J
John Galt
Guest
Hello wabmester! It's like I said before. If it's raining
money, find the biggest bucket you can and run outside.
John Galt
money, find the biggest bucket you can and run outside.
John Galt
Pay off mortgage early ?
- Thread starter renferme
- Start date
You are absolutely correct. Based on that, of course, no analysis FIRECALC can offer is valid. In fact, there is really no analysis you can do that would be unarguably meaningful.
True, I could lose my advantage over the next several decades. But, of course, I could always pay off my mortgage tomorrow and lock in the gains. Those who have already paid off their mortgage do not have an analogous option if I keep running up the gains.
Of course your statement that your choice not to borrow in market peaks is meaningless bravado. You couldn't possibly know when market peaks hit till after they have passed, so you could not have decided a priori not to borrow durring them. Also, the statement is a little like saying I made $500,000 today. I decided not to invest that money in company XYZ and they went bankrupt. But if it makes you happy to think in those terms, enjoy those thoughts.
Yes, and none of us know what those "lower" returns than in the past might be over the next several decades. I have heard some of the more successful investors suggest returns of 6% to 8% as reasonable guesses over the next decade. That would put me in very good shape. If we see a market that acts like that of the Great Depression, I may be retreating from this strategy in a few years. I have enough financial cusion to absorb it. If we see a market worse than the Great Depression, we may all be in trouble.
cute fuzzy bunny
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Goodness I think I may have to go into the clothes closet and look for that white shirt with the thick vertical black stripes on it, along with my whistle...
I think its safe to say that in an average 30 year period, the chances of making a better return on a lump of cash while investing in instruments having a similar risk factor to a mortgage (uh, treasuries and what else?) is not so good.
If investing in riskier instruments, then certainly one can do better.
If you already paid through more than half your mortgage, as many people have, then the remaining interest isnt too interesting to avoid and one can most likely do better investing than paying off.
As pointed out, one cannot see into the future and it all may go to hell in a handbasket, but as likely as not, the next 30 years should have a lot in common with the last 30 years...more or less. We've certainly had a little bit of everything.
However, its also worthwhile to note the other perspectives of being able to take more risk in ones investments having "bought back the bond" of their mortgage (I dont have to worry about losing the house), or being able to accept less risk in ones portfolio because they have smaller monthly payments (I dont need as much money thrown off monthly, so why take that risk?).
For me, it was worthwhile for the latter reason. I dont need to take as much risk because I dont need to make the mortgage payment every month, and conversely I need to keep less cash buffer on hand in case I experience a topsy turvy time in the markets.
And while it was also pointed out that someone who hasnt paid off can always do so, its also possible for me to take out another mortgage at any time, or draw from my HELOC if needed.
I sleep good. If you sleep good with your decisions, and believe me I think we've covered every perspective, analysis and piece of data needed for anyone to make a decision, then your decision is equally good.
I think its safe to say that in an average 30 year period, the chances of making a better return on a lump of cash while investing in instruments having a similar risk factor to a mortgage (uh, treasuries and what else?) is not so good.
If investing in riskier instruments, then certainly one can do better.
If you already paid through more than half your mortgage, as many people have, then the remaining interest isnt too interesting to avoid and one can most likely do better investing than paying off.
As pointed out, one cannot see into the future and it all may go to hell in a handbasket, but as likely as not, the next 30 years should have a lot in common with the last 30 years...more or less. We've certainly had a little bit of everything.
However, its also worthwhile to note the other perspectives of being able to take more risk in ones investments having "bought back the bond" of their mortgage (I dont have to worry about losing the house), or being able to accept less risk in ones portfolio because they have smaller monthly payments (I dont need as much money thrown off monthly, so why take that risk?).
For me, it was worthwhile for the latter reason. I dont need to take as much risk because I dont need to make the mortgage payment every month, and conversely I need to keep less cash buffer on hand in case I experience a topsy turvy time in the markets.
And while it was also pointed out that someone who hasnt paid off can always do so, its also possible for me to take out another mortgage at any time, or draw from my HELOC if needed.
I sleep good. If you sleep good with your decisions, and believe me I think we've covered every perspective, analysis and piece of data needed for anyone to make a decision, then your decision is equally good.
Reducing Risk: I haven't ever heard others on this board discussing making their portfolio more aggressive after paying off their mortgage, but if risk is what drives your mortgage decisions, that would seem the reasonable thing to do. Alternatively, you could keep a mortgage and reduce your equity/fixed allocation to reduce risk. Using the example from before, here is how that might affect your probability of gaining financially:
EQU/FIXED PROBABILITY OF
RATIO BEATING PAYOFF RESULTS
80/20 78.8%
70/30 78.8%
60/40 78.8%
50/50 76.5%
40/60 72.0%
30/70 70.5%
Again, the assumptions are:
Withdrawals: $9907 (annual payments on 5.25%, 30 year loan)
Starting Portfolio: $149,500 (loan amount)
Lifespan of portfolio: 30 years (duration of loan)
percent of portfolio in stocks: 60% (specific to your portfolio)
where is the rest of investments: TIPS (specific to your portfolio)
Annual investment expenses: 0.2 (specific to your portfolio)
inflation estimate: None (since loan payments are fixed)
Check first year withdrawal box (loan payments begin immediately)
So if you want to make a high probability investment and reduce your risk, the odds are still with most investors. This strategy won't work for John Galt. John made the right choice for his investment strategy.
EQU/FIXED PROBABILITY OF
RATIO BEATING PAYOFF RESULTS
80/20 78.8%
70/30 78.8%
60/40 78.8%
50/50 76.5%
40/60 72.0%
30/70 70.5%
Again, the assumptions are:
Withdrawals: $9907 (annual payments on 5.25%, 30 year loan)
Starting Portfolio: $149,500 (loan amount)
Lifespan of portfolio: 30 years (duration of loan)
percent of portfolio in stocks: 60% (specific to your portfolio)
where is the rest of investments: TIPS (specific to your portfolio)
Annual investment expenses: 0.2 (specific to your portfolio)
inflation estimate: None (since loan payments are fixed)
Check first year withdrawal box (loan payments begin immediately)
So if you want to make a high probability investment and reduce your risk, the odds are still with most investors. This strategy won't work for John Galt. John made the right choice for his investment strategy.
Ok, here are a couple of different thoughts on this issue. Would you consider holding a 5% mortgage an inflation (or hyper-inflation) hedge? If inflation really shoots up, which the financial markets have not priced in currently, then having the mortgage money in the bank earning 10% would feel real good. As some have said - hold it for a few years and see what happens.
On the risk side, I would say I'm off the wrong end of the safety scale. I had the opportunity to pay off the mortgage a year ago, but took the money and put it down on a 20 unit apartment building. It looks to make me about 18k tax sheltered per year, more whenever the economy picks up a little. With that, and maybe some increase in real estate prices over the next 10 years, I should be in good shape. Without it, another bear year would have had me worried, so I guess I am taking more risk early on, to build up my portfolio to the point I am comfortable at. Do the others who favor a mortgage also feel that their net worth is 'borderline' for retirement, and therefore, either conciously or unconciously, favor the extra risk/return?
On the lower risk side, we do have enough equity in our house, to move to a smaller house and have it paid for, which we will do at some point. With two teenage daughters, I am not ready to move back to a 1-bathroom house yet!
Wayne
On the risk side, I would say I'm off the wrong end of the safety scale. I had the opportunity to pay off the mortgage a year ago, but took the money and put it down on a 20 unit apartment building. It looks to make me about 18k tax sheltered per year, more whenever the economy picks up a little. With that, and maybe some increase in real estate prices over the next 10 years, I should be in good shape. Without it, another bear year would have had me worried, so I guess I am taking more risk early on, to build up my portfolio to the point I am comfortable at. Do the others who favor a mortgage also feel that their net worth is 'borderline' for retirement, and therefore, either conciously or unconciously, favor the extra risk/return?
On the lower risk side, we do have enough equity in our house, to move to a smaller house and have it paid for, which we will do at some point. With two teenage daughters, I am not ready to move back to a 1-bathroom house yet!
Wayne
cute fuzzy bunny
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
On the portfolio size, I felt more than comfortable that I'd make it with or without paying off the mortgages...in my case I paid mine, my parents, and my fiancees off. I did about 5 minutes thought on the benefits of investing the money, but given that was 18 months into the recent 3 year bear market, and given my published thoughts about market over valuation, I didnt think too hard about keeping the money and investing it.
I summed it up by thinking..."heck, if it all goes to hell in a handbasket and somehow I lose most or all of my investments, I can pull part time at the quick-e mart and still pay the bills."
Tell ya what though...if the market lost 25% or more of its value due to some crisis or other major event, and I was happy with where my current investments are, I might think very hard about pulling 100k out of my HELOC at 4% and laying that out there. I've got the assets to cover it if needed, and in the middle of a minor disaster I doubt the fed would be jerking up the rates to affect that 4% any time soon.
In the meanwhile my fiancee pushed the money she was paying on her mortgage into increasing her retirement plan deductions, so when she retires we'll have a pretty nice nestegg to work with. And my dad said he wont have to sell any of his savings bonds for a couple of years, the Social Security is more than covering expenses. I know he went to sleep a few times a week wondering if the money was going to last. Now I know he probably doesnt do that anymore.
I summed it up by thinking..."heck, if it all goes to hell in a handbasket and somehow I lose most or all of my investments, I can pull part time at the quick-e mart and still pay the bills."
Tell ya what though...if the market lost 25% or more of its value due to some crisis or other major event, and I was happy with where my current investments are, I might think very hard about pulling 100k out of my HELOC at 4% and laying that out there. I've got the assets to cover it if needed, and in the middle of a minor disaster I doubt the fed would be jerking up the rates to affect that 4% any time soon.
In the meanwhile my fiancee pushed the money she was paying on her mortgage into increasing her retirement plan deductions, so when she retires we'll have a pretty nice nestegg to work with. And my dad said he wont have to sell any of his savings bonds for a couple of years, the Social Security is more than covering expenses. I know he went to sleep a few times a week wondering if the money was going to last. Now I know he probably doesnt do that anymore.
J
John Galt
Guest
We've been in this house 2 years and 6 months. Paid cash and
happy with that. I have a couple of things holding me
back from any temptation to get a HELOC. For one thing,
we are in a flood plain, so most any lender would require flood insurance whcih we opt not to carry.
However, I have never been so fond of where my money was invested that I would borrow on the house
to avoid moving my invested cash. I have thought about
"pulling hours at the QUIK MART" if things got really
sticky. Hopefully that won't be necessary.
John Galt
happy with that. I have a couple of things holding me
back from any temptation to get a HELOC. For one thing,
we are in a flood plain, so most any lender would require flood insurance whcih we opt not to carry.
However, I have never been so fond of where my money was invested that I would borrow on the house
to avoid moving my invested cash. I have thought about
"pulling hours at the QUIK MART" if things got really
sticky. Hopefully that won't be necessary.
John Galt
Given that the expected (most probable) return on stocks (at least based on historical data) is about 10.5% per year, and that the expected return on TIPs is about 5.5% per year, it stands to reason that the gain on a portfolio consisting of stocks and TIPs will probably exceed the payments on a 5.25% mortgage. The longer the holding period that is considered, the higher the probability will be. So for a person who is accumulating wealth, having a mortgage at 5.25% and investing the principal in stocks and TIPs is a "good bet."
But retirees face a different situation. Presumably, most retirees are attempting to maximize the probability that they will successfully sustain a particular withdrawal rate over a particular number of years. In general, they are not trying to maximize their "most probable" wealth when they die. Because of this, and the fact that most retirees would be approaching the mortgage/investment choice with a time horizon of perhaps only 5 to 10 years, the option of keeping the mortgage and investing the principal would either reduce or at least not significantly increase their probability of sustaining a particular withdrawal rate. This is because of the risk that the investments might either lose value, or not gain enough to equal the interest payments on the mortgage.
J
John Galt
Guest
Good morning salaryguru. Excellent post!
Like many others, I have pondered this issue a great
deal. Several reasons I remain in a paid off mode on the house (mostly psychological). The "time horizon"
you mention is a big one. I always assume
(obviously I hope I'm wrong) that my time horizon is very short. This is another "given", along with my no-stocks portfolio which simplifies my investment
decisions. I'm already thinking about money 24/7,
so taking a few possibilities off the table helps me to remain
functionally lucid.
John Galt
Like many others, I have pondered this issue a great
deal. Several reasons I remain in a paid off mode on the house (mostly psychological). The "time horizon"
you mention is a big one. I always assume
(obviously I hope I'm wrong) that my time horizon is very short. This is another "given", along with my no-stocks portfolio which simplifies my investment
decisions. I'm already thinking about money 24/7,
so taking a few possibilities off the table helps me to remain
functionally lucid.
John Galt
Good point, and probably the key to understanding the differences of opinion here. At the two ends of the spectrum, early retirees (<50) with marginal assets may have a different viewpoint and need than later retirees (>60) with sufficient assets. The early ones, either from habit or concious choice, may still be in an asset accumulation mode. This includes the semi retired, such as me, who work (sometimes quite reluctantly, sometimes not) a few days a month.
Wayne
I agree completely. And I appologize to the entire board for being so single minded about these posts. It is not because I want to convince any of you that you should not pay off your mortgage. But I admit to feeling like my motives and integrity were being questioned unfairly. I may be making the wrong decision (I honestly don't think so) but it is based on some fairly detailed analysis of both the rewards and risks, as well as a thorough understanding of my own situation.
A
adviceseeker
Guest
As I mentioned in an earlier post, the interesting thing about this forum is that yo quickly realize there are no "cookie cutter" answers to many of these questions. Everyone is in a unique set of circumstances.
My biggest problem with paying off the mortgage when you have a low interest rate is that with each additional dollar paid in equity that could have been used to fund another investment, the return on the home asset decreases (the house goes up in value at a rate that is unrelated to the equity level - the more you have tied up in the home the less your annual return will be). In additional, there are asset diversification issues; you will have more $$$ invested in a single asset. While you may plan on living in your home for years to come, if you changed your mind, higher interest rates or some local problem could result in that asset losing value just like any other investment.
I enjoy the input on this issue since it is one I have been struggling with as I prepare to retire in about 6-months.
My biggest problem with paying off the mortgage when you have a low interest rate is that with each additional dollar paid in equity that could have been used to fund another investment, the return on the home asset decreases (the house goes up in value at a rate that is unrelated to the equity level - the more you have tied up in the home the less your annual return will be). In additional, there are asset diversification issues; you will have more $$$ invested in a single asset. While you may plan on living in your home for years to come, if you changed your mind, higher interest rates or some local problem could result in that asset losing value just like any other investment.
I enjoy the input on this issue since it is one I have been struggling with as I prepare to retire in about 6-months.
As I have stated in other posts, I am one of those somewhat pessimistic people who expects the real rate of return on stocks to decline below its historical average of around 7%, to perhaps 5% or so. Nominal returns on stocks tend (over time) to benefit from inflation, so if inflation increases to perhaps 5%, the nominal return on stocks could still be 10% per year.
Such forecasts are very long-term, and as a result the current level of the stock market has very little to do with them. It appears to me, however, that the total stock market is very close to being fairly valued from the perspective of its long-term trend to date. But whether it's, say, 20% over-valued or under-valued now is practically irrelevant to long-term predictions of real growth.
J
John Galt
Guest
Oops GDER, while you did a good job of covering
adviceseeker's post re. mortgage payoff, equity, return,
diversification, etc, you slipped over into sarcasm.
That's my department
.
John Galt
adviceseeker's post re. mortgage payoff, equity, return,
diversification, etc, you slipped over into sarcasm.
That's my department
.John Galt
A
adviceseeker
Guest
I don't mind the criticism....like I said, everyone has a different perspective. Let me give you an example - and let me know what you think.
You have a $100,000 home and can either pay it off or take a 5.25% mortgage for $90,000 and 15-years. The home will appreciate 5% per year. At the end of 15-years, the home is worth $208K, regardless of which option you select. If you took the 15-year mortgage, the $90,000 loan costs $40K in interest by the end. If you invest the $90,000 and achieve an annual compounded return of 5%, the $90,000 grows to $187K, superior to the $40K in interest expense. This is without considering the tax implications.
I know peace of mind is an issue, but if you are looking at financials only, and can assume the market risk associated with earning a 5% return, you may choose to finance your home instead of paying it off.
Any thoughts/comments?
You have a $100,000 home and can either pay it off or take a 5.25% mortgage for $90,000 and 15-years. The home will appreciate 5% per year. At the end of 15-years, the home is worth $208K, regardless of which option you select. If you took the 15-year mortgage, the $90,000 loan costs $40K in interest by the end. If you invest the $90,000 and achieve an annual compounded return of 5%, the $90,000 grows to $187K, superior to the $40K in interest expense. This is without considering the tax implications.
I know peace of mind is an issue, but if you are looking at financials only, and can assume the market risk associated with earning a 5% return, you may choose to finance your home instead of paying it off.
Any thoughts/comments?
Your figures have just "proved" that you can borrow money at 5.25%, invest it at 5%, and make a substantial profit. You'd better go back to the drawing board. The key to the answer is that the $90,000 doesn't grow at 5% per year because every year you need to withdraw the amount required to make the mortgage payments!
A
adviceseeker
Guest
Last time on this....you only borrow the $90K at 5.25% for one month (the first). As you amortize the loan you are borrowing less and less...that is why the interest is only $40K at the end of the loan!
My assumption is that the $90K is an independent investment decision, and the house payment would come from other assets (pension, SS, other savings, etc.). Obviously you can look at this several different ways.
Bottom line is that the decision to pay off the house may be as much for non-financial reasons as otherwise, and is a personal decision.
Thanks for the input.
My assumption is that the $90K is an independent investment decision, and the house payment would come from other assets (pension, SS, other savings, etc.). Obviously you can look at this several different ways.
Bottom line is that the decision to pay off the house may be as much for non-financial reasons as otherwise, and is a personal decision.
Thanks for the input.
J
John Galt
Guest
Hey GDER! You don't need to apologize. Sarcasm, invective and hyperbole can make writing more interesting. Someone will get their hackles up, but
as long as we still have the First Amendment, I say
just let it flow.
John Galt
as long as we still have the First Amendment, I say
just let it flow.
John Galt
Yes. You've indicated that you feel that historical analysis is not valid. Although I do understand that past performance is no guarantee of future results, I also believe that there is value in using historical simulators like FIRECALC. That, along with some customized spreadsheets are the best tools I have to look at this problem. I actually believe my odds are significantly better than 78% since I feel that pre-1929 results are less meaningful to today's markets. If I neglet them, I find my odds of beating the payoff better than 90%. But the value of historical data is clearly only an assumption on my part. I recognize that we are in a period of overvaluation and that we face serious challenges going forward. If things turn very sour over the next several years, I may end up retreating from this strategy.
Are you using any specific models or simulations to arrive at your conclusion that the next 30 years will provide returns under 5.25%? What number do you feel is more realistic? Are there other "mathematical flaws" you see in my analysis that you can offer corrections for?
I am fairly certain that Buffet's comments were made prior to last year's run up, so I assume his expectations are that we are in for several sub 6% years over the next decade. That still leaves me ahead at the 10 year mark in my mortgage and I will have almost 2 decades more to get further ahead -- unless I back away from the strategy at some point in the future. I don't know of any predictions for 30 year returns that I would trust. The historical simulators are the tool I trust most to analyze this kind of situation. You could also use Monte Carlo simulations, but these tools omitt some very important correlations in economic data and are calibrated using historical simulations anyway.
cute fuzzy bunny
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
About the only assumption that I think bears reconsideration is the one on home appreciation rates. I can go look for the source but I read something recently that said home appreciation rates are nearly zero in 80-85% of the US. And they've been roughly zero for some time.
Even where there is appreciation, there is volatility.
Consider my home in the SF bay area. In 1992-93 there was a roughly 20% drop in prices in the immediate area and I bought. I bought a house that had been listed for $180 that I ended up getting for $162 That $162 house turned into a $211 house 2 years later and they sell for roughly $345 today. A pathetic 50 year old 900 sq foot house on a nice sized lot in a fair to middling neighborhood.
My home in the sacramento area originally sold for $410 in 1989. Prices had dropped steadily until I bought it in 1996 for $312. After I bought it prices steadily rose until I sold it last year for $490. Much nicer home, 3000 sq feet on a half acre in a top notch neighborhood...but it suffered from huge swings in volatility.
My most recent home sold for $250 on an ask of $269. Homes in this area just a few years ago couldnt be given away for $175. I'm betting that the value drops in the next few years, perhaps by 20-40k. But by the time I consider moving in 6-10 years, it'll have regained its value and then some.
In the meanwhile, a home you bought for $80k in podunk middle america 8-10 years ago probably still sells for 80k. Some inflation appreciation compensated by depreciation due to aging.
Points: Volatility in RE can be as high or higher than risky equity investments. A fixed and positive return on home equity is not a given...even over a long term. RE doesnt gain much if anything in most areas. Boy can you make a lot of money on a house if you buy and sell at the right times...
Setting aside the calculations based on past performance, how about a not so rosy scenario...
If we had a 5 year sideways or downwards market, and I had to dip into my capital base instead of living off dividends:
If I had a 200,000 mortgage on my property for 15 years at 5.25%, adding in my $24k per year living expenses, my total draw for that five year stagnant period would be $216,420. Without the mortgage involved, my total draw during that down time would be $120,000.
For an ER with a portfolio in the 500k-750k range, that 216,420 pull would probably send them back to work. I dont think you could recover from that level of loss without supplementary income.
Unlikely scenario? Well if you ER'd at the end of 1999 and stayed fully invested, depending on your investment mix you're probably somewhere between still under water and slightly above where you started. Unless we see a nice run-up for the rest of this year, the scenario I just laid out just happened.
Alternative line of thinking: my house can lose 100% of its value and I can still live in it without it costing me a penny vs a home with a mortgage. And I can peg the maximum loss of this investment: the purchase price minus (the cost of the developed land plus the construction cost of the home) minus depreciation...ignoring other factors. However my portfolio invested in stocks and bonds can drop half or all of its value and leave me with absolutely nothing of benefit.
Even where there is appreciation, there is volatility.
Consider my home in the SF bay area. In 1992-93 there was a roughly 20% drop in prices in the immediate area and I bought. I bought a house that had been listed for $180 that I ended up getting for $162 That $162 house turned into a $211 house 2 years later and they sell for roughly $345 today. A pathetic 50 year old 900 sq foot house on a nice sized lot in a fair to middling neighborhood.
My home in the sacramento area originally sold for $410 in 1989. Prices had dropped steadily until I bought it in 1996 for $312. After I bought it prices steadily rose until I sold it last year for $490. Much nicer home, 3000 sq feet on a half acre in a top notch neighborhood...but it suffered from huge swings in volatility.
My most recent home sold for $250 on an ask of $269. Homes in this area just a few years ago couldnt be given away for $175. I'm betting that the value drops in the next few years, perhaps by 20-40k. But by the time I consider moving in 6-10 years, it'll have regained its value and then some.
In the meanwhile, a home you bought for $80k in podunk middle america 8-10 years ago probably still sells for 80k. Some inflation appreciation compensated by depreciation due to aging.
Points: Volatility in RE can be as high or higher than risky equity investments. A fixed and positive return on home equity is not a given...even over a long term. RE doesnt gain much if anything in most areas. Boy can you make a lot of money on a house if you buy and sell at the right times...
Setting aside the calculations based on past performance, how about a not so rosy scenario...
If we had a 5 year sideways or downwards market, and I had to dip into my capital base instead of living off dividends:
If I had a 200,000 mortgage on my property for 15 years at 5.25%, adding in my $24k per year living expenses, my total draw for that five year stagnant period would be $216,420. Without the mortgage involved, my total draw during that down time would be $120,000.
For an ER with a portfolio in the 500k-750k range, that 216,420 pull would probably send them back to work. I dont think you could recover from that level of loss without supplementary income.
Unlikely scenario? Well if you ER'd at the end of 1999 and stayed fully invested, depending on your investment mix you're probably somewhere between still under water and slightly above where you started. Unless we see a nice run-up for the rest of this year, the scenario I just laid out just happened.
Alternative line of thinking: my house can lose 100% of its value and I can still live in it without it costing me a penny vs a home with a mortgage. And I can peg the maximum loss of this investment: the purchase price minus (the cost of the developed land plus the construction cost of the home) minus depreciation...ignoring other factors. However my portfolio invested in stocks and bonds can drop half or all of its value and leave me with absolutely nothing of benefit.
I really have assumed nothing about home appreciation rates in any of this analysis. I have implicitly assumed that both the mortgage holder and the person who chose to pay off the mortgage keep the house for at least the life of the loan. If the house depreciates and the investors have to sell, both lose.
But that risk surely cuts both ways. If you own a home outright and something happens to make it an unacceptable place to live, you are stuck with a huge loss. With a mortgage, you do always have the option of walking away from it. Although, lets face it, for most cases both approaches leave you hurt. I'm not sure how you would quantify that risk. Have you got any suggestions?
As far as the downside risk of keeping the mortgage, FIRECALC shows you the historical downside risk. Run the simulation specified in previous posts and examine the cases that failed. The simulator shows how many times and how much the mortgage case cost the investor. If you can't handle that much downside, you should set a stop loss target and pay off your loan if this strategy begins to go too far south.
I think a point that needs to be made is that I can sit around and think about economic calamities that would make any specific investment strategy fail. But without doing some analysis of the probability and impact of that calamity, you can't really conclude that any strategy is good, bad or neutral. If I let this kind of thinking determine what I am going to do, then I will become paralyzed, because nothing will work under all conceivable conditions. In order to get beyond this paralasis, I need to look at models and methods to estimate probabilities, to bound the universe of possibilities. It is probably wise to have contingency plans for certain kinds of calamities. (In this case, there is a clear option to payoff the mortgage at any time.) But beyond that, I would feel more comfortable considering data and analysis than some vague, qualitative hypothesized events.
cute fuzzy bunny
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Actually the comment about appreciation wasnt targetted at anything you said, it was towards a comment adviceseeker made a few posts ago where he surmised a 5% annual increase in the homes value and asked for comment. I should have been more specific.
I'm also not at odds at all with yours or anyone else analysis using firecalc or any other tool using 30/40/100/1000 years of historical data.
What I said is if you went through a bad 5 year period, and sure as shootin' we just did, having assets in a volatile asset class and doubling your withdrawal rate because over a 30 or 50 year period a tool said you'd probably do better a majority of time, you might find yourself going back to work. This asset class guaranteed me a 5-6% return on investment AND I can live in it no matter what its worth.
Further, its entirely a lot more likely that we would see a 5 year bad time in the market than "something" would happen to my rural area home to make it undesirable to live here. No earthquakes, hurricanes, flood plains, hells angels relocation plans or any other sort of thing evident.
Two things keep pinging at me though. One is that a lot of folks think the economy is really going to suck pretty soon and for a long time...plenty of folks here seem to think so. I would suppose that if one felt that way, investing in ones home might beat the crap out of buying TIPS. Maybe not. But in any case, betting on big years for the stock and bond markets because it was that way most of the time historically may not be a very good idea. I am ALL for using any tools at ones disposal to plan, assess risk and deploy assets.
The other thing is that while we have a lot of devout anti-market timers, a lot of folks still talk about changing asset classes and the type of instruments in those asset classes based on what might be about to happen, but I digress.
However, in this case isnt it just that in one hand you will probably make more money if you keep the cash and dont pay off the mortgage, while in the other hand if you do hit a bad string of investing years - - something that definitely happens and quite possibly could happen again pretty soon, that the balance of benefit slips to preventing the big loss?
Otherwise, wouldnt everyone have a portfolio consisting of emerging markets stocks, foreign stocks, and small cap value stocks because historically those have had the highest returns and in all likelihood, they very well might continue to do so?
Now...the original poster asked consideration whether he should use the majority of their appreciated portfolio to pay off their mortgage. I'd say no to that. I would say that if your mortgage is before the half-way "flip" and the balance is less than 20-25% of your assets, its very well worth considering simply because doing so gives a nice safe rate of return, dramatically reduces your withdrawal rate, and no matter what happens you can still live in it. If you're after the halfway point in the mortgage, plan to move in the next few years, or the payoff would be a substantial chunk of your portfolio, then I'd probably think pretty hard on it.
I'm also not at odds at all with yours or anyone else analysis using firecalc or any other tool using 30/40/100/1000 years of historical data.
What I said is if you went through a bad 5 year period, and sure as shootin' we just did, having assets in a volatile asset class and doubling your withdrawal rate because over a 30 or 50 year period a tool said you'd probably do better a majority of time, you might find yourself going back to work. This asset class guaranteed me a 5-6% return on investment AND I can live in it no matter what its worth.
Further, its entirely a lot more likely that we would see a 5 year bad time in the market than "something" would happen to my rural area home to make it undesirable to live here. No earthquakes, hurricanes, flood plains, hells angels relocation plans or any other sort of thing evident.
Two things keep pinging at me though. One is that a lot of folks think the economy is really going to suck pretty soon and for a long time...plenty of folks here seem to think so. I would suppose that if one felt that way, investing in ones home might beat the crap out of buying TIPS. Maybe not. But in any case, betting on big years for the stock and bond markets because it was that way most of the time historically may not be a very good idea. I am ALL for using any tools at ones disposal to plan, assess risk and deploy assets.
The other thing is that while we have a lot of devout anti-market timers, a lot of folks still talk about changing asset classes and the type of instruments in those asset classes based on what might be about to happen, but I digress.
However, in this case isnt it just that in one hand you will probably make more money if you keep the cash and dont pay off the mortgage, while in the other hand if you do hit a bad string of investing years - - something that definitely happens and quite possibly could happen again pretty soon, that the balance of benefit slips to preventing the big loss?
Otherwise, wouldnt everyone have a portfolio consisting of emerging markets stocks, foreign stocks, and small cap value stocks because historically those have had the highest returns and in all likelihood, they very well might continue to do so?
Now...the original poster asked consideration whether he should use the majority of their appreciated portfolio to pay off their mortgage. I'd say no to that. I would say that if your mortgage is before the half-way "flip" and the balance is less than 20-25% of your assets, its very well worth considering simply because doing so gives a nice safe rate of return, dramatically reduces your withdrawal rate, and no matter what happens you can still live in it. If you're after the halfway point in the mortgage, plan to move in the next few years, or the payoff would be a substantial chunk of your portfolio, then I'd probably think pretty hard on it.
J
John Galt
Guest
I think the main reason why I tend to disregard
historical financial data is my very short horizon.
Probabilities of future activity based on past activity
do not impress at all. I don't need to get rich. I just
need predictability.
John Galt
historical financial data is my very short horizon.
Probabilities of future activity based on past activity
do not impress at all. I don't need to get rich. I just
need predictability.
John Galt
wabmester
Thinks s/he gets paid by the post
- Joined
- Dec 6, 2003
- Messages
- 4,459
Heh, I tend to disregard historical data because of my long horizon. If the data goes back 100 years, and I (or more likely, my wife) need to look forward 50 years, the data gives me the same level of confidence I would have predicting tomorrow's events based on what happened in the last two days.
As I opined elsewhere: historical data is a good predictor of volatility, a fair predictor of covariance, and a lousy predictor of future returns.
If somebody could just convince me that the US GDP will continue to grow for the next 50 years, I'd jump back into stocks.
J
John Galt
Guest
Wabmester...............I don't know what the GDP
will do over the next 50 years, but I can guarantee
one thing. The government itself will continue to grow.
You can take that to the bank.
John Galt
will do over the next 50 years, but I can guarantee
one thing. The government itself will continue to grow.
You can take that to the bank.
John Galt
