paid off mortgage yesterday

[Danmar]

I don't know that it is really that big a deal to keep things 'apples to apples' in this case.

Consider someone with a $1,200,000 portfolio invested 75/25 and a $200,000 mortgage, versus taking that down to a $1,000,000 portfolio and paying down the mortgage. AA choices like 75/25, or 60/40 or 50/50 are just round number targets. Would that person really adjust their AA after paying down the mortgage (or vice-versa)?

I just don't think it is a material enough change to make adjustments one way or the other.

I also sort of disagree that just because the payoff is considered a 'safe' investment, that one should adjust in turn. OK, it is 'safe' - but was the investor looking for that safety, or is it just a side effect of the nature of the payoff? In the big picture, I think it sort of washes out.

For an analogy, consider the decision between purchasing an annuity or not. We don't say that to keep it 'apples to apples' that one must consider an alternate investment that returns the exact same $ amount each year. No, we consider whether a portfolio can be reasonably expected to outperform an annuity in the long run, with ups and downs.

-ERD50

I agree. My basic point is that having a mortgage increases your risk. As long as this is understood and the effect is manageable no problem. It still is a little misleading to say "I expect to make 8% on my portfolio and my mortgage only costs 4% so it's a no brainer".

Not sure your analogy re annuities is valid. Annuities are really longevity insurance.

 

[dvalley]

First off congrats on paying off the mortgage, that's awesome and I hope to be there one day. However, like many here the math and logic takes over and I leave it alone. With my tax bracket the mortgage rate of 3.75% becomes 2.6%. Furthermore as the inflation rate goes up the new money becomes cheaper than the old so I basically use the cheaper money to pay down the old money which brings that rate down even more. I can easily beat that in the market.

 

[youbet]

Annuities are really longevity insurance.

Although in times of moderate (or higher) inflation, a non-cola'd annuity stuggles to be as good as holding a diversified portfolio in terms of providing "longevity insurance." Inflation risk makes non-cola'd annuities a real crap shoot.

 

[youbet]

We paid off our mortgage many years ago when rates were in the upper single digits. We didn't think of it as a big deal then and wouldn't think of it as a big deal now. We've just never been "house people" (our house = small portion of total worth) and by the time we decided to pay the mortgage off, the balance was a very small percentage vs. our total worth so it was just a minor matter of convenience. It was just easier to pay off the small balance of the existing mortgage than shop for a new mortgage at the then existing lower rates.

I can understand though how folks could get caught up in the "goal achievement" aspect of it and, despite the financial impact being near nil, really feeling good about it. So congratulations!

 

[Danmar]

Although in times of moderate (or higher) inflation, a non-cola'd annuity stuggles to be as good as holding a diversified portfolio in terms of providing "longevity insurance." Inflation risk makes non-cola'd annuities a real crap shoot.

Ok agree. In fact I thought a bit more about this and I now agree that any stream of fixed cash flow could have an impact on you AA. Most people tend to ignore mortgages, but maybe they shouldn't? But also annuities, and pensions (incoming cash flow) and alimony ( outgoing cash flow) in theory have an impact.

For example if you have a large pension you should consider this in your AA as it will notionally be like FI and, all other things being equal, should allow you to assume more risk. I have a very large pension that when capitalized, gives me a notional AA of about 60/40. My actual portfolio is 100% equities. Likewise the mortgage, (opposite) should cause you to be more conservative and adopt more FI in you AA. Agree this generally isn't done, at least for mortgages, but in theory makes sense.

 

[youbet]

Ok agree.

I wish I could get my wife to say that, just once even.......

the mortgage, (opposite) should cause you to be more conservative and adopt more FI in you AA.

I think most folks pay mortgages out of current earned income, ie., they have a job. If the job or career is considered solid, I wouldn't bother adjusting AA in consideration of a stream of debt payments unless the debt was a significant percentage of my total worth.

If you were making periodic debt payments out of investment income and the debt was a significant portion of your total worth, I think your outlook would be prudent.

 

[Danmar]

I wish I could get my wife to say that, just once even.......

I think most folks pay mortgages out of current earned income, ie., they have a job. If the job or career is considered solid, I wouldn't bother adjusting AA in consideration of a stream of debt payments unless the debt was a significant percentage of my total worth.

If you were making periodic debt payments out of investment income and the debt was a significant portion of your total worth, I think your outlook would be prudent.

Agree, again. I was really thinking more of a retired person, like myself. When I retired aI paid the mortgage off.

 

[Dog]

We sold our home and retired the mortgage debt in June....and are now debt-free with the exception of taxes - and it feels GREAT! DH and I really do need to celebrate by burning our old mortgage papers as this was a long term goal/dream realized.

 

[RobbieB]

When we bought this house I had a 10% loan. Refi'd at 8.5 and then again at 8.25 (15 year). I had incentive to pay it off -

Now with these low rates, not so important.

The funny thing was when rates started to plummet to around 6%, I got a lot of refi calls and told them that yes, I would love to refi. Next question was how much do you owe? Fifty grand.

Click.

 

[athena53]

The funny thing was when rates started to plummet to around 6%, I got a lot of refi calls and told them that yes, I would love to refi. Next question was how much do you owe? Fifty grand.

Click.

But... You coulda done a big cash-out refi and taken that world cruise you always wanted!

 

[Freedom56]

Good move. I never regretted paying off my mortgage. For those that tell you about the tax deduction you will miss, just tell them that you can get the same deduction by donating to charity.

 

[ERD50]

Good move. I never regretted paying off my mortgage. For those that tell you about the tax deduction you will miss, just tell them that you can get the same deduction by donating to charity.

You don't (or shouldn't) carry a mortgage for the tax deduction, but it is part of the calculation.

-ERD50

 

[convergent]

Hello again everyone. I don't stop by often, so it's been awhile since I last posted.

I enjoy reading progress made by others on their ER journey. As a way to encourage others, I would like to share my own progress. I paid off my mortgage yesterday. I've been pre-paying since day one. It took me 12 years to pay off my 15 years mortgage.

I won't get into the intellectual discussion on the merits of paying off a mortgage vs. investing, but not being in debt feels pretty darn good.

So for those still chipping away, go get'em! We'll wait for you here.

Congratulations! One of the best feelings in the world to know that you actually own the house you "own". You are in a great minority in being out of debt. I hit that milestone about 5 years ago and love it.

 

[rayvt]

I get piece of mind knowing I have the liquidity to take on any big surprises. This could be compromised if all that money was tied up in the house.

Obviously, people can do what they want. But some of these reasons really don't hold water.

-ERD50

Most of the reasons are emotional. And we know what they say about the success rate of letting your investment life being dominated by emotional comfort.

From the pure financial aspect, having long-term, non-callable, fixed rate, cheap cheap cheap loan is a good thing. A very good thing. Which is why large successful companies float bond issues.

To me, emotional comfort is knowing that I could pay off the mortgage any time I wanted to, using less than 10%-20% of my portfolio. In two days .. one day to get the payoff balance, one day for the wire transfer.


But since it is a personal emotional thing, there is really no argument other than that -- that it's a personal thing. De gustibus non disputandum est.

 

[REWahoo]

Most of the reasons are emotional. And we know what they say about the success rate of letting your investment life being dominated by emotional comfort.

And here I was thinking "they" were referring to the market, not mortgages.

All I know is I would have needed to generate $200,000 ($267,000 including tax) more in income in my 11 years of retirement if I'd kept the mortgage. Sure, I probably could have done so with the $ I used to pay off the mortgage, but I chose to avoid the risk. That's the way my taste runs.

 

[harley]

Hey, I didn't mean to start the religious war again. I just meant to say that I don't consider the mortgage debt, any more than I consider the money I'll owe on my credit card at the end of the month to be debt. Debt to me is buying something you can't afford out of pocket, then having to pay for it later. Using other people's money to my advantage when I could pay it immediately isn't the same thing. It's just asset allocation differences to me. If I didn't have a mortgage I'd have an extra $400K tied up in a non-appreciating (in my area) non-asset (I don't consider my house an investment). So having a chunk of the value available for more lucrative purposes makes me feel warm and fuzzy.

 

[kgtest]

Hello again everyone. I don't stop by often, so it's been awhile since I last posted.

I enjoy reading progress made by others on their ER journey. As a way to encourage others, I would like to share my own progress. I paid off my mortgage yesterday. I've been pre-paying since day one. It took me 12 years to pay off my 15 years mortgage.

I won't get into the intellectual discussion on the merits of paying off a mortgage vs. investing, but not being in debt feels pretty darn good.

So for those still chipping away, go get'em! We'll wait for you here.

Encouraging indeed! Been paying extra on my mammoth $377k note since day one as well, and also hope to clear the bank sooner than 12yrs. Nice work!

 

[Danmar]

Hey, I didn't mean to start the religious war again. I just meant to say that I don't consider the mortgage debt,

Well that's an interesting idea. Mortgage isn't debt. To each their own.

 

[Gumby]

Well that's an interesting idea. Mortgage isn't debt. To each their own.

I could see some viewing a mortgage in certain circumstances as being like margin debt in a brokerage account - you could always just sell the stock and pay it off. I don't see it that way, but it would not be irrational.

 

[Meadbh]

Hey, I didn't mean to start the religious war again. I just meant to say that I don't consider the mortgage debt, any more than I consider the money I'll owe on my credit card at the end of the month to be debt.

I don think there's an accountant or financier anywhere who would agree with your interpretation if the word "debt", but...........whatever.

 

[harley]

I don think there's an accountant or financier anywhere who would agree with your interpretation if the word "debt", but...........whatever.

Well, that's why I don't socialize with that class of people. I have lots of interesting interpretations of words and concepts. Someday the rest of the world will recognize my genius. Probably posthumously, as usual.

 

[Meadbh]

Congratulations on paying off your home mortgage!

I have had mortgages on two homes, and paid them both off ASAP (both within 2 years). In Canada, mortgage interest on one's principal residence is not tax deductible, but no capital gains tax is payable on the eventual sale of the home. Mortgage interest rates are adjusted at the end of the term, not guaranteed for the entire amortization period. Therefore, it is to the homeowner's advantage to minimize home mortgage debt.

After paying off and renovating my first home I invested my spare cash flow into rental properties. Some I now own free and clear. The remaining mortgages are all currently at very low rates (2.19-2.59% APR), interest is tax deductible, and I am building equity and future income streams. Because rental income is fairly predictable, I consider my real estate portfolio analogous to a fixed income investment.

 

[youbet]

I could see some viewing a mortgage in certain circumstances as being like margin debt in a brokerage account - you could always just sell the stock and pay it off. I don't see it that way, but it would not be irrational.

I tend to agree here Gumby. A mortgage or a margin loan is secured debt. The terms dictate you must maintain possession of the asset you borrowed against or pay back the loan. This is very different than unsecured debt such as a credit card.

My mortgage was for $40k on a house we purchased for $68k. Over the years I watched the value of the asset (the house) increase to near $200k while the mortgage was slowly paid down. Sometime when there was less than $10k left to pay on the mortgage, I noted interest rates had dropped significantly. I investigated a re-fi but since the dollar amount was small, I just paid off the mortgage and went on my way. No big deal.........

This is different than times when I've had unsecured debt. For example, we ran up several thousand dollars on our CC on a vacation. I couldn't wait to pay off that CC bill in full at the next billing cycle and avoid the high interest of carrying the debt and also to not have a debt that was unsecured by a corresponding asset.

As rayvt said, for most paying off a mortgage is a subjective, emotional thing. You borrow to buy a house when young because you don't have the cash to pay for it. At the beginning, the payment may be onerous and a real pita. Those feelings are never forgotten and lead to a big "hooray!" on payoff day. This despite the fact that by the time that day arrives, folks on this board were likely in a position where the mortgage balance is a tiny percentage of their total worth and they could have paid it off anytime they chose.

I really don't think that paying off a mortgage balance has a significant financial impact on the typical poster here. An exception might be paying off a large mortgage prior to retirement to avoid needing the cash flow (creating AGI) to make the periodic payments.

I don't understand the strong feelings one way or the other........ But I accept the latent "need" to celebrate even though the reasons (having a large loan and a small total worth) for the celebration are likely long gone by the time the event takes place. It's just folks looking back and remembering how daunting the chore of paying for the house seemed at the beginning.

 

[harley]

After paying off and renovating my first home I invested my spare cash flow into rental properties. Some I now own free and clear. The remaining mortgages are all currently at very low rates (2.19-2.59% APR), interest is tax deductible, and I am building equity and future income streams. Because rental income is fairly predictable, I consider my real estate portfolio analogous to a fixed income investment.

I do too, although I doubt financiers and accountants would agree. I invested the cash I took out a mortgage for into two rental properties. They are returning (now) way more than the principal and interest on the mortgage, plus the value of the homes has increased by about 50%. Plus the significant tax advantages of depreciation and the various deductions for costs. I'll have to pay some of those back if I ever sell, but I intend for that to be DD's problem after I'm taking a dirt nap. In the meantime, my rental income pays the mortgage twice over, and so far (knock on wood) I haven't had any issues with occupancy or damaging tenants. I know if bad times come it won't be acting as FI anymore, but it's good enough for me for now.


Harley - Ignoring GAAP since the 20th century.

 

[rayvt]

And here I was thinking "they" were referring to the market, not mortgages.

All I know is I would have needed to generate $200,000 ($267,000 including tax) more in income in my 11 years of retirement if I'd kept the mortgage. Sure, I probably could have done so with the $ I used to pay off the mortgage, but I chose to avoid the risk. That's the way my taste runs.

$200,000 invested in the S&P500, including reinvested dividends, grew to $428,000 in the 15 years ending Jan 2016.

OTOH, $200,000 invested on the same date and doing a $1515/mo withdrawal ends up at $80,700.
And that's with the 50% drawdown in the 2008/2009 crash. Although I will grant that that would have been a nail-biting time.

That's hindsight, of course. But Firecalc shows a 80% success rate, and that's a 9.1% withdrawal rate.

Yes, it's a personal preference. Some people prefer the non-risk, some people prefer the higher profit.

-----------------
($200,000 / 11 / 12 = $1515)
I'm assuming that $1515 is P&I only, not PITI -- because you have to pay T&I whether you have a mortgage or not.