Pay off house or dump it in the market?

[ERD50]

I think that the problem with this line of thinking is sample size and survivorship bias. We all look at the stock market as a very good and relatively safe long-term bet because we've got ~ 100 years of data from one of the most successful countries in the history of the world. But there is no assurance that the future will be like the past? .....

Well, like I said, if you don't like those odds, don't take them.

But most people would say that's about as sure a bet as you are going to find. But there is nothing wrong with deciding you just don't want to play, it is a personal decision.

From an earlier post, with more specific data:

http://www.early-retirement.org/forums/f28/pay-off-house-95249.html#post2158658

... these show 20 and 30 year rolling average total returns for the stock market:

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

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

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%.

So if you can get a mortgage below those rates (pretty easy these days), history is way on your side.

Some people may still not want the slight risk that they could under-perform their mortgage. That's fine, their decision. Just don't try to sell it to me as any sort of great financial decision, or that almost everyone should pay off their mortgage.

-ERD50

 

[Hamlet]

Well, like I said, if you don't like those odds, don't take them.

But most people would say that's about as sure a bet as you are going to find. But there is nothing wrong with deciding you just don't want to play, it is a personal decision.

From an earlier post, with more specific data:

http://www.early-retirement.org/forums/f28/pay-off-house-95249.html#post2158658

-ERD50

What if we include Japan's historical returns in the data set? It then becomes a lot less sure. What makes everyone assume that the US's future returns aren't as likely to look like Japan's past as the US's?

The idea that the stock market is nearly a sure bet because it has been in the past for one specific country over one specific century is not accounting correctly for the real risks going forward, IMO.

Most people in the US seem to think long term investment returns are some sort of birthright. If you start looking globally, it looks a whole lot less sure.

Don't get me wrong. I think it is a very good bet that the US stock market will give decent returns over the next 30 years, but it is nowhere near the lock people seem to think it is.

 

[ERD50]

What if we include Japan's historical returns in the data set? It then becomes a lot less sure. ... .

OK. That doesn't change anything I said, if you don't like those odds, don't play. I promise I won't force you.

... What makes everyone assume that the US's future returns aren't as likely to look like Japan's past as the US's?

The idea that the stock market is nearly a sure bet because it has been in the past for one specific country over one specific century is not accounting correctly for the real risks going forward, IMO.

Most people in the US seem to think long term investment returns are some sort of birthright. If you start looking globally, it looks a whole lot less sure.

Don't get me wrong. I think it is a very good bet that the US stock market will give decent returns over the next 30 years, but it is nowhere near the lock people seem to think it is.

All I've got is history, and even when I apply some "worse than the past" numbers, and assume they hit during the life of my mortgage, it still is likely that it won't hurt very much at all, versus the very high chance of a gain. I still like the odds, and I really like the money I've earned (~ $60,000) since my 2003 Refi.

How are you handling this for your portfolio? What AA do you use? We could have runaway inflation, we could have a bond market crash. At some point you just need to have some faith, and make a decision. We don't need to make the same decision, there is room for different takes on it. But at some point, all this fear of what-ifs will have you working until the day you die.

-ERD50

 

[Hamlet]

OK. That doesn't change anything I said, if you don't like those odds, don't play. I promise I won't force you.



All I've got is history, and even when I apply some "worse than the past" numbers, and assume they hit during the life of my mortgage, it still is likely that it won't hurt very much at all, versus the very high chance of a gain. I still like the odds, and I really like the money I've earned (~ $60,000) since my 2003 Refi.

How are you handling this for your portfolio? What AA do you use? We could have runaway inflation, we could have a bond market crash. At some point you just need to have some faith, and make a decision. We don't need to make the same decision, there is room for different takes on it. But at some point, all this fear of what-ifs will have you working until the day you die.

-ERD50

I'm 70 stocks/30 stable value, and I have a 250k 30-year mortgage on my primary residence at 3.5%

It's not that I am particularly bearish on the stock market's long term prospects in general. I just think that things are riskier long-term than just looking at historical returns of specifically US stocks would indicate. We are essentially cherry-picking one of the best 100 year runs of any one country in the history of investing.

Saying that the market has never had a 30-year downturn is kind of like the logic that lead us into the financial crisis-- "There's never been a nation-wide decline in housing prices, so we can leverage up." Our historical sample size is not really very big. Plan for results that are potentially outside of the historical sample if you are using borrowed money, because leverage is about the most dangerous financial tool there is.

I would recommend that anyone choosing to borrow money to invest in the stock market look at the 30-year performance of the Nikkei 225 before doing so. That is 30 years of negative performance from a wealthy country that really hasn't had terrible economic results. They haven't collapsed or had their currency inflate away to nothing. They've just kinda stagnated.

 

[ERD50]

....
Saying that the market has never had a 30-year downturn is kind of like the logic that lead us into the financial crisis-- ...

I would recommend that anyone choosing to borrow money to invest in the stock market look at the 30-year performance of the Nikkei 225 before doing so. That is 30 years of negative performance from a wealthy country that really hasn't had terrible economic results. They haven't collapsed or had their currency inflate away to nothing. They've just kinda stagnated.

I'm not disagreeing with you, but I'm also not saying that since the 30 year history has been good, that it could never be bad. I never say never.

And it's telling that the worst scenario you have is stagnation for 30 years. Sure, the investment didn't help pay the mortgage. But if that's the worst we can quote (and yes, it could be worse than that), I feel pretty good about my chances.

Also, my mortgage is not a high % of my portfolio, so the worst case is not a killer, and the 'good case' is good, but also not exactly life changing. But again, the odds make it attractive for me.

-ERD50

 

[Hamlet]

I'm not disagreeing with you, but I'm also not saying that since the 30 year history has been good, that it could never be bad. I never say never.

And it's telling that the worst scenario you have is stagnation for 30 years. Sure, the investment didn't help pay the mortgage. But if that's the worst we can quote (and yes, it could be worse than that), I feel pretty good about my chances.

Also, my mortgage is not a high % of my portfolio, so the worst case is not a killer, and the 'good case' is good, but also not exactly life changing. But again, the odds make it attractive for me.

-ERD50

Yes, the risk is more modest if your mortgage is not large. I discussed that, and for me I was happier paying down the mortgage when it was 400k. I'm less concerned with it at 250k. That number is going to be different for everyone.

Japan is not really the worst-case scenario. That's just a bad scenario that may be likely enough to prepare for (say a 5% chance)

The worst-case scenario is my investments going to near zero for various calamitous reasons that really aren't terribly unlikely when you are talking about 30-100 year time frames. Revolutions occur, currencies collapse, and wealth gets destroyed or seized often enough historically that someone reading the history books should probably understand that there really are no 99% "safe" withdrawal rates over those lengths of time. On the plus side though, when those events occur, most people have bigger concerns than their investments

 

[HI Bill]

Eliminating debt has a great psychological benefit for many. You no longer have to keep your job to pay your mortgage, car loan, or credit card debt. This, for me, made work more tolerable. After I paid off my car loan, I felt more free. After I sold my condo and was 100% debt-free, my attitude towards work shifted. It became more tolerable, as I did not HAVE to be here. It became a choice, where working longer gets me more travel in retirement. I know this doesn't altogether make sense, but people are emotional, sometimes irrational beings. We are not Data from Star Trek!

 

[Dean56]

Eliminating debt has a great psychological benefit for many. You no longer have to keep your job to pay your mortgage, car loan, or credit card debt. This, for me, made work more tolerable. It became a choice, where working longer gets me more travel in retirement.

Bill, I agree with your thinking 100%. I am in the same situation.......paid off house, no debt and still w**k for MegaCorp. Investing & saving more for retirement.

It's nice knowing you can just walk away without even thinking about it.

OP- Good luck with what ever option you choose.

 

[Rianne]

Eliminating debt has a great psychological benefit for many. You no longer have to keep your job to pay your mortgage, car loan, or credit card debt. This, for me, made work more tolerable. After I paid off my car loan, I felt more free. After I sold my condo and was 100% debt-free, my attitude towards work shifted. It became more tolerable, as I did not HAVE to be here. It became a choice, where working longer gets me more travel in retirement. I know this doesn't altogether make sense, but people are emotional, sometimes irrational beings. We are not Data from Star Trek!

We paid cash for our house ($210K) in 2012, partly because of what happened in 2008-9, partly because we hate debt (the state of owing money). I don't look at debt as "good" or "bad" it is what it is, debt. The calculations mean nothing to us. Unless we bought a house with "0" interest, that might be a different story. It's all a matter of opinion.

 

[Cassius King]

Eliminating debt has a great psychological benefit for many. You no longer have to keep your job to pay your mortgage, car loan, or credit card debt. This, for me, made work more tolerable. After I paid off my car loan, I felt more free. After I sold my condo and was 100% debt-free, my attitude towards work shifted. It became more tolerable, as I did not HAVE to be here. It became a choice, where working longer gets me more travel in retirement. I know this doesn't altogether make sense, but people are emotional, sometimes irrational beings. We are not Data from Star Trek!

I wanted to highlight that piece because that is the crux of the discussion here. If you hadn't paid off your house, that money would be invested somewhere. It doesn't disappear.
So in all truth, you're net worth is probably very close to the same as it was if you hadn't paid off the house. The money is just in a different bucket, house vs investment. The psychological piece is the comfort of knowing you have no debt and feeling good about it. When in fact, you are no richer or poorer either way, having a mortgage or not.

 

[pb4uski]

I wanted to highlight that piece because that is the crux of the discussion here. If you hadn't paid off your house, that money would be invested somewhere. It doesn't disappear.
So in all truth, you're net worth is probably very close to the same as it was if you hadn't paid off the house. The money is just in a different bucket, house vs investment. The psychological piece is the comfort of knowing you have no debt and feeling good about it. When in fact, you are no richer or poorer either way, having a mortgage or not.

CK,

I don't agree with the bolded part. I'll use my mortgage as an example.

I retired in January 2012. At the same time, I refinanced our 4.375% $215k 15-year morgage to a 3.375% 15-year mortgage with monthly payments of $1,524. I had more than $215k in taxable investments and could have chose to pay off the mortgage. I also had cash flow to cover our spending and the mortgage payments.

So isolating the mortgage and a matching amount of investments, in January 2012 I had $215k of investments and a $215k mortgage... so a NW of $0.

Fast forward 7 years to December 2018. That $215k of investments would be worth $376k and my mortgage has declined to ~$129k so a NW of $247k.

https://www.portfoliovisualizer.com...location1_1=60&symbol2=VBMFX&allocation2_1=40

OTOH, had I paid off the mortgage, I would have has $1,524/month to invest and that would have accumulated to be $158k in December 2018.

https://www.portfoliovisualizer.com...location1_1=60&symbol2=VBMFX&allocation2_1=40

So my NW is $89k higher as a result of NOT paying off the mortgage. Another way to calculate the benefit is to start with ~$215k of investments and have the portfolio make the mortgage payments and then subtract the $129k mortgage balance from the $218k residual balance.... $89k.

https://www.portfoliovisualizer.com...location1_1=60&symbol2=VBMFX&allocation2_1=40

Now, I'll be the first to admit that investment results for the last 7 years have been favorable. The historical total return for a 60/40 portfolio is 8.8% for 1924-2017 per Vanguard... more than 5% greater than my mortgage interest rate. The average mortgage balance for the 7 years has been ~$172k... and $172k * 5% * 7 years is $60k so I have done better than I could have reasonable expected.... but still, even $60k isn't chump change.

I'll also concede that I am taking some risk that the investments return less than 3.375% or have bad sequence of returns... but I accept that risk with my eyes wide open because I think the likely benefits exceed the risk.

 

[Oakster]

So basically you got lucky then? Thanks

How is that luck? Living below ones means, paying off debt early (house) and consistently and steadily investing in mutual funds is the same plan I am using. My house will be paid off in less than 2 months. I am down to my last $15k. I want to eliminate and risk and have the free cash to invest, buy rental property or possibly a second home.

Simply put, the unexpected can happen and people have lost their homes etc due to a mortgage. It is safer and easier on your family if that mortgage isn't there.

To look at it backwards, if your house is paid off, you can always borrow against and get that money back out of it, and put it into other investments. I know that I would not do that personally, which validates the move to pay it off.

 

[Oakster]

CK,

I don't agree with the bolded part. I'll use my mortgage as an example.

I retired in January 2012. At the same time, I refinanced our 4.375% $215k 15-year morgage to a 3.375% 15-year mortgage with monthly payments of $1,524. I had more than $215k in taxable investments and could have chose to pay off the mortgage. I also had cash flow to cover our spending and the mortgage payments.

So isolating the mortgage and a matching amount of investments, in January 2012 I had $215k of investments and a $215k mortgage... so a NW of $0.

Fast forward 7 years to December 2018. That $215k of investments would be worth $376k and my mortgage has declined to ~$129k so a NW of $247k.

https://www.portfoliovisualizer.com...location1_1=60&symbol2=VBMFX&allocation2_1=40

OTOH, had I paid off the mortgage, I would have has $1,524/month to invest and that would have accumulated to be $158k in December 2018.

https://www.portfoliovisualizer.com...location1_1=60&symbol2=VBMFX&allocation2_1=40

So my NW is $89k higher as a result of NOT paying off the mortgage. Another way to calculate the benefit is to start with ~$215k of investments and have the portfolio make the mortgage payments and then subtract the $129k mortgage balance from the $218k residual balance.... $89k.

https://www.portfoliovisualizer.com...location1_1=60&symbol2=VBMFX&allocation2_1=40

Now, I'll be the first to admit that investment results for the last 7 years have been favorable. The historical total return for a 60/40 portfolio is 8.8% for 1924-2017 per Vanguard... more than 5% greater than my mortgage interest rate. The average mortgage balance for the 7 years has been ~$172k... and $172k * 5% * 7 years is $60k so I have done better than I could have reasonable expected.... but still, even $60k isn't chump change.

I'll also concede that I am taking some risk that the investments return less than 3.375% or have bad sequence of returns... but I accept that risk with my eyes wide open because I think the likely benefits exceed the risk.

don't you have to consider the gain in equity in your net worth as well?

 

[pb4uski]

don't you have to consider the gain in equity in your net worth as well?

The gain in equity is included in the decrease in the mortgage from $215k in Jan 2012 to $129k in Dec 2018.

 

[Beer-man]

CK,

I don't agree with the bolded part. I'll use my mortgage as an example.

I retired in January 2012. At the same time, I refinanced our 4.375% $215k 15-year morgage to a 3.375% 15-year mortgage with monthly payments of $1,524. I had more than $215k in taxable investments and could have chose to pay off the mortgage. I also had cash flow to cover our spending and the mortgage payments.

So isolating the mortgage and a matching amount of investments, in January 2012 I had $215k of investments and a $215k mortgage... so a NW of $0.

Fast forward 7 years to December 2018. That $215k of investments would be worth $376k and my mortgage has declined to ~$129k so a NW of $247k.

https://www.portfoliovisualizer.com...location1_1=60&symbol2=VBMFX&allocation2_1=40

OTOH, had I paid off the mortgage, I would have has $1,524/month to invest and that would have accumulated to be $158k in December 2018.

https://www.portfoliovisualizer.com...location1_1=60&symbol2=VBMFX&allocation2_1=40

So my NW is $89k higher as a result of NOT paying off the mortgage. Another way to calculate the benefit is to start with ~$215k of investments and have the portfolio make the mortgage payments and then subtract the $129k mortgage balance from the $218k residual balance.... $89k.

https://www.portfoliovisualizer.com...location1_1=60&symbol2=VBMFX&allocation2_1=40

Now, I'll be the first to admit that investment results for the last 7 years have been favorable. The historical total return for a 60/40 portfolio is 8.8% for 1924-2017 per Vanguard... more than 5% greater than my mortgage interest rate. The average mortgage balance for the 7 years has been ~$172k... and $172k * 5% * 7 years is $60k so I have done better than I could have reasonable expected.... but still, even $60k isn't chump change.

I'll also concede that I am taking some risk that the investments return less than 3.375% or have bad sequence of returns... but I accept that risk with my eyes wide open because I think the likely benefits exceed the risk.

Great analysis thank you

 

[Nick12]

Paid off house at year 12 of 30 year fixed mortgage in 2005. The naysayers said I was crazy. The next 13 years invested more $$$ in stock market index funds. Retired at age 51 last year. It CAN be done.

 

[HI Bill]

CK,

I don't agree with the bolded part. I'll use my mortgage as an example.

I retired in January 2012. At the same time, I refinanced our 4.375% $215k 15-year morgage to a 3.375% 15-year mortgage with monthly payments of $1,524. I had more than $215k in taxable investments and could have chose to pay off the mortgage. I also had cash flow to cover our spending and the mortgage payments.

So isolating the mortgage and a matching amount of investments, in January 2012 I had $215k of investments and a $215k mortgage... so a NW of $0.

Fast forward 7 years to December 2018. That $215k of investments would be worth $376k and my mortgage has declined to ~$129k so a NW of $247k.

https://www.portfoliovisualizer.com...location1_1=60&symbol2=VBMFX&allocation2_1=40

OTOH, had I paid off the mortgage, I would have has $1,524/month to invest and that would have accumulated to be $158k in December 2018.

https://www.portfoliovisualizer.com...location1_1=60&symbol2=VBMFX&allocation2_1=40

So my NW is $89k higher as a result of NOT paying off the mortgage. Another way to calculate the benefit is to start with ~$215k of investments and have the portfolio make the mortgage payments and then subtract the $129k mortgage balance from the $218k residual balance.... $89k.

https://www.portfoliovisualizer.com...location1_1=60&symbol2=VBMFX&allocation2_1=40

Now, I'll be the first to admit that investment results for the last 7 years have been favorable. The historical total return for a 60/40 portfolio is 8.8% for 1924-2017 per Vanguard... more than 5% greater than my mortgage interest rate. The average mortgage balance for the 7 years has been ~$172k... and $172k * 5% * 7 years is $60k so I have done better than I could have reasonable expected.... but still, even $60k isn't chump change.

I'll also concede that I am taking some risk that the investments return less than 3.375% or have bad sequence of returns... but I accept that risk with my eyes wide open because I think the likely benefits exceed the risk.

Great analysis. And over the long term, of course, you're right, as long as interest rates stay low.

But the OP only owes $59K, and it's 2019. No one seems to think the market will continue 8.8% returns over the next few years; given the current near-market highs, and given the OP's retirement situtation, I believe paying the loan off is the most prudent option. It doesn't matter whether the OP's house falls in value after he pays it off as long as he continues to live in it. But IF the market tanks, average 7-8% returns could end up like last year or worse (-20%+ from peak value for the year), and the safety of having a paid off mortage is lost.

 

[meleana]

Pay off the house. We paid off our house many years ago after a market crash. We had like $45,000 left in a Science and Technology fund and I decided to put it to better use. Best thing we ever did.


Of course, now our property and school taxes are as much as our mortgage payment used to be.

 

[gooddog]

This is an easy one. Pay off the house, wait six months, then apply for a HELOC with a major bank such as Chase or US Bank. The bank will do an appraisal for free, which gives you the current market value of your house. The HELOC will change your credit utilization for FICO scoring purposes - in your favor. Having the HELOC will give you instant access to cash should you see a great deal on a foreclosure, of decide to invest should the market crash.

 

[Beer-man]

No one is saying it’s a bad idea, but that it’s mathematically inferior to pay off your mortgage early.

 

[pb4uski]

Great analysis. And over the long term, of course, you're right, as long as interest rates stay low.

But the OP only owes $59K, and it's 2019. No one seems to think the market will continue 8.8% returns over the next few years; given the current near-market highs, and given the OP's retirement situtation, I believe paying the loan off is the most prudent option. It doesn't matter whether the OP's house falls in value after he pays it off as long as he continues to live in it. But IF the market tanks, average 7-8% returns could end up like last year or worse (-20%+ from peak value for the year), and the safety of having a paid off mortage is lost.

You must have a crystal ball that I don't have... no one has any idea what the market will do over the next 12-18 months... could be better or could be worse... also, the 8.8% is for a 60/40 portfolio... I think the OP is mostly stocks so 10% is more like the historical return. The thing is that statistically it is more likely that the market will be up rather than down and also more likly that if they invest they will earn more than the rate that they are paying on their mortgage.... could it go sideways... sure, but you take your chances and it sounds like the OP is in a good place so even if it did go sideways then they would be a-ok.

 

[thumbs]

Question for the folks that say paying of the mortgage early is only an emotional decision: Do you regularly refinance your house and invest the proceeds?

 

[ERD50]

Question for the folks that say paying of the mortgage early is only an emotional decision: Do you regularly refinance your house and invest the proceeds?

Yes.

-ERD50

 

[thumbs]

When you take a 15 or 30 year mortgage in the US, is there a charge to "break it" to refinance? I have done that a few times to buy investment real estate in the past when the mortgage comes up for renewal (every 5 years for me)

 

[Another Reader]

Yes.

-ERD50

When it was easy to get cash out, reduce the interest rate, and buy properties at good prices, yes. Haven't been able to do that for awhile. Last did that at the end of 2012, when interest rates were at the bottom.