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Old 10-26-2007, 02:01 AM   #121
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Sometimes there IS some big financial benefit to paying off a mortgage.
That's fine - that is not irrational. - ERD50
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Old 10-26-2007, 03:48 AM   #122
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Wow a zillion posts on my one example. For me the paying off vs keeping mortgage, is pretty much strictly a financial decision. That said, I did pay off my mortgage (early) about 15 years ago on my first house. There was a psychologically benefit to being debt free and saying woo hoo I truly OWN my house.

However, I also understand the other side that people feel more secure with mortgage and having access to more liquid assets. I sometime wonder, why do have ~$700K tied up in house that is generating very little income (I do have a renter.)? I find myself wishing my mortgage was bigger.

It seems me that because people respond differently to debt that within a fairly wide range of mortgage there is no correct answer.

To Answer ERD50 question, how much is the peace of mind worth. FWIW, IMO if your mortgage is more than 1% below the risk free interest rate (which is not the same as a T-bill) there is no sense in paying off a mortgage. On the other hand if your mortgage is more than 2% above the risk free rate, having a mortgage is taking on unnecessary risk. In practical terms I think that for people with mortgages between 5% and 8% there is no universal right answer. That is my final answer.
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Old 10-26-2007, 07:16 AM   #123
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You have a diversification problem. There are many ways to resolve that. Only one of them is paying off the mortgage. There are/were many other options.

-ERD50
I had a diversification problem. It was quite deliberate. But that was how I retired at 39, at which time I immediately resolved the diversification problem.

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Old 10-26-2007, 09:29 AM   #124
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However, I also understand the other side that people feel more secure with mortgage and having access to more liquid assets. I sometime wonder, why do have ~$700K tied up in house that is generating very little income (I do have a renter.)? I find myself wishing my mortgage was bigger.
I hear you on that one.

Landlording seemed like a good idea when the stock market was being sucked down the toilet by the NASDAQ and Hawaii real estate was bottoming out.

But now we're sitting on huge cap gains and pitifully low cash-on-cash returns that can be beat by dozens of Mainland locations. Reversion to the mean could kick in any day now on those cap gains, but selling is a hugely illiquid transaction with high costs and a massive AMT bite. It's a colossal hassle that's easy to contemplate and then decide to go surfing.

No wonder there's such a brisk business in 1031 firms around here that'll switch landlords over to Mainland TICs or even REITs.
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Old 10-26-2007, 09:29 AM   #125
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You're trying to equate financial/quantitative decisions with emotional decisions.

A financial/quantitative decision would add up all the factors and compare them somehow to the emotional feeling of paying off the mortgage, and make a decision on that basis.

An emotional decision doesn't care about the financial/quantitative aspects of the issue.

You can argue about the financial/quantitative factors being ignored in an emotional decision, but it's irrelevant to the basis with which the person made the emotional decision.

You're trying to claim that the financial/quantitative basis for decision making is somehow better than the emotional basis for decision making. Your claim is only correct within the financial/quantitative perspective. To the person making the decision on an emotional basis, your perspective is irrelevant.

I'd recommend that you accept the existence of the phenomenon without trying to force it to fit within your view of the world!
It would appear he wants those of us with paid for houses to apologize and admit we are stupid and inferior.
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Old 10-26-2007, 09:32 AM   #126
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It would appear he wants those of us with paid for houses to apologize and admit we are stupid and inferior.
I don't see it that way. I think he wanted to make sure that he understood who was making financial decisions (and why) vs who was making the emotional decisions.

Your use of the "S" and the "I" words appears more intended to provoke than to discuss.
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Old 10-26-2007, 09:45 AM   #127
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I don't see it that way. I think he wanted to make sure that he understood who was making financial decisions (and why) vs who was making the emotional decisions.

Your use of the "S" and the "I" words appears more intended to provoke than to discuss.
I think it is just that the subject of paying off mortgages is very highly charged for some of us, and emotions are close to the surface. It is very difficult to pay off a house, and many of us have made the HUGE effort that it takes to do this. Others have not, and it is hard to understand that they are not just rationalizing the fact that they made a different choice.

We all need to keep an open mind when we discuss this, and to realize that there are logical, mathematical (as well as emotional) reasons for decisions to either pay off or not pay off a mortgage.

To me it seems that the equivalent of paying off a mortgage would be the most conservative of fixed income investments in an amount large enough to cover the mortgage P&I (plus level of insurance required by the mortgage company, if it is higher than what one might independently choose, plus any late fees, online bill pay fees, and any other annoying fees), minus the taxes on the income from that investment. Also, one could place a cost on one's time in dealing with all of this instead of simply paying it off.
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Old 10-26-2007, 09:50 AM   #128
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The whole "pay off debt or invest" question, especially where a lower-interest, possibly deductible mortgage is concerned, is one people will never agree on. That's largely because it's a decision based as much on security and "comfort level" as strictly financial, IMO. We can't put a blanket, one-size-fits-all value on the peace of mind people feel in paying off a mortgage. If one looks strictly at financial outcomes and decides that long term they can do better investing a chunk of money at 8-9% instead of paying off a 5.5% loan, that makes sense. However, if someone is a Dave Ramsey-style debtophobe who is more interested in the "security" of being debt-free than of maximizing their wealth, paying off the mortgage makes sense to them.

It does little good to tell others what they should do because they likely have different motivations and perhaps different tolerances/aversion to debt.
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Old 10-26-2007, 10:09 AM   #129
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It would appear he wants those of us with paid for houses to apologize and admit we are stupid and inferior.
I thought he was questioning the "celebration factor". And I agree with him. I'll not buy you a card or send you a "Happy you met your financial obligation to your mortgagor " gift just as I don't expect a "We're happy for you on your successfull transfer of $1,000 from your checking to your savings account" card. I will sell you either of those cards (PM me for your FIRE discount).

My first mortgage was paid off in 1993. I still own the property. I have over $400,000 in mortgages on other properties. It really doesn't make a difference to me which property is paid off and which one has a mortgage. I like my net worth based on the total figure. I'd actually like it even better if I had an extra $400K in mortgages and controlled an extra $2,000,000 in property. Go figure!

This is posted in the Fire and money forum and should be looked at from the financial perspective IMHO. Maybe the "warm fuzzy" posts should be moved to the health and retirement forum. "Since paying off my mortgage I have been experiencing regular BM's" Who's gonna argue with you?
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Old 10-26-2007, 10:22 AM   #130
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It is very difficult to pay off a house, and many of us have made the HUGE effort that it takes to do this. Others have not, and it is hard to understand that they are not just rationalizing the fact that they made a different choice.
I'll avoid the emotional debate - I've commented on that enough. But, what confounds me in your statement is this:

Sure, it takes a HUGE effort to come up with the money to pay off the house. But that does not mean the money needs to go to that account (the house). That same money could be in an investment account. Same effort to put $100,000 towards your mortgage principal as it is to put into investments.

I'm not rationalizing anything. I have not even made the decision yet. I will look at it when I see what my rates are next year (currently fixed at 5%, that ends in Dec). So, I'm trying to get all the views to make sure I have not overlooked anything.

The 'safety' of the investment is something to think about. CFB has commented on this, and I finally sat down and ran some numbers to get a better handle on it. Though my mort is small enough, it won't make a big difference anyhow. I just kind of hate to see my investment account balance go down by the amount of my mortgage principal.

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Old 10-26-2007, 10:28 AM   #131
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It would appear he wants those of us with paid for houses to apologize and admit we are stupid and inferior.
When the finger points at the moon, the fool looks at the finger.

You should understand that some of the folks involved in this debate have read fairly clear executive summaries of scientific documents and subsequently proclaimed that they said exactly the opposite of what the document actually said.

The problem here is some folks have made an emotional decision based on a simplistic perspective that tells them they'll make more money. By poking holes in that decision, you make them uncomfortable with their logic and their only reasonable reactions are to admit that they're wrong or to tell you that you've made an emotional decision.

If you have a ridiculously cheap rate, a reliable income stream to pay the debt, and/or you dont mind taking on a lot more risk to possibly gain a slightly higher return, and dont mind lower survivability in a long term down market...you oughta keep the debt.

I paid off my 6.25% mortgage 7 years ago with appreciated company stock that subsequently dropped 80% in value. Since that decision, the rates on fixed income have never exceeded the prevailing mortgage rate. My portfolio risk was nearly zero since I never had to sell shares to pay the bills.

Oh yeah, and it feels good too. Yet, my decision was based 110% on the characteristics of my total financial picture. Not on looking at the mortgage rate on one hand and the long term rate of return on equities on the other, forgetting to risk adjust, and deciding I could make more money. Thats a bush league mistake.

Nords' case is a perfect example of when keeping a mortgage makes sense. He regularly does the paperwork to refinance to the lowest available rate. He has a solid income that pays the bills. He's willing to take on significant equity risk in exchange for higher long term results. He doesnt hold a lot of cash or bonds paying below mortgage rates.

A high risk strategy, but if you've got the balls for it, a reasonable one.

Someone with 200k in debt who then structures a 50/50 or 60/40 port to reduce their volatility, then sets aside 5 years of cash to survive downturns and has nothing but their portfolio to rely on to make payments? Thats someone who has created a problem and then applied fourteen rolls of duct tape to it to solve the problems and taken on a lot of unnecessary risk.

I should also at this time point out (again) that in 2003 when I could get a 3.98% 5 year fixed/adjustable mortgage, I posed a question as to whether I should take it and invest the proceeds. 100% of the respondents here said they would not do it. Too risky. Cash was paying squat, bonds were getting killed by the rate drops, and stocks had been languishing for more than 2 years. Too risky.

So when times are good, folks are brave, everyone elses choices are emotional. Times are bad, people are cautious...even 3.98% isnt worth the risk.


Dang it! Perspective!
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Old 10-26-2007, 10:32 AM   #132
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I had a diversification problem. It was quite deliberate. But that was how I retired at 39, at which time I immediately resolved the diversification problem.

Audrey
A little off the main topic here, but I suspect that your definition of 'diversification' would be quite different from most on this forum.

You said:

Quote:
> 90% of my net worth was in company stock. Of course I was dependent on the company as well!

By selling a small amount of company stock to pay off my mortgage,

Wow, you have 90% of NW in company stock, you sell off a 'small amount', and now you are diversified? I couldn't sleep at night with all those eggs in one basket, mortgage or no mortgage!

And, it misses the point that you could have sold the stock, and either paid off the mortgage or not. The 'diversification' would have happened independent of the mortgage question. Right?

-ERD50
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Old 10-26-2007, 10:53 AM   #133
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Wow, you have 90% of NW in company stock, you sell off a 'small amount', and now you are diversified? I couldn't sleep at night with all those eggs in one basket, mortgage or no mortgage!

And, it misses the point that you could have sold the stock, and either paid off the mortgage or not. The 'diversification' would have happened independent of the mortgage question. Right?

-ERD50
I don't think you understood my story. Yes, I was very concentrated way back then when I paid off the mortgage. I was taking a huge gamble on company stock and very loath to sell any of it, but decided at the time that I should at least pay off the mortgage so I didn't have to worry about the roof over my head in case disaster struck.

A couple of years later as I prepared to retire, I started selling company stock hand over fist to create my retirement portfolio, and that was 8 years ago. Now the stock is a very small % of my net worth.

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Old 10-26-2007, 12:28 PM   #134
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A couple of years later as I prepared to retire, I started selling company stock hand over fist to create my retirement portfolio, and that was 8 years ago. Now the stock is a very small % of my net worth.
OK, that does sound more in line with what most people would call 'diversified'. You just had me wondering there.

Quote:
I was taking a huge gamble on company stock and very loath to sell any of it, but decided at the time that I should at least pay off the mortgage so I didn't have to worry about the roof over my head in case disaster struck.
And my counterpoint to that is - if you sold enough stock to pay off the mortgage and put it into an account, you could draw from that account to pay the monthly mortgage bill if disaster struck.

It's just not an all-or-nothing thing. It's not really the mortgage pay off that could 'save' you, but alternately, the liquid investments. Either one can do that job. In some ways, the liquidity might be better - you can decide to spend it as needed. Other factors would determine which is best.

I think CFB mentioned that liquidity is pretty easy to get anyway through a heloc. I don't know what you need to do to qualify for one, never did it. Would you need to do it before disaster struck? But that could very well solve the liquidity problem either way, I don't know.

-ERD50
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Old 10-26-2007, 12:59 PM   #135
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My mortgage rate was just over 7% at that time. I don't recall a low-risk investment at the time that gave after-tax results with that kind of return.

And this was so much SIMPLER.

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The way I think about it
Old 10-26-2007, 01:02 PM   #136
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The way I think about it

You have a spending portfolio you draw 4% on, and a mortgage portfolio the size of the mortgage debt that you draw the mortgage rate on, say 6%. A fixed mortgage has a limited term and will decrease with inflation allowing a somewhat higher safe withdrawal rate. Decide the survivability rate you will accept on your mortgage portfolio. This decision can be influenced by both reason and emotion. That will determine the acceptable mortgage rate and whether you should keep it or pay it off. I would also recommend applying current conditions such as bond rates and stock returns to it to estimate whether now is a good time or not rather than using historical data alone and whether you would invest more conservatively because of it leading to lower anticipated returns.

The hard question is why one would apply a different survivability rate to your mortgage portfolio than you would apply to you spending portfolio, if you do so.
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Old 10-26-2007, 01:12 PM   #137
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My mortgage rate was just over 7% at that time. I don't recall a low-risk investment at the time that gave after-tax results with that kind of return.

And this was so much SIMPLER.

Audrey
Those are good reasons. Thanks - ERD50
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Old 10-26-2007, 01:31 PM   #138
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A fixed mortgage will decrease with inflation allowing a somewhat higher safe withdrawal rate.
The invested money decreases the exact same amount due to inflation. No free lunch and no increased safe withdrawal rate.
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Old 10-26-2007, 01:34 PM   #139
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You have a spending portfolio you draw 4% on, and a mortgage portfolio the size of the mortgage debt that you draw the mortgage rate on, say 6%. A fixed mortgage has a limited term and will decrease with inflation allowing a somewhat higher safe withdrawal rate.
Paying down the principal on a 6% mortgage is financially no different than putting that money into a sure-thing 6% investment for the remaining duration of the loan. If you don't itemize, that's like a sure-thing tax free 6% return. If someone could point me to a tax-free, ultra-safe 6% investment, I'd love to hear about it.
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Old 10-26-2007, 02:00 PM   #140
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I just kind of hate to see my investment account balance go down by the amount of my mortgage principal.

-ERD50
This sounds like emotion driven decision making to me. You "hate" to see your investment account balance go down by the amount of your mortgage principal??

What do the numbers say? Why are you letting feelings like this influence your decision? "I love the feeling of having no mortgage" "I hate to see my investment account balance go down by the amount of my mortgage principal." Same thing.........

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