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Old 08-19-2009, 09:07 AM   #121
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Hi--
For waht it is worth, the Wall Street Journal published an article on holding a mortgage into retirement---seemd sort of relevant to this discussion. Thought you might want to see it. Link: Retiring? Pay Off Your Mortgage - WSJ.com
Interesting article--thanks for posting the link. From the article:

Quote:
To be sure, for some retirees paying down a mortgage isn't an option. But for those who have savings beyond what is needed for living expenses, is it ever a good idea to hold a mortgage into retirement instead of using that money to pay it down?
Anthony Webb, a research economist at the Center for Retirement Research at Boston College, says the answer for most people is "no."
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Old 08-19-2009, 09:23 AM   #122
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Here's a great reason not to carry a mortgage. You can eliminate issues like this.

My Bad! Woman's House Mistakenly Auctioned by Bank | NBC Miami
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Old 08-19-2009, 01:15 PM   #123
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Here's a great reason not to carry a mortgage. You can eliminate issues like this.

My Bad! Woman's House Mistakenly Auctioned by Bank | NBC Miami
Not necessarily. The Miami-Dade County Clerk made a tiny little boo-boo, failing to file paperwork related to the refinancing and a judge's order to quash the sale. Oopsie.

You could get into the same state through property tax problems, or even homeowners association dues. Patrick Mahaffay lost his Sea Ranch home for being behind on his HOA dues. The $300,000 home was sold at auction for $2,403 to a business specializing in vulture trades. The former owner protested, of course. The buyer finally offered to sell the home back to the former owner for $10,000.
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Old 08-24-2009, 06:37 AM   #124
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I am busy reading the Otar book mentioned in a more recent thread.

(The book is obtainable at this link, in the near future only.)

otar retirement calculator



I though of this thread when I found a whole chapter on borrowing to invest. I'm prevented from cutting and pasting some brief quotes from the beginning and end of the chapter by security in the PDF, so I will paraphrase.





Near the beginning of the chapter:
  • when you borrow to invest, there are up to six parties who may benefit from the transaction, but only one who may lose, you.
  • if you borrow to invest, you must think you are smarter or luckier than the bank, otherwise why wouldn't they just invest the money directly.
At the end of the chapter there is a checklist of several conditions you must satisfy if you are going to borrow to invest, I will just mention three.
  • Do not borrow during retirement or within ten years of retirement.
  • Do not borrow more than half the amount invested.
  • You need to out-peform the index by 4% or more.
If you disagree with these points, I suggest you read the book rather than respond to them in isolation, as I don't plan to relay the arguments for the other side.
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Old 08-30-2009, 09:22 PM   #125
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Hi--
For waht it is worth, the Wall Street Journal published an article on holding a mortgage into retirement---seemd sort of relevant to this discussion. Thought you might want to see it. Link: Retiring? Pay Off Your Mortgage - WSJ.com
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Originally Posted by Bestwifeever View Post
Interesting article--thanks for posting the link. From the article:

To be sure, for some retirees paying down a mortgage isn't an option. But for those who have savings beyond what is needed for living expenses, is it ever a good idea to hold a mortgage into retirement instead of using that money to pay it down?
Anthony Webb, a research economist at the Center for Retirement Research at Boston College, says the answer for most people is "no."
I finally got around to reading the article. AFAIAC, this is typical "journalism" that does more to cloud the issue than to clarify it. The title indicates the article is about pay-off or invest (which means you have the funds to pay it off), but the first half is a mix of retiring w/o sufficient net worth, increased credit card debt that people carry today, etc, and makes no distinction that that is a separate issue.

And while the quote from a research economist that BWE includes seems to be a pretty unequivocal "NO" for most people, you really need to see it in its full context:

Quote:
For money held in a money-market account or some other safe investment such as U.S. Treasurys, Mr. Webb says an investor is unlikely to earn enough of a return to offset the cost of the mortgage interest.
Well, that does not take an advanced degree to comprehend. You can't invest money at a lower expected return than what you borrow it at and expect to come out ahead. That's obvious.

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And while a portfolio of all stocks could earn high enough returns to come out ahead of a mortgage, in a diversified portfolio of stocks and bonds the drag of the mortgage is likely to offset the potential boost given by stocks.
I'm assuming this was a case of poor editing. Does he mean "offset" or "reduce"? Clearly, the interest payments reduce the stock gains, but long term gains in stocks are normally higher than current mortgage rates. So the gains are not "offset" (if he meant "totally offset").

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A household that carries a mortgage and invests in the stock market is basically trading on margin," he says.
OK, you can say it that way if you want to make it sound scary. But is that always a bad thing? I wouldn't do it if the mortgage was a large % of my NW, and it always makes me wonder (maybe I'll write him):

Does that also mean that no one should ever invest a penny in anything (outside of an emergency fund) until their mortgage is paid off? By his words, a 401K contribution would qualify as "trading on margin", right? I'm pretty sure that a significant amount of 401Ks, IRAs and other savings is being done by people with outstanding mortgages. But I don't hear any economists recommending that people avoid those savings until the home is paid for, warning them that they are "trading on margin". Or did I miss those?

-ERD50
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Old 08-30-2009, 11:02 PM   #126
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Balderdash. The thing that makes margin dangerous is that it can be called at any time. And that it can (and will!) be called if the value of the stocks drop.

Neither of these is the case for a mortgage.
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Old 09-02-2009, 12:08 AM   #127
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You don't include your home in your calculations. That is not irrational. But it also is not irrational for people to include their home.
But I think it is irrational. Sure, it does increase your net worth figure, but that's rather meaningless.

IMHO, your house is a consumption item, just like the food in your freezer and pantry. You don't count those in your net worth, because those are consumption items. You have to live somewhere. Whereever that is, you are using up the benefit by simply living in it. Unless you are planning to sell your house and move into a cardboard box under a bridge, that is.
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Old 09-02-2009, 12:18 AM   #128
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Not true - you could own a home free and clear, but if you fail to pay your property taxes then the gubmint can get a tax lien and foreclose on the house.

Do you have any other hairs you need split?
There is also the situation a financial advisor told us about. "Do you know how a retired couple can lose their fully paid-off house? Easy. one of them gets sick and they need a large chunk of money and/or a large ongoing payments. They have to sell their paid-off house to get the money they need."

This came true with my uncle a few years back. He had unexpected quintuple heart bypass surgery, little cash, and a free-and-clear house & land. Couldn't borrow against the house, couldn't get a HELOC.
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Old 09-02-2009, 02:32 AM   #129
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But I think it is irrational. Sure, it does increase your net worth figure, but that's rather meaningless.

IMHO, your house is a consumption item, just like the food in your freezer and pantry. You don't count those in your net worth, because those are consumption items. You have to live somewhere. Whereever that is, you are using up the benefit by simply living in it. Unless you are planning to sell your house and move into a cardboard box under a bridge, that is.
i can see that housing is a consumption item if you are paying rent. that is more like the food in your freezer because once you consume it (live for the month that your rent payment bought or ate the food in your freezer) it is gone with no value left. but when you are buying (or have bought) a home the easiest way to show it isnt a consumption item (but actually a financial asset) is to look at the situation when you have paid off the mortgage note on said house. at that time your monthly income requirement to cover living expenses drops by the amount of the P&I of your mortgage payment.

in an attempt to show my point that your house is a financial asset lets look at an example. assume while you have a mortgage payment the P&I = $1000/mo. when the mortgage is paid off there would be a drop in the required income to cover living expenses of $12,000 a year which using the 25x rule of thumb is equivilant to an additional $300,000 of portfolio value that would be required if you had to pay that $1000/mo out in rent to maintain an equivilant lifestyle in retirement if you didnt own said home. the nice thing about this (fantom) $300,000 of portfolio is that it is throwing off (a fantom) $12,000/yr that is both guaranteed and non taxable (which would actually make the value greater than $300,000)
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Old 09-02-2009, 08:43 AM   #130
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Well, I would say that, yes, your house is a financial asset. In essentially the same sense that your car, your clothes, and the food in your freezer are. You can either sell it to raise cash, or "consume" it by living in it. But you can't do both. You can't eat your cake and have it, too.

If you live in it (rather than sell it), then its value is immaterial. It could be worth $300K or $3M---doesn't matter. The value is locked away where you don't have access to it. Sure, in one sense it may have a (fantom) $300,000 of portfolio [value] is that it is throwing off (a fantom) $12,000/yr. But that's fantom, not real. It is non-taxable because it is not real. It's not income, it's just the absense of an expense.

Consider it this way. Suppose your paid-off house is worth $300K, throwing off a "phantom" non-taxable income of $1000/mo. Alternatively, suppose your house is worth $3M, throwing off a "phantom" non-taxable income of $10,000/mo. Is there any difference in your finacnial situation between these two scenarios? I say no. You can't spend that $1000, nor can you spend the $10,000.

Suppose you are retired with a fixed income of $1500/mo, and have lving expenses (food, gas, electricity, phone, etc.) of $1200/mo. Leaving $300/mo of excess income.

Can you afford either house? YES. No payments, regardless of house value.

Can you go on a $5000 cruiise with either house? NO, with either. The extra $9000 of phantom income is only phantom, not real. You can't spend it. You can only spend real money. And your real money is $300, not $10,300.

It's nice to have freed up $1000 of expenses by having a paid-up house, but that's all you have done. You've un-committed an expense, not added to your income.
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Old 09-02-2009, 08:55 AM   #131
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i can see that housing is a consumption item if you are paying rent. that is more like the food in your freezer because once you consume it (live for the month that your rent payment bought or ate the food in your freezer) it is gone with no value left. but when you are buying (or have bought) a home the easiest way to show it isnt a consumption item (but actually a financial asset) is to look at the situation when you have paid off the mortgage note on said house. at that time your monthly income requirement to cover living expenses drops by the amount of the P&I of your mortgage payment.

in an attempt to show my point that your house is a financial asset lets look at an example. assume while you have a mortgage payment the P&I = $1000/mo. when the mortgage is paid off there would be a drop in the required income to cover living expenses of $12,000 a year which using the 25x rule of thumb is equivilant to an additional $300,000 of portfolio value that would be required if you had to pay that $1000/mo out in rent to maintain an equivilant lifestyle in retirement if you didnt own said home. the nice thing about this (fantom) $300,000 of portfolio is that it is throwing off (a fantom) $12,000/yr that is both guaranteed and non taxable (which would actually make the value greater than $300,000)
jdw_fire, I agree with rayvt that it makes sense to not include your house in your net worth. An exception would be if you bought more house than you need/want in retirement, and plan to downsize at some point. In that case, the "excess value" (house value minus replacement cost) in your house could be added to your NW.

Your numbers are flawed though. The 25x rule of thumb is for an inflation adjusted level of spending. A mortgage is a fixed annual payment. I've done FIRECALC runs to evaluate the multiplier for my non-COLA'd pension, and I (as have others) come up with ~ 12-14x for portfolio equivalent. So let's try again:

$1,000/month is $12,000/annual. That is a 30 year, 5%, $187,000 mortgage.

$12,000 x 14 (using the upper end) = $168,000.

So, with the mortgage, you have an extra $187,000 in your portfolio, but you only need ~ $168,000 to pay the mortgage. Individual tax situations will affect this, and probably close the gap some (or entirely). But the numbers always seem to come out pretty close, and that is why I always suggest to run the numbers, or even just go with what "feels good", but I've never seen the numbers to justify that it makes a big difference either way.

-ERD50
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Old 09-02-2009, 09:03 AM   #132
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I don't agree that a fully paid for (or one with a lot of equity) house is a phantom asset. Even though there are many fees and it's not generally advisable, you can get a reverse mortgage on your home and receive monthly payments. I'm not saying this is a good thing to do, just that your home could generate income for you.

In addition, like a car, bat, plane, etc., it has actual cash value. If you don't consider these to have real value, you can say the same thing about coin or stamp collections, rare books, artwork, etc. As long as you own them they don't generate actual income, but they are real, not phantom assets. And they can increase or decrease in value.

Something does not have to generate income to be an asset. I bonds don't generate spendable income until you cash them - does that mean they are phantom assets since they don't throw off monthly income that can be spent?

We are not talking about assets like "good will" or "name brand" - houses, cars, etc., are actual things that exist and can be sold relatively easily (depending on how much you ask for them). I would definitely include them in my net worth - if not, why would you include other items that don't generate immediate income?
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Old 09-02-2009, 10:32 AM   #133
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jdw_fire, I agree with rayvt that it makes sense to not include your house in your net worth. An exception would be if you bought more house than you need/want in retirement, and plan to downsize at some point. In that case, the "excess value" (house value minus replacement cost) in your house could be added to your NW.
Yes, it's that exception that some of us are counting on, or are using as a safety net.

In my case, I'm not planning to downsize, but if I can see on the horizon that I'm not going to make it, I will. And unless I have an unexpected large expense suddenly come up, I figure I'll see it coming in time to not have to do a fire sale.

And house size isn't necessarily what makes it valuable. I have a wonderful view. Others may be ocean front or lake front. Getting a similar house but without in a different location could net quite a bit. But in my case I would also downsize.

I have to live somewhere, but I can get quite a bit of money without having to switch to a cardboard box.
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Old 09-02-2009, 10:47 AM   #134
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I never believed in counting my home's value as part of my net worth for all the reasons that have been discussed here. I still believe these things true in normal times, but the housing bubble forced big changes in our thinking. Our house tripled in value so that it became an unreasonable portion of our net worth. Before we sold it, our taxes were more than the original mortgage.

Selling our house allowed us to embark on a 5 year early-retirement adventure. We bought a 39 foot sailboat and lived on it, and the payments were less than the taxes on our house had been. The income from the proceeds of the house sale went a long way toward financing our retirement expenses.

The downside is that when we finally decided to settle down again we found that the housing market had continued to skyrocket and we were priced out of all the neighborhoods that we had assumed we might settle in. Now we are renting a tiny apartment and looking and waiting. The condo market here seems to be in an upheaval.

C'est la vie. We aren't complaining.
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Old 09-02-2009, 11:42 AM   #135
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I was just wishing that for the past 7 years I'd put my after tax savings into extra principal payments rather than equities. If I'd put the money towards paying off debt I would have paid off the mortgage and my current 20% loss from the peak of my after tax investments would be a far smaller absolute number, instead I still have $200k left on the house.
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Old 09-02-2009, 12:33 PM   #136
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I was just wishing that for the past 7 years I'd put my after tax savings into extra principal payments rather than equities. If I'd put the money towards paying off debt I would have paid off the mortgage and my current 20% loss from the peak of my after tax investments would be a far smaller absolute number, instead I still have $200k left on the house.
And I was just wishing that I would have mortgaged/sold everything and bought Google at the IPO 4.5x in 5 years....

My point it, this sort of "rear view mirror" analysis only seems to be useful in terms of helping you decide what to do moving forward. Another way to put that is, what kept you from paying down the mortgage the last 7 years?

So, looking forward, do you expect the long term return of a diversified investment from current levels to be less than current mortgage rates? If so, what are you invested in?

edit/add - actually, if you have been DCA'ing into the market all during the downturn, you might not do so bad at all, assuming we have reasonable returns going forward. You bought a lot of shares at what might turn out to be bargain prices (we hope!)

-ERD50
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Old 09-02-2009, 02:42 PM   #137
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Well, I would say that, yes, your house is a financial asset. In essentially the same sense that your car, your clothes, and the food in your freezer are. You can either sell it to raise cash, or "consume" it by living in it. But you can't do both. You can't eat your cake and have it, too.
i agree it is similar to your car and clothes but not food in your freezer. the reason is that you can rent living space, a car and even clothes (eg. rented tux) but not food. to consume food you must own it (unless you are willing to steal it). when you own the car, clothes or house (paid in full) you no longer have a rental payment for them.

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It's not income, it's just the absense of an expense.

...

You've un-committed an expense, not added to your income.
but when you are looking to retire, uncommitting an expense is atleast as good as adding income (i submit it is better since it allows a lower income and thus lower income tax bracket). the point here is how much it costs to maintain the lifestyle you have chosen. if you choose to rent your house, car and clothes you will require alot higher income (and therefore alot larger portfolio) for any given lifestyle then if you own your house, car and clothes and all i am saying it that owning those things is a lifestyle equivilant to having a larger porfolio and renting them. therefore the things owned have a portfolio equivilant value. now not many people choose to rent a car instead of owning 1 (i am sure there are people who cant drive or live in a place where it makes sense not to) and fewer still are the people who rent clothes instead of owning them so these things arent often talked of in this sense, but if you think about my point using them as an example it really makes my point. what i was saying in my previous post was that if you hold lifestyle constant, owning your home reduces the size of portfolio you need and that difference in portfolio value required is the portfolio value of your home.


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Consider it this way. Suppose your paid-off house is worth $300K, throwing off a "phantom" non-taxable income of $1000/mo. Alternatively, suppose your house is worth $3M, throwing off a "phantom" non-taxable income of $10,000/mo. Is there any difference in your finacnial situation between these two scenarios? I say no. You can't spend that $1000, nor can you spend the $10,000.
the problem with your example is that you havent kept lifestyle constant and therefore it is an invalid example in your attempt to refute my point.
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Old 09-02-2009, 02:44 PM   #138
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All our computations and models rely on historical data and I was with ERD50 for a long time. But we all know that time horizon and future market returns will change the results of such calculations, a few down years going into ER is always possible. So I will continue to take 50% of my gains and put it into the mortgage as insurance against years of negative returns.
I don't understand this thinking at all. Maybe I'm failing to understand something, but this seems to me to be an outright fallacy. Here's why:

When you make extra principal payments, you don't get any concrete benefit until decades later, when the mortgage is finally paid off. Your required monthly payment stays the same--it doesn't go down.

You still have to make the same required payment each and every month---you don't get to skip any payments. You can't call the bank and say, "Hey, remember all those extra payments I made last year? Well I want to skip a couple of payment now."

It's a one-way lockbox. You put (extra) money in but you can't get it back out. The pnly way to tap it is to take out a new borrowing--a HELOC, a cash-out refi, etc. But that's not taking your money back out---it's taking out a new loan. Even a new advance on an existing HELOC is just a new loan--it's not getting your own money back.

Your risk situation is NOT reduced when you make extra payments. In fact, your risk is a bit higher, since you've reduced your liquidity. If you get foreclosed, the bank takes your house and KEEPS all the extra money you've paid in. You can't say, "Hey, I gave you $10,000 extra that I wasn't required to, so now give it back."

Your net worth is no different, you've just shifted some of it from (liquid) cash to (illiquid) real-estate. You do have an unrealized gain from the interest that you've ducked. But it doesn't become realized until you finally pay the mortgage off completely.

There are only two conditions w/r/t a mortgage on your house. 1) You have a mortgage, and 2) you don't have a mortgage. There is no "you have a smaller mortgage balance than you otherwise would have." That's #1--you have a mortgage.

If you really and truly want to pay off your mortgage early, it seems the best way to do so is with a "Mortgage Freedom Account". Instead of paying extra on your mortgage, put that extra money into your MFA. When the MFA is larger than the mortgage balance, pay it off all at once. This MFA money is in your hands. If you get foreclosed, you keep the MFA---the bank doesn't take it as well as your mouse. Actually, you are LESS likely to get foreclosed. You can tap the MFA to make your mortgage payments. The bank is happy because they continue to get their monthly payment. You're happy because you are effectively skipping payments, since it doesn't come out-of-pocket but rather from the MFA.

The net cost of the MFA method is the difference between the mortgage interest rate and the MFA earning rate. Think of this cost as an insurance premium. This "insurance" is protecting you from running out of liquidity before the mortgage is fully paid off.
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Old 09-02-2009, 02:46 PM   #139
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Your numbers are flawed though. The 25x rule of thumb is for an inflation adjusted level of spending. A mortgage is a fixed annual payment. I've done FIRECALC runs to evaluate the multiplier for my non-COLA'd pension, and I (as have others) come up with ~ 12-14x for portfolio equivalent. So let's try again:

$1,000/month is $12,000/annual. That is a 30 year, 5%, $187,000 mortgage.

$12,000 x 14 (using the upper end) = $168,000.

So, with the mortgage, you have an extra $187,000 in your portfolio, but you only need ~ $168,000 to pay the mortgage. Individual tax situations will affect this, and probably close the gap some (or entirely). But the numbers always seem to come out pretty close, and that is why I always suggest to run the numbers, or even just go with what "feels good", but I've never seen the numbers to justify that it makes a big difference either way.

-ERD50
my example using a mortgage was an attempt to get at what the rental value of said house might be so please forgive me. that being said i believe i am still correct when you use the rental value of the house in the example. i explained further in a previous post. and rent will need a cola to compensate.
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Old 09-02-2009, 03:02 PM   #140
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the problem with your example is that you havent kept lifestyle constant and therefore it is an invalid example in your attempt to refute my point.
The point I was trying to make is that it doesn't matter how much your house is worth. You are "using up" the entire value of your house by living in it. That's what I meant by saying a house is a consumption item. The only way to extract the value out is to sell it--but then you're not living in it anymore. Well, maybe you could extract some value by getting a roommate and renting half the house to them. But then you aren't using (consuming) the entire house, only half of it. But you are consuming 100% of your half.

Perhaps it's a fine point, perhaps we are just talking past one another, perhaps we are saying the same thing in different ways.

I have the same problem when people say "Paying extra on mortgage principal is the same as earning the same rate. If the mortgage is 6%, then I am earning 6% on the extra $1000 principal payment."

My response to that is, "Well then, I pay off my 20% interest rate credit card every month, so I'm earning 20% on that money. And 20% is more than 6%, so I'm doing a whole lot better than you."

The truth, of course, is that they are not earning 6% and I am not earning 20%. Both of us are just reducing the expense that we would otherwise be paying. It's no different from deciding to not buy a new car. I've avoided a $20,000 expense but that's not the same as earning $20,000.
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