Pay off house or dump it in the market?

[flintnational]

Here is a link to a thread I started about risk adjusted returns. My initial post and Pb4uski's post #6 summarize the math behind the decision. The different expected returns are because the two choices have different stock allocations, IOW different risk profiles. And, as we all know, if you increase your stock allocation, historically most of the time you will have higher returns. You can accomplish the same results with or without a mortgage by simply adjusting your stock allocation.

 

[Beer-man]

Question for the folks that say paying of the mortgage early is only an emotional decision: Do you regularly refinance your house and invest the proceeds?

You mean pull cash out of the equity or invest the difference in the lower rate?

I have refinanced 2x and continue to place the invest the extra I have from my lower payment

 

[pb4uski]

When you take a 15 or 30 year mortgage in the US, is there a charge to "break it" to refinance? I have done that a few times to buy investment real estate in the past when the mortgage comes up for renewal (every 5 years for me)

No, US mortgages can generally be paid off early with no penalty... the payoff is just the remaining principal balance and any interest since the last monthly payment.

 

[pb4uski]

When it was easy to get cash out, reduce the interest rate, and buy properties at good prices, yes. Haven't been able to do that for awhile. Last did that at the end of 2012, when interest rates were at the property solely vest in bottom.

+1.... all of my many refinancings have been done to reduce rate... taking additional cash out for investing was a by-product of refinancing to reduce the interest rate and monthly payments.

While I believe that it best to not pay off a low interest rate mortgage and to invest money that would otherwise be used for additional principal payments, I would probably not recommend that one take out a mortgage on a property owned free and clear solely to invest for a spread... but if you already have a low interest loan in place, why not take advantage of it?

 

[winyaz]

When comparing a guaranteed return (paying off the mortgage and saving $x dollars in interest) to an unknown return (future investment returns - mortgage costs), I don't understand why the references to market returns from 1926-2018, or whatever. It is now 2019 and what matters is future returns. There is a strong correlation between valuations and future returns, which means future returns are likely to be much less than historical.

Specifically, this website https://interactive.researchaffilia...SD&model=ER&scale=LINEAR&terms=REAL&_k=6kfnyi
estimates 0.7% annually of the next 10 years for US Large Cap. This one https://www.advisorperspectives.com/commentaries/2018/02/02/7-year-asset-class-forecasts
estimated -4.7% real returns (returns - inflation) over the next 7 years from the end of 2017.

Now many may have different estimates of future returns and the estimated future returns of the company stock may be quite different from the market, and there is a high degree of uncertainty in any estimates, especially over the short term. Still, when comparing a guaranteed return to an estimated future return, I would want an estimated future return much higher than the guaranteed return to provide a cushion for the unknown. I don't see that cushion in the US stock market right now.

If it were me I would pay off the mortgage, but then I also have a very strong preference for earning a return on my money rather than paying someone else for the use of theirs.

 

[pb4uski]

How does one "earn a return on my money" if you've used it all to payoff the mortgage? [emoji67]*[emoji66]*[emoji65]

 

[winyaz]

How does one "earn a return on my money" if you've used it all to payoff the mortgage? [emoji67]*[emoji66]*[emoji65]

No one said anything about using it all to payoff the mortgage. The Op talked about having other investments, as I had when I paid off my mortgage.

 

[pb4uski]

Whatever, but it is indisutable that any money used to make discretionary principal payments is no longer available to earn a return.

 

[winyaz]

Whatever, but it is indispensable that any money used to make discretionary principal payments is no longer available to earn a return.

Then you missed my point, which is that you are earning a return on that money by saving the interest payments that would otherwise be made. And that it is unknown what the return (or loss) on the money would be if it were instead invested in stocks.

 

[pb4uski]

I didn't miss your point... it is so obvious it is hardly worth making a point if it. While it is true that what one would earn on investments, be it stocks or a mix of stock and fixed income is unknown, what is known is that for periods of time they have outearned mortgage interest more often than not.

 

[Rianne]

Then you missed my point, which is that you are earning a return on that money by saving the interest payments that would otherwise be made. And that it is unknown what the return (or loss) on the money would be if it were instead invested in stocks.

I agree. I think of interest as an expense that we pay above the value of our house. Write off or not, gain or loss, it is an expense. A stock or stock fund price is the amount you pay for it at the time of purchase. Add 2.5%, 3% whatever the interest is, it is an expense above and beyond the price you bought the house/stock for. The value of the house/stock can go up or down or sideways, the interest/expense is there regardless. That's why low cost, low expense stock/stock funds are valuable to me.

I think of my house as a stock I will not sell and get much value just living in it. If the actual value of my house plummets, ok, I can live with that because I am living in my house and not selling it, therefore have no payments on it and no one can kick me out of it.

 

[Oakster]

So to all the people that love their mortgage and want to keep it around.... do you borrow from the equity periodically to invest in the stock market? If the value goes up, or over time the debt goes down, do you harvest that equity to invest into the stock market?

 

[ERD50]

So to all the people that love their mortgage and want to keep it around.... do you borrow from the equity periodically to invest in the stock market? If the value goes up, or over time the debt goes down, do you harvest that equity to invest into the stock market?

If I could do it with a few mouse clicks, and conditions were right, I would. But it is typically more involved, and there are costs with a refi.

-ERD50

 

[Penny6]

Ty for all the encouragement. Home is paid off and joined the double comma club. So thankful, and excited about what is to come!

 

[gooddog]

Congrats on the house, and joining the 'double comma club'.

 

[thumbs]

Way to go Penny6! Continue to keep us posted.