Change in Mortgage Thinking in Retirement

[pb4uski]

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Originally Posted by Freedom56 The financial planet I'm on involves comprhension of basic arithmetic, a net worth over 8 figures, three homes owned free and clear, zero debt, and an investment strategy that involves preservation of capital and still earning a healthy return through self directed investments. If you ever land on this planet you will begin to understand, I never said that I have an investment portfolio that will never exceed a mortgage rate. What I stated was , the moment you have ANY of your investments in an asset classes lower than your mortgage rate, you are losing. Why would I pay a mortgage and float money paying less in a money market fund?

Well first thing, congratulations... you're rich... so what... many of us here are... some more than others. Second, we universally agreed with you that if someone's investment earnings rate is less than their mortgage interest rate that it makes no sense to carry a mortgage.. so I'm not sure what the problem is.

In most of our cases it is the opposite... our investment earnings rate has been and is reasonably expected to be more than our mortgage interest rate... and we have a higher appetite for risk than you seem to... all is good.

On the comprehension of basic arithmetic part... a net worth of "over 8 figures" would logically have to be 9 figures.... or a minimum of $100,000,000... I hope that you are right on that but I'm skeptical.... but if you are right I like having rich friends and acquaintances.

[kite_rider]

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Originally Posted by Freedom56 What I stated was , the moment you have ANY of your investments in an asset classes lower than your mortgage rate, you are losing. Why would I pay a mortgage and float money paying less in a money market fund?

I got in the middle of your back and forth. But anyway, I can think of two possible reasons;

1. Inflation risk (I mentioned in a previous post)
2. A quirk in our mortgage laws that allows you to 'walk away' from your house if you owe more than it's currently worth, even if you have the money to pay it off. Kind of a weird 'put' option.

I'm not an advocate of #2, but it's a possible reason...

[Freedom56]

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Originally Posted by pb4uski Well first thing, congratulations... you're rich... so what... many of us here are... some more than others. Second, we universally agreed with you that if someone's investment earnings rate is less than their mortgage interest rate that it makes no sense to carry a mortgage.. so I'm not sure what the problem is. In most of our cases it is the opposite... our investment earnings rate has been and is reasonably expected to be more than our mortgage interest rate... and we have a higher appetite for risk than you seem to... all is good. On the comprehension of basic arithmetic part... a net worth of "over 8 figures" would logically have to be 9 figures.... or a minimum of $100,000,000... I hope that you are right on that but I'm skeptical.... but if you are right I like having rich friends and acquaintances.

No it's over the 8 figure limit if you exclude the primary residence but include the 2nd and 3rd residences. Sorry for the wording.

Given the bond funds you own according to your posts to me in another thread, you should forget about beating your mortgage rate and focus on beating cash stuffed in a mattress.

[Freedom56]

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Originally Posted by kite_rider I got in the middle of your back and forth. But anyway, I can think of two possible reasons; 1. Inflation risk (I mentioned in a previous post) 2. A quirk in our mortgage laws that allows you to 'walk away' from your house if you owe more than it's currently worth, even if you have the money to pay it off. Kind of a weird 'put' option. I'm not an advocate of #2, but it's a possible reason...

What if you have a full recourse mortgage? In such a case, the bank can go after your other assets. Many are in such a situation.

[kite_rider]

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Originally Posted by Freedom56 What if you have a full recourse mortgage? In such a case, the bank can go after your other assets. Many are in such a situation.

Do you live in the USA? If you do, I'll go out on a limb and say that *most* mortgages here are nonrecourse. [EDIT: I live and invest in non-recourse states. I guess there are places in the USA that have recourse mortgages..] Maybe you are thinking of some private lending deal; in which case you wouldn't be getting 3.3% locked for 30 years anyway. Private lenders know better...

[ERD50]

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Originally Posted by Freedom56 The financial planet I'm on involves comprhension of basic arithmetic, a net worth over 8 figures, three homes owned free and clear, zero debt, and an investment strategy that involves preservation of capital and still earning a healthy return through self directed investments. If you ever land on this planet you will begin to understand, I never said that I have an investment portfolio that will never exceed a mortgage rate. What I stated was , the moment you have ANY of your investments in an asset classes lower than your mortgage rate, you are losing. Why would I pay a mortgage and float money paying less in a money market fund?

Ditto on pb4uski's post, and....

I'll take that "comprhension of basic arithmetic" on your planet comment as a slur, inferring that we don't comprehend basic arithmetic. Nice.

And I said "if" your portfolio never exceeds mortgage rates... and I stand by that logic. I can't possibly know whether your portfolio return would ever/never exceed mortgage rates. Think in terms of context and concepts.

And I disagree again that if any of my investments are in asset classes lower than my mortgage rate (for even a 'moment' !?), that I am 'losing'. I've already explained that. Disagree if you want, but pb4uski posted our planet's basic arithmetic, and he showed that he was "winning" even though some of his asset classes are earning less than his mortgage rate. How can that be? Argue with the numbers if you want, not me.

AA is not silly.

And, especially if you have a net worth over 8 figures (or did you mean more than $10,000,000? I didn't follow your explanation. On my financial planet, basic arithmetic tells us that $10,000,000 to $99,999,999 is 8 figures, not 'over 8 figures'), if you don't choose to invest in equities, and don't want to hold a mortgage, that's fine (not that what I think matters).

But I view this forum as a place to share ideas. And it helps to provide some context so that people reading understand the conditions, so they can learn and apply the information to their circumstances. I don't think that eliminating a mortgage based on your points is helpful to the average member here.

-ERD50

[kite_rider]

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Originally Posted by Freedom56 No it's over the 8 figure limit if you exclude the primary residence but include the 2nd and 3rd residences. Sorry for the wording.

Congrats. You have become the Russ Hanneman of this thread. Please share some of that 'Tres Commas Tequilla' with the rest of us!

https://www.youtube.com/watch?v=2XxwhMcUjYU

[Freedom56]

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Originally Posted by kite_rider Do you live in the USA? If you do, I'll go out on a limb and say that *most* mortgages here are nonrecourse. [EDIT: I live and invest in non-recourse states. I guess there are places in the USA that have recourse mortgages..] Maybe you are thinking of some private lending deal; in which case you wouldn't be getting 3.3% locked for 30 years anyway. Private lenders know better...

Can you read? I said, "many are in that situation". People that re-finance and take equity out, find themselves in a full recourse loan. California is a no recourse state on until...

https://www.thebalance.com/about-recourse-loans-315576

from the link:

Refinances, second mortgages, and "cash out" transactions tend to create recourse loans (even if you previously had a non-recourse loan).

In other words, you might buy a home and the initial loan is not recourse debt – but any additional loans you get using the same collateral are recourse loans.

My neighbor wanted to walk away from his home in 2010 until he realized his non recourse loan became a recourse loan after he refinanced with cash out.

[Freedom56]

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Originally Posted by ERD50 Ditto on pb4uski's post, and.... And I disagree again that if any of my investments are in asset classes lower than my mortgage rate (for even a 'moment' !?), that I am 'losing'. I've already explained that. Disagree if you want, but pb4uski posted our planet's basic arithmetic, and he showed that he was "winning" even though some of his asset classes are earning less than his mortgage rate. How can that be? Argue with the numbers if you want, not me. -ERD50

So try this example from pb4uski, if he paid off his mortgage with his cash and losing bond funds, would his total return improve? It's basic arithmetic right?

[Texas Proud]

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Originally Posted by Freedom56 We had an $84K balance on a $1.1M home. Most of my neighbors are carrying $800k to $900K balances. I don't see their arbitrage game working out too well for them. I see them digging themselves into a deeper hole. But they do have nice cars and boats. I can have anywhere from $300K to over $800K cash from bond maturities and interest payments floating in money market funds waiting, at less than current mortgage rates, waiting for my next investment. For your argument to make any sense, all of your investments, including cash balances, has to earn more than your mortage interest payments. Can you really make that claim?

Reading this post and another you have, it does not make sense for YOU to invest and keep a mortgage since you invest so conservatively that your return is not that great.... but that brings up a different argument..


You are taking on much more risk than people who have a mtg and invest... you are betting that inflation will stay low for the rest of your life... you have a low yield on your investments (which will be going up with the increased interest rates, good for you) but will probably match or be below inflation going forward... I am not willing to take that risk...


Second, there is a big opportunity cost of having an above $1 million equity in a house... you might not experience it since you probably are in a high cost area where housing is going to be higher than inflation... for you this is a win... where I live housing cost increases more closely matches inflation and for many years was below...


Your argument about your neighbors is also meaningless.... they are NOT investing their money but taking on more debt by buying other toys... the argument is saving and investing the money or paying off the mtg... do not put in a stray man about people who do neither....

[harley]

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Originally Posted by Texas Proud You are taking on much more risk than people who have a mtg and invest... you are betting that inflation will stay low for the rest of your life... you have a low yield on your investments (which will be going up with the increased interest rates, good for you) but will probably match or be below inflation going forward... I am not willing to take that risk...

Doesn't matter. He has over 8 figures and lives on another planet. Dude.

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Second, there is a big opportunity cost of having an above $1 million equity in a house... you might not experience it since you probably are in a high cost area where housing is going to be higher than inflation... for you this is a win... where I live housing cost increases more closely matches inflation and for many years was below...

See above.

[ERD50]

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Originally Posted by Freedom56 So try this example from pb4uski, if he paid off his mortgage with his cash and losing bond funds, would his total return improve? It's basic arithmetic right?

It is too narrow of a view. If we are only going to think of maximizing long term returns on each asset class, no one would hold any fixed income at all. Historically, over long periods, stocks out-perform fixed income. So if we are going to construct a portfolio on 'simple arithmetic', we hold no fixed income. So there is no fixed income in the arithmetic.

Stocks beat fixed income period, regardless of a mortgage or no mortgage, so the question simply doesn't apply in the real world.

A paraphrase of an Einstein quote is “Everything should be made as simple as possible, but no simpler.”

In the real world, most people pick a/an (un-silly) AA as a balance between long term results and short term fluctuations, with the fixed income smoothing things out. Most people making this calculation aren't going to take a huge mortgage relative to their NW. So in turn, they don't change their AA, so the average return of their total portfolio is what matters, not any individual asset class.

Since you are committed to not holding any equities at all, you probably can't relate.

-ERD50

[pb4uski]

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Originally Posted by Freedom56 So try this example from pb4uski, if he paid off his mortgage with his cash and losing bond funds, would his total return improve? It's basic arithmetic right?

I earlier conceded that if someone has a mortgage rate that exceeds what they earn on bonds/cash AND they adjust their AA that paying off the mortgage is the right move.

Total return on the portfolio would obviously improve if lower return assets are sold.... no rocket science there.... the portfolio would be riskier after the pay off since it would have more stocks and less bonds and cash.

Since higher risk means higher return, then it is not surprising that total return would be higher if I sold lower return assets and used the proceeds to pay off my mortgage.

Just like a 60/35/5 portfolio in the long run will have higher total returns than a 0/88/12 portfolio.... basic math.

[Freedom56]

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Originally Posted by Texas Proud Reading this post and another you have, it does not make sense for YOU to invest and keep a mortgage since you invest so conservatively that your return is not that great.... but that brings up a different argument.. You are taking on much more risk than people who have a mtg and invest... you are betting that inflation will stay low for the rest of your life... you have a low yield on your investments (which will be going up with the increased interest rates, good for you) but will probably match or be below inflation going forward... I am not willing to take that risk... Second, there is a big opportunity cost of having an above $1 million equity in a house... you might not experience it since you probably are in a high cost area where housing is going to be higher than inflation... for you this is a win... where I live housing cost increases more closely matches inflation and for many years was below... Your argument about your neighbors is also meaningless.... they are NOT investing their money but taking on more debt by buying other toys... the argument is saving and investing the money or paying off the mtg... do not put in a stray man about people who do neither....

With all due respect, my returns have been fine. 4.19% YTD in a flat market is not bad. Most bond funds are nowhere close to achieving my performance. I'm content with 6-7% returns on my bond portfolio. Since 2014 it has been much better than that. My pension covers all our expense and most of our travel. Do you really think inflation is going to be a problem? Look what the bond market is signalling. If there was a concern, the 30 year would be over 4.5% We are already in a Federal tax bracket of 33% and 10.3% state. So I have no motivation to take additional risk to earn more taxable income. We also have no plans to withdraw from our IRAs until 70.5. As for our home we bought it new in 1995 for $262K about year after the big Northridge earthquake. Homes prices were depressed then but recovered nicely. People were running away from their homes then. Today there isn't enough to satisfy demand. We put about $140K of improvements into the house (all paid with cash flow) over the last 23 years. Prices have appreciated significantly here over the last 23 years but, we saw no reason to cash out and take on more debt. We paid cash in 2011 for our place in Florida. We have done very well with that investment. Much better than the markets. Inventory is very low and prices will likely run up gradually at both locations. I look at investments very differently now than I did when I was much younger. Slow and conservative is good for us and a lot of people.

[pb4uski]

How much credit risk are you exposed to?

[bada bing]

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Originally Posted by pb4uski Ours is 6 1/2 years old... out of 15 years. I don't get the "sake of being free of it".... mine is on auto-pay and as a result I hardly notice it. My portfolio returns for 2016, 2017 and YTD 2018 were 8.84%, 14.1% and 2.62%... my mortgage cost is 3.375% (1.55% YTD)... so why would I pay it off?

That is very close to my thinking. I have a 6 year old 30 year fixed mortgage at 2.625%. I had the money to pay for the house in cash when I purchased but elected to take the mortgage. I actually put enough money to pay off the mortgage in a separate account when I purchased the house. The account is up 60% over the first 6 years, over 3 times the interest total on the mortgage over the same time. In a convoluted way of thinking, the arbitrage between mortgage and portfolio returns can be expected to far more than pay for the house over the 30 year term. In hindsight, locking in a mortgage at the lowest rates available in my lifetime is the best financial move I've ever made, percentage wise.

I actually find having a mortgage to be less hassle than not having one. The mortgage is on autopay from my checking account and includes escrow for insurance and taxes. If I didn't have the mortgage, I would have to pay the taxes and insurance myself as neither offer autopay enrollment.

[Freedom56]

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Originally Posted by pb4uski How much credit risk are you exposed to?

70% of my bonds are BBB and higher. 30% are BB to BB+ (Qwest/Centurylink/Ally Financial). I generally hold my bonds to maturity unless the gain is higher than the future interest payments to call or maturity. The high yield portion of my portfolio is driving my gains this year.

People with these investment grade short and medium term bond funds don't understand how much pain they will feel over the coming year. These funds are holding a lot of low coupon high rated debt that will continue to erode any gains. High grade short term corporate bonds/notes are yielding less than CDs of the same term. This can't last. The investor should be paid a risk premium not pay a penalty for taking additional risk. For this to continue you have to believe that either CDs yields will fall or the price of the high grade bonds/notes will fall to compensate for yield.

[COcheesehead]

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Originally Posted by bada bing That is very close to my thinking. I have a 6 year old 30 year fixed mortgage at 2.625%. I had the money to pay for the house in cash when I purchased but elected to take the mortgage. I actually put enough money to pay off the mortgage in a separate account when I purchased the house. The account is up 60% over the first 6 years, over 3 times the interest total on the mortgage over the same time. In a convoluted way of thinking, the arbitrage between mortgage and portfolio returns can be expected to far more than pay for the house over the 30 year term. In hindsight, locking in a mortgage at the lowest rates available in my lifetime is the best financial move I've ever made, percentage wise. I actually find having a mortgage mortgage to be less hassle than not having one. The mortgage is on autopay from my checking account and includes escrow for insurance and taxes. If I didn't have the mortgage, I would have to pay the taxes and insurance myself as neither offer autopay enrollment.

So you’re paying 2.625% on your mortgage balance so someone can make two Billpay entries for you?

[Mulligan]

I refinanced about 6 years ago (a few years into retirement) with a 3.75%, 30 yr fixed. I will be paying on it 20 plus years more in slow motion. I like holding a reverse bond. Of course its easier doing it since the P&I is only 9.5% of my net monthly pension.

[Freedom56]

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Originally Posted by pb4uski Just like a 60/35/5 portfolio in the long run will have higher total returns than a 0/88/12 portfolio.... basic math.

These AA models dished out by the financial industry are self serving so the industry can continue to collect fees. I know many people that are extremely wealthy and that achieved it through their rental properties. They don't touch equities or even corporate bonds. So where do rental properties into your AA model? I know for a fact that they didn't hit the panic button in 2008/9. In fact business improved as the demand for rental properties increased. The billionaire that bought the majority of the units in our condo building in Florida made his money from rental properties and shorting mortgage bonds in 2008. Don't be blinded by the belief that equities are the best asset class for yield. Just maybe some of these people caught onto an idea when they played monopoly during their younger years.