor (if that is even the correct adjective.) Most people really shouldn't get into the weeds of these things. First start with simplicity and once that is going smoothly evaluate if adding additional complexity is worth the time commitment.

As an example start with a target date fund in an employer 401k and start building wealth. With a few years of raises and whatnot, one may want to invest in a taxable account where target date funds are adequate. Although we all will agree breaking them up and having an AA allocation across all investment vehicles provides a benefit. That benefit should be evaluated vs the added time and the added complexity. Not everyone is willing to understand rebalancing, tax loss harvesting and the benefit of tax lots when selling in retirement. For them a target date fund even in taxable is the right choice because the added complexity will only harm them. Adding the mortgage as a negative bond is completely out of the question. And...might I add that there are plenty of people asking questions on this forum in that exact position as I described above. Mortgage as a negative bond shouldn't even be introduced to them.

And I beg to differ on your comment about John and Jane Doe. because the boglehead forum is a wonderful resource for financial advice. This website's goal as stated on the getting started page is "to give ordinary investors a fair shake." And that includes the Doe family.

BTW, despite me downplaying mortgage as a negative bond's usefulness. There was a time when I had a mortgage and did indeed take my mortgage as a negative bond seriously. It was the right decision at that particular time. But I was towards the tail end of my building wealth career.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
will23
Posts: 118
Joined: Mon Mar 16, 2009 10:32 pm

Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by will23 »

spdoublebass wrote: Thu Aug 04, 2022 10:18 am
will23 wrote: Wed Aug 03, 2022 7:20 pm
spdoublebass wrote: Sun Jul 10, 2022 5:46 pm
If we keep this really simple, Say a couple saves $20K a year, (they put $6k each in a Roth IRA and another $4k each in a Roth 401k), but also has a mortgage, how would they treat their mortgage as a negative bond with an 80/20 AA? Basically, I'm asking how to combine #1 and #2 above.

Thanks in advance.
I thought I'd try to answer your actual question, in a straightforward mathematical way.

Let's say you are 5 years into the mortgage (you've made 60 payments). You need to calculate how much lower your mortgage balance is due to your excess payments. You do this by either looking at the original mortgage amortization schedule that came in the ridiculous pile of papers you signed or with the formula '=PV(0.05/12,360-60,-123.45,,0)', where 123.45 is your schedule payment (principal and interest only, not escrow), the .05 is your interest rate. Then compare that to your actual mortgage balance (from a mortgage statement, web site), add that difference to your net worth and also your bond allocation.

You will need to make another adjustments if you don't want to 'cheat': after you pay off your mortgage you must take the monthly payment saved and apply it to your investment account (until the end of 30 years), so in this example contribute $123.45 to investments monthly. Even though you paid the mortgage off, you still adjust for the difference between your current balance and the amount on the amortization schedule.

If you pay the mortgage down too rapidly, you may not have enough in bonds to rebalance into stock.
My thought now is what about taking $400 a month (about 20% of new money) and putting it on the mortgage. I would pay it off in under 13 years. This is very appealing to me on many levels.

That is what I was asking about. I think I would rather be 52/58 with a paid off mortgage, than waiting the full 21ish years.

I am just trying to figure out if I'd regret it or not. I do not think it's overkill, meaning I'm not putting all of my money towards the mortgage, I would obviously regret that.
At these rates too, I think I'd just buy Ibonds with the $400. Then redeem them when inflation drops under 5% and pay it towards the principal.
Based on your reasoning, I don't think you will "regret it". If you are really worried about regret, start smaller and see how it goes.

What you are suggesting is probably not 'optimal' but is at least reasonable and seems to have some psychological benefits for you.
EnjoyIt
Posts: 6675
Joined: Sun Dec 29, 2013 8:06 pm

Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by EnjoyIt »

spdoublebass wrote: Thu Aug 04, 2022 10:18 am
will23 wrote: Wed Aug 03, 2022 7:20 pm
spdoublebass wrote: Sun Jul 10, 2022 5:46 pm
If we keep this really simple, Say a couple saves $20K a year, (they put $6k each in a Roth IRA and another $4k each in a Roth 401k), but also has a mortgage, how would they treat their mortgage as a negative bond with an 80/20 AA? Basically, I'm asking how to combine #1 and #2 above.

Thanks in advance.
I thought I'd try to answer your actual question, in a straightforward mathematical way.

Let's say you are 5 years into the mortgage (you've made 60 payments). You need to calculate how much lower your mortgage balance is due to your excess payments. You do this by either looking at the original mortgage amortization schedule that came in the ridiculous pile of papers you signed or with the formula '=PV(0.05/12,360-60,-123.45,,0)', where 123.45 is your schedule payment (principal and interest only, not escrow), the .05 is your interest rate. Then compare that to your actual mortgage balance (from a mortgage statement, web site), add that difference to your net worth and also your bond allocation.

You will need to make another adjustments if you don't want to 'cheat': after you pay off your mortgage you must take the monthly payment saved and apply it to your investment account (until the end of 30 years), so in this example contribute $123.45 to investments monthly. Even though you paid the mortgage off, you still adjust for the difference between your current balance and the amount on the amortization schedule.

If you pay the mortgage down too rapidly, you may not have enough in bonds to rebalance into stock.
Thanks for the information. I'm a little embarrassed to admit, I didn't follow all of that.

I guess I should have been more to the point in my OP. This forum makes you feel like a very small fish in a big pond. Ha!

Anyway. We save 20% for retirement. Let's just say that's a bout $2000 a month. I currently have been $1900 in stock and $100 in TIAA Trad fund. (I don't want to go down the TIAA rabbit hole here if possible).

Next month, we are starting a 25 year, bi weekly mortgage at 5%. Which means it is scheduled to be paid off in 21ish years due to the bi weekly schedule.

My thought process was we are currently at 95/5 (age 39/45). I know it's been said we could even 75/25 at our ages. I am ok with our AA and before the mortgage never thought of adding more bonds.

My thought now is what about taking $400 a month (about 20% of new money) and putting it on the mortgage. I would pay it off in under 13 years. This is very appealing to me on many levels.

That is what I was asking about. I think I would rather be 52/58 with a paid off mortgage, than waiting the full 21ish years.

I am just trying to figure out if I'd regret it or not. I do not think it's overkill, meaning I'm not putting all of my money towards the mortgage, I would obviously regret that.
At these rates too, I think I'd just buy Ibonds with the $400. Then redeem them when inflation drops under 5% and pay it towards the principal.
There is nothing wrong at wanting to be debt free. It feels good and it is worth paying a bit of a premium to achieving that goal. Is it the most likely path for maximum wealth? Possibly not. But, $400 a month isn’t going to break anything and eventually in 13 years you will feel great about being done with the mortgage.

Me, personally, I did not put extra into the mortgage until I was nearing what I believed was financial independence. But I will admit, back then, being debt free felt good. Today. . . Meh.

Edit to add: Just make sure you are investing enough to meet your retirement goals before adding anything extra into a relatively low interest rate mortgage.
Last edited by EnjoyIt on Sat Aug 06, 2022 2:37 am, edited 1 time in total.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
mikejuss
Posts: 2066
Joined: Tue Jun 23, 2020 1:36 pm

Re: Mortgage as a negative bond...Don't pay down mortgage early...House is not a bond

Post by mikejuss »

There are much worse (and probably a few better) things to do with your money than to pay down your mortgage.
Walkure
Posts: 565
Joined: Tue Apr 11, 2017 9:59 pm

Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by Walkure »

toddthebod wrote: Thu Aug 04, 2022 10:00 am Not explicitly, no. But there are plenty of people upthread arguing that if you have X amount of mortgage you are now "200% stocks". How is that helpful? What then is an appropriate asset allocation for a young investor? 200% equities? 150% equities?
IMHO, between 150% and 200% is right about the sweet spot for young accumulators. The Lifecycle Investing thread covers this quite thoroughly.

Personally, I've always been a bit amused that folks dial in an AA without ever going through the exercise of defining a personal utility function. I particularly liked the insights from this thread and this thread, both by user Uncorrelated.
User avatar
StevieG72
Posts: 1666
Joined: Wed Feb 05, 2014 9:00 pm

Re: Mortgage as a negative bond...Don't pay down mortgage early...House is not a bond

Post by StevieG72 »

When bonds started circling the drain, it was a bo brainer to pay off mortgage. It was < 100k anyways.
Fools think their own way is right, but the wise listen to others.
mikejuss
Posts: 2066
Joined: Tue Jun 23, 2020 1:36 pm

Re: Mortgage as a negative bond...Don't pay down mortgage early...House is not a bond

Post by mikejuss »

I truly don't understand all the agony around the question.
jello_nailer
Posts: 522
Joined: Sun Apr 07, 2019 10:20 pm

Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by jello_nailer »

[/quote]

There is nothing wrong at wanting to be debated free.
[/quote]

I hayt spel chek and auto corrkt, who even needs it.
User avatar
AerialWombat
Posts: 2786
Joined: Tue May 29, 2018 1:07 pm
Location: Cashtown, Cashylvania

Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by AerialWombat »

willthrill81 wrote: Wed Aug 03, 2022 10:08 am
manuvns wrote: Wed Aug 03, 2022 10:07 am I will never pay off my mortgage it's the bet leverage available to working people
Leverage makes the good times better but also makes the bad times worse. Ask one of the millions who lost their homes during the GFC.
I was one of those people. The time I spent homeless during the GFC is heavily reflected in my current portfolio composition and how I make certain financial decisions. Such thinking may not be optimal, but I don’t care. Minimizing downside risk is priority one for me, period.
This post is a work of fiction. Any similarity to real financial advice is purely coincidental.
Sheridan
Posts: 34
Joined: Tue Feb 01, 2022 9:02 pm
Location: USA

Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by Sheridan »

AerialWombat wrote: Fri Aug 05, 2022 11:32 pm
willthrill81 wrote: Wed Aug 03, 2022 10:08 am
manuvns wrote: Wed Aug 03, 2022 10:07 am I will never pay off my mortgage it's the bet leverage available to working people
Leverage makes the good times better but also makes the bad times worse. Ask one of the millions who lost their homes during the GFC.
I was one of those people. The time I spent homeless during the GFC is heavily reflected in my current portfolio composition and how I make certain financial decisions. Such thinking may not be optimal, but I don’t care. Minimizing downside risk is priority one for me, period.
And this is exactly why I paid off mine. I see an outstanding mortgage as a loan where my shelter is used as collateral. Shelter is a basic need, right up there with food and water.
coachd50
Posts: 903
Joined: Sun Oct 22, 2017 10:12 am

Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by coachd50 »

Sheridan wrote: Fri Aug 05, 2022 11:42 pm
AerialWombat wrote: Fri Aug 05, 2022 11:32 pm
willthrill81 wrote: Wed Aug 03, 2022 10:08 am
manuvns wrote: Wed Aug 03, 2022 10:07 am I will never pay off my mortgage it's the bet leverage available to working people
Leverage makes the good times better but also makes the bad times worse. Ask one of the millions who lost their homes during the GFC.
I was one of those people. The time I spent homeless during the GFC is heavily reflected in my current portfolio composition and how I make certain financial decisions. Such thinking may not be optimal, but I don’t care. Minimizing downside risk is priority one for me, period.
And this is exactly why I paid off mine. I see an outstanding mortgage as a loan where my shelter is used as collateral. Shelter is a basic need, right up there with food and water.
But for the purposes of this never ending, “no universal right answer because personal finance is personal”discussion- the situation you and aerial wombat above address only applies to individuals who have amassed enough in investment accounts to have the choice between leaving it in investment accounts or paying off balance.

Someone aggressively using their income to pay extra towards their mortgage- but still having a sizeable balance on that mortgage likely would not have benefited from that action if they were so adversely impacted by the GFC (or other shock causing them to lose their job). Right?
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by willthrill81 »

coachd50 wrote: Sun Aug 07, 2022 7:30 am Someone aggressively using their income to pay extra towards their mortgage- but still having a sizeable balance on that mortgage likely would not have benefited from that action if they were so adversely impacted by the GFC (or other shock causing them to lose their job). Right?
That's why many instead use a sinking fund for the purpose of eventually paying off the mortgage. This enables them to retain the liquidity of the funds until they can pay off the mortgage in one fell swoop, thereby reducing their need for liquidity. However, this has usually entailed paying a higher after-tax rate on one's mortgage than one earned from the sinking fund.

However, a mortgage can also potentially be recast after significant principal payments, reducing the fixed principal and interest payment.
User avatar
AerialWombat
Posts: 2786
Joined: Tue May 29, 2018 1:07 pm
Location: Cashtown, Cashylvania

Re: Mortgage negative bond...Don't pay down mortgage early...House is not a bond

Post by AerialWombat »

willthrill81 wrote: Sun Aug 07, 2022 10:24 am
coachd50 wrote: Sun Aug 07, 2022 7:30 am Someone aggressively using their income to pay extra towards their mortgage- but still having a sizeable balance on that mortgage likely would not have benefited from that action if they were so adversely impacted by the GFC (or other shock causing them to lose their job). Right?
That's why many instead use a sinking fund for the purpose of eventually paying off the mortgage. This enables them to retain the liquidity of the funds until they can pay off the mortgage in one fell swoop, thereby reducing their need for liquidity. However, this has usually entailed paying a higher after-tax rate on one's mortgage than one earned from the sinking fund.

However, a mortgage can also potentially be recast after significant principal payments, reducing the fixed principal and interest payment.
…and perhaps somewhat ironically given my prior post, this is precisely why I haven’t paid off my mortgage. I can, the cash is sitting in T-bills, but I’ve come to value the liquidity more than I value the prospect of being mortgage-free (plus I still have all the mortgages on rentals). As I double up my cash over the next year, I’ll give greater consideration to paying off the mortgage, or maybe I won’t— the liquidity is giving me greater confidence in increasing equity allocation, where the money can theoretically outpace the mortgage rate and inflation.

Bottom line is that it’s not a cut-and-dried decision.
This post is a work of fiction. Any similarity to real financial advice is purely coincidental.
MichRoots
Posts: 51
Joined: Sun Apr 03, 2022 2:01 pm

Re: Mortgage as a negative bond...Don't pay down mortgage early...House is not a bond

Post by MichRoots »

I can understand the mathematical concept of not paying off the mortgage because you are making more money in another account.

I kept way too much money in savings earning 0 for several years. But it paid off within the past year as ibonds started paying 7% and now over 9%. Had I paid off the mortgage earlier with my large savings I would not have been able to put as much money into ibonds in this past year. My savings had grown so large that I did end up paying off the entire mortgage (at 3.375% interest) while also investing in ibonds.

Now my savings is growing like a weed as I have no mortgage.
User avatar
grabiner
Advisory Board
Posts: 32277
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Mortgage as a negative bond...Don't pay down mortgage early...House is not a bond

Post by grabiner »

MichRoots wrote: Sun Aug 07, 2022 12:05 pm I can understand the mathematical concept of not paying off the mortgage because you are making more money in another account.

I kept way too much money in savings earning 0 for several years. But it paid off within the past year as ibonds started paying 7% and now over 9%. Had I paid off the mortgage earlier with my large savings I would not have been able to put as much money into ibonds in this past year. My savings had grown so large that I did end up paying off the entire mortgage (at 3.375% interest) while also investing in ibonds.
This is not the right comparison, because the mortgage prepayment is at a long-term fixed rate, while the I-Bond rate is short-term. You can cash in the I-Bonds when inflation declines, or keep them but earn only 2% or 3% if that is the inflation rate. Also, your past moves did not pay off'; if you earned near 0 for three years, then bought I-Bonds which earn 9% for one year, your compound return is only 2.25%. (They may have been right anyway, if keeping the money liquid was important.)

Also, if you had paid off the mortgage earlier, you would have been able to buy I-Bonds this year, because the money you paid towards the mortgage would have been available for investments instead.
Wiki David Grabiner
Apathizer
Posts: 1135
Joined: Sun Sep 26, 2021 2:56 pm

Re: Mortgage as a negative bond...Don't pay down mortgage early...House is not a bond

Post by Apathizer »

mikejuss wrote: Fri Aug 05, 2022 10:35 pm I truly don't understand all the agony around the question.
It's largely self-inflicted. The issues can be very complex and many people are greedily obsessed with attempting to determine the most financially optimal approach when that's probably implausible since the future is largely unpredictable. Paying it off is compelling to me since eliminating debt simplifies financing and investing.
ROTH: 40% AVUS, 30% DFAX, 30% BNDW. Taxable: 50% BNDW, 30% AVUS, 20% DFAX.
MichRoots
Posts: 51
Joined: Sun Apr 03, 2022 2:01 pm

Re: Mortgage as a negative bond...Don't pay down mortgage early...House is not a bond

Post by MichRoots »

grabiner wrote: Sun Aug 07, 2022 12:14 pm
MichRoots wrote: Sun Aug 07, 2022 12:05 pm I can understand the mathematical concept of not paying off the mortgage because you are making more money in another account.

I kept way too much money in savings earning 0 for several years. But it paid off within the past year as ibonds started paying 7% and now over 9%. Had I paid off the mortgage earlier with my large savings I would not have been able to put as much money into ibonds in this past year. My savings had grown so large that I did end up paying off the entire mortgage (at 3.375% interest) while also investing in ibonds.
This is not the right comparison, because the mortgage prepayment is at a long-term fixed rate, while the I-Bond rate is short-term. You can cash in the I-Bonds when inflation declines, or keep them but earn only 2% or 3% if that is the inflation rate. Also, your past moves did not pay off'; if you earned near 0 for three years, then bought I-Bonds which earn 9% for one year, your compound return is only 2.25%. (They may have been right anyway, if keeping the money liquid was important.)

Also, if you had paid off the mortgage earlier, you would have been able to buy I-Bonds this year, because the money you paid towards the mortgage would have been available for investments instead.
I like to keep around 8 months of living expenses in a liquid account for emergency purposes. So it wasn't until the past year where the saving account started growing to the point where paying off the mortgage would leave 6 months living expenses in savings. I will add that I wasn't too worried about the <1% interest I was getting on my bank accounts (though it was not pleasurable) because inflation was 2% or so the past several years.

I am sure you have heard the argument "if you can make more money on an investment than paying off your house, then why don't you borrow to the maximum on your home and invest it at that rate?"
nydoc
Posts: 407
Joined: Mon Jul 22, 2019 5:57 pm

Re: Mortgage as a negative bond...Don't pay down mortgage early...House is not a bond

Post by nydoc »

When there are so many options take the middle
Path. Whenever there is some extra money pay half towards mortgage and other half for investment.
User avatar
grabiner
Advisory Board
Posts: 32277
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Mortgage as a negative bond...Don't pay down mortgage early...House is not a bond

Post by grabiner »

MichRoots wrote: Sun Aug 07, 2022 12:51 pm I am sure you have heard the argument "if you can make more money on an investment than paying off your house, then why don't you borrow to the maximum on your home and invest it at that rate?"
And the normal response to that is a failure to consider risk. If you can make more money on a low-risk bond investment than on a mortgage, then it does make sense to hold the bonds.

Thus, it makes sense to buy I-Bonds this year in preference to making mortgage prepayments; if appropriate, you can sell the I-Bonds next year and use the money to pay down the mortgage then, coming out ahead compared to paying down the mortgage this year.
Wiki David Grabiner
Post Reply