Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
A new debate on paying off the mortgage (or not).
Old 05-02-2004, 10:08 AM   #1
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,616
A new debate on paying off the mortgage (or not).

We've been debating whether it's better to pay off the mortgage or to invest it in higher-return assets (whatever those are). Aside from smiting each other mightily with calculators & statistical theory, IMO to this point the debate has only been a reciprocal diatribe without persuasion. We still have our mortgages.

Linda Stern takes an asset-allocation approach. It doesn't have much to do with the previous debates about historical returns & calculators, so please restrict those comments to that thread. But take a look in this thread at how your own portfolio is affected by a mortgage.

Reuters Finance: Should You Prepay Your Mortgage?

http://www.reuters.com/newsArticle.j...toryID=5008611

According to the article, our own retirement portfolio has risen by our home value (again, "whatever that is") and our mortgage has pushed our asset allocation from 0% bonds to -25%. We haven't included our home equity in our retirement portfolio, and I'm still trying to decide if this is deworsification!

But asset allocation may only be a different approach to solving part of the mortgage problem. In the back half of the article, she gives a nod to the other concerns that we've already brought up.
__________________

__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: A new debate on paying off the mortgage (or no
Old 05-02-2004, 12:01 PM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: A new debate on paying off the mortgage (or no

Nords -

This was actually my core point that was apparently lost in the "smiting". In short, replace the mortgage with a portion of your fixed income investment money.

After doing so, one can leave their portfolio with a higher ratio of stocks, which by historical analysis would provide a higher rate of return. Or one can rebalance to the same allocation or one that is lower in volatility due to the lower SWR requirements.

Unless you're getting the current mortgage rate as a low risk bond return (minus taxes and expenses) or forsee that return in the next few years. Right now even high yield bonds are barely beating the mortgage rate, and thats before taxes.
__________________

__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: A new debate on paying off the mortgage (or no
Old 05-02-2004, 01:26 PM   #3
Thinks s/he gets paid by the post
charlie's Avatar
 
Join Date: Mar 2004
Location: Dallas
Posts: 1,211
Re: A new debate on paying off the mortgage (or no

I have a home equity loan at 3.95% which will be
paid off in 5 years. I could pay it off but have chosen
not to do so at this time. But, I reserve the right to
do so if it seems appropriate in the future. Seems
like a no brainer to me for my situation.

Personally, I do not consider my home as part of
my portfolio in any way other than as an improbable
source of funds if it becomes necessary. We hope
to live here happily ever after and let the kids deal
with the house and all our accumulated junk. Serves
them right!

Cheers,

Charlie (aka Chuck-Lyn)
__________________
charlie is offline   Reply With Quote
Re: A new debate on paying off the mortgage (or no
Old 05-02-2004, 02:39 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2003
Location: Kansas City
Posts: 7,408
Re: A new debate on paying off the mortgage (or no

? Am I reading the link right? Over a long span, say 30 yr fixed, then there are likely to be periods where the numbers say pay ahead on your mortgage by the amount you're allocating to bonds and then buy bonds when the interest rate exceeds your fixed mortgage by enough to make them the better buy.
I.e. switch as the numbers/interest rate changes?
__________________
unclemick is offline   Reply With Quote
Re: A new debate on paying off the mortgage (or no
Old 05-02-2004, 06:26 PM   #5
Thinks s/he gets paid by the post
charlie's Avatar
 
Join Date: Mar 2004
Location: Dallas
Posts: 1,211
Re: A new debate on paying off the mortgage (or no

The main reason I am reluctant to pay off the
home equity loan is that it would tie up a big
part of my after tax savings and reduce future
options. In my case, my small business just
about covers the monthly payment. If I sell
the business in the next 5 years, I will likely
pay off the loan ... but who knows how I will
see things at that time?

GDER, I would not borrow money on the house to
invest it. That's called "leverage", if I am not mistaken,
and seems risky as hell to me if you put it into anything
other than US Gov debt or AAA bonds. You might be
able to cover the interest on your mortgage with
interest earned on "safe" bonds, but you would not
be able to cover principal payments. You might be
able to take out a "balloon" mortgage and cover the
payoff with bonds maturing at the same time as the
mortgage but that seems like a lot of running in place
to me.

Cheers,

Charlie (aka Chuck-Lyn)
__________________
charlie is offline   Reply With Quote
Old 05-09-2008, 10:09 AM   #6
Recycles dryer sheets
Pete's Avatar
 
Join Date: May 2008
Posts: 350
In the book Ordinary People Extraordinary Wealth you get many reasons to keep your mortgage. I paid off my mortgage and the benefits were mostly psychological. I feel real peace of mind and it convinced me to leave work early.
__________________
Pete is offline   Reply With Quote
Old 05-09-2008, 10:13 AM   #7
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
Well, here's another way to look at it.

Let's say you have the ability to pay off a $100,000 mortgage at (say) 6%. You ask whether or not you should pay off the mortgage. A lot of people would say no because you can likely invest it at a higher long-term return, plus potential tax breaks for keeping the mortgage.

Now ask the same people: If you owned your home free and clear, would you borrow $100K against it at 6% to invest?

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.

But these are essentially identical situations; the choice is whether you prefer to have $100,000 and a $100K mortgage or you have a paid-off home. But sentiment often changes depending on which way you approach it.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 05-09-2008, 01:28 PM   #8
Moderator Emeritus
 
Join Date: Oct 2007
Posts: 4,929
In my case, I retired when the mortgage was paid off, because I knew that at that point I'd have an exciting new budget item coming in to replace it, the family medical insurance.

The insurance budget is pretty close to what the old mortgage payment was.
__________________
M Paquette is offline   Reply With Quote
Old 05-09-2008, 02:46 PM   #9
Recycles dryer sheets
gettingthere's Avatar
 
Join Date: Jul 2006
Location: Massachusetts
Posts: 150
Quote:
Originally Posted by ziggy29 View Post
Well, here's another way to look at it.

Let's say you have the ability to pay off a $100,000 mortgage at (say) 6%. You ask whether or not you should pay off the mortgage. A lot of people would say no because you can likely invest it at a higher long-term return, plus potential tax breaks for keeping the mortgage.

Now ask the same people: If you owned your home free and clear, would you borrow $100K against it at 6% to invest?

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.

But these are essentially identical situations; the choice is whether you prefer to have $100,000 and a $100K mortgage or you have a paid-off home. But sentiment often changes depending on which way you approach it.
Ziggy, I like this way of looking at it.

Intellectually I know I could do better investing the extra I am paying down each month, but emotionally, I want to see that mortgage paid off by the time I retire.

It helps to be able to look at the question this way.
__________________
gettingthere is offline   Reply With Quote
Old 05-09-2008, 03:03 PM   #10
Thinks s/he gets paid by the post
 
Join Date: Dec 2007
Posts: 4,764
I cant find the article to the link anymore. If anyone has it please re-link.

Thanks
__________________
Notmuchlonger is offline   Reply With Quote
Old 05-09-2008, 03:18 PM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Posts: 13,254
Quote:
Originally Posted by Notmuchlonger View Post
I cant find the article to the link anymore. If anyone has it please re-link.

Thanks
I looked... an OLD thread... long gone...
__________________
Texas Proud is offline   Reply With Quote
Old 05-09-2008, 03:23 PM   #12
Thinks s/he gets paid by the post
OAG's Avatar
 
Join Date: Jun 2006
Location: Central, Ohio, USA
Posts: 2,598
This was a 4 year old thread - of course the link is gone.
__________________
Vietnam Veteran, CW4 USA, Retired 1979
OAG is offline   Reply With Quote
Old 05-09-2008, 03:24 PM   #13
Thinks s/he gets paid by the post
 
Join Date: Dec 2007
Posts: 4,764
Ha I thought it was just last week Necro threads..
__________________
Notmuchlonger is offline   Reply With Quote
Old 05-10-2008, 09:29 AM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
donheff's Avatar
 
Join Date: Feb 2006
Location: Washington, DC
Posts: 8,634
Quote:
Originally Posted by ziggy29 View Post
Well, here's another way to look at it.

Let's say you have the ability to pay off a $100,000 mortgage at (say) 6%. You ask whether or not you should pay off the mortgage. A lot of people would say no because you can likely invest it at a higher long-term return, plus potential tax breaks for keeping the mortgage.

Now ask the same people: If you owned your home free and clear, would you borrow $100K against it at 6% to invest?

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.

But these are essentially identical situations; the choice is whether you prefer to have $100,000 and a $100K mortgage or you have a paid-off home. But sentiment often changes depending on which way you approach it.
Yeah, I have wondered about the same thing. I know people who refinanced to pull cash out for a home addition, to buy other property (I did that), to pay off other loans... all sorts of things. But I have never personally met anyone who pulled equity out of their home to invest in the market. I assume there are such people but they seem to be as rare as hen's teeth. Yet, as you say, it appears to be essentially the same thing as choosing not to use cash equivalent funds to pay off an existing mortgage. Seems to expose a weird quirk in our psychology. I guess I am partially guilty myself. I am sitting on cash right now that is earmarked to pay off the mortgage on our weekend place (already paid off the primary). But I won't do so until DW fully pulls out of work. The tax deduction swings our decision now with a continuing high income. When we switch over to a withdrawal mode and are looking at the cost in portfolio to fund the SWR to pay the mortgage the subjective comfort factor tilts us in the other direction.
__________________
Every man is, or hopes to be, an Idler. -- Samuel Johnson
donheff is offline   Reply With Quote
Old 05-10-2008, 02:58 PM   #15
Thinks s/he gets paid by the post
bright eyed's Avatar
 
Join Date: Jan 2007
Posts: 1,891
Quote:
Originally Posted by donheff View Post
Yeah, I have wondered about the same thing. I know people who refinanced to pull cash out for a home addition, to buy other property (I did that), to pay off other loans... all sorts of things. But I have never personally met anyone who pulled equity out of their home to invest in the market. I assume there are such people but they seem to be as rare as hen's teeth. Yet, as you say, it appears to be essentially the same thing as choosing not to use cash equivalent funds to pay off an existing mortgage. Seems to expose a weird quirk in our psychology. I guess I am partially guilty myself. I am sitting on cash right now that is earmarked to pay off the mortgage on our weekend place (already paid off the primary). But I won't do so until DW fully pulls out of work. The tax deduction swings our decision now with a continuing high income. When we switch over to a withdrawal mode and are looking at the cost in portfolio to fund the SWR to pay the mortgage the subjective comfort factor tilts us in the other direction.
I've been working over in my head the basic idea that Ziggy outlined - and the usual argument in favor of not paying (that' i've observed) is the "tax break" - how much difference does that make? Does it say offset the interest you are paying on the loan by a significant amount (combined then w/ the $ you are earning in investments - makes "not paying" a better financial solution?)

We rent but I'm starting to snoop around home values in our area which have FINALLY become within our reach - and the "total cost of loan" basically stunned me out of looking for a while until I can better understand the math! That alone made me feel like paying off earlier was worth it...my parents paid double digit interest in the 80's on the house i'm in now...so the relatively low rates now still put the fear of the universe in me...
__________________
If i think of something clever to say, i'll put it here...
bright eyed is offline   Reply With Quote
Old 05-10-2008, 03:48 PM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
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.
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Old 05-10-2008, 04:03 PM   #17
Moderator Emeritus
Khan's Avatar
 
Join Date: Aug 2006
Location: Pine Island, Florida
Posts: 6,868
Send a message via AIM to 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.
__________________
"Knowin' no one nowhere's gonna miss us when we're gone..."
Khan is offline   Reply With Quote
Old 05-10-2008, 07:26 PM   #18
Recycles dryer sheets
 
Join Date: Oct 2007
Posts: 463
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.
__________________
TickTock Rule Of Finance - heavily discount any promises of money/benefits to be paid to you in the future

"I've traded love for pennies, sold my soul for less" -Jim Croce, Age
TickTock is offline   Reply With Quote
Old 05-10-2008, 07:28 PM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
donheff's Avatar
 
Join Date: Feb 2006
Location: Washington, DC
Posts: 8,634
Quote:
Originally Posted by bright eyed View Post
I've been working over in my head the basic idea that Ziggy outlined - and the usual argument in favor of not paying (that' i've observed) is the "tax break" - how much difference does that make? Does it say offset the interest you are paying on the loan by a significant amount (combined then w/ the $ you are earning in investments - makes "not paying" a better financial solution?)
For most people considering buying a home there isn't much choice. You don't have enough to buy it outright so you are going to take out a big loan. It is usually a bit cheaper to rent x sq ft in a given area than to buy. But in the early years of a loan almost everything you pay is interest and thus deductible (AMT is a danger here). If you are a big wage earner that could mean that you get back 36 cents for every dollar you pay from the Feds plus whatever from the state. That can make a mortgage seem a lot easier to live with. As the years go buy, you are still paying the same mortgage but rents have (probably) gone way up. Makes you feel downright self satisfied. At some point you have paid back a lot of the loan and the deductible portion of your payment isn't so big. Back in the day, though, you could just refinance and pick up a new 30 year loan on the remaining principle at a lower rate than you had before. Now your deduction is back up and you are probably paying less. But that was when rates kept dropping -- now they are as low as they will go.

Get out your spreadsheets and do the math. I never did
__________________
Every man is, or hopes to be, an Idler. -- Samuel Johnson
donheff is offline   Reply With Quote
Old 05-11-2008, 01:19 PM   #20
Thinks s/he gets paid by the post
bright eyed's Avatar
 
Join Date: Jan 2007
Posts: 1,891
Quote:
Originally Posted by donheff View Post
For most people considering buying a home there isn't much choice. You don't have enough to buy it outright so you are going to take out a big loan. It is usually a bit cheaper to rent x sq ft in a given area than to buy. But in the early years of a loan almost everything you pay is interest and thus deductible (AMT is a danger here). If you are a big wage earner that could mean that you get back 36 cents for every dollar you pay from the Feds plus whatever from the state. That can make a mortgage seem a lot easier to live with. As the years go buy, you are still paying the same mortgage but rents have (probably) gone way up. Makes you feel downright self satisfied. At some point you have paid back a lot of the loan and the deductible portion of your payment isn't so big. Back in the day, though, you could just refinance and pick up a new 30 year loan on the remaining principle at a lower rate than you had before. Now your deduction is back up and you are probably paying less. But that was when rates kept dropping -- now they are as low as they will go.

Get out your spreadsheets and do the math. I never did
Yes - that is what i'll have to do. We're somewhat protected cuz we're renting from my parents and paying WAY below market - but they could end up needing to selling it - so i'm giving myself about a 3-5 year window to figure it all out and decide what to do! In that time we should have enough saved for about 10% or more down on a home in socal...which we don't now...
__________________

__________________
If i think of something clever to say, i'll put it here...
bright eyed is offline   Reply With Quote
Reply

Tags
mortgage


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Mortgage payments after Early Retirement walkinwood FIRE and Money 19 04-28-2007 07:45 PM
Pay off the Mortgage at Retirement??? bbuzzard FIRE and Money 89 04-16-2007 08:01 AM
Paying off mortgage with an SPIA donheff Life after FIRE 5 12-19-2006 11:56 AM
Advice Needed - Taxable Invest vs Pre-Pay mortgage Trace Young Dreamers 5 09-14-2004 07:16 PM

 

 
All times are GMT -6. The time now is 10:56 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.