YAPOMD (Yet another pay off mortgage debate...)

[cute fuzzy bunny]

Dancing Badger Badger Badger.com! The Original!

[dizzy]

Quote:

Originally Posted by Texas Proud I calling trolll here.. (first time I read this thread)...... Dizzy has seven post... all on this thread.... His first post said he wanted a 27 year annuity to match his mortgage... then later he changed what he said when someone pointed out they were mirror images and it was stupid to do it... And then when someone else said it was an interest rate arb with no upside if you die and only downside... he changed it again.... To answer the first question... there is NO good reason to buy a 27 year annuity that matches the payments exactly on a mortgage unless the cost of that annuity is LESS than the payoff of the mortgage AND it is guaranteed for the full 27 years even if you die... anything else is just trolling...

Sorry -- I'm really not trying to be a troll. Apologies if my communication has been less than clear. But here goes an 8th post to try to explain it again...

I am not and never have been looking for an annuity to be the exact mirror of my mortgage. Even I agree that would be stupid. I am considering is an annuity which expires at the MIN(27 yrs, death) and exactly covers the mortgage payment. Clearly with no friction and exactly the same interest rates, the cost of this annuity should be less than cost of the mortgage payoff since in the case of death in less than 27 years, the insurer would receive a windfall. Make sense?

The debate in my mind is about the magnitude of the effect, not its underlying soundness.

dizzy

[dizzy]

I got some time to do a simple calculation with the mortality tables at

Actuarial Life Table

Basically, I modeled a series of payments to a population of 50-year-old men for 30 years. According to the table, about half of them will die sometime during the period. Each year I would only pay the ones still living. I took this series of outlays to NPV with an arbitrary interest rate (I picked 5%). Then I also took the PV of the constant payment over 30 years assuming everyone lived. It turns out the "mortality discount" in this case is about 13%.

So assuming no cost of money difference between the mortgage and the annuity, I could buy my mortgage payments for life and still have 13% of the payoff still in my portfolio.

I think this effect is interesting enough that I might consider keeping my mortgage for a few years and annuitize later if interest rates rise, (or pay it off anyway if we get a few bullish years of growth).


dizzy