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Prepaying one's mortgage is akin to investing in bonds, save that the risk is zero. Whether or not it is sensible, depends on the prevailing rates on bonds, vs. the mortgage rate. There is also the emotional factor, which is contingent on whether in one's local real-estate market, the long-term trend in housing prices is positive or negative.
You know that is a great way to view paying off a mortgage.
I think bonds are a "suckers" bet IF they are callable. I refuse to invest in anything but short-term bonds of less than a year duration.
BUT for most folks paying off their mortgage is probably the best thing they can do financially. And just maybe, paying off the mortgage should be part of their investment in the bond portfolio. That is a win-win since most mortgages are not called.
This whole discussion reminds me of a time I was sitting in a car dealership about 20 years ago. I put a large down payment on the car, and the salesman was incredulous that I'd tie money up in a car vs. taking out a loan. "Because the loan was only 7.4%, and I'd be better off investing that money in the stock market for higher returns." I just shook my head and moved on. To his credit - he was correct at that particular moment. But he was very wrong in the longer term.
The friend of JONOV has more of a clue than you give him credit for. He will not be saddled with a payment if his condition worsen and their personal household income deteriorates, and if worst comes to worst he will die knowing that his wife will have a house that is paid for. That's worth a lot. Emotionally and financially.
I see people trying to parse this into a "paying down debt is incorrect because it's an emotional decision, not a logical one". I don't buy it. Portfolio theory says otherwise. All investing has components of both logic and emotional self knowledge. Successful investors know where their risk tolerance is, and don't push past that chasing earnings. The ones that get fleeced are the ones who convince themselves that they are stone cold killers, go 100% equities (or whatever risk number is past their tolerance - be it 75% or 30%) and then find out in a 20% correction that they can't sleep at night and bail.
Can't rep you enough.
This is such a refreshing take on the typical argument that someone who is in favor of paying down mortgage must be an emotional person, not thinking logically.
A typical residential mortgage, although neither callable by the lender nor having a balloon payment (both good!!!), is a fixed obligation that is due monthly by the 15th that none of the mortgage loan obligors can escape from. Most people, who have the 30-year fixed rate mortgage, are stuck with it and its monthly obligations for that duration if they never sell their home.
It is very easy to say that a mortgage loan is the cheapest loan one can get, this is very true, and that even an average investor can easily get a return that beat that, this might be true but is debatable depending on the financial acumen or even the temperament of each individual.
We have the choice to invest or not, but we don't have such luxury when it comes to mortgage payments.
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I'm won't hide that I'm debt adverse. I'm making accelerated payments on my 3% mortgage.
Excellent, I am also partially prepaying the mortgage on my primary residence (15 year fixed rate mortgage, incidentally also at 3%). My goal is to chip away at it through accelerated payments, up to a point that I can afford to pay off the entire remaining balance in one fell swoop.
Which brings me to my next point, the liquidity benefits of paying off mortgage early which that a lot of people don't talk about (or think about). We know that one of the key metrics for qualifying for a mortgage loan is DTI or the Debt-to-Income ratio. What if you want to buy an investment property, or two, or three...? You might not be able to because of the mortgage payment on the primary residence hanging over your head. I am fortunate enough that I have low enough 'D' over high enough 'I' that have a DTI that has been high enough for me to quality for mortgage loans to purchase investment properties. Think about this for a moment: Eliminating your primary home mortgage payment so that you can leverage up and purchase additional investment properties or qualify for business loans.
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But I consider it part of my fixed income portfolio, and have my other investments allocated accordingly in more aggressive areas.
This is akin to a variant of barbell strategy, https://en.wikipedia.org/wiki/Barbell_strategy which studies have shown to produce higher risk-adjusted return. This has a lot of merits. I take a similar approach with my portfolio (most of my very aggressive investment are done through tax-advantage vehicles such as 401k though).
You know that is a great way to view paying off a mortgage.
I think bonds are a "suckers" bet IF they are callable. I refuse to invest in anything but short-term bonds of less than a year duration.
BUT for most folks paying off their mortgage is probably the best thing they can do financially. And just maybe, paying off the mortgage should be part of their investment in the bond portfolio. That is a win-win since most mortgages are not called.
it really is not the same as a bond .a bond is liquid , a bond can be sold and the money reallocated to a better opportunity . a house can't be re-balanced when it becomes to much of your net worth. a mortgage is just another expense like any other and what it buys is a house ..
i think people have a wrong conception as to what a mortgage is . a mortgage by itself is only a loan to buy something . it acts as nothing by itself .
if it buys an asset that responds well to inflation than it is the asset that is an inflation hedge . the asset if bought for cash still has the exact same ability to act as that inflation hedge. you hear all the time a mortgage acts as an inflation hedge or it acts as a bond .
if it is an asset like treasury bonds that a loan buys which can be a recession or depression hedge then once again it is not the loan that acts in any special way , it is the asset you buy , but that is true whether cash or loan .
comparing a mortgage to anything other than a loan which is an expense is really not going to be accurate .
Last edited by mathjak107; 07-19-2018 at 04:27 AM..
It is very easy to say that a mortgage loan is the cheapest loan one can get, this is very true, and that even an average investor can easily get a return that beat that, this might be true but is debatable depending on the financial acumen or even the temperament of each individual.
....... Eliminating your primary home mortgage payment so that you can leverage up and purchase additional investment properties or qualify for business loans.
Actually a mortgage is very often not the cheapest loan one can get. Car loans are often much less. The fixed 30 year mortgage rate has grown to about 4.2%. Last week I bought a HD pickup truck for $70K. I had the money from an insurance claim and additional cash in my checking account for the purchase. The interest rate was about 3.5% so I took the loan. As you point out it is highly likely that my return on that money will be greater than the interest payment. I don't need financial acumen or special temperament. I merely invest in mutual funds and allow the investment to ride.
The notion of eliminating a mortgage in order to buy additional properties makes zero sense. I sold my previous house of 20 some years and had the cash to buy a new house. Instead I financed. Now if I want to buy another house, I have the cash I would have spent (plus the $100K in profit) in order to buy a second property.
..... I refuse to invest in anything but short-term bonds of less than a year duration.
If that is your level of investment strategy and you have a sufficient emergency fund, then paying off a mortgage might make sense. I cannot imagine being satisfied with a roughly 1% ROI. That does not even keep up with inflation. Even my illiterate grandfather who emigrated from the hills of northern Italy understood the importance of having his money work for him.
yep , nothing like guaranteeing your self a loss after taxes and inflation with short term bonds and cash instruments . far to risky of an investment for my taste .
I am not sure if the idea of risk applies. Risk means there is a chance of failure. In this case short term bond rates are less than inflation and there is a certainty of loss.
well that is the risk with cash instruments , you face just about a guaranteed loss after inflation and taxes . anytime losses are in the equation that is the "risk" you take.
i think people have a wrong conception as to what a mortgage is . a mortgage by itself is only a loan to buy something . it acts as nothing by itself .
if it buys an asset that responds well to inflation than it is the asset that is an inflation hedge . the asset if bought for cash still has the exact same ability to act as that inflation hedge. you hear all the time a mortgage acts as an inflation hedge or it acts as a bond .
if it is an asset like treasury bonds that a loan buys which can be a recession or depression hedge then once again it is not the loan that acts in any special way , it is the asset you buy , but that is true whether cash or loan .
comparing a mortgage to anything other than a loan which is an expense is really not going to be accurate .
one other point about a mortgage being compared to a bond .
in a depression or recession bonds can soar in value . real estate bought with that mortgage can plunge . so once again you see a mortgage is just a loan , it is neutral and is only about the asset you buy just like with any borrowed money .
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