Why Pay off the mortgage?

[rayvt]

I look at it this way:
* Cost--Mortage interest rate = 6%. Fixed for long term (30 years)
* Gain--S&P 500 = 10.5% long term average. Not fixed. Average.
* 30 years is long-term by any reasonable definition.
* 10.5% (gain) is greater than 6% (cost)

Therefore, as long as you can reliably make the mortgage payments during the periods when the S&P500 returns are negative, keeping the mortgage is financially the best thing to do.

If you are risk averse, keep 5 years payments in cash (earning maybe 4%), to tide you over an extended market downturn.

[Oldbabe]

Sorry to jump into this thread so late but I wonder if anyone has considered that in future years interest rates will likely rise and your 5.7% mortgage (my rate) payment will be looking pretty good, especially if inflation reigns.
I realize I'm speculating about economic conditions but I'm not alone in my views.

If these conditions prevail, having paid off your mortgage in advance will leave you with less $$$ invested and growing. Not good in inflationary times.

[Want2retire]

Originally Posted by Oldbabe

Sorry to jump into this thread so late but I wonder if anyone has considered that in future years interest rates will likely rise and your 5.7% mortgage (my rate) payment will be looking pretty good, especially if inflation reigns.
I realize I'm speculating about economic conditions but I'm not alone in my views.

If these conditions prevail, having paid off your mortgage in advance will leave you with less $$$ invested and growing. Not good in inflationary times.

I remember back in the 80's when it was smart to borrow as much as possible! Sometimes I wonder if I will regret paying off my 6.375% mortgage. I think you are making a really, really good point and it's one that I have wondered about.

I paid $798/mo for a $128,000 mortgage that I got in 2002, and paid off in 2006.

$798*12 = $9576, which I guess would be about $13,500 before taxes? At any rate, I'm thinking that at 4%, the size nest egg required to produce that kind of monthly payment would be over twice the $128K amount. Maybe my figures are screwy but even in inflationary times I don't think I could retire if I had to have that much extra in nestegg for 25 more years.

Of course, once I was 79 my house would be paid off so there is something to be said for that.

Also, if I had a lot of money things might look different to me. But really, I don't and the simplicity of no mortgage appeals to me.

[Running_Man]

There is no guarantee that mortgage rates are going to increase. What if deflation were to hit as in Japan in 1990's or US in 1930's? Of course with that having a mortgage would have been the worst possible outcome as you would still owe the money and your investments (stocks) declined by 80% or more.

The error is at looking at your total portfolio in making the decision as it is really a contained investment idea, other than the ability to recover from a total loss.

It is very difficult to gauge the long term trend of interest rates as a reason to justify such an investment strategy. The decision to not pay off the mortgage with rates at 5.375 and assuming an interest only $200,000 loan will be an annual expense of $10,750 from which you would need a sinking fund net investment of $200,000 to exceed. If you invested in a bear market and your $200,000 went down 50% in the early years, it would be very difficult to earn more than the annual payments of 11-15% of the fund it would be consuming at that point. Once you consumed your $200,000 your mortgage foray would be a total loss as any eventual return to profitablilty would just be shifting investment gains from the rest of your portfolio which you would have had with paying off the morgage in order to cover the loss on your mortgage adventure. This would be true even if over 30 years the result was an average gain of 10 percent, or if the investor was 50 or twenty!Once the investment consumes the $200,000 sinking fund no future results can compensate to make it a successful investment, it would be a 100% failure.

Likewise your total loss would be limited to the $200,000 as that would be the amount you would need to still pay from the remainder of your portfolio, but the problem would be most likely your portfolio would likewise be in a weaker condition to assume this additional expense.

If the early years were bull market years this could be a very profitable strategy based on long term trends.

I would consider of course before making such a decision if my capital structure was such that I was willing to take on the risk of the loss, and how the increased risk of portfolio failure would affect my future. Firecalc indicated a 93% chance of success but it is really the early years that will most likely determine whether it is successful or not. It is just about a 7 percent chance that those early years will sink you.

I would look at it by judging if a bank were to come to you willing to loan unlimited amounts of money fixed at 5.375%, how much would you be comfortable to borrow in an effort to leverage your gains?

A worst case scenario in my mind would be what would the additional $10,750 in expense be on 50% of my remaining portfolio, since in most other cases I would be raking in the money.