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Old 07-20-2021, 08:44 PM   #141
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Is it really just purely a math question for you? I suspect for almost all of us, it's not just purely a math question. Behavioral economics teaches us that it's not all about math and that we humans place more weight on avoiding losses than generating gains. ...
And Behavioral Economics teaches us that placing more weight on avoiding losses than generating gains leads to incorrect decisions. And I don't mean preferences, I mean factually incorrect. So shouldn't we try to overcome that human trait (with information/education), and avoid the pitfalls?

https://www.nngroup.com/articles/prospect-theory/

Quote:
Scenario 1: Participants started with $1000. They then could choose between:

A) Winning $1000 with a 50% probability (and winning $0 with a 50% probability), or
B) Getting another $500 for sure.

Scenario 2: Participants started with $2000. They then could choose between:

C) Losing $1000 with a 50% probability (and losing $0 with a 50% probability), or
D) Losing $500 for sure.

....
Note that the outcomes and odds for each scenario are exactly the same. For either A or C, you have a 50/50 of ending up with $2000 or $1000. For B or D, you end up with $1500.


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... However, people made opposite choices in the two scenarios: the majority chose the risk-averse option B in Scenario 1 and the loss-averse option C in scenario 2.

Changing the framing of the problem (by adjusting the initial gift and the options accordingly) led people to a different decision.
There should have been no difference between the preference of A/B and C/D, but there was, because people weren't thinking straight.


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Whether it's pure math or not I think depends on each one's life experiences. I was homeless in 1968 living in a paid-for $350 car. I guess that made me hate debt and appreciate liquidity. ...
You do realize that paying off the mortgage (hating debt) results in *less* liquidity?

I appreciate liquidity too, and have made the calculation that mortgage debt at these historically low interest rates is not something to hate. You can decide against it if you want, but I see no reason to hate it.

-ERD50
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Old 07-20-2021, 09:08 PM   #142
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We paid our mortgage years ago - way before retirement...

For us, it was and has been the best decision.

Only you can answer what is right for you vs keeping the money in the market....
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Old 07-20-2021, 11:09 PM   #143
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But realize that most of us here are very atypical. This group of people has the ability to easily pay off their mortgage. Most people cannot pay off their mortgage, because they don't have the money. Those are the people who have an actual sleep-well-at-night issue.

If you have enough money that you can easily pay off the mortgage, SWAN issues are mostly all in your head. First world problem.

Many here likely have the ability to pay off their mortgage off many times over. The mortgage arbitrage is just a way to add a bit extra to the portfolio income.
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Old 07-20-2021, 11:40 PM   #144
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If I had a 3% mortgage I wouldn't pay it off early. I paid off an 8% early though -

Yup pure math. But I'm not going to refi and buy equities either. House is 10% of net worth. Why bother?
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Old 07-21-2021, 04:48 AM   #145
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Some like me like to have a piece of mind paying off a mortgage in that I don't owe anyone anything . No one has to understand how I feel.
I retired almost 3 years ago with a mortgage and now have about 3 1/2 years to go. Since I have the money to support paying it and a low interest rate, I decided to keep it rather than using ready cash to pay it off. For me, I just don't look at having no mortgage as being debt free because I will always have the large tax bill (debt to the government!) to pay. When the mortgage is paid off, I'll still have a substantial monthly payment that will go into a self-funded escrow account for taxes and insurance.

I believe that having the extra ready cash in case of a down market, in case an opportunity comes up or just fun money to spend on something we really want to do is more valuable for us. YMMV but this works for us.

One thing I sometimes wish I had done pre-retirement was take out a HELOC. We have a few home projects that we'd like to do. A HELOC would allow us to fund it over several years rather than withdraw from the tax deferred retirement funds all at once and pushing us into a higher tax bracket. Of course I hadn't found this site back then and didn't know what I didn't know. We'll just stagger the projects a bit so minimize the tax bite.
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Old 07-21-2021, 01:04 PM   #146
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Yes, if I could get a cash-out mortgage for the same cost (fees & rate) as a non-cashout mortgage.

Those of us who are serial refinancers are essentially doing this. Every time you refi you start a new 30 year period. We've been in this house for 15 years, but have 29 1/2 years to go on the mortgage. Have always just refi'ed the current balance, because nowadays they charge a lot if you take cash out-- including rolling a HELOC balance into the loan.

Better.com is currently offering me a 15 year, no cost refi with a $200k cash out for 2.125% and $2k credit through the Amex offer. I owe less than $50k on my current mortgage, but I am seriously considering doing this. I feel pretty confident I can make more than 2.125% on the money over 15 years.
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Old 07-21-2021, 01:05 PM   #147
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I retired almost 3 years ago with a mortgage and now have about 3 1/2 years to go. Since I have the money to support paying it and a low interest rate, I decided to keep it rather than using ready cash to pay it off. For me, I just don't look at having no mortgage as being debt free because I will always have the large tax bill (debt to the government!) to pay. When the mortgage is paid off, I'll still have a substantial monthly payment that will go into a self-funded escrow account for taxes and insurance.



I believe that having the extra ready cash in case of a down market, in case an opportunity comes up or just fun money to spend on something we really want to do is more valuable for us. YMMV but this works for us.



One thing I sometimes wish I had done pre-retirement was take out a HELOC. We have a few home projects that we'd like to do. A HELOC would allow us to fund it over several years rather than withdraw from the tax deferred retirement funds all at once and pushing us into a higher tax bracket. Of course I hadn't found this site back then and didn't know what I didn't know. We'll just stagger the projects a bit so minimize the tax bite.


You should be able to get a heloc, look around. Another option is a pledged asset line (PAL) through your brokerage.
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Old 07-21-2021, 01:10 PM   #148
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For someone who is squeaking by or still in the savings/earning mode without a large emergency fund or accessible saving...ok, sure, stick with the 30.



But for the vast majority here, and for 100% of those for whom paying in full is an option, then a 15 year is a good middle ground if the rates are worth the bother of the refi.



The risk is about zero for this population.


Or you can take the 30 year loan and still pay it off as though it was a 15 year loan with extra principal payments.
That way you have a fall back position if needed.
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Old 07-21-2021, 02:34 PM   #149
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You should be able to get a heloc, look around. Another option is a pledged asset line (PAL) through your brokerage.
Since piccolopat said that money needs to come out of tax deferred account for house projects, I would assume that taxable accounts are small. PAL can only be done against taxable accounts.
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Old 07-21-2021, 03:12 PM   #150
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Yes, it is just a math question for some of us. That has been answered in this thread alone, many times, by myself and others.

Pointing out math facts is being logical, not dismissive. No one here has criticized people who don't have a mortgage, but if the reasons they don't have one are illogical or not supported by math, that has been pointed out.
So all of us with a paid off house should immediately borrow to max LTV against our house, then invest the money (assuming ~3% loan)? Or take out a margin or pledged asset loan against the portfolio for as much as we can invest (and sleep) with because the interest rate is cheap?

Because that's the same logic, and yes by the math it makes sense. But it most definitely is not just a math question. It's whether you want to use arbitrage or not.
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Old 07-21-2021, 03:22 PM   #151
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So under that logic, all of us with a paid off house should immediately borrow to max LTV against our house, then invest the money (assuming <3% loan)?

Because that's the same logic, and yes by the math it makes sense. But it most definitely is not just a math question.
No, it is still a personal decision.

But one should recognize that maximizing a <3% fixed 30 year loan (w/o incurring PMI or other expenses), and investing that long term, has a very, very likely chance of being a good financial move, and very likely to be very good. And only a small chance of it being neutral (based on history). It's never been < 3% 7.75% (see below edit/add) for any 30 year period.

But, it's not just simple math - it involves probability and statistics, and an uncertain future. But that's true of all investing. The arbitrage looks very attractive, but that doesn't mean that someone can't look at those numbers and say - "No Thanks".

But one should not deny the numbers.

edit/add:

For some perspective, here's some info I had from a post I made a while back:

Maybe someone can come up with more recent/better sources, but these show 20 and 30 year rolling average total returns for the stock market:

https://awealthofcommonsense.com/201...arket-returns/

https://www.crestmontresearch.com/do...Yr-Returns.pdf

From what I can see, only three 20 year periods dropped below 5%, and only one barely below 4% (out of 78).

Thirty year returns were all above 7.75%

And the average returns of course, are way higher. Historically, investments have beat a 3.5% mortgage over all 20 year cycles, and even the very worst had double the return over 30 year cycles. It's no guarantee, the future could be worse than the worst of the past, but if you don't take the bets that a clearly in your favor, you are unlikely to get ahead.

-ERD50
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Old 07-21-2021, 03:45 PM   #152
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Yeah, I'm not saying it's a bad call either way and given current rates keeping the mortgage is most likely is a winner. Simply pointing out (with examples) the silliness of saying that arbitrage is simple math.
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Old 07-21-2021, 04:06 PM   #153
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It is simple math. But it does present a lot of work going through the whole refi thing retired. With lots of questions and forms to fill out. The additional cash flow needed has to be planned for.

Like I said, I wouldn't be in any rush to pay off a 3% loan (having one currently), but doing the refi thing on a paid off house just to invest, nah, pass.
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Old 07-21-2021, 04:08 PM   #154
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Yeah, I'm not saying it's a bad call either way and given current rates keeping the mortgage is most likely is a winner. Simply pointing out (with examples) the silliness of saying that arbitrage is simple math.
Well, it still pretty simple math. As I said, allow for a little analysis of history and consideration of probabilities, but it's not complex either.

Just look at those graphs I linked, see that a 3% mortgage looks good based on history, not much more to it, is there?

About as simple as any other financial decision, probably simpler - AA decision, SWR, those involve the same things, and aren't really that complex when you boil it down (though they still get discussed to death!).

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Old 07-21-2021, 05:16 PM   #155
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So all of us with a paid off house should immediately borrow to max LTV against our house, then invest the money (assuming ~3% loan)? Or take out a margin or pledged asset loan against the portfolio for as much as we can invest (and sleep) with because the interest rate is cheap?

Because that's the same logic, and yes by the math it makes sense. But it most definitely is not just a math question. It's whether you want to use arbitrage or not.
Per the snippet you quoted from me, my answer was, "Yes, it is just a math question for some of us." Your house, you can do what you want. The serial refinancers here haven't told other posters here to refinance against their will. We've just pointed out when flawed logic or incorrect math calculations have been used as a reason against having a mortgage.
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Old 07-22-2021, 08:11 PM   #156
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It's whether you want to use arbitrage or not.

Count me in for some of that sweet, sweet margin! Honestly, if it was just me at this point, Id gladly rent in order to have more $ passively invested in the global markets. Alas, DW wants a yard.
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Old 07-23-2021, 07:26 AM   #157
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This is one of those hardy perennials that isnt about math or logic or anything other than personal risk tolerance and personal anxieties and personal needs for security. Im someone that simply always feels safer when the roof over my head is secure and paid for. I know I left money on the table by paying off my cheap mortgage but the feeling of relief and accomplishment was immense, and the continued feeling of security is great. So look within yourself. It is the only place youll find a good answer to this question.
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Old 07-23-2021, 02:07 PM   #158
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Well, it still pretty simple math. As I said, allow for a little analysis of history and consideration of probabilities, but it's not complex either.

Just look at those graphs I linked, see that a 3% mortgage looks good based on history, not much more to it, is there?

About as simple as any other financial decision, probably simpler - AA decision, SWR, those involve the same things, and aren't really that complex when you boil it down (though they still get discussed to death!).

-ERD50
But again, under that logic why stop there? Refi to the hilt, get as big of a margin loan against your portfolio as you can, etc etc etc. Interest rates are cheap, borrow to the hilt and max those gains! The math works!

Yes the math works given history, I already said that. But a mortgage is just arbitrage like anything else, assuming you invest the unspent/loaned money - you have to take on whatever risk you're comfortable with.
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Old 07-23-2021, 02:17 PM   #159
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This is one of those hardy perennials that isnt about math or logic or anything other than personal risk tolerance and personal anxieties and personal needs for security. Im someone that simply always feels safer when the roof over my head is secure and paid for. I know I left money on the table by paying off my cheap mortgage but the feeling of relief and accomplishment was immense, and the continued feeling of security is great. So look within yourself. It is the only place youll find a good answer to this question.
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Old 07-23-2021, 03:06 PM   #160
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The only statements being argued here is having a mortgage is risky, even if you have more than enough savings to pay off the house and don't invest the money in bitcoins because you might get foreclosed on. Most people get foreclosed on because they get sued, can't pay their taxes or are broke, not because the mortgage autopay doesn't go through one month on time. If you can't sleep because you have a mortgage you might forget to pay and lose the house, then you must lose sleep over having property taxes, too, because if you don't pay those you can also lose your house from not paying those.


And the people that have stated they came out way ahead financially during a long bull market by not having a mortgage. Given investment returns and mortgage rates these past ten years, that seem highly improbable.

I haven't seen any posts suggesting everyone should have a mortgage, including those who don't want one.
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