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Old 10-05-2008, 12:11 PM   #41
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(Emphasis added.)I think the same thing applies here. People who have done well recently by paying off their houses are now glad about their choice -- and rightfully so -- and are commenting in this thread about how great it is.
How could it not be so? If someone had $1mm in a Firecalc endorsed 70:30 split and removed $250,000 to pay off her mortgage on Jan 1, 2008, she has saved herself from a $50,000 drawdown and has been less nervous to boot. What's not to love?

But it is as meaningless as any other timing dependent choice. Sometimes you win, sometimes not. As long as your probability matrix is more or less accurate and you don't overextend, no problem how you play it.

Ha
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Old 10-05-2008, 12:13 PM   #42
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Also, in this market, a 100% guaranteed 6% return is pretty hard to resist.

Paying off your mortgage is like a 30 year or shorter simple annuity that pays off your mortgage, not a bond. So 6% is actually not too great.

I did take out a HELOC in August 2001 and invested it all before 9/11. I left it in for 4 to 5 years, which did take some disipline through 2002. I finally reached break even (including interest) and pulled out. If I had stayed in I would have made a good return, but I had a HELOC renewal coming up in two years and didn't want to be forced to liquidate.

I have a mortgage at 6% with no plans to pay it off. My personal rate of return is higher than 6%, so the mortgage has been a plus so far. If the market goes down another 10% or so I may use the just renewed HELOC to try it again. So far I have been returning cash to the market as it drops.
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Old 10-05-2008, 01:20 PM   #43
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Paying off your mortgage is like a 30 year or shorter simple annuity that pays off your mortgage, not a bond. So 6% is actually not too great.
I don't understand this. I get the fact that a bond has a return of capital at the end, vs and annuity which doesn't, but how is the cost of money not comparable? If there was a spread, wouldn't people be funding bonds with annuities or vice versa?
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Old 10-05-2008, 02:29 PM   #44
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A mortgage is a 30 year bond you've issued to the bank, and you pay the interest to them, so comparisons between fixed income returns and mortgage costs are spot on.

Its also a little too simplistic to say "I make more than my mortgage rate, so I'm making money".

Are you investing more conservatively with a mortgage than you would without one? The difference is a loss. Are you holding more cash with a mortgage than you would without one? Take the smaller returns for cash out of your investing returns. Have you implemented other backup plans that have a cost?

Nords sidesteps all of this by putting his mortgage money into the highest return, highest volatility equity class, having no fixed income, and having an assured cola adjusted income. And he's barely squeaking out a profit.

Maybe the best way to look at the situation is to determine the worst plausible outcome of both options.

In one case, if you get very ill, lose your job or suffer major investing losses, you also lose your home. In the other case...well...nothing really bad happens as long as you can cough up the property taxes.

By the way, all of this presumes we're talking about moderately capitalized early retirees. If you're still working, are over or undercapitalized, or like 100% equity portfolios and have the discipline to stick it out through a long bear market like the Depression or Stagflation periods, or you have a rate thats <5%, then you oughta have a mortgage.
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Old 10-05-2008, 02:58 PM   #45
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Nice summary Bunny.

Reminds me of 2001. My megacorp was close to bankrupcy. Been laying off thousands of folks at all levels for the whole year, but I had some peace of mind knowing that I had no mortgage. If laid off, the 2 kids in college could get student loans etc. I was confident I could another another job within a few months, but not having a mortgage meant the cash reserves should carry me through easily enough.
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Old 10-05-2008, 03:05 PM   #46
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Originally Posted by haha View Post
How could it not be so? If someone had $1mm in a Firecalc endorsed 70:30 split and removed $250,000 to pay off her mortgage on Jan 1, 2008, she has saved herself from a $50,000 drawdown and has been less nervous to boot. What's not to love?

But it is as meaningless as any other timing dependent choice. Sometimes you win, sometimes not. As long as your probability matrix is more or less accurate and you don't overextend, no problem how you play it.

Ha
I can't tell if we're talking past each other or not. I'm somewhat curious to find out. I also want to clarify my position for anyone else interested.

When we make decisions about the future, there are probabilities about what will happen, there is our decision, and then there is what actually ends up happening.

My point is simply that it makes more sense to me to attempt to evaluate my decisions based on whether or not I assessed the probabilities correctly and made the right decision and less on what the actual outcome was.

Let me use a series of bets on a coin toss to clarify my points:

1. You tell me you have a fair coin, I can choose to bet on heads or tails. I put up a $1, and you pay me $100 if I guess correctly.

a. I choose to bet and I win. I would choose to feel good about this, partly because I'm ahead $99, but more so because I believe I assessed the odds correctly.

b. I choose to bet and I lose. I would choose to feel good about this even though I lost $1, again because I believe I assessed the odds correctly and made a good decision, even though the outcome was bad.

2. Same as (1), but you only pay me 50 cents if I win.

a. I choose to bet and I win. I wouldn't feel good about this because, even though I won, I would have made a bad bet in the sense that the probabilities didn't favor a payoff.

Back to the mortgage case: I am in situation 1(b) - I've placed a bet that the probabilities tell me I should win over time, but so far I happen to be losing. While I'm not happy about having less wealth than I would have had if I had made a different set of decisions, I still think it was a good decision because I think the basis for my bet was valid and I just happen to have been unlucky so far.

There of course, may be some feedback from the actual outcome to what the probabilities actually turned out to be. If you claim to have a fair coin but then the coin starts turning up tails 90% of the time, I'm going to revisit my assumptions. If in 15 years the S&P is still in it's current range and inflation between now and then has run at 2% annually, then I'll admit I made a bad choice and will be suitably regretful.

It depends on how one sets one's assumptions or predictions, I guess. In a sense both the people who decided to pay off their mortgage recently and have done well by that decision, and the people like me (and Nords) who have decided to try to arb a mortgage are both looking at past history to set those assumptions. The former are looking at a smaller time frame and a smaller data set and extrapolating to the larger question; the latter are looking at greater time frames and a larger data set to try to interpolate to an individual situation.

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Old 10-05-2008, 03:06 PM   #47
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By the way, all of this presumes we're talking about moderately capitalized early retirees. If you're still working, are over or undercapitalized, or like 100% equity portfolios and have the discipline to stick it out through a long bear market like the Depression or Stagflation periods, or you have a rate thats <5%, then you oughta have a mortgage.
still working - check
over or undercapitalized - check
like 100% equity portfolios - check
have the discipline - check
a rate thats <5% - check

have a mortgage - check

Phew!

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Old 10-05-2008, 03:11 PM   #48
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I can't tell if we're talking past each other or not. I'm somewhat curious to find out. I also want to clarify my position for anyone else interested.

When we make decisions about the future, there are probabilities about what will happen, there is our decision, and then there is what actually ends up happening.

My point is simply that it makes more sense to me to attempt to evaluate my decisions based on whether or not I assessed the probabilities correctly and made the right decision and less on what the actual outcome was.

Let me use a series of bets on a coin toss to clarify my points:

1. You tell me you have a fair coin, I can choose to bet on heads or tails. I put up a $1, and you pay me $100 if I guess correctly.

a. I choose to bet and I win. I would choose to feel good about this, partly because I'm ahead $99, but more so because I believe I assessed the odds correctly.

b. I choose to bet and I lose. I would choose to feel good about this even though I lost $1, again because I believe I assessed the odds correctly and made a good decision, even though the outcome was bad.

2. Same as (1), but you only pay me 50 cents if I win.

a. I choose to bet and I win. I wouldn't feel good about this because, even though I won, I would have made a bad bet in the sense that the probabilities didn't favor a payoff.

There of course, may be some feedback from the actual outcome to what the probabilities actually turned out to be. If you claim to have a fair coin but then the coin starts turning up tails 90% of the time, I'm going to revisit my assumptions.

It depends on how one sets one's assumptions or predictions, I guess. In a sense both the people who decided to pay off their mortgage recently and have done well by that decision, and the people like me (and Nords) who have decided to try to arb a mortgage are both looking at past history to set those assumptions. The former are looking at a smaller time frame and a smaller data set and extrapolating to the larger question; the latter are looking at greater time frames and a larger data set to try to interpolate to an individual situation.

2Cor521
Hey Bible Man- you have just saved me the tuition on a probability matrix and decision tree course at my local CC.

Ha
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Old 10-05-2008, 03:38 PM   #49
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You're welcome, ha.

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Old 10-05-2008, 08:49 PM   #50
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You could buy a 30 year (or whatever) annuity to pay your mortgage payments exactly, with no excess interest or principal return. The value of paying off the mortgage is exactly the value of that annuity.

What bond pays you 6% while also returning some of your principal each month?

If you have an interest only mortgage and you sell the house to return your principal after 30 years, then you have a bond equivalent.
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Old 10-05-2008, 09:12 PM   #51
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I'd get about 3.75-3.8% from an annuity. Get me a mortgage at that rate and I'm your man.

Granted if you're in your 60's you'd get a better rate. You also wont be likely to be paying the full 30 years on your mortgage, so factor in the mortality rates per the IRS.

But you're right. No bond pays 6% and returns principal. Which is why mortgages are a lousy choice for an early retiree that is living off their investments. They're currently paying 4.xx% with no principal return.

Again, get me a mortgage at that rate and a return thats similar, risk adjusted, and I'm all ears.
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Old 10-05-2008, 09:52 PM   #52
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From Immediate Annuities: Highest Annuity Rates on Immediate Annuities and Annuities. Annuities - Annuity Interest Rates (I have no idea who they are, just googled them), I can get $590/month immediate annuity for 30 years period certain for a one time $100k payment. That's $7080/year, which is more than a 6% bond would pay ($6000/year presumably). Of course the payments will only last for 30 years, just like the mortgage payments, but the bond will return $100k after 30 years.

I'll let someone else figure out the implied interest rate for the annuity. I assume it is less than a good mortgage rate. Nonetheless, that annuity is not a simple 7% bond. Your mortgage payments will stop at the end of the mortgage and you will never be able to invest that principal unless you sell or borrow.

Anyway, I'm not arguing either payoff or don't, but paying off a mortgage is self annuitizing at the implied interest rate of the mortgage, not self bonding, and does not have a return like a bond investment at that same interest rate.
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Old 10-06-2008, 12:37 AM   #53
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Just a parenthetical comment: On debates such as these, I think there is a bias towards setting courses of action based on what has worked well in the recent past.
...
I would agree with the above. I'm sure that if you asked the OP's question to a similar community in the late 90's you would have seen many more folks advocating investing in equities rather than paying off the mortage. Folks generally tend to recommend an approch that works for them - until it doesn't.

That's not to say that I think either answer is more 'correct'. I think, in a world where you can afford very long time horizons, the math does point to investing extra funds in equities. But almost no one can afford that luxury, so it's just a question of how much risk you're comfortable with.

To me, this is just like figuring your asset allocation - there's too many variables for each person for there to be a general 'correct' answer.

In my case, I'm middle of the road - I've paid off about 2/3 of my mortgage to get to my comfort zone, then invested everything after that.

BTW, one point that I haven't seen made in this thread: not paying off the mortgage, in most cases, gives you the option to simply walk away if your home suddenly becomes worth less than your mortgage (obviously the current economic situation, but also due to uninsured events like earthquake, hurricane, etc.). I know it's not ethical and should not be a major consideration in a decision like this, but something worth noting as a potential differentiator if you live in a neighborhood where this is a concern.
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Old 10-06-2008, 02:24 AM   #54
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I live debt free, and all i know is it gives me a tremendously happy and healthy feeling. I'm sure from a financial standpoint i could be working my assets much harder, and see others doing that, but my philosphy is that anything i own to some extent owns me. I like being owned by my interests and passions. Good luck in your decision.
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Old 10-06-2008, 08:44 AM   #55
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Anyway, I'm not arguing either payoff or don't, but paying off a mortgage is self annuitizing at the implied interest rate of the mortgage, not self bonding, and does not have a return like a bond investment at that same interest rate.
I think you forgot a small item. At the end of the mortgage you've got an asset worth 6 or 7 figures. At the end of a bond you also get the principal. At the end of the annuity you've got nothing.
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Old 10-06-2008, 11:06 AM   #56
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Why not do both. Set a minimum monthly contribution rate for investments and begin to pay down the mortgage. Increase your principal payment with a portion of any future raises. Win-Win.

And don't forget to spend some cash. Live a little, life is short.
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Old 10-06-2008, 11:13 AM   #57
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I think you forgot a small item. At the end of the mortgage you've got an asset worth 6 or 7 figures. At the end of a bond you also get the principal. At the end of the annuity you've got nothing.

I did say before that you have to sell your house to realize that investment. That makes it a little bond-like, if your house is an investment. You'd also have to have an interest only mortgage.

However, the annuity case remains the same. You use the annuity to make the house P&I payments and you still have the same investment in the house. Or you pay off the mortgage and you still have the same investment in the house. If you bought a bond that threw off enough income to pay the house payment you would have the same investment in the house plus the bond principal returned at the end of the period. If you buy a bond with the same interest rate as your mortgage it will pay only some of your house payments (all the interest of the first payment but no principal because it doesn't return any principal, more of the principal for later payments as the interest owed with each payment falls), but will return all your principal at the end.

If you pay off your mortgage you are buying an annuity that costs the payoff amount, returns your mortgage P&I payments each month, and lasts for a "period certain" equal to the remaining length of the mortgage.
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Old 10-06-2008, 11:51 AM   #58
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The bond and the annuity case are different structures, but the cost of money is still comparable. The payments on a 100k 30 yr loan/annuity at 6% are 600/month. The interest on a 100k bond @ 6% is only 500/month. The payment stream on a bond is less because you get the principal back at the end. As far as future value @ 30 yrs goes, they are identical: the annuity future value is about 600k, and the bond payment stream future value is 500k (FV(annuity) = FV(bond payments) + return of captital). So implied interest rates (aka cost of money) are the best way to compare any two investment vehicles whether its an annuity/loan or a bond.

Again, since we had the cash available to payoff, we decided that a "30 yr. 100% guaranteed 6% return vehicle" was a reasonably good addition to our portfolio.
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Old 10-06-2008, 12:13 PM   #59
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Paying off my mortgage.(hopefully in next two years)

I've been paying a little extra for the past few years and letting additional cash sit in a money market. Until lately, i've been earning just enough to cover the mortgage interest. so its a wash...

I tend to keep more cash on hand than required, only because i still have the mortgage, so recently i decided to get aggressive with the mortgage and pay it off.
I'm 35, cars paid for, college paid for, kids college paid for, we max our 401k/roths'...as soon as i get the mortgage out of the way...we are much closer to achiving FIRE!!

I've gone back and forth about if i should pay off mortgage or invest...
and i simply think i'll sleep a little better at night..without any debt!

:-)
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Old 10-06-2008, 06:48 PM   #60
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we max our 401k/roths'...
Sorry if I'm stomping on board etiquette by turning this into "yet another pay off the mortgage" thread, but the above reminded me of another reason I am not paying off my mortgage.

Right now I am paying my regular monthly mortgage payments and am also maxing out many of the typical things: 401(k), Roth IRA, 529, ESA. If I were to divert funding away from those savings vehicles in order to pay off my mortgage, then I could pay it off in about 5 years. But then I would probably be able to max out those savings vehicles again and still have extra cash left over which I would want to save, so I'd probably stick that in a taxable account.

I haven't run the simulations on which is better, but I currently don't like the thought of losing out on the next 5 years of contributions to those savings vehicles because I won't be able to make it up later.

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