OT: Not Paying Off Your Mortgage

[tomato coupe]

Originally Posted by echappist

you quoted the following (emphases added) from my original post...

The chance of a net negative return in the next 20 years is no greater for a 61-year-old than it is for someone who has another 35-40 years to invest.

The sequence of returns (in the context of the mortgage vs. no mortgage issue) affects the details, but it does not change the overall financial picture.

[veloduffer]

Originally Posted by tomato coupe

Yes, both are assets that can increase and decrease in value. Historical, however, the stock market has increased in value more than real estate. For instance, from 1928 to 2013 the stock market increased at an average rate of 9.5% per year, while real estate increased at an average rate of 3.7% per year.



Real estate has done better in recent years. From 1975 to 2013, the average annual increase for the stock market and real estate were 7.6% and 4.3%, respectively.

True enough, but that is historical performance. Markets change - look at the stock market with the elimination of floor specialists, flash trading, more products to short the market with, ETFs, etc. And performance is only as good as when you need to withdraw/sell - 2009 is very different from 2019.

Portfolio construction points to diversification amongst assets, including bonds, real estate and hard assets (gold). A diversified portfolio has a slightly lower return than an all-equity portfolio and has much less volatility.




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[Gummee]

Originally Posted by Mzilliox

i dont know? good point, haha. Sometimes i wonder if im in the right country.

One thing is for certain, if i pay off my house very soon, which i will, then i wont be paying a house payment at all. and my house payment money can go right to savings. and i will have equity available to borrow against should i ever want to acquire more property. or money available for a monthly payment, since i no longer have one of thems. stock markets are at least 30% fake stuff but land and water are always real.

of course im sure i could screw over more people, invest into something crappy that makes money and pollutes the earth, make some rich guys richer, and leverage or something. but enough people do that already

How exactly are you going to qualify for a loan if you aren't working/are disabled/etc?

There's more than just equity needed. Where's the income to pay back the loan

?

Land is great. Buy as much as you can because they're not making any more land. ...but... buying land is the same as paying off your mortgage: there's zero (or less) liquidity and a potentially large down side. The up side to buying land *could* be very large if you guess right tho.

M

[tomato coupe]

Originally Posted by veloduffer

True enough, but that is historical performance.

Historical performance is all we've got -- no one can predict the future.

Markets change - look at the stock market with the elimination of floor specialists, flash trading, more products to short the market with, ETFs, etc. And performance is only as good as when you need to withdraw/sell - 2009 is very different from 2019.

Sure, markets change. That's why one must look at long term results, which are pretty consistent.

Portfolio construction points to diversification amongst assets, including bonds, real estate and hard assets (gold). A diversified portfolio has a slightly lower return than an all-equity portfolio and has much less volatility.

Diversification is good, but one could argue that owning your home, versus having a mortgage and investing the money (that would be locked up in your home), is the opposite of diversification.

[EDS]

I would not move into a higher interest mortgage at age 61 unless I were strapped for cash.

That said, I think a lot of people see they have had a 10% rate of return from the equity markets over the past decade and prefer to put extra cash in the market as a result rather than pay down low interest mortgages.

[C40_guy]

Originally Posted by veloduffer

I don’t get this idea that investing in your house is worse than investing in equities.

The house value will vary whether or not there's a mortgage attached to it. You don't need to own it outright to benefit from its appreciation.

Separately, the home ownership math isn't quite that simple anymore.

Depending on local/regional housing costs and a variety of other factors, a case can be made for renting versus owning.

[tomato coupe]

Originally Posted by EDS

That said, I think a lot of people see they have had a 10% rate of return from the equity markets over the past decade and prefer to put extra cash in the market as a result rather than pay down low interest mortgages.

That's Camp A. They are (generally) comfortable with the risk associated with more "aggressive" financial decisions.

Camp B prefers to pay off their mortgages. They are (generally) more risk averse.

[tomato coupe]

Originally Posted by C40_guy

The house value will vary whether or not there's a mortgage attached to it. You don't need to own it outright to benefit from its appreciation.

Yeah, you're quite right. The changing value of the house is actually irrelevant, because you realize that change regardless of whether or not you have a mortgage. The real issue is, how much does it cost you to pay off a mortgage in terms of lost investment opportunity?

[EDS]

Originally Posted by tomato coupe

That's Camp A. They are (generally) comfortable with the risk associated with more "aggressive" financial decisions.

Camp B prefers to pay off their mortgages. They are (generally) more risk averse.

Both extremes are risky (heavy leverage or no diversified retirement planning). If you are already maxing out 401k and IRA contributions I support throwing money at the mortgage to get rid of it. That said, I think it is much riskier to aggressively pay down a mortgage if you are not simultaneously making adequate investments for retirement.

[MattTuck]

I am on year 1 of a 30 year mortgage. If you are in the last few years of the amortization schedule, there's not a very good reason to pay it off early.... you might save a few hundred to a few thousand bucks.

If you are early in the mortgage, that is the time to find ways to decrease your over all interest expense.

[kppolich]

Yes it is nice to live debt free, but also the opportunity cost of using that money to fund something other than a house is also an option. Depends on Jim's risk tolerance, insurance strategy, and retirement goal age/spending habits.

I'd sell the house and downsize. Use the extra money to inflate the nestegg going into retirement and have the next house paid for with a nice piece of change in the bank collecting steady interest instead of the other way around.

[Ralph]

As I mentioned in a post up the thread....and I'm a retiree of a career at Merrill Lynch (financial services firm).....I am well familiar with this discussion.

The reason we live in a paid for home is I wanted to be in a position in retirement where no one can kick me out of my home as long as I pay my taxes and HOA fees. Other expenses such as HO insurance, utilities, and maintenance are somewhat under my control....but taxes have to be paid.

I totally understand my paid for home represents dead money. Even though we are currently in a hot RE market around here. That most likely I could do better in the markets with a 75% mortgage. And all I get out of it is it's rent value. But I sleep good at nights in my old age knowing I have a place to live should I get sick and disabled. And BTW.....if one of us were to require skilled nursing care at $10,000 per month or so....and if we spent down all our money in a nursing home.....well.....Medicaid usually lets one of you stay in the house until you are both dead. But they require you to spend down other financial assets. If you lay in a nursing home bed for a couple years at $10,000 per month.....you go thru a lot of life's savings in a hurry. I've seen folks blow thru a million bucks before the state took over. Life doesn't always have a happy ending.

[MikeD]

I payed off my mortgage when I retired. I only had about 5-6 years left on it so the payment was mostly principal. Just wanted to be debt free when I retired. Financially, it was probably better to keep paying on the loan.

[tomato coupe]

Originally Posted by MikeD

I payed off my mortgage when I retired. I only had about 5-6 years left on it so the payment was mostly principal. Just wanted to be debt free when I retired. Financially, it was probably better to keep paying on the loan.

It doesn't matter when you pay it off, you will always have only principle left.

*Except for maybe a month of interest.

[MattTuck]

I think he meant his payments (at the time) were mostly principle, as opposed to the early years when payments are mostly interest.