Pay off the mortgage or set it and forget it, what would you do?

[ERD50]

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/2016/05/deconstructing-30-year-stock-market-returns/

https://www.crestmontresearch.com/docs/Stock-20-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

 

[GTFan]

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.

 

[RobbieB]

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.

 

[ERD50]

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!).

-ERD50

 

[daylatedollarshort]

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.

 

[Markola]

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, I’d gladly rent in order to have more $ passively invested in the global markets. Alas, DW wants a yard.

 

[Dd852]

This is one of those hardy perennials that isn’t about math or logic or anything other than personal risk tolerance and personal anxieties and personal needs for security. I’m 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 you’ll find a good answer to this question.

 

[GTFan]

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.

 

[Karloff]

This is one of those hardy perennials that isn’t about math or logic or anything other than personal risk tolerance and personal anxieties and personal needs for security. I’m 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 you’ll find a good answer to this question.

+1

 

[daylatedollarshort]

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.

 

[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.

You answered your own question ("you have to take on whatever risk you're comfortable with").

I do plan to refi to the hilt. And I will be comfortable with that level of risk, because it isn't a huge % of my portfolio.

Margin rates are not so cheap, and are not fixed, so no, I'm not going to do that - not the same thing at all.

You seem to keep wanting to find a hole in this logic (and stretching scenarios, like with margin, to try to fit your view). If after all the discussions on this forum and others on this topic, if there was a hole in it, it would be obvious by now.

Yes, it's not guaranteed, that is understood, but it's not a flaw of the logic. It is, as you say, a risk I'm comfortable with. Historically (for 20 and 30 year periods), it has always paid off at these mortgage rates. Let me stress that - always. On average quite handsomely, and sometimes very significantly. Even the worst 20 year period provided a nice boost. Clearly, the future can be different from the past, there's the risk.

If you aren't comfortable with those odds, don't take them, it's fine with me. But I think it's a stretch to try to paint them as something scary for someone going in with their eyes open and keeping the mortgage to a reasonable % of total portfolio.

-ERD50

 

[Out-to-Lunch]

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.

Yes, indeed! I have even thought of doing this. Of course, the mortgage interest is no longer tax-deductible. That probably matters little, post, TCJA, but should be borne in mind.

 

[rayvt]

Margin rates are not so cheap, and are not fixed, so no, I'm not going to do that - not the same thing at all.

And primarily, margin is callable at the whim of the lender. A mortgage is fixed rate, the required monthly payment does not change, and it cannot be called.

Historically (for 20 and 30 year periods), it has always paid off at these mortgage rates. Let me stress that - always. On average quite handsomely, and sometimes very significantly. Even the worst 20 year period provided a nice boost.

The average and median returns for all rolling 20 year periods for the S&P 500, 1950 to 2017, was 10.6%. The worst 20 year period was 6.3%. That period began 7/1959.

The historical odds are way in your favor for carrying a mortgage.

 

[free2020]

You answered your own question ("you have to take on whatever risk you're comfortable with").

I do plan to refi to the hilt. And I will be comfortable with that level of risk, because it isn't a huge % of my portfolio.

Margin rates are not so cheap, and are not fixed, so no, I'm not going to do that - not the same thing at all.

You seem to keep wanting to find a hole in this logic (and stretching scenarios, like with margin, to try to fit your view). If after all the discussions on this forum and others on this topic, if there was a hole in it, it would be obvious by now.

Yes, it's not guaranteed, that is understood, but it's not a flaw of the logic. It is, as you say, a risk I'm comfortable with. Historically (for 20 and 30 year periods), it has always paid off at these mortgage rates. Let me stress that - always. On average quite handsomely, and sometimes very significantly. Even the worst 20 year period provided a nice boost. Clearly, the future can be different from the past, there's the risk.

If you aren't comfortable with those odds, don't take them, it's fine with me. But I think it's a stretch to try to paint them as something scary for someone going in with their eyes open and keeping the mortgage to a reasonable % of total portfolio.

-ERD50

You're absolutely correct, the most rational thing to do, especially at today's mortgage rates, is to keep the mortgage intact and watch it decline to a lower proportion of net worth. Especially starting at a low proportion already! Yes, there is a chance element, but I'm with you, I will take it! I intend to do the same as you.When we step out of the house, we're taking chances anyway. Everyday.

But most here have used "what you're comfortable with" to justify being mortgage free. Rationality and emotionality are irreconcilable. No point trying to argue or convince.

I have no issues remaining a partial owner of the roof over our head until our passing. With gratitude to the lender to allow this! And the largesse from the fed promoting home ownership

 

[corn18]

You answered your own question ("you have to take on whatever risk you're comfortable with").

I do plan to refi to the hilt. And I will be comfortable with that level of risk, because it isn't a huge % of my portfolio.

Margin rates are not so cheap, and are not fixed, so no, I'm not going to do that - not the same thing at all.

You seem to keep wanting to find a hole in this logic (and stretching scenarios, like with margin, to try to fit your view). If after all the discussions on this forum and others on this topic, if there was a hole in it, it would be obvious by now.

Yes, it's not guaranteed, that is understood, but it's not a flaw of the logic. It is, as you say, a risk I'm comfortable with. Historically (for 20 and 30 year periods), it has always paid off at these mortgage rates. Let me stress that - always. On average quite handsomely, and sometimes very significantly. Even the worst 20 year period provided a nice boost. Clearly, the future can be different from the past, there's the risk.

If you aren't comfortable with those odds, don't take them, it's fine with me. But I think it's a stretch to try to paint them as something scary for someone going in with their eyes open and keeping the mortgage to a reasonable % of total portfolio.

-ERD50

This is the graph that motivates me to keep my 30 year 2.25% fixed rate mortgage. I think it is very low risk that the nominal return on my 55/45 portfolio will drop below 2.25% average over the next 30 years. Heck, the 10 year break even rate is 2.35%, so I am actually making money on my mortgage since the NPV is less than the balance due. Very low risk, IMHO.

 

[bobandsherry]

One reason you MIGHT pay off your mortgage is to avoid the ACA subsidy cliff. By paying off your mortgage you lower you cash flow need. Need two years removes the cliff, so could be good time to plan. But who knows what the rules for subsidy repayment may be after that.