City-Data Forum Did you pay off a mortgage at a reasonably young age and live mortgage free? How did that impact retirement? (communities, support)
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05-24-2015, 11:07 AM
 12,705 posts, read 9,967,478 times Reputation: 9515

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Quote:
 Originally Posted by honobob Please show your calculations for this adjustment so I can understand.
Ok, so let's say you have a mortgage at X% interest and invest your money at Y%. Of course Y may be unknown in advance, as for example with the stock market.

First, consider what happens if we do not consider inflation. In this case, we would simply say that the mortgage should be paid off if X > Y, and not otherwise. Of course since Y actually is unknown, risk tolerance has to be factored in as well.

Now what about inflation? Well, in this case, the purchasing power of the dollars goes down by Z% each year. So the net cost of the mortgage is not really X%, rather, it is (X-Z)%.

This argues in favor of keeping the mortgage rather than paying off early, right? Not so fast - because the Y% return on the investment also has to be corrected for inflation. In this case it becomes (Y-Z)%.

So we should compare the adjusted interest rate on the mortgage, which is (X-Z)%, to the adjusted investment return, which is (Y-Z)%.

But the funny thing is that, whether X-Z is greater than Y-Z or vice versa, is exactly the same as whether X is greater than Y or vice versa. All you have done is subtracted a constant from both sides.

Therefore, one can take the impact of inflation into account, but it changes absolutely nothing. In other words, factor inflation in all you want, but this actually has nothing whatsoever to do with whether it is sensible to payoff the mortgage early!

05-24-2015, 11:11 AM
 12,705 posts, read 9,967,478 times Reputation: 9515
Quote:
 Originally Posted by honobob Exactly! The money is STUCK in the house earning NOTHING just as if it were under the mattress only way less liquid.
It's saving money on (after-tax) interest.

05-24-2015, 11:33 AM
 Location: SF Bay & Diamond Head 1,779 posts, read 1,418,471 times Reputation: 1971
Quote:
 Originally Posted by ncole1 Ok, so let's say you have a mortgage at X% interest and invest your money at Y%. Of course Y may be unknown in advance, as for example with the stock market. First, consider what happens if we do not consider inflation. In this case, we would simply say that the mortgage should be paid off if X > Y, and not otherwise. Of course since Y actually is unknown, risk tolerance has to be factored in as well. Now what about inflation? Well, in this case, the purchasing power of the dollars goes down by Z% each year. So the net cost of the mortgage is not really X%, rather, it is (X-Z)%. This argues in favor of keeping the mortgage rather than paying off early, right? Not so fast - because the Y% return on the investment also has to be corrected for inflation. In this case it becomes (Y-Z)%. So we should compare the adjusted interest rate on the mortgage, which is (X-Z)%, to the adjusted investment return, which is (Y-Z)%. But the funny thing is that, whether X-Z is greater than Y-Z or vice versa, is exactly the same as whether X is greater than Y or vice versa. All you have done is subtracted a constant from both sides. Therefore, one can take the impact of inflation into account, but it changes absolutely nothing. In other wordZs, factor inflation in all you want, but this actually has nothing whatsoever to do with whether it is sensible to payoff the mortgage early!

ZZZZZZZZZZZZZZZZZZZZZZZZZZ Ya wanna put some real numbers there? I don't pay in X, Y, or Z's and I think you are trying to slip in adjustments that are not appropriate. You are decreasing the return on investments by inflation but not for the percentage INCREASE in investments due to inflation.

Kids, inflation matters.

05-24-2015, 12:06 PM
 Location: RVA 2,164 posts, read 1,265,616 times Reputation: 4451
I think a lot of this really has to do with what percentage of your retirement assets are tied up in your house. I see a mortgage as part of diversification. If you've struggled to pay yours, then you are betting on a real estate return and want to to live in a housing situation that requires a mortgage to accomplish something you can't afford. And are betting it's value plus real costs increases ahead of investments. If you have a mortgage you can easily pay off at anytiime, it matters little difference whether you pay it off or keep the loan.

At today's ridiculously low rates, it is a simple investment tool, as long as you are not betting the farm on it. In the 80s& 90s and right up u til 2007 not too many people argue a mortgage was a smart move. Just a tool, people. For most people, a mortgage has a far better return on identical living than rent, which is how I always view it. Rents go up, mortgages don't as much. Paying it off is a simple trade of risk aversion for security. When a high COL homeowner sells his house and then retires and buys the same home for half, he's glad he got in the game with a mortgage.p

05-24-2015, 12:19 PM
 71,515 posts, read 71,694,121 times Reputation: 49088
Quote:
 Originally Posted by honobob Exactly! The money is STUCK in the house earning NOTHING just as if it were under the mattress only way less liquid.
this is not true either . owning a home can be a cost cutter which can improve cash flow greatly eventually . right now we are on the fence about buying a co-op for cash. if i buy our cost of housing will fall by 6k a year from renting . but i will give up 12k a year on the income we are no longer getting on what we tie up.

so initially renting is cheaper,. but 5 years down the road our maintenance should go up no where what our rent does and if the place appreciates even better.

my ex wife is living in another co-op we own. when we bought it in 1987 it cost us about 1100 a month for mortgage and maintenance . it rented for 850.00 i think maintenance was 475.

well today she lives there for just maintenance which is 600 and if she was renting it that co-op is 1600 .

so the money is not doing nothing . eventually it is cutting costs and bringing up cash flow if you don't sell and live in it..

05-24-2015, 12:44 PM
 12,705 posts, read 9,967,478 times Reputation: 9515
Quote:
 Originally Posted by honobob ZZZZZZZZZZZZZZZZZZZZZZZZZZ Ya wanna put some real numbers there? I don't pay in X, Y, or Z's and I think you are trying to slip in adjustments that are not appropriate. You are decreasing the return on investments by inflation but not for the percentage INCREASE in investments due to inflation. Kids, inflation matters.
Inflation increases the value of all investments, including fixed income? Since when?

The fact is that if you are using a nominal return in your analysis, the inflationary component is already built in, even if there is such a component. As long as you compare nominal to nominal or real to real, you get the right answer.

05-24-2015, 12:53 PM
 Location: SF Bay & Diamond Head 1,779 posts, read 1,418,471 times Reputation: 1971
Quote:
 Originally Posted by ncole1 Inflation increases the value of all investments, including fixed income? Since when? The fact is that if you are using a nominal return in your analysis, the inflationary component is already built in, even if there is such a component. As long as you compare nominal to nominal or real to real, you get the right answer.
You do/choose not understand what I am saying. All I asked for is a simple factual illustration of what you are trying to say cause from your X's and O's it seems that you are saying the investment dollars are in a fixed long term investment like a CD. Please illustrate.

05-24-2015, 12:57 PM
 12,705 posts, read 9,967,478 times Reputation: 9515
Quote:
 Originally Posted by honobob You do/choose not understand what I am saying. All I asked for is a simple factual illustration of what you are trying to say cause from your X's and O's it seems that you are saying the investment dollars are in a fixed long term investment like a CD. Please illustrate.
I already did. It's not my fault if you can't understand algebra and substitute numbers in for letters.

05-24-2015, 01:00 PM
 Location: SF Bay & Diamond Head 1,779 posts, read 1,418,471 times Reputation: 1971
Quote:
 Originally Posted by mathjak107 this is not true either . owning a home can be a cost cutter which can improve cash flow greatly eventually . right now we are on the fence about buying a co-op for cash. if i buy our cost of housing will fall by 6k a year from renting . but i will give up 12k a year on the income we are no longer getting on what we tie up. so initially renting is cheaper,. but 5 years down the road our maintenance should go up no where what our rent does and if the place appreciates even better. my ex wife is living in another co-op we own. when we bought it in 1987 it cost us about 1100 a month for mortgage and maintenance . it rented for 850.00 i think maintenance was 475. well today she lives there for just maintenance which is 600 and if she was renting it that co-op is 1600 . so the money is not doing nothing . eventually it is cutting costs and bringing up cash flow if you don't sell and live in it..
WHAT is not TRUE? If you have a house and NO mortgage you have ONE investment. If I have a house and a mortgage I have a house investment and a dollar investment and a mortgage liability. All I have to do is beat a <4% liability that is subsidized and inflation enhanced. There are SOME scenarios for SOME people where that would be bad but not in my world.

05-24-2015, 01:01 PM
 12,705 posts, read 9,967,478 times Reputation: 9515
Quote:
 Originally Posted by Perryinva I think a lot of this really has to do with what percentage of your retirement assets are tied up in your house. I see a mortgage as part of diversification. If you've struggled to pay yours, then you are betting on a real estate return and want to to live in a housing situation that requires a mortgage to accomplish something you can't afford. And are betting it's value plus real costs increases ahead of investments. If you have a mortgage you can easily pay off at anytiime, it matters little difference whether you pay it off or keep the loan. At today's ridiculously low rates, it is a simple investment tool, as long as you are not betting the farm on it. In the 80s& 90s and right up u til 2007 not too many people argue a mortgage was a smart move. Just a tool, people. For most people, a mortgage has a far better return on identical living than rent, which is how I always view it.
Irrelevant. We are discussing own with vs. without a mortgage, NOT rent vs. own!
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