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Re: Pay off mortgage early ?
Old 01-13-2004, 03:48 PM   #21
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Re: Pay off mortgage early ?

Yes, there are two sides to this issue and do what is comfortable for you. One can envision any number of scenarios that can work either way. Consider just one: Jan 2000, $200,000 is available to pay off mortgage or invest in the market.

Invest in market up till 2003: result a loss of approx 30% (depending on asset mix, etc). The $200,000 is now worth $140,000, plus you have a mortgage payment of approx $900 month, (plus you have made 36 $900 mortgage payments in the meantime (approx $ 32,000).

Payoff mortgage: result: you still have the $200,000 available (home equity, etc) plus an item that does not reduce your cash flow by $ 900 month. You have an improved cash flow situation.

This is really more a risk tolerance question. What do you feel more comfortable with and what do you expect the market to do. Some experts predict 6-7% returns in the market in future.

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Re: Pay off mortgage early ?
Old 01-13-2004, 04:03 PM   #22
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Re: Pay off mortgage early ?

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Thanks guys, * I think I understand the logic as to why it may be better to postpone the payoff, * but the psychological *side of me, *right now anyway, * is saying I'll feel so much better if completely and totally out of debt. * *But will run the numbers in about 3 or 4 years from now and see how I feel then.
You WILL feel much better if you are completely out of debt...with all due respect to all the strategies put forth by other very knowledgeable people that replied, until you are actually COMPLETELY OUT OF DEBT, you won't understand how good it feels...and that is something that no spreadsheet calculation will ever solve for you.

My advice is always(to everyone), borrow as little as possible, and pay it off as soon as possible. You will never regret it.
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Re: Pay off mortgage early ?
Old 01-13-2004, 04:15 PM   #23
 
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Re: Pay off mortgage early ?

farmerEd,

Agreed, I am out of debt and it feels good.

However, If I could borrow $10 million at 1/2 % APR, I do it in a Heartbeat
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Re: Pay off mortgage early ?
Old 01-13-2004, 05:39 PM   #24
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Re: Pay off mortgage early ?

The thing about debt is that it is OK if you can afford it .
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Re: Pay off mortgage early ?
Old 01-14-2004, 03:27 AM   #25
 
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Re: Pay off mortgage early ?

I agree with cut-throat. It is nice to have no debts, but
sometimes it makes sense. I've borrowed many
times since I retired and made money every time.
Remember, if it's raining money, get the biggest bucket you can and stand outside.

John Galt
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Re: Pay off mortgage early ?
Old 01-14-2004, 06:08 AM   #26
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Re: Pay off mortgage early ?

It's never rained money on me, but if it ever does, I'll have my bucket ready.
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Re: Pay off mortgage early ?
Old 01-14-2004, 06:37 AM   #27
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Re: Pay off mortgage early ?



JMortgage debt (especially if it is under 6%), puts you in the cat bird seat, if we get even close to the inflation of the late 60s though the early 80s.
I had a young family in 1966, and was 28 years old. For the next 16 years inflation and stagflation was the order of the day. (My parents were depression folks, and they went to their grave never trusting banks again).
Since 1982 or so, we have been in an almost cant miss environment, with bonds and stock returns making investment novices feel like they were in the class with Ted.
My own personal opinion, if I were in my earlly 50s, and was of the opinion that inflation was going to be a problem in the future, as long as I could service the debt with no problem, I dont think I would want to give away an excellent hedge.
In 1981 mortgages were running 16%. (CDs were paying about the same for 4 years.
Having real estate with a low interest rate was about the only way you could sell your property. The classified ads were picked clean every day, with real estate investors looking for assumable loans. If you had one, you were almost guaranteed a quick sale.
There are other ways of course, to hedge inflation, and this board (most posters) seems to like tips. I do too, and recently bought some.
The fact that your mortgage interest is deductible, (for most folks), makes to me, a pretty good case for holding on to a low interest mortgage.
Of course, if the current home you have is the last home you intend to live in, and have no intentions of ever selling, the piece of mind factor has to be figured in.
Jarhead
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Re: Pay off mortgage early ?
Old 01-14-2004, 05:22 PM   #28
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Re: Pay off mortgage early ?

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Having real estate with a low interest rate was about the only way you could sell your property. *The classified ads were picked clean every day, with real estate investors looking for assumable loans.
Jarhead,

I think that assumable residential loans are about as comon as hen's teeth today. Still, that mortgage money is there to use in various money making ways, while you continue to live in the property.

Often though, the tax factors are negative. And, if your offsetting investment goes bad, your home is on the line. For some people, that can be a good enough reason to avoid mortgages.

Mikey
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Re: Pay off mortgage early ?
Old 01-14-2004, 09:13 PM   #29
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Re: Pay off mortgage early ?

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And, if your offsetting investment goes bad, your home is on the line. For some people, that can be a good enough reason to avoid mortgages.
This argument keeps appearing, but it just does not make sense. Take a "typical" situation: investor has $1.1M at retirement and owes $100K on loan with 20 years remaining. The two options the investor has are to (1) pay off the loan and go into retirement with $1M or (2) start with $1.1M and keep making payments for 20 years (or pay off at any time in the future).

If the investor chooses (2) and ends up with their house on the line, then it means they would have had to have lost more than 90% (>$1M) of their nest egg in the first 20 years of retirement. Even if you assume that happens, then the poor guy who chose option (1) is in even worse shape unless he can sell his house. And if there were some reason why a rational person facing such an economic crises would prefer to own a house over eating, then all that a person who chose option 2 would have to have done is paid off the loan just before his balance dropped below the payoff amount.

If paying off your mortgage gives you a warm fuzzy that you just can't live without, then pay off your mortgage. But if you can afford to pay it off, then your house isn't on the line unless your entire lifestyle is on the line.
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Re: Pay off mortgage early ?
Old 01-14-2004, 11:17 PM   #30
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Re: Pay off mortgage early ?

You make a good point. Realistically, one's entire portfolio is carrying the mortgage, not just whatever offsetting investment was made with the proceeds of the loan (or the money that would have been earmarked for paying off the loan.)

Mikey
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Re: Pay off mortgage early ?
Old 01-15-2004, 04:42 AM   #31
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Re: Pay off mortgage early ?

While I agree that paying off a mortgage isn't exactly a "no-brainer," one consideration that favors paying it off is this.

When a person's interest payments become fairly modest, as a mortgage matures, there may no longer be any tax advantage to holding the mortgage. This will happen if a person's itemized deductions fall below their standard deduction.

The most important consideration, though, is the interest rate on the mortgage. If it is above the after-tax return on secure investments such as a Treasury Note of equivalent maturity, it is best for most people to pay it off.

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Re: Pay off mortgage early ?
Old 01-15-2004, 06:15 AM   #32
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Re: Pay off mortgage early ?

Ted says "When a person's interest payments become fairly modest, as a mortgage matures, there may no longer be any tax advantage to holding the mortgage. This will happen if a person's itemized deductions fall below their standard deduction.

The most important consideration, though, is the interest rate on the mortgage. If it is above the after-tax return on secure investments such as a Treasury Note of equivalent maturity, it is best for most people to pay it off"

A GREAT EXPLANATION. THANKS !
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Re: Pay off mortgage early ?
Old 01-15-2004, 04:47 PM   #33
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Re: Pay off mortgage early ?

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. . . The most important consideration, though, is the interest rate on the mortgage. If it is above the after-tax return on secure investments such as a Treasury Note of equivalent maturity, it is best for most people to pay it off.
The converse of that is certainly true. . . If secure investments of equivalent maturity offer better after-tax return than the interest rate on the mortgage, it would be foolish to pay off the mortgage.

But this statement assumes much about the problem that is not neccesarily true. Run the numbers and see for your situation. Or don't run the numbers and decide based on your emotion, if that suits you better.

Example: (Case 1)
Investor has:
paid off home
$1M nest egg
75% equities
25% commercial paper
30 year horizon
0.18% expense ratio
Initial withdrawal rate = $40,000

FIRECALC probability of success = 100%
Average terminal value =$4,218,464
=============
Example: (Case 2)
Investor has:
remaining mortgage balance of $100K
@5%
for 10 more years
$1.1 M nest egg (original + $100K owed)
75% equities
25% commercial paper
30 year horizon
0.18% expense ratio
Initial withdrawal rate = $46,400 (case 1 + mortgage payments)
change in withdrawal by -$6440 after 10 years

FIRECALC probability of success = 100%
Average terminal value =$4,558,859

So case 2 provides equally high probability of success with a probability to increase withdrawal rate by more than 8% over case 1. Alternatively, that 8% can be used to offset items such as healthcare that increase at well over the average inflation rate.

The analysis ignores tax advantages of case 2.

When using retirement simulators like FIRECALC, we tend to focus on probability of success and safe withdrawal rate, but once acceptable SWR is achieved there is a lot of potential advantage to increasing the terminal value. That value is a relative indicator of how well you might be able to deal with unexpected inflation or other unexpected large expenses. Alternatively, it indicates a probability that you will be able to increase your SWR at some point in the future.

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Re: Pay off mortgage early ?
Old 01-16-2004, 05:21 AM   #34
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Re: Pay off mortgage early ?

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The converse of that is certainly true. . . If secure investments of equivalent maturity offer better after-tax return than the interest rate on the mortgage, it would be foolish to pay off the mortgage. *

But this statement assumes much about the problem that is not neccesarily true. *Run the numbers and see for your situation. *Or don't run the numbers and decide based on your emotion, if that suits you better. *
The only thing that this analysis illustrates is that if you can get a mortgage at a NEGATIVE 8.7% interest rate, you certainly will be better off taking it and investing the money.

Aside from the fact that the mortgage payment should be about $12,700 per year in this example, it should be recognized that taking the $100,000 from the mortgage and, in effect, investing it 75% in stocks and 25% in commercial paper is NOT investing it in "secure investments." *Running the analysis with FIRECalc using the correct numbers illustrates this -- especially if the planning period is less than 30 years and the withdrawal percentage is increased. *

Furthermore, per my previous comments about the tax deductibility of mortgage interest disappearing, there is not necessarily any tax advantage to keeping an "old" mortgage.
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Re: Pay off mortgage early ?
Old 01-16-2004, 07:09 AM   #35
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Re: Pay off mortgage early ?

All the discussion here has been about an "all or nothing" payoff of a mortgage.

Another avenue is pre-paying months as-you-go. *This will not drain your ready cash, and you can feed it when you are comfortable with doing so.

Back when we did this, we had to pay $5 or so to have a loan payment table printed out for us from the lender. *It was $5 well spent. *Nothing like a complete list of payments for 30 years month by month. *Each line was a month, with Principal, Interest to be paid for that month. Principle to go, Interest etc. listed.

The usual monthly payment due is Principal + Interest. *So if you pay the month's payment, plus JUST the Principle for the next month, you have moved ahead two months. *Early on, almost all of a monthly payment is interest, so skipping ahead is easy. *As you get far into the loan, the extra Principle payments get heavier and heavier, but by then inflation and salary increases are helping out. *We did years at first, then chunks of years, down to just 2 mos or so when needed. *
I know it's not rocket science, but back then I was the only one I knew who did it. *Many figured that there was something "wrong" with it. *I felt there was something "wrong" with NOT doing it!

As inflation moves on, the amount of the mortgage that can be deducted from Fed tax decreases to zero, as mentioned before. *Unless one buys such an expensive house, and does a 95% loan and lives BEYOND ones means.

We kicked ourselves a bit for not looking into pre-paying earlier than we did. *That first year or so was almost ALL interest! *So the additional payment of principal would have been small change. *But we did catch on before too long.

Debt-free since '85. *Or maybe it was earlier than that *
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Re: Pay off mortgage early ?
Old 01-16-2004, 07:30 AM   #36
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Re: Pay off mortgage early ?

we do something like that. Got a 30 year loan on our house 4 years ago, but began paying it off like it was a 15 year loan. Then a little over a year ago, when interest rates went way down, we refinanced, got a 15 year mortgage. Since we had already paid 3 years on the first mortgage, we now are paying the 15 year loan as if it were a 12 year loan. So now we have a little less than 11 years to go. That would take me to age 68 and I do believe that I would like this debt out of the way by the time I begin taking social security. That's kind of why I proposed this question in the first place.
Cheers, Ben
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Re: Pay off mortgage early ?
Old 01-16-2004, 09:43 AM   #37
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Re: Pay off mortgage early ?

In addition to the previous comments from everyone, some things to also consider: 1) if one needs to go into a nursing home under medicaid, I believe (someone correct if not right) your home is not considered an asset that must be used up before you qualify to go into a nursing home, leaving the other spouse with the house. Whereas stocks and other investments are capped and must be used up before entering nursing home (medicaid). In other words the stocks etc are not protected. 2) also I believe in certain states that your home is protected from certain liabilites/lawsuits and is an added form of protection of your asset (i.e. house).

Someone may have more details and info on these topics, please add and clarify.

Thanks
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Re: Pay off mortgage early ?
Old 01-16-2004, 07:21 PM   #38
 
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Re: Pay off mortgage early ?

I have heard of cases where people moved to a state
specifically because their home would be judgement proof, and then
tried to protect huge sums (invested in their residence)
from creditors. I assume there must be a statute of limitations involved, but it is surely one more factor to be
taken into account when considering where to reside.

John Galt
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Re: Pay off mortgage early ?
Old 01-16-2004, 08:26 PM   #39
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Re: Pay off mortgage early ?

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The only thing that this analysis illustrates is that if you can get a mortgage at a NEGATIVE 8.7% interest rate, you certainly will be better off taking it and investing the money. . .
Which is more than any analysis others have presented proves because no other analysis has been presented.

I believe you'll find that the simulation is a valid simulation for a legitimate situation. It does overestimate the value of paying off the mortgage for a couple of reasons, but provides a worst case analysis for that situation. You may have simply misinterpreted the simulation.

The "secure investments" requirements is an arbitrarily constraint that I have not placed on the strategy. Since the point of the strategy is to realize gains above the interest rate of the mortgage, it would be foolish to place that money in low yielding bonds. If you could do that and come out ahead, then clearly you would be better off doing that. That situation may be available to people who re-finance today and face retirement in 10 years or so, but it would be a rare situation.

The risk issue is best dealt with at an overall portfolio level as opposed to trying to make a direct risk translation of your home mortgage to a specific investment in your portfolio. Requiring a direct trade of mortgage risk for a specific investment's risk would be a very narrow way to evaluate this strategy. Again, if you can make a direct risk translation from one mortgage to one investment, it makes the decision easy. But once you have achieved a risk level that is sufficient for you, you can begin to look at how to trade additional risk security for other factors.

I'm retired now, Ted. And this discussion reminds me of why I chose to get away from the office and retire early. I think you should pay off your mortgage if you haven't already. I hope it turns out to be a successful strategy for you.
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Re: Pay off mortgage early ?
Old 01-17-2004, 05:55 AM   #40
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Re: Pay off mortgage early ?

JohnGalt,

Isn't that what OJ did? He went to Florida, bought a huge house, and then took up residence there to avoid the civil lawsuits from his, uh, situation.

John Connally did that too in Texas. He was in fact the individual responsible for the limit placed on such homesteads because he bought a huge ranch right before the creditors came down on him. It's still a high limit, maybe unlimited for non-acreage, as I believe some of the Enron perps are using it too.
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