Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Pre-paying Mortgage Perspective after the "Crash"
Old 12-13-2008, 10:16 AM   #1
Recycles dryer sheets
 
Join Date: May 2007
Posts: 148
Pre-paying Mortgage Perspective after the "Crash"

Apologies if this has already been asked/addressed, but given the big drop off in the market, are there any folks out there who are re-evaluating the wisdom of not prepaying thier mortgage and investing the difference in equity mutual funds? I know lots of folks have always felt that given the deductibility of mortgage interest, and the typical longer term higher returns available in equities, that keeping the mortgage was the best financial decision. I have not run the numbers, but I am wondering if prepaying has been a better decision than investing in the market given the recent financial environment. On a personal note, I have been prepaying my mortgage (throwing about an extra $1000/month at a 15-year fixed rate mortgage [5.25%]), and for me, on the surface, it seems like the only good financial decision I have made these days. Atleast I will have a paid off house where I can look at my sad mutual fund statements.

Thanks.
__________________

__________________
stephenandrew is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 12-13-2008, 10:23 AM   #2
Recycles dryer sheets
 
Join Date: Nov 2008
Posts: 131
I've always thought prepaying was a good idea, and that the idea of not prepaying and investing the difference in stocks was a fad that would pass during the next bad bear market. Anecdotally it seems to be the case.

People are again realizing that a smaller guaranteed return often beats a possible larger return, I think.
__________________

__________________
Architect is offline   Reply With Quote
Old 12-13-2008, 10:34 AM   #3
Full time employment: Posting here.
hankster's Avatar
 
Join Date: Jan 2008
Posts: 645
I feel it's an individual's choice depending on what one is comfortable with. For me personally? I'll take the paid off home. Someone else can carry a mortgage and try to get a spread with their investing.
__________________
"There is no dignity quite so impressive, and no independence quite so important, as living within your means." Calvin Coolidge
hankster is offline   Reply With Quote
Old 12-13-2008, 10:37 AM   #4
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
There are two schools of thought on this "payoff mortgage or invest" question: one is that stocks are pretty "cheap" now and thus represent a better buy than usual. The other is that prepaying a 5.5% mortgage is effectively a sure-thing, 100% safe 5.5% return on your money, and there's basically nowhere else you can get a sure thing return that high than to pay down the mortgage with excess cash flow.

Personally, if I were in the position of deciding between accelerating mortgage paydown and investing more, I'd probably hedge my bets and do a little of both, since I see merits in both of those arguments. Having said that, being fortunate enough to have a paid-off house I know how much peace of mind that provides in times like these, and you can't easily put a specific dollar amount on that feeling.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 12-13-2008, 01:50 PM   #5
Recycles dryer sheets
 
Join Date: Oct 2005
Posts: 325
I am so happy that I didn't pay off my mortgage right now. I like having the extra few hundred K around as a cushion when times get tough.
__________________
CybrMike is offline   Reply With Quote
Old 12-13-2008, 01:54 PM   #6
Full time employment: Posting here.
Lusitan's Avatar
 
Join Date: Jan 2006
Location: Boston
Posts: 620
I have never been able to decide which is better, so I have pretty much split the difference: after I max out all of my tax-favored retirement plans, the rest of my savings is split between investments (per my asset allocation) and paying down the mortgage and student loan debt I have.

I figure I will only be half-wrong no matter what the right answer turns out to be in retrospect.
__________________
Lusitan is offline   Reply With Quote
Old 12-13-2008, 02:04 PM   #7
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,616
Quote:
Originally Posted by stephenandrew View Post
Apologies if this has already been asked/addressed, but given the big drop off in the market, are there any folks out there who are re-evaluating the wisdom of not prepaying thier mortgage and investing the difference in equity mutual exchange-traded funds?
No.

And as Charlie Munger says, "I have nothing further to add."
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Old 12-13-2008, 02:06 PM   #8
Recycles dryer sheets
 
Join Date: May 2007
Posts: 148
Quote:
Originally Posted by CybrMike View Post
I am so happy that I didn't pay off my mortgage right now. I like having the extra few hundred K around as a cushion when times get tough.

So that is an interesting point---you are less concerned about the return than preserving liquidity. I gather that you did not put the money you could have used to pay off the mortgages into equities then, but rather something more stable? MMF? If it had been in equities, I assume your "few hundred K" might previosuly have been 600 or 700K.
__________________
stephenandrew is offline   Reply With Quote
Old 12-13-2008, 02:32 PM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,262
Quote:
Originally Posted by stephenandrew View Post
.... and the typical longer term higher returns available in equities,


Thanks.
Since this subject *has* been beat to death time and time again, I'll only add that the bolded words above are the key.

It makes no more sense to evaluate a long term decision right at the point when stocks are down, than it does to evaluate that long term decision right at the point when stocks are way up. With that thinking, at any point in time there are 'good' and 'bad' investments. But you can't make rational long term decisions on what an investment did just recently.

Now, if any 'mortgage arbitrage' players out there were bragging about their decision when stocks were up, they deserve some ribbing now that they are down. But I'm pretty sure that most of them were not tooting their horn, they realized that it was a long term plan that would have ups and downs - one that may or may not work out.

-ERD50
__________________
ERD50 is online now   Reply With Quote
Old 12-13-2008, 02:37 PM   #10
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
By the way -- the musings I posted earlier assume an adequately funded emergency fund. So even though I'd probably divide excess cash flow between paying down mortgage debt and investing *if I had a fully funded emergency stash of cash*, if my emergency fund were deficient I'd use the first few months of extra cash flow to boost that until I had at least six months of expenses in it -- preferably a year in this economic environment where new jobs are much harder to come by.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 12-13-2008, 02:52 PM   #11
Recycles dryer sheets
 
Join Date: May 2007
Posts: 148
Quote:
Originally Posted by ERD50 View Post
Now, if any 'mortgage arbitrage' players out there were bragging about their decision when stocks were up, they deserve some ribbing now that they are down. But I'm pretty sure that most of them were not tooting their horn, they realized that it was a long term plan that would have ups and downs - one that may or may not work out.

-ERD50

I would gently disagree---some, not all, but some of the folks who promoted the idea of "investing the difference" were nearly fanatical in their belief that for anyone to pay off their mortgage early was foolish, and their intelligence was in question. I would also suggest that this has been a pretty significant set back in terms of equity values (a big "down"), and as such, it might have made some people second guess their decision--I know I do that all the time.
__________________
stephenandrew is offline   Reply With Quote
Old 12-13-2008, 03:08 PM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,262
Quote:
Originally Posted by stephenandrew View Post
I would gently disagree---some, not all, but some of the folks who promoted the idea of "investing the difference" were nearly fanatical in their belief that for anyone to pay off their mortgage early was foolish, and their intelligence was in question.
You might be right - maybe my memory is filtered by my own bias. But I really don't recall those posts, or maybe I skipped over them for the drivel that they would represent (pre-filtered, if you will ).

BTW, so you understand my 'bias' comment - my personal feeling is that paying off or not paying off is probably one of the least significant decisions that a person has to make. I don't think it's going to make a big difference either way. But that is why I cringe when people get all excited and are throwing confetti around, celebrating the fact that they used their savings to pay off their mortgage. I can understand celebrating that you managed to save enough to pay it off, but whether you do or not seems relatively unimportant. It might be to your advantage or it might not, and you won't know until it's too late to change. whooopee.

-ERD50
__________________
ERD50 is online now   Reply With Quote
Old 12-13-2008, 03:26 PM   #13
Recycles dryer sheets
Gardnr's Avatar
 
Join Date: Jul 2008
Location: ENE MO - near STL
Posts: 424
Quote:
Originally Posted by stephenandrew View Post
I would gently disagree---some, not all, but some of the folks who promoted the idea of "investing the difference" were nearly fanatical in their belief that for anyone to pay off their mortgage early was foolish, and their intelligence was in question.
On this forum, or somewhere else? Most of those on this forum have recognized the trade offs, risks, etc. and the fact that it is a complicated decision that depends a lot on personal circumstances. In other words a balanced, reasonable discussion. But maybe I just ignored discounted the others.

Elsewhere I have seen the kind of single-minded fanatical perspective that you refer to.
__________________
Gardnr is offline   Reply With Quote
Old 12-13-2008, 03:29 PM   #14
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
Quote:
Originally Posted by Gardnr View Post
On this forum, or somewhere else? Most of those on this forum have recognized the trade offs, risks, etc. and the fact that it is a complicated decision that depends a lot on personal circumstances. In other words a balanced, reasonable discussion. But maybe I just ignored discounted the others.

Elsewhere I have seen the kind of single-minded fanatical perspective that you refer to.
I don't see as much of it here, but occasionally I do.

"Pay off debt or invest" is right up there with "rent or buy" in terms of financial discussions that get people riled up as if there's always a one-size-fits-all answer, which is almost never the case.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 12-13-2008, 03:30 PM   #15
Full time employment: Posting here.
 
Join Date: Sep 2007
Posts: 716
ERD50 made the key point. To invest in the market for short-term considerations is foolish. The proper viewpoint is to look at long-term, not short-term results.

The recent market crash is a short-term issue. Both a house mortage and a retirement investment portfolio are long-term issues.

In truth, if you had a large stockmarket account a year ago, the BEST thing to do would have been to go to cash and put that in CDs, not to cash out and pay the mortgage.

But nobody is prescient, which is why you have to go by the numbers. 10.5% (average) is more than 5.75% (fixed).
__________________
rayvt is offline   Reply With Quote
Old 12-13-2008, 03:35 PM   #16
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
Quote:
Originally Posted by rayvt View Post
But nobody is prescient, which is why you have to go by the numbers. 10.5% (average) is more than 5.75% (fixed).
Agreed. But that's why it depends on your goals and your risk tolerance.

Some people are risk-averse enough that they'd rather have a sure-thing 5.75% than a risky 10.5%. That's a personal risk tolerance decision that everyone needs to answer for themselves.

You also have to be pretty sure you don't need the money for many years (I'd say 10+, maybe 15+) and that you're not going to panic and sell low when stocks are in the tank. Not everyone is in that boat.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 12-14-2008, 11:27 AM   #17
Thinks s/he gets paid by the post
Texarkandy's Avatar
 
Join Date: Feb 2008
Posts: 1,281
I think it depends on your personal situation.

If you are 30 years old with a good 4.5% 15 year fixed (like me) & planning to ER at 50, you might not be so concerned about having the mortgage paid off and a little more concerned with building your personal treasure.

If you are 48 years old planning to ER at 50 (like me) with a somewhat modest retirement plan, you might be a little more concerned about getting the remainder of that mortgage paid off, if only for cash-flow reasons.
__________________
Retired 2009!
Texarkandy is offline   Reply With Quote
Old 12-14-2008, 11:42 AM   #18
Recycles dryer sheets
 
Join Date: Aug 2005
Posts: 127
My house is paid off and all my savings are invested in CD's and always has been. I might have not been the big talker at parties but I'm happy even in these down times.
__________________
If you think nobody cares whether you're alive or dead, try missing a couple of mortgage payments.
kowski is offline   Reply With Quote
Old 12-14-2008, 11:43 AM   #19
Administrator
W2R's Avatar
 
Join Date: Jan 2007
Location: New Orleans
Posts: 38,827
Logically the decision whether or not to pre-pay one's mortgage should not be influenced by market timing because the effects of this decision have a long time horizon.

On the other hand, if one is disgusted with the market, why not? The emotional reassurance of having one's house paid off are immense, when the market is plunging.

Just don't forget to buy low, sell high, when it comes to equity purchases.

Personally, I paid off my home during the boom years of 2003-2006 and even so, I do not regret it.
__________________
Already we are boldly launched upon the deep; but soon we shall be lost in its unshored, harbourless immensities.

- - H. Melville, 1851
W2R is offline   Reply With Quote
Old 12-14-2008, 12:45 PM   #20
Full time employment: Posting here.
Frugality_of_Apathy's Avatar
 
Join Date: Jul 2008
Posts: 622
Purely depends on your interest rate. Something in the 4% range probably isn't too important to pay off right away, but if you're in the 7% range that's definitely going to hinder you later in life.

The thing about the "guaranteed return" is more a question of having debt in general or not. If you never pay off your mortgage than you are always going to a a negative x% to compete with for all your investments. Getting an 8% return on your investment rather than paying down the 5% mortgage only leaves you keeping pace with inflation. Once that house is paid off all of your investments gains are actually gains and don't have to be siphoned off to pay for your debt every month.

What I do is rather than invest in stable funds I take that portion and pay down my mortgage and everything that goes into the market is set for maximum risk.

The question to ask your self is: Say you've got $20,000 in the market and a $100,000 house. Would you recommend to your friend with $80,000 debt on their house and no money in the market to refinance their house for $100,000 so they can put $20,000 in the market?
And if you would recommend that, ask yourself why you haven't refinanced your house to 80% of it's value this year to invest more.
__________________

__________________
Frugality_of_Apathy is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
"Crash Proof" by Peter D. Schiff - Discussion Thread Hal3 FIRE and Money 14 08-18-2008 09:51 AM
The "80% of pre-retirement income" sound bite Nords FIRE and Money 1 02-05-2008 09:43 PM
Finally, an end to the "80% of pre-retirement income" thumbrule Nords FIRE and Money 15 10-02-2006 01:20 PM
Military Pre-Paying Mortgage VANGUARDROI FIRE and Money 10 04-28-2006 09:52 PM
Book report: Lowenstein's "Origins of the Crash" Nords Other topics 1 03-06-2006 02:12 AM

 

 
All times are GMT -6. The time now is 08:32 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.