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

[daylatedollarshort]

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

Okay, fair point. However, no one here has recommended keeping a mortgage if you aren't making money, or expect to make money, on the investment difference. So I'm not really sure how Kitces article applies to this thread. If you aren't making money on the rate differences, you can always pay off the loan or refinance if rates drop. If interest rates increase, it is a pretty low risk way to potentially make hundreds of thousands of dollars.

 

[mathjak107]

Exactly what I am saying .

The mortgage is neutral ..if you are not making money it’s no inflation hedge .

So it all depends on what you buy…

The term a mortgage is a an inflation hedge that People use a lot is not really correct .

As unless you buy something keeping up with or exceeding inflation the mortgage itself did nothing as a hedge.

It only provided the funds to buy something …it’s up to what was done with it to determine if it’s a hedge or not.

People Have bought real estate and ended up selling for less then they paid , so even that may be no inflation hedge , mortgage or not .

In fact the interest can make it even harder to be a hedge as it means you may have paid 2 to 3x the cost of the house over 30 years…

So money is neutral when looking at inflation hedges

 

[Bruceski44]

Exactly what I am saying .

The mortgage is neutral ..if you are not making money it’s no inflation hedge .

I don't care what you or anyone else says. Using discounted dollars to pay a fixed debt protects against inflation. Protection = hedge. Therefore a mortgage is an inflation hedge.

Your argument is a distinction with no difference and seems to be more about semantics than the strategy. I let it pass last time you posted this, but seeing as how it's mostly semantics and you haven't debated the idea of using discounted dollars to pay a fixed debt, I had to call you on it this time. This year alone I'm getting an 8-10% discount on my mortgage payments. The debt isn't changing, but the value of the dollars is. My payments are effectively lower, regardless of what I do with the money.

 

[mathjak107]

You can believe whatever you like.

I guess you think kitces is wrong too …so it is isnt my opinion you take issue with but his ….

Perhaps the financial world is following the wrong person .

 

[almost there]

"Why can I not stop thinking about paying off my mortgage?!?!"
Because its a huge Burdon.
And its like a giant load is lifted when its gone.

 

[gamboolman]

corn,

ms gamboolgal and I paid off our Mortgage about 8 year before I retired. I think it was in 2013 or 2014.

For us it was a good decision - although the math said it was a bad choice.
But we sleep good at night and have no regrets.

But for your specific criteria - I would have to agree to keep the mortgage.

Remember:
It is about what is right for you and ms corn !

[/IMG]

 

[Bruceski44]

You can believe whatever you like.

I guess you think kitces is wrong too …so it is isnt my opinion you take issue with but his ….

Perhaps the financial world is following the wrong person .

Do you have an opinion of your own? Or do you just blindly follow others with no analysis of your own? Do you believe everything you read? If so, why not believe me? If not, why not? I don't make my living writing blogs? Do you have any thoughts on the idea I promoted in my post?

 

[tulak]

From the Kitches executive summary:

“In fact, rising inflation would just devalue the mortgage in nominal (future) dollars.”

Sounds like an inflation hedge to me.

I’ll read the entire article later, but from the executive summary, his wording is bit loose.

The reality is there are multiple hedges. The mortgage is paid with cheaper dollars and the extra funds can be invested to hedge against inflation. He chose to focus on the latter, which does allow for more content. And the title is bound to get more clicks/readers too.

 

[mathjak107]

Do you have an opinion of your own? Or do you just blindly follow others with no analysis of your own? Do you believe everything you read? If so, why not believe me? If not, why not? I don't make my living writing blogs? Do you have any thoughts on the idea I promoted in my post?

I share the opinion of those I think not only make sense to me , but are acknowledged to be one of the most acclaimed researchers in the field of retirement finances.

The issue here is there is a big difference between borrowing to buy the real estate vs borrowing so your own money can stay invested .

“For a young household with few financial assets , the mortgage is literally financing the home and is likely a good deal because a smaller proportion of each paycheck will be required to make the payments (assuming pay increases with inflation and they want to stay in the home).

For a household with significant financial assets, the answer is not as clear cut.


The thinking of , if you were lucky enough to lock in a low rate on your mortgage, you have a “hedge” against inflation because your payments and loan balance decrease in real terms.


But that ignores the asset side of the balance sheet, which is subject to the same inflation. What is being hedged? Somebody who is paying 3% on a mortgage while having assets parked in cash at 1% because they are nervous about the market is not hedging against inflation ,

they are losing 2% even before the further erosion of their net worth by inflation.

Somebody who had a 60/40 portfolio and a 3% mortgage so far in 2022 … well, you do the math “

https://www.advisorperspectives.com...our-mortgage-is-not-a-hedge-against-inflation

 

[RunningBum]

Nobody is locking in on 1% CDs for 30 years.

The market drop is a different issue, unrelated to inflation hedging.

 

[Rianne]

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

-We have +$100K in I bonds from the early 2000s.
-We have laddered CDs and TIPS, 2.15 - 3.5 over 3 years.
-Are staying in the equity funds even though -12%
-Home value +7%, no mortgage
-Paid for the house in cash from proceeds from the previous home sale

Our 60/40 portfolio gains over 10 years are ~5%. We did not jump in and out of the market. Did our bond funds give us a hedge? I don't think so. IMO, the wave-up had to come crashing down at some point. The losses in our portfolio are more than the gains we would have made investing the previous house sale $ in the market at 3% interest 10 years ago.

And we hate debt.

 

[retired1]

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

Because it's always in the back of mind even though you know you can pay it off any time. I hate paying any fees/interest etc so I paid if off asap. With $0 debt I feel I am truly retired

 

[Bigdawg]

Somebody who had a 60/40 portfolio and a 3% mortgage so far in 2022 … well, you do the math “

https://www.advisorperspectives.com...our-mortgage-is-not-a-hedge-against-inflation

Easy to cherry pick an extremely small sample size/snap shot in time. If you are around in 25 years, let's make a bet: I could pay off the 500K I owe on my house at 2.87% or I can keep paying it (for 25 more years). Here's the bet: Will I be better off keeping that 500K invested (95/5) or would I be better off paying off my mortgage today or keep paying it each month with my pension income? I'll take the bet that over the next 25 years I will return better than 2.87% on my invested $. If I am wrong (and I may be), the USA (and the world) is in for a rough 25 years.

 

[mathjak107]

Easy to cherry pick an extremely small sample size/snap shot in time. If you are around in 25 years, let's make a bet: I could pay off the 500K I owe on my house at 2.87% or I can keep paying it (for 25 more years). Here's the bet: Will I be better off keeping that 500K invested (95/5) or would I be better off paying off my mortgage today or keep paying it each month with my pension income? I'll take the bet that over the next 25 years I will return better than 2.87% on my invested $. If I am wrong (and I may be), the USA (and the world) is in for a rough 25 years.

It isn’t about the time frame picked .

It is only an example of the fact that when one has assets invested vs the mortgage those assets determines what is an inflation hedge .

The mortgage money only facilitates the buying or keeping of those assets.

To be an inflation hedge you need to beat inflation plus the interest you are paying

 

[sergio]

I'm generally strongly in the "pay it off camp".

We paid ours off - it was 3.75% with 1.5% inflation.

No way I would pay yours off unless you have an edge case (e.g. you need home equity that can't be touched by creditors/lawsuits).

You have an absolute bargain basement rate, equities have fallen 15% this year so not a great time to sell, and inflation is running at 7-10%. You are in a sweet position. Set your mortgage to autopay, set a reminder to re-evaluate every 6 months, and forget about it. Now go and enjoy some ice cold beers to celebrate your awesome position.

 

[almost there]

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.

Wow, I didn't know 30 yr's ever got down to 2.25%...
Tough call. I hate debt, but can easily get 3% on 5 year CD's.
Thats a $307.00 a month difference. not sure its worth it to you.
Being 100% debt free means a lot to me. Everyone is different though.
Tough call.

 

[Bigdawg]

Being 100% debt free means a lot to me.

^This is just a mind game. Is anyone ever "debt free"? I have been traditionally "debt free" at various times of my life. In 1997 I acquired my first mortgage and have had "debt" ever since. In 2000 when I paid off that first mortgage I had credit card debt. I currently only have a mortgage. No car payment, credit card debt or any other debt. Here is the caveat, I am creating more debt as I write this. I am using electricity, burning calories, acquiring more time toward my property taxes, I will use water today and flush the toilet. Spending money basically just living. It is irrelavent to me that some of the money I am spending to day is mortgage, taxes, water bill, sewer bill, electric bill, etc... The fact that some of it (mortgage) is debt is irrelavent to me. I will spend $ every day from now until the day I die. Maybe my ease is because I have mutiple COLA pensions currently coming in each month with more scheduled in the future (SS). I do look for strategic things to use my $. For instance DW's old car payment. When she had a 0% loan we did not pay if off early. When she got a new car and the rate was 2.5% I did pay that off early. Not because the money I used wasn't earning more than that. It was just an easier amount I guess. Much easier to pay off 20k car loan as opposed to my 500K mortgage balance. WIth the recent market drop, the 20K that I used to pay off her car last year would be at 19-21k today. WOrth less because of inflation obviously. Oh well.

 

[almost there]

"Maybe my ease is because I have mutiple COLA pensions currently coming in each month"

Bingo. That is a huge part of it. And one of the reasons opinions can be so divided here.
As its not apple's to apple's.

Not saying one retirement is better than another. Just different ways of getting there.
With one persons view looking nuts to another. In both directions. LOL LOL

 

[Mulligan]

^This is just a mind game. Is anyone ever "debt free"? I have been traditionally "debt free" at various times of my life. In 1997 I acquired my first mortgage and have had "debt" ever since. In 2000 when I paid off that first mortgage I had credit card debt. I currently only have a mortgage. No car payment, credit card debt or any other debt. Here is the caveat, I am creating more debt as I write this. I am using electricity, burning calories, acquiring more time toward my property taxes, I will use water today and flush the toilet. Spending money basically just living. It is irrelavent to me that some of the money I am spending to day is mortgage, taxes, water bill, sewer bill, electric bill, etc... The fact that some of it (mortgage) is debt is irrelavent to me. I will spend $ every day from now until the day I die. Maybe my ease is because I have mutiple COLA pensions currently coming in each month with more scheduled in the future (SS). I do look for strategic things to use my $. For instance DW's old car payment. When she had a 0% loan we did not pay if off early. When she got a new car and the rate was 2.5% I did pay that off early. Not because the money I used wasn't earning more than that. It was just an easier amount I guess. Much easier to pay off 20k car loan as opposed to my 500K mortgage balance. WIth the recent market drop, the 20K that I used to pay off her car last year would be at 19-21k today. WOrth less because of inflation obviously. Oh well.

The COLA’d pension is the key for me having debt. I have my 2.75% 15 year refinanced home loan, a 0% 7 year new car loan from last year, and 0% 18 month credit card (had to pay 4% fee) I am also paying off from a home improvement job. Those debt payments combined represent 24% of my net monthly pension and I still dont spend entire monthly benefit. So I have the flexibility to just pay as I go, so that I will.

 

[daylatedollarshort]

I share the opinion of those I think not only make sense to me , but are acknowledged to be one of the most acclaimed researchers in the field of retirement finances.

The issue here is there is a big difference between borrowing to buy the real estate vs borrowing so your own money can stay invested .

“For a young household with few financial assets , the mortgage is literally financing the home and is likely a good deal because a smaller proportion of each paycheck will be required to make the payments (assuming pay increases with inflation and they want to stay in the home).

For a household with significant financial assets, the answer is not as clear cut.


The thinking of , if you were lucky enough to lock in a low rate on your mortgage, you have a “hedge” against inflation because your payments and loan balance decrease in real terms.


But that ignores the asset side of the balance sheet, which is subject to the same inflation. What is being hedged? Somebody who is paying 3% on a mortgage while having assets parked in cash at 1% because they are nervous about the market is not hedging against inflation ,

they are losing 2% even before the further erosion of their net worth by inflation.

Somebody who had a 60/40 portfolio and a 3% mortgage so far in 2022 … well, you do the math “

https://www.advisorperspectives.com...our-mortgage-is-not-a-hedge-against-inflation

You don't need to compare a mortgage loan to your entire portfolio, just the part you balance your loan with. My loan is offset with a non-cola pension and a TIPS ladder. It is part of an asset matching strategy - Matching strategy - Bogleheads.

A low interest rate mortgage and I bonds or a TIPS ladder combined work pretty good as an inflation hedge and a matching strategy. People who refinanced last year when mortgage rates hit historic lows, have 2 - 3% mortgages, and are earning inflation plus 0 - 3% real yields on TIPS ladders and I bonds are coming out ahead. It is just math.

On a $400K loan, a 4% differential on the interest earned and interest paid out is $16K. If interest rate drop, one can always refinance or pay off the loan. If rates stay the same or go up, one can invest the difference. It is kind of a win win scenario.

 

[mathjak107]

With inflates low as it was for so many years tips were not going to have been a good deal .

It is only since the spike

 

[daylatedollarshort]

With inflates low as it was for so many years tips were not going to have been a good deal .

It is only since the spike

It is not only since the spike. TIPS' real yield just went negative when interest rates were very low. When we retired they were over 2% real yield. The rates change over time based on market conditions, just like bonds and CD rates.

TIPS at a 1.3% real yield provide a 4% safe withdrawal rate over 30 years with the safety of Treasuries. They aren't a good way to get rich. They are a good way to stay rich, especially when the market tanks and inflation is high. The latest Morningstar projections for a safe withdrawal rate on a 50/50 portfolio going forward are 3.33%.

From the Bogleheads wiki on matching strategies, "...stocks and mutual funds cannot be used in matching strategies. For the money you ‘must’ have, use matching strategies and for the money you would ‘like’ to have, use diversification and risky assets."

 

[mathjak107]

According to what I read it takes at least a 2% real return over the first 15 years of a 30 year retirement for 4% swr to hold .

That assumes you may die with very little left too .

All failures occurred the first 15 year when they failed to hold a 2% real return.

Even the best bull markets later couldn’t save them .

So while 30 year averages were not far off of normal , all failures , 1907,1929 ,1937,1965/1966 failed from the first 15 years not averaging at least 2% real return .

So based on that tips at 1.30% would not have done well

https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/

 

[jazz4cash]

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 .

I dunno. I’m thinking many folks that are adamant about paying off the mortgage might be using funds that would otherwise be in ultra safe investments so if you are not comfortable with market risk paying off the mortgage is a smart guaranteed return. I’m very happy with my 2.75 rate for 20 yrs but I should’ve gone out 30 yrs. I distinctly remember very early on a financial advisor saying he’d really like a 100 year mortgage to hedge inflation. That stuck with me.

 

[daylatedollarshort]

According to what I read it takes at least a 2% real return over the first 15 years of a 30 year retirement for 4% swr to hold .

That assumes you may die with very little left too .

All failures occurred the first 15 year when they failed to hold a 2% real return.

Even the best bull markets later couldn’t save them .

So while 30 year averages were not far off of normal , all failures , 1907,1929 ,1937,1965/1966 failed from the first 15 years not averaging at least 2% real return .

So based on that tips at 1.30% would not have done well

https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/

At a 0% real return, over 30 years the safe withdrawal rate on a TIPS ladder is 3.33% (100 / 30 years = 3.33%). TIPS have their pros and cons, but the math is the math. At 1.3% the SWR is 4%, at 3% the SWR is 5%.

Safe Withdrawal Rate (SWR) with Treasury Inflation Protected Securities (prospercuity.com)

That does assume nothing left. That is what safe withdrawal rate means - how much you can safely withdraw each year before running out of money, not how much you can safely withdraw each year and still leave your portfolio intact or worth more than when you started after you die.

Perhaps I missed it, but can you please quote the part of the Kitces article that has the safe withdrawal rates on TIPS because I didn't see TIPS even mentioned in the article. TIPS real returns are known in advance and they don't have sequence of returns risk, so any articles on stocks and bonds and historical averages have nothing to do with the SWR on TIPS. They perform similarly to I bonds, only without the annual limits, and few other differences, like taxation.