Why can I not stop thinking about paying off my mortgage?!?!

[RunningBum]

I wonder how many people that lost their homes in 07 -08 wished they would have paid off their mortgage.

I'm guessing most people that lost their homes then did not have the resources to pay off their mortgage.

Those that could have paid it off and didn't but lost their homes may have done that as a strategy to walk away from a mortgage balance higher than the home was worth then.

 

[jeffd]

I'm guessing most people that lost their homes then did not have the resources to pay off their mortgage.

Those that could have paid it off and didn't but lost their homes may have done that as a strategy to walk away from a mortgage balance higher than the home was worth then.

No argument with this, I think a lot of them just plain bought more house than
they needed. Much like what has been happening for the last couple of years,paying 10- 50,000 over asking price. I wonder if they will be underwater
in a year or two.

I don't have any answers and I am in no-way qualified to add much to this. I
have lived in this house for 37 years, it's small at 1000 sq.feet but we raised 3 kids and now it's just me here.

And I get where the otherside is coming from. I am just a product of my upbrining that as long as you are in debt you really are not free and my belief is there really is no good debt. A house is just a house to me and not something I want to gamble with, but as I said before this is only my opinion
and I know what that's worth

 

[daylatedollarshort]

I find it interesting that many here don't want to gamble with getting a low interest mortgage and investing the difference, yet will put half or more of their investments into the stock market. With the mortgage one can always pay it off or refinance if rates drop, so there is very little risk. With the stock market the possibility of a 40% drop or more is always a possibility.

 

[mathjak107]

What is interesting is most don’t realize that when you have a choice of mortgage or no mortgage that in effect you are borrowing money to invest with .

Most of us here would say if they were going to borrow money to invest they want an extra risk premium over and above what they typically would expect not using borrowed money .

Don’t forget , when spending down in retirement you are adding thousands of dollars going out in interest in potentially a down year for your investments .

Like. Now , where we have a down year so far , we have soaring inflation causing bigger withdrawals and on top of that thousands in interest potentially going out .

That is a triple whammy .

So just getting more then you are paying in interest may not be worth it .

You are adding a lot more risk so you should expect more than you normally would want .

The problem is that many of us are no longer aggressive enough in our investing to get that risk premium with a balanced portfolio.

So you may want to give some thought to this risk premium stuff when deciding if simply getting a percent or two over what you are paying is enough to take on more sequence risk .

For me I know it is no longer worth it borrowing. My portfolio has become to conservative to make borrowing to invest worth doing .

Kitces looked at this very issue

https://www.kitces.com/blog/why-keeping-a-mortgage-and-a-portfolio-may-not-be-worth-the-risk/

 

[EastWest Gal]

I could pay cash for this house. I sold a paid off house to buy this house. I know how it feels to have a paid off mortgage.

That explains the emotion of wanting to pay off the mortgage. You simply aren’t accustomed to having a mortgage. Just put in extra principal payments with your monthly mortgage payment. In times of inflation, a fixed 30 year mortgage is a huge hedge against inflation. And you are only one year into that mortgage.

We bought our present home in 1998. Five years in we refinanced to a 15 year mortgage, landscaped our back yard, put in a nice pool, hot tub, and a large patio area. Made extra payments. 11 years later we had only one year of payments left. I took out money from inherited treasuries and paid it off.

Another factor is the change in tax law in 2018. With the standard deduction doubled, and limits on mortgage interest deduction, the advantage of having a mortgage is somewhat reduced.

 

[Rianne]

I can't find anything that earns me 3% let alone 5% today. As far as predicting a timeline, the market's sudden downturn leaving our portfolio at a -12% begs the question: is even a 2%-3% mortgage worth the risk? Yes, we all believe in the overall long-term investing mantra but we were 54 and decided to pay cash for our home, even though the interest rates were low.

Some of us might be thinking "do I sell those long-term equity funds?" Owning our home lets us remain in the market without too much concern. Give me all the calculations and charts, I am 100% happy with our decision.

Our home value has increased 7% and that's good enough for me. Family history and debt brought us to the conclusion, we hate debt in any shape or form.

 

[daylatedollarshort]

Don’t forget , when spending down in retirement you are adding thousands of dollars going out in interest in potentially a down year for your investments .

Like. Now , where we have a down year so far , we have soaring inflation causing bigger withdrawals and on top of that thousands in interest potentially going out .

That is a triple whammy .

So just getting more then you are paying in interest may not be worth it .

In my example earlier in this thread, the mortgage money was invested in TIPS, not stocks, so only as much risk as Treasuries. Our portfolio is not having a down year at all. Our withdrawal rate is still well under 1%. Our mortgage under 3%, and we have the equivalent in TIPS with real yields making more than inflation or I Bonds.

Fixed income rates are going up, so those of us who refinanced or took out new mortgages when mortgage rates were at historic lows are going to come out ahead. It is just math. Low mortgage rate / higher fixed income rates. Save and invest the difference. If rates drop one can always refinance or pay off the loan.

 

[corn18]

I can't find anything that earns me 3% let alone 5% today. As far as predicting a timeline, the market's sudden downturn leaving our portfolio at a -12% begs the question: is even a 2%-3% mortgage worth the risk? Yes, we all believe in the overall long-term investing mantra but we were 54 and decided to pay cash for our home, even though the interest rates were low.

Some of us might be thinking "do I sell those long-term equity funds?" Owning our home lets us remain in the market without too much concern. Give me all the calculations and charts, I am 100% happy with our decision.

Our home value has increased 7% and that's good enough for me. Family history and debt brought us to the conclusion, we hate debt in any shape or form.

Why does the payoff need to be in equities? My 3 year CD ladder is earning 2.58%. There is enough in the CD ladder to payoff the mortgage.

And don't forget about inflation. 8% inflation with a 2.25% fixed rate mortgage is a risk reducer.

 

[daylatedollarshort]

I can't find anything that earns me 3% let alone 5% today.

TIPS and I bonds. They adjust with inflation. Older ones may also have real yields up to 3% over inflation.

 

[jeffd]

There are a lot of things I don't understand about finances, one of them is when people say that a low interest mortgage is a hedge against inflation.

If we are both at the gas station filling our cars up and you have a mortgage
and I don't how are you better off and doing better against inflation than me?

It's just something I wonder about

 

[daylatedollarshort]

There are a lot of things I don't understand about finances, one of them is when people say that a low interest mortgage is a hedge against inflation.

If we are both at the gas station filling our cars up and you have a mortgage
and I don't how are you better off and doing better against inflation than me?

It's just something I wonder about

When inflation is high, usually interest rates go up. Your mortgage does not. On a $200K loan, if you are paying 2.5% in fixed interest and earning 5% on the money you borrowed, you have an extra $5K a year to invest ($10k interest earned less $5K interest expense). Using a compound interest calculator - If you save $5,000.00 per year your savings may grow to $348,803.96 after 30 years. This includes a starting balance of $0.00 and a 5% annual rate of return.

 

[tulak]

Why does the payoff need to be in equities? My 3 year CD ladder is earning 2.58%. There is enough in the CD ladder to payoff the mortgage.

And don't forget about inflation. 8% inflation with a 2.25% fixed rate mortgage is a risk reducer.

So for a 500k mortgage, you’ll get $1650 extra for the .33% difference. Not a small amount and odds are you could get a better yield by laddering CDs/Treasuries with longer durations.

In my case, I get a tax benefit since I’m able to itemize due to mortgage interest. This saves me about 2k/year in taxes.

 

[tulak]

There are a lot of things I don't understand about finances, one of them is when people say that a low interest mortgage is a hedge against inflation.



If we are both at the gas station filling our cars up and you have a mortgage

and I don't how are you better off and doing better against inflation than me?



It's just something I wonder about

Two ways it helps:

1. The mortgage payment is fixed, requiring less real dollars to service over time due to inflation.

2. My portfolio balance is higher because I have a mortgage and you don’t.

I feel that a lot of people neglect #2 in these conversations. You can have a 1 million dollars invested with no mortgage or 1.5 million with a 500k mortgage. Both are equal. Which you prefer depends on your risk tolerance and financial psychology.

There is no right answer, but looking at historical data, the 1.5 million with a mortgage leaves you with more money. But as has been discussed here many times, it’s not only about the money.

 

[dtbach]

We are building a new house and I have 250K at 2.68% 15 year. Once we sell the house I may have enough to only need 150K of the loan but at that percent I think I'll only apply enough money to reach the 250K and use the remainder to invest.


When I take SS at 70 in a few months that will be enough to pay mortgage and property taxes so not so difficult.

 

[Bigdawg]

Two ways it helps:

1. The mortgage payment is fixed, requiring less real dollars to service over time due to inflation.

2. My portfolio balance is higher because I have a mortgage and you don’t.

I feel that a lot of people neglect #2 in these conversations. You can have a 1 million dollars invested with no mortgage or 1.5 million with a 500k mortgage. Both are equal. Which you prefer depends on your risk tolerance and financial psychology.

There is no right answer, but looking at historical data, the 1.5 million with a mortgage leaves you with more money.

^This is the clearest way to look at it as far as I'm concerned. I have 500K left (house worth 900K), 2 years into a 30 year at 2.87%. I only have 800K invested. If I take 500K to pay off the mortgage I will only have 300K invested. Not comfortable with that. With 2 retired military pensions, VA Disability, DW still works, SSX2 on the way in 10-15 years and a FERS pension coming for DW in 12 years (all pensions COLA'd) we easily make the decision to keep the low rate mortgage. Monthly, I usually throw an extra 100-1000 on the principal. After 25 months I have paid down 35 months of the mortgage.

I have had paid off mortgages on a townhouse and a house my sister lived in. Made zero difference to me. Money is just money. Every day I take a breath, I have costs. Taxes, insurance, groceries, etc... Obviously not having a mortgage would be nice but it wouldn't change the 5-6K/yr I pay in property taxes, car insurance, registrations, groceries, travel, etc... Current mortgage represents less than 40% of current monthly pension income. Each year when COLA'd pensions increase, mortgage stays the same. Net gain.

 

[corn18]

There are a lot of things I don't understand about finances, one of them is when people say that a low interest mortgage is a hedge against inflation.

If we are both at the gas station filling our cars up and you have a mortgage
and I don't how are you better off and doing better against inflation than me?

It's just something I wonder about

You have to look at the Net Present Value (NPV) of the mortgage discounted for inflation. A dollar today is not worth a dollar in 2050. Since the mortgage is not indexed to inflation, the payment is a lot less in 2050 in terms of today's dollars.

Let's look at an example:

$500,000 2.25% 30 year fixed rate mortgae

P&I = $1920.10
Total payments $691,236

Or you could pay $500,000 cash, saving you $191,236 in interest.

But wait, that same $1,920 in 2052 is a lot less in 2022 dollars.

Assume 8% inflation

The NPV of your 30 mortgage is $280,855. That is, the total amount you will pay for that mortgage in 2022 dollars is $280,855. So you just paid $280,855 for a $500,000 loan. Sure, your payment that actually comes out of your bank account doesn't change, but the value of those dollars is significantly less.

I use the current 10 year break even inflation rate of 2.74%.

NPV of that mortgage is $481,200. Again, I am paying $481,200 for a $500,000 loan.

In essence, you could have taken the cash you would have used to pay off the mortgage and bought a Ferrari. You still make money on a mortgage which has a rate lower than inflation.

Let me ask you this: Do you inflate your spending for other items in your budget? Like maybe the cost of food, clothing, taxes, movies, gas, etc...? This is the same thing except your mortgage can never go up. Inflation can be 50% and your mortgage payment stays the same. The higher the inflation, the more you save on your mortgage.

 

[mathjak107]

The flip side is though ,is a mortgage is actually neutral ….

It is what you buy with that mortgage that determines if that mortgage is a hedge or not .

Remember when you have choices of borrowing with the mortgage and leaving your money invested or investing the money not being used to pay off the mortgage,you are borrowing to invest .

If I bought all bonds with that mortgage money then that mortgage is no hedge.

This is something kitces looked at

https://www.kitces.com/blog/why-a-m...t-can-provide-access-to-investments-that-are/

 

[CaliKid]

Just a rant because I really should not pay off my mortgage. But I so want to. ARRRRRGGGGHHHHH!!!!!

56, retired, 30 year 2.25% fixed rate mortgage with 29 years left. $492k balance. Would take all my taxable account to pay it off, so would have to do it over 3-5 years so I can get it all out @ 0% LTCG.

My model says it would be the dumbest thing ever.

I agree. Dumbest thing ever... and I am generally one who is a proponent in paying off mortgages. No chance here. Zero chance.

 

[corn18]

The flip side is though ,is a mortgage is actually neutral ….

It is what you buy with that mortgage that determines if that mortgage is a hedge or not .

Remember when you have choices of borrowing with the mortgage and leaving your money invested or investing the money not being used to pay off the mortgage,you are borrowing to invest .

If I bought all bonds with that mortgage money then that mortgage is no hedge

The inflation hedge is independent of what you do with any money you could have used to pay off the mortgage, or the car, or the motorhome. If inflation is higher than the loan rate, you come out ahead regardless of the value of the underlying asset.

 

[mathjak107]

A mortgage is neutral , not a hedge at all .


according to kitces

EXECUTIVE SUMMARY

Having a mortgage is often framed as a way to hedge against inflation. As the conventional wisdom goes, with a mortgage your monthly payment is locked in (assuming it’s not an Adjustable-Rate Mortgage [ARM]), even if inflation goes up and interest rates rise. In fact, rising inflation would just devalue the mortgage in nominal (future) dollars.

Yet the reality is that ultimately, a mortgage may be paid off with inflation-adjusted wages, free up funds to be invested into inflation-hedging vehicles (from TIPS to equities), used to create a reserve for investing in bonds at higher rates in the future (a form of call option on interest rates), or be deployed to purchase a residence that provides a hedge against rising rents. In all of these scenarios, though, it is actually how the mortgage-related funds are deployed, or the income sources used to fund it, that are the actual inflation hedges… not the mortgage itself!

Ultimately, this doesn’t mean that a mortgage can’t indirect lead to beneficial outcomes if inflation (and interest rates) rise. But in the end, the benefits will not actually come from the use of the mortgage itself as an inflation hedge, but the other inflation-adjusted assets and income an individual has to support the mortgage instead! Of course, the caveat is that the use of leverage to hedge inflation can cut both ways, and magnify the unfavorable outcomes in non-inflation scenarios as well!

https://www.kitces.com/blog/why-a-m...t-can-provide-access-to-investments-that-are/

 

[corn18]

A mortgage is neutral , not a hedge at all .


according to kitces

EXECUTIVE SUMMARY

Having a mortgage is often framed as a way to hedge against inflation. As the conventional wisdom goes, with a mortgage your monthly payment is locked in (assuming it’s not an Adjustable-Rate Mortgage [ARM]), even if inflation goes up and interest rates rise. In fact, rising inflation would just devalue the mortgage in nominal (future) dollars.

Yet the reality is that ultimately, a mortgage may be paid off with inflation-adjusted wages, free up funds to be invested into inflation-hedging vehicles (from TIPS to equities), used to create a reserve for investing in bonds at higher rates in the future (a form of call option on interest rates), or be deployed to purchase a residence that provides a hedge against rising rents. In all of these scenarios, though, it is actually how the mortgage-related funds are deployed, or the income sources used to fund it, that are the actual inflation hedges… not the mortgage itself!

Ultimately, this doesn’t mean that a mortgage can’t indirect lead to beneficial outcomes if inflation (and interest rates) rise. But in the end, the benefits will not actually come from the use of the mortgage itself as an inflation hedge, but the other inflation-adjusted assets and income an individual has to support the mortgage instead! Of course, the caveat is that the use of leverage to hedge inflation can cut both ways, and magnify the unfavorable outcomes in non-inflation scenarios as well!

https://www.kitces.com/blog/why-a-m...t-can-provide-access-to-investments-that-are/

That only covers certain cases, although it might be most cases in the non ER world.

If you are paying off your mortgage with income and that income is not keeping up with inflation (like we have now) then the mortgage is neutral at best, probably less than neutral.

Same if you need the money you would have used to pay cash to pay off the mortgage. If that money is not earning a risk adjusted return equal to the mortgage rate, then the mortgage is not neutral, even with inflation.

But if you are retired and have enough cash to pay off a mortgage and don't need that cash to fund the mortgage payments, then the mortgage is a great inflation hedge. And if you have a COLA military pension and SS, then it is a fantastic hedge because your income is keeping up with inflation.

 

[flyingaway]

What if the OP sold his/her stocks in January and paid off the mortgage? Would that be a smart move?

What if the stocks drop 50% from now?

 

[mathjak107]

That only covers certain cases, although it might be most cases in the non ER world.

If you are paying off your mortgage with income and that income is not keeping up with inflation (like we have now) then the mortgage is neutral at best, probably less than neutral.

Same if you need the money you would have used to pay cash to pay off the mortgage. If that money is not earning a risk adjusted return equal to the mortgage rate, then the mortgage is not neutral, even with inflation.

But if you are retired and have enough cash to pay off a mortgage and don't need that cash to fund the mortgage payments, then the mortgage is a great inflation hedge. And if you have a COLA military pension and SS, then it is a fantastic hedge because your income is keeping up with inflation.

I think anytime you have a choice to pay off a mortgage or pay cash the same situation applies .

You are borrowing to do something with that money or your money .


What you do with that money ultimately determines that moneys use and whether a hedge or not.

Let’s suppose you threw it in a cd and did nothing with it .

9% inflation and 3% interest on the mortgage while you get 3% on a cd says it’s no inflation hedge

 

[daylatedollarshort]

A mortgage is neutral , not a hedge at all .


according to kitces

EXECUTIVE SUMMARY

Having a mortgage is often framed as a way to hedge against inflation. As the conventional wisdom goes, with a mortgage your monthly payment is locked in (assuming it’s not an Adjustable-Rate Mortgage [ARM]), even if inflation goes up and interest rates rise. In fact, rising inflation would just devalue the mortgage in nominal (future) dollars.

Yet the reality is that ultimately, a mortgage may be paid off with inflation-adjusted wages, free up funds to be invested into inflation-hedging vehicles (from TIPS to equities), used to create a reserve for investing in bonds at higher rates in the future (a form of call option on interest rates), or be deployed to purchase a residence that provides a hedge against rising rents. In all of these scenarios, though, it is actually how the mortgage-related funds are deployed, or the income sources used to fund it, that are the actual inflation hedges… not the mortgage itself!

Ultimately, this doesn’t mean that a mortgage can’t indirect lead to beneficial outcomes if inflation (and interest rates) rise. But in the end, the benefits will not actually come from the use of the mortgage itself as an inflation hedge, but the other inflation-adjusted assets and income an individual has to support the mortgage instead! Of course, the caveat is that the use of leverage to hedge inflation can cut both ways, and magnify the unfavorable outcomes in non-inflation scenarios as well!

https://www.kitces.com/blog/why-a-m...t-can-provide-access-to-investments-that-are/

Or one can view it more simply as -

"As inflation rises, the cost of everything goes up, including real estate. However, if you can lock in a low-interest, fixed-rate mortgage, then the cost of your home—an appreciating asset—will stay the same as the value of your property rises." https://www.forbes.com/advisor/mortgages/homebuying-can-hedge-against-inflation/

 

[mathjak107]

Or one can view it more simply as -

"As inflation rises, the cost of everything goes up, including real estate. However, if you can lock in a low-interest, fixed-rate mortgage, then the cost of your home—an appreciating asset—will stay the same as the value of your property rises." https://www.forbes.com/advisor/mortgages/homebuying-can-hedge-against-inflation/

Except mortgage or not the real estate sees the same appreciation..