Hi. Pay down mortgage or invest in TODAY's market ?

[flintnational]

No, we are not in agreement where it comes down to what really matters, real life.

We may be in agreement on the math, but I am not in agreement with the application of that math.

But the math is all I am analyzing. Everyone is free to implement or not implement as they see fit. If someone wants to keep a 3% mortgage when their bonds are paying 2%, that's okay with me. Not optimal from a math standpoint, but okay. And, maybe it meets other non-math goals they have. As far as AA, I have held risk even in both of my examples. If risk is not held even, of coarse an AA with a higher stock percent will perform better. And that is exactly what those that take a mortgage out and invest it per their existing AA are doing. They are increasing their risk. They have converted home equity (a bond like investment) into stocks. So we mislead when we say, "If my portfolio return is greater than my mortgage, I should not pay off my mortgage". It is not a risk adjusted comparison.

And regarding real life, I did pay down a 3% mortgage with 2% bond money and upped my stock allocation to 70% to hold overall risk even . Easy and i made 1% on the spread. And, I continue to make 1%. Of coarse that's what the math tells us would happen. In the future if this reverses and bonds pay more than mortgage rates, I will take out a mortgage, invest the funds and reduce my stock allocation to adjust for the increased risk.

It's all yours. I am moving over to the Amazon Prime Day thread.

 

[ERD50]

... It's all yours. I am moving over to the Amazon Prime Day thread.

That's fine. I'm going to continue the thought process, because I feel you've made good points, I just feel there is something missing. I've thought about it a bit, so I'll just throw those thoughts out there.

.... As far as AA, I have held risk even in both of my examples. If risk is not held even, of coarse an AA with a higher stock percent will perform better. And that is exactly what those that take a mortgage out and invest it per their existing AA are doing. They are increasing their risk. They have converted home equity (a bond like investment) into stocks. So we mislead when we say, "If my portfolio return is greater than my mortgage, I should not pay off my mortgage". It is not a risk adjusted comparison. ...

So as I said, you're not 'wrong' in my view, but I'm not sure the situation applies for some of us, nor does it need to. Let me express it this way:

If I decide I'm comfortable with say a 75/25 AA, I won't change that whether I have a $1,000,000 portfolio, or a $900,000 portfolio. And it would not make any difference to me where that added $100,000 came from. It could come from gambling winnings, an inheritance that maybe was invested in a MM at the time, I find it under the couch cushion, or I hold a $100,000 mortgage. The source doesn't matter to me, the future does.

An investor with a 75/25AA knows there is no guarantee. But they also know that over a 20~30 year period, their investment portfolio has a very, very good chance to outperform a low rate mortgage. So they figure a low rate mortgage is an attractive bet, and accept it is not a guarantee. They are not looking for guarantees.

So you can say it's not apples-apples because the risk profile is different, fine. But I say I'm not concerned about the 'risk free' aspect of a mortgage payoff, just as I was not concerned that my rich Uncle had my inheritance in a MM. I didn't take out a mortgage with the idea that paying it off would be 'risk free', that's just a built in function of how a pay off works. I took out a mortgage probably because I didn't have, or did not want to use up so much of my liquidity at the time. It's not like buying a CD which you might do primarily for the risk-free aspect of it.

So that is why I'd say most people probably do not adjust their AA much, if at all, with or w/o a mortgage, especially if the mortgage is not a large % of their portfolio. They are looking forward, not backwards at the source of the funds.

-ERD50

 

[Steeler75]

Paying off a mortgage is not always based on financial data, but can include an emotional basis ( the weight off ones shoulder from being debt free is very real to some).

As others have said before, if your home was paid for, would you take out a mortgage to invest in the market? Just another way of looking at the situation.

 

[ERD50]

... As others have said before, if your home was paid for, would you take out a mortgage to invest in the market? Just another way of looking at the situation.

Sure, why not? That's basically what I did when I refinanced back around 2003. I could have paid it off, I took out a new 30 year loan. Glad I did, made lots of money, and accept it might not have worked out so well. I was comfortable with the risk/reward scenario. If you aren't, then don't.

Considered doing it again when rates were getting so low, but I'm not sure how much longer we will be in this house, so I'm not sure the upfront costs/hassle would be worth it.

Paying off a mortgage is not always based on financial data, but can include an emotional basis ( the weight off ones shoulder from being debt free is very real to some). ...

Yes, but I like to try to act on what is actually "real", not a "perceived reality".

For example, DW hates the expressways, the trucks and cars "zooming in/out" bothers her. I point out that statistics show that expressways are about 4x safer than than highways, largely because those cars/trucks are moving with you, and the speed difference is usually less than 20 mph, instead of coming at you in the other lane with a speed difference of over 100 mph. And no intersections.

So she "feels" safer on the highways. But that won't keep her out of the hospital or morgue, will it?

Fortunately, the mortgage decision is pretty minor for most people, but I still like actual facts/data over "feelings". I think in most cases, it is best to try to reign in the feelings if you can, by making yourself aware of the facts.

-ERD50

 

[kgtest]

Sure, why not? That's basically what I did when I refinanced back around 2003. I could have paid it off, I took out a new 30 year loan. Glad I did, made lots of money, and accept it might not have worked out so well. I was comfortable with the risk/reward scenario. If you aren't, then don't.

Considered doing it again when rates were getting so low, but I'm not sure how much longer we will be in this house, so I'm not sure the upfront costs/hassle would be worth it.


-ERD50

Interesting. I considered this, asked the advice of my ole man...should've maybe asked the forum. So I just refi'd at 2.75 and they were offering something like 210k cashout if I wanted (houses in my area are niche and have appraised well higher than when I bought).

I was like hmmm, take the 210k at 2.75% (and this wasn't even a jumbo loan and DW isn't on the note) and invest it into 100% equities?

I decided not to. Slow and steady, there is no silver bullet. likely over the next 15 years stocks will outperform bond (2.75%) and my interest payment difference, but I didn't want to take that risk when the current trejectory is working so far. I do realize success is usually dependent upon the amount/frequency/types of risks one takes and not how intelligent one is...but...just couldn't play with fire. What if the recession is here tomorrow? I couldn't sleep with 2 kids and DW knowing I could totally go from ER to bust in 10years.

 

[kgtest]

I want to be clear people are in agreement that real estate, and bonds are different asset types though right? So one might want to diversify away from just BOND + STOCK, or REAL ESTATE + STOCK into BOND + REAL ESTATE + STOCK....especially as their retirement nears? I ask this but I literally do not hold bonds, not sure if anyone in my immediate family does...but we do go heavy on RE.

 

[ERD50]

... So I just refi'd at 2.75 and they were offering something like 210k cashout if I wanted (houses in my area are niche and have appraised well higher than when I bought).

I was like hmmm, take the 210k at 2.75% (and this wasn't even a jumbo loan and DW isn't on the note) and invest it into 100% equities?

I decided not to. Slow and steady, there is no silver bullet. likely over the next 15 years stocks will outperform bond (2.75%) and my interest payment difference, but I didn't want to take that risk when the current trejectory is working so far. ....

And I think that's just fine. You evaluated it, and you decided the risk/reward, while it probably would work out, was just not something you were comfortable with. You made your choice, others might decide different, whatever fits.

However...

...but...just couldn't play with fire. What if the recession is here tomorrow? I couldn't sleep with 2 kids and DW knowing I could totally go from ER to bust in 10years.

Isn't that overstating the risk? Would having the extra funds invested at a reasonable AA (one consistent with the fear of a recession), along with the drag of the mortgage payments, really take you from being OK in a recession to "bust"? I'd like to see that scenario, I just don't think it would be the case, unless you were really going to extremes in some way. In that case, no, don't do it! But I don't see typical scenarios being affected to such a degree.

Can you outline what a scenario that would take from comfy to "bust"? I'm just trying to understand your fear (which as I say, might be warranted in extreme cases of leverage).

-ERD50

 

[lemming]

A mind is a terrible thing to change. And I am changing mine-it is a painful process prying money from my clenched fists.
No one has considered taxes on the money you are using to pay off the balance. Last year I had a zero tax liability for federal and state because I only had SS and dividend income. SCORE! Then I bought a new car. I can make the payments just fine with a minimal withdrawal-so no tax this year or until I start with RMD withdrawals.But I hate the payment cloud over my head. So Plan A for now is to pay off the mortgage for cash flow and pay down the car until my RMD year and then pay it off. This takes me to a fed/state tax burden of 6,000 and reduces my dividend income. Worth it or Not ? Not sure but that is how I am doing it.

 

[lemming]

I just realized this was an introductory post . So welcome to the forum and feel free to argue your own points. That is all part of the process of crowd sourcing.

 

[WhenIsItTime]

Welcome to forum!

My view here is that (1) when you are early in accumulating investable assets, you should use a mortgage. Better to accumulate some invested assets for cushion and liquidity then relying on debt.

(2) once have ability to rely on invested assets for living expenses, then pay down mortgage quickly/early.

My reasoning: in scenario 2, important to look at net asset position considering mortgage as fixed expense. If you have $1m invested with 80% stock and 20% in bonds/fixed income and a $200k mortgage, then you are basically 100% invested in stock as fixed income and mortgage cancel out although likely worse as mortgage probably carries higher rate.

I think continuing to hold mortgage hoping for higher return is misleading on risk/reward.

 

[corn18]

OP, I am struggling with this as well. When I put my mortgage into my AA as a negative bond, it revealed that I was 100% stocks at age 53, 3 years from retirement. Yikes!!!

Then I spazzed and decided to take all my extra income this year (it's a lot) and pay off the mortgage.

Then I freaked out because that would really stretch my liquidity.

Then I passed out and peed myself a little.

Haven't decided what to do, yet. But I do have a metric boatload of money sitting in cash right now.

 

[Maidensong]

Personally, we decided being debt free was a MUST before the DH retired early in 2014. It's a lovely feeling to own our stuff, our home, our rentals. It's a tremendous relief.

And OP, your impulse to leave your wife the security of a paid-for home should something happen to you is, in my opinion, a loving thing to do.

There are times to follow the spreadsheet and times to follow your heart.

 

[2cheap2eat]

Seems like there are two thoughts on paying off mortgage early. I decided to pay primary house off early, even though I had a low interest rate.

DW and I like knowing we own it outright. We also set aside money to cover property taxes etc for several years.

I actually ended up buying a rental property which has been working out well. DW and I are still working, so we plan pay the rental off before FIRE.

 

[hotwired]

Percentiles

I think with this question anytime it comes up, it's all about where the market is in terms of valuation.

On the website dshort.com, they show the cape 10 valuation of the market, and go into the quintiles a little bit. Quintiles being 20% bands of valuation. So if the valuation of the market is in the bottom 20% well bottom 40% even, it's considered quite undervalued whereas if it's in the top quintile or top 20% it's considered overvalued.

We are clearly in the top 20% right now meaning that the market is historically overvalued. Given that I don't think anyone could accuse a person of market timing if they decided to pay off a shore thing mortgage versus put money in this market. This isn't a matter of it being a sure thing or not but a simple risk reward calculation. Don't ask me what the math is behind that calculation but I think you get my drift!

 

[hotwired]

I should add that we actually face this last year and the year before, we had eleven apartment buildings and houses and we started selling them. Instead of putting the excess into our portfolio, we paid off mortgages on our remaining buildings. We felt this was a wise thing to do or at least prudent given the valuation of the market. Now we have a ton of equity that we can draw on if the market ever tanks.

 

[Dakotah]

Pay Down

I’ve never ever talked to anyone that regretted paying off mortgage early.
An advisor I talked to prior to my ER five years ago strongly advised paying off all mortgages prior to ER.

 

[rk911]

don't ignore risk. pay off the mortgage which then frees up $ to invest in today's and tomrrow's market.

 

[kbst]

I haven’t Read everything but I’ve been retired for nine years and we have a 85 thousand dollar mortgage on a $500,000 house and a $250,000 beach condo. The payment is $543 a month with 2 fifths going towards the principal. According to my wife we’re keeping the mortgage so we can take stuff we give to charity off our taxes. I rarely question my wife so is this true? It’s not that big of a deal either way.

 

[rk911]

think of how much more you could give to charity if you were debt free. giving to charity solely for the tax deduction is giving for the wrong reason.

 

[WhenIsItTime]

I haven’t Read everything but I’ve been retired for nine years and we have a 85 thousand dollar mortgage on a $500,000 house and a $250,000 beach condo. The payment is $543 a month with 2 fifths going towards the principal. According to my wife we’re keeping the mortgage so we can take stuff we give to charity off our taxes. I rarely question my wife so is this true? It’s not that big of a deal either way.

2/5 principal seems like a lot of interest on that balance.

If you have the $85k invested earning a return similar to mortgage rate then you are paying income tax on that money that likely exceeds any deduction although YMMV.

 

[ERD50]

I think I'm going to scream.

"And OP, your impulse to leave your wife the security of a paid-for home should something happen to you is, in my opinion, a loving thing to do."​

Now, in your opinion, I don't love my wife (because I have a mortgage)?

OK, I know that's not what you intended, but think about it. If paying off the mortgage is a loving thing to do, there is only one alternative, it's binary, and that is not paying off the mortgage. So if a pay off is loving and caring, I must be a non-caring person. Thanks.

That's actually what got me started on being vocal and persistent on the pay-off mortgage threads. There was always a big fuss and congrats on a pay-off. Well, if a pay-off is to be celebrated, not paying off must be a sad state of affairs. It's not. For many of us, it is a well thought out decision, that has paid off well. Either way, in most cases is really pretty minor financially. But people continue to make a big deal over it.

And I just had this discussion with my wife. The mortgage is on auto-pay from our checking account. I have an auto withdraw from saving to that checking account. But there is still utilities, property taxes, maintenance, etc, and not all can be on auto-pay. One auto-pay for the mortgage, out of all those bills, is not going to be a hardship for her. We have plenty of resources to pay the mortgage. And if we didn't, I sure could not pay it off!

And paying off the mortgage does not lock in security on a home. There are still those other bills to pay, any of which could cause you to lose your home, especially property tax, or at least struggle.

... think of how much more you could give to charity if you were debt free.
..​

.

Would you please read that to yourself out loud, and then tell me it makes sense?

It's backwards. With a payoff, you just stuck a bunch of money in your house, it is no longer available to give to charity.

... pay off the mortgage which then frees up $ to invest in today's and tomrrow's market​

.

Before the pay off, the money was invested in the market. Now, after I took it out of the market, you are telling me that I have more to put in the market, because I don't have a mortgage payment? How long will it take to build up that investment again? Backwards.

Please people, think!

-ERD50

 

[Badger]

You only owe 40K so the interest is probably small, either way should be fine. I owe $235K, principal is about $2,600 and interest is $875 Monthly with about 7 years left. I will pay mine off in January as I retired this year. I still would owe about 65K in interest so paying off would save me that amount, if I tried to make 65K in 6-7 years with 235k might be a stretch, and that would be just to break even..

+1 I did the same for the same reasons only my mortgage was only $45k when I bought the house. After I was about half way through the 30 year mortgage the interest on the loan was not enough to itemize on my taxes. I paid it off in about 5 years with extra payment each month. For the past 20 years or more I have had no mortgage. Once the mortgage was paid off then the same amount of money each month was invested. It was great to own the house, have no payments, save on the mortgage interest, and watch my nest egg grow fast.


Cheers!

 

[joeea]

OP, I am struggling with this as well. When I put my mortgage into my AA as a negative bond, it revealed that I was 100% stocks at age 53, 3 years from retirement. Yikes!!!

Mortgages aren't negative bonds.

Then I spazzed and decided to take all my extra income this year (it's a lot) and pay off the mortgage.

Then I freaked out because that would really stretch my liquidity.

Then I passed out and peed myself a little.

Haven't decided what to do, yet.

Sounds like it might be a good idea to wash.

 

[joeea]

Now, in your opinion, I don't love my wife (because I have a mortgage)?

OK, I know that's not what you intended, but think about it. If paying off the mortgage is a loving thing to do, there is only one alternative, it's binary, and that is not paying off the mortgage. So if a pay off is loving and caring, I must be a non-caring person. Thanks.

If paying off a mortgage involved just snapping your fingers, it would be a loving thing to do. And everyone would do it.

But paying off a mortgage involves taking money from somewhere. That money should obviously be invested in a loving and caring way.

 

[Dave in VA]

I see it as a cash flow issue. If you can pay off the mortgage before you retire, you will have an extra (whatever your mortgage payment is) every month. We had 2 homes and sold one when we retired, paying off both mortgages. Very happy with this decision.