A new debate on paying off the mortgage (or not).

[hogwild]

Paying off the mortage is a cash flow issue in my case. I only owe about 70k and my PI pmt is 1168/mo. This means, using the 4% rule (or the reciprical 25x) I would need $350,000 just to support the payments. To me, the 70k payoff makes sense.

[CitricAcid]

Hate to continue on a topic that is posted too often and takes over the board, but would like to add onto a comment that CFB made regarding social norms or whatever. I feel the reason that the mortgage debt and 6% interest is considered standard while borrowing at lower rates to earn higher rates isn't is simply because of the tangible and intrinsic value of a home. (I don't believe this, however, because money in essence is tangible and intrinsic in the fact that it can be exchanged for goods and services, so liquid investments, like stocks are after exchanging tangible assets, and could actually turn into a house... but I digress). Borrowing money at a standard rate so that people can have a roof over your head is a lot more socially understandable and accepted because:
a.) homeownership is an ideal many in this country think should be universal
b.) not everybody trusts the stock market
c.) everybody trusts the real estate market
d.) sentimental/psychological value

Quote:

Originally Posted by hogwild Paying off the mortage is a cash flow issue in my case. I only owe about 70k and my PI pmt is 1168/mo. This means, using the 4% rule (or the reciprical 25x) I would need $350,000 just to support the payments. To me, the 70k payoff makes sense.

This is partly incorrect. Having $350,000 would be able to pay off that amount INDEFINITELY... and when the payments stop, you would still HAVE $350,000. Also, the $350,000 would grow with inflation and has no timeframe. Considering the amount you can make with other alternatives and the time frame involved with the payments, the value is a lot closer to 70k. At that rate, it seems there are 7 years left on this mortgage. Amortize an amount of money that pays off 70k in 7 years using money today that can be invested elsewhere and it will be around 100k.

[slazenger]

Quote:

Originally Posted by Nords Since we've debated this issue a couple thousand times on this board, let me point out a couple things that others have previously mentioned: 1. The deduction advantage is only to the extent that it exceeds one's standard deduction. I pay over $18K/year in mortgage interest now so that's no problem this year, but in another 10 years the lines may cross as the deduction is adjusted for inflation and the interest payments drop.

I only pointed it out once earlier in the thread (not a thousand times, granted ), but I specifically mentioned I take this deduction. To be clear, I've passed the standard deduction before I even consider the mortgage interest so every dime of my mortgage interest is deducted for the time being.

Quote:

2. It makes no sense to own bonds earning less than the mortgage rate.

In a taxable account? I agree. But gosh, you throw in all the advantages of an IRA and you've easily got a situation where you end up with more green in the end with the IRA corporate bonds pitted against just paying a mortgage note. Look at this from the perspective of a traditional IRA (though I use Roths which are arguably better). What kind of investment gives you an instant 25% return on your money AND lets that investment grow tax free for as long as you like? A traditional IRA for someone with a marginal rate of 25%. If i choose to go the route of paying more than my regular 30 year fixed payment, this is exactly the kind of account that won't get full funding.

If we're talking about mortgage vs taxable accounts, again I'm on the side of paying off the mortgage.

[popowich]

Quote:

Originally Posted by ziggy29 A lot of the people who would NOT pay off the home with a $100,000 lump-sum windfall would also NOT go $100K into debt to invest.

My original mortgage amount was 96K.

When I was younger I had 40K that I wasted and should have put at least 20K of it into a gigantic payment and knocked down my mortgage balance.

Today at 31 years old I'd pay off my house in a heart beat, no second thoughts. Your home is more than an investment, it's the roof over your head. You don't mess around with that.

At no age would I have borrowed 100K at 6% to invest for a higher rate of return.

A friend of mine and I did joke for a long time about taking out extra college loans at 4% to invest but did not see the sense in taking on additional debt.

-Raymond

[OAG]

This was a 4 year old thread - of course the link is gone.

[Notmuchlonger]

Ha I thought it was just last week Necro threads..

[cute fuzzy bunny]

The tax break is only interesting if you're still working. If you're retired with a mortgage, you have to withdraw $xx to pay the mortgage and pay taxes on that excess withdrawal, in order to receive the offsetting tax break. Not only no free lunch, no lunch at all.

Works if you're accumulating, but if you're accumulating, not within a few years of retirement, and dutifully holding 20-40% of your portfolio in bonds paying 3-5% while paying a 5-6%+ mortgage...well...that math is even easier.

[Khan]

Quote:

But I have never personally met anyone who pulled equity out of their home to invest in the market.

I haven't met such folks either.

I do recall reading many proposals to do so in the late 1990s.

[TickTock]

Money magazine regularly recommends pulling equity out of the house and investing it in the market on their 'One Family's Finances' (or whatever the proper title is) column.

Bleh. My suggestion - with $800,000 equity in your $1,100,000 home, sell the freaking home, buy a $300,000 home outright and invest the $500,000!

But that's just me.

On taking out a loan at 5.5% (or whatever) and investing it in a balanced AA - yes, the long-term math favors it... BUT! in the short term, you can't predict how markets will perform. If they underperform the expected return for the next ten years, how does it affect your plans? (Doesn't necessarily tip the decision one way or the other, but it should be considered.) For me, the certainty of lower monthly expenses via paying off the mortgage trumps the expected higher return of borrowing and investing. I'm fiscally conservative that way.

[rec7]

Quote:

Originally Posted by TickTock Money magazine regularly recommends pulling equity out of the house and investing it in the market on their 'One Family's Finances' (or whatever the proper title is) column. Bleh. My suggestion - with $800,000 equity in your $1,100,000 home, sell the freaking home, buy a $300,000 home outright and invest the $500,000! But that's just me. On taking out a loan at 5.5% (or whatever) and investing it in a balanced AA - yes, the long-term math favors it... BUT! in the short term, you can't predict how markets will perform. If they underperform the expected return for the next ten years, how does it affect your plans? (Doesn't necessarily tip the decision one way or the other, but it should be considered.) For me, the certainty of lower monthly expenses via paying off the mortgage trumps the expected higher return of borrowing and investing. I'm fiscally conservative that way.

That's my thinking too sell the expensive home buy a cheaper one then but that money in the market. That way if the market tanks you still have a paid for home.

[cute fuzzy bunny]

Hmm, I paid of my 6% mortgage in 2000. Avoided losing half of what I spent doing that if I'd have left it in the market. Then avoided being paid <5% rates on fixed income interest over the last 8 years. Avoided paying taxes almost every year by having a small annual withdrawal amount. Had a simpler tax preparation by not itemizing. Avoided any concerns about market volatility because I dont have to liquidate any assets into a down market.

So...I guess it depends a bit on your timing and strategy.

A lot of the "solid math" that goes into these calculations presumes a 30 year stay in the home and all the numbers run on a 30 year basis. Given brass balls and an unwavering focus on leaving things alone, that works great. All 20+ year numbers show a greater equity return than the same period mortgage rates. For significantly less than 100% equity holdings the numbers close up a bit.

Taken on a 7-10 year basis, which is greater than the standard time the vast majority of people hold a single mortgage, the average period gains vs period mortgage rates produces a losing proposition about half the time.

Sleep at night factors also vary wildly.

Its simple investing on margin. Playing with the rates and time frames are just convenient excuses. The bottom line is that people are cultured to accept a mortgage debt as reasonable, ordinary and standard. Margin debt or taking a loan to invest is not so well inured.

[Ronnieboy]

I am willing to make this offer to anyone who believes that the mortgage interest deduction is a good deal. You send me $10k and I will be more than happy to send you back $3k. In fact I will go one step further - I am feeling the need for economic stimulus - I will send back $5k. Please email me for more details....

[cute fuzzy bunny]

I'll be glad to bankroll you in this business endeavor at the usual rates. I'll supply the $5k, you send me the 10k, and I'll kick you back a $1k finders fee for each customer.

[walkinwood]

Here's a link to the article.
Finance: Should You Prepay Your Mortgage?

I'm having a hard time understanding it. can someone help?

Say I want a 60/40 equity to bond asset allocation & have a $1M portfolio ($600K equity, $400K bond). I also have $400K house with a $200K mortgage.

Treating this as purely an asset allocation problem (ie. If I assume that the after-tax mortgage rate is the same as the after-tax rate of a treasury bond) Is she saying:

a) my effective portfolio is $800K with $600K in equity, $200K ($400k - $200K mortgage) in bonds, so effectively a 75/25 asset allocation.

b) So, if I want a 60/40 allocation with the mortgage, I really should have $480k (60% of $800K) in stock and 520K in bonds?

Thank you.

[aenlighten]

Possibly, if the interest rate were low, taxes were high, and I had stable income streams such as annuities or pensions to cover it. Trading a non-indexed pension for a deflating mortgage would reduce inflation risk. Otherwise, not likely.

[cute fuzzy bunny]

I think the good question around asset allocation is to note that your risk profile changes substantially without a mortgage, and your spending risk goes down substantially.

So while your portfolio is smaller, you could take on more investing risk (say 75/25 or 80/20) for perhaps an even higher return than you could have achieved with a more staid 50/50 or 60/40. Or since you dont need that enormous upside because you dont have much in the way of payment risk, you could reduce your portfolio risk, shoot for a bit more cheap income, and improve your sleep at night factor.

If your spending is slashed by 30-50%, shouldnt that change other aspects of your financial life?

[blessed]

Pete,

I'm one of the people quoted in the "Ordinary People,Extraordinary Wealth"; and I still have a mortgage and my DH and I are retired.

[aenlighten]

There are not only financial and real assets, but values of income streams. The larger the latter compared to expenses, the more risk one could tolerate. I would also consider these as part of ones portfolio.

As people age they can lower their risk due to a shorter time horizon, but I think many do not because their portfolio becomes large enough that they feel no need to. Their spending may increase but their portfolio increases faster and they may feel they can trim their expenses more easily in a downturn.

[cute fuzzy bunny]

Many home equity loans are fee free, can often be had at rates under 6% (penfed has had several offerings quite recently), and in some cases the interest may be tax deductible.

It DOES create a frame of mind issue. Many people accept having a mortgage as being "normal" without doing an analysis of the issues.

In this instance, there is very little difference between margin investing with your house as collateral and holding a mortgage to improve the size of your investment portfolio.

Look at it from this perspective. You hold a mortgage, invest the money...but you invest it a little more conservatively because...well...cant have your investments take a dive and have to be selling off depreciated assets to pay the mortgage. And then you set aside 2-5+ years of cash or equivalents to fully insulate you from market swings. And then maybe you eke out a percent or two after costs. Now subtract the reduced investment gains from the more conservative portfolio. Now subtract the weak returns you got on all that cash.

Doesnt it seem like you've just created a series of problems and then spent potential returns solving them and reducing the risk you created?

I've always been big on not making problems, and hence not having to jump through hoops to solve them.

[slazenger]

Quote:

Originally Posted by cute fuzzy bunny Look at it from this perspective. You hold a mortgage, invest the money...but you invest it a little more conservatively because...well...cant have your investments take a dive and have to be selling off depreciated assets to pay the mortgage. And then you set aside 2-5+ years of cash or equivalents to fully insulate you from market swings. And then maybe you eke out a percent or two after costs. Now subtract the reduced investment gains from the more conservative portfolio. Now subtract the weak returns you got on all that cash. Doesnt it seem like you've just created a series of problems and then spent potential returns solving them and reducing the risk you created? I've always been big on not making problems, and hence not having to jump through hoops to solve them.

If i understand the perspective you just described, it doesn't include a situation where there is earned income (my job) supporting and paying for the mortgage. If I'm recalling correctly, you are retired and don't have earned income anymore. Though there are no guarantees, my job (and its associated income) is extremely stable.