Money in the bank vs paying down/off the mortgage (dump, inherit)
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Everyone makes decisions using different processes. When it comes to money and investing, I like to throw out emotions and try to make decisions based on analysis. We can start with the very basics. A current mortgage will cost us less than 4%, closer to 3%, interest. Overtime money invested in the the stock market will yield up to about 10%. A 60:40 allocation will yield about 7-8% with much less volatility.
That is a pretty crude analysis. As Mathjak points out constantly, we need to worry about sequence of returns, volatility in the markets and other factors that can result in short term risk for investing. Fortunately we have a really powerful tool to help analyze these factors: Firecalc. This is the same tool that helps predict outcomes for withdrawals from our portfolio. In essence this is what we are doing with money invested from a mortgage. We know that for the long term a roughly 60:40 portfolio will easily cover the 4% cost of today's mortgages. Sure there is some short term risk. Firecalc can even show us that risk in detail with graphical analysis. The risk of falling behind decreases very substantially for investing over a minimum of 5 or 10 years. Even a loss does not mean some sort of major catastrophe. It just means that investing did a bit worse than putting that money towards paying off the mortgage. I highly recommend using Firecalc with factors that pertain to your individual situation.
Mathjak seems to enjoy mudding the waters. This issue is really not that difficult. For the vast majority of situations investing instead of paying off a mortgage makes a lot of sense. It is almost impossible to lose and the yield can be very considerable. If Mathjak ever decides to buy a house or condo instead of renting, it will be interesting to see what his analysis yields. My guess is he will take a low interest rate mortgage over paying cash.
Everyone makes decisions using different processes. When it comes to money and investing, I like to throw out emotions and try to make decisions based on analysis. We can start with the very basics. A current mortgage will cost us less than 4%, closer to 3%, interest. Overtime money invested in the the stock market will yield up to about 10%. A 60:40 allocation will yield about 7-8% with much less volatility.
That is a pretty crude analysis. As Mathjak points out constantly, we need to worry about sequence of returns, volatility in the markets and other factors that can result in short term risk for investing. Fortunately we have a really powerful tool to help analyze these factors: Firecalc. This is the same tool that helps predict outcomes for withdrawals from our portfolio. In essence this is what we are doing with money invested from a mortgage. We know that for the long term a roughly 60:40 portfolio will easily cover the 4% cost of today's mortgages. Sure there is some short term risk. Firecalc can even show us that risk in detail with graphical analysis. The risk of falling behind decreases very substantially for investing over a minimum of 5 or 10 years. Even a loss does not mean some sort of major catastrophe. It just means that investing did a bit worse than putting that money towards paying off the mortgage. I highly recommend using Firecalc with factors that pertain to your individual situation.
Mathjak seems to enjoy mudding the waters. This issue is really not that difficult. For the vast majority of situations investing instead of paying off a mortgage makes a lot of sense. It is almost impossible to lose and the yield can be very considerable. If Mathjak ever decides to buy a house or condo instead of renting, it will be interesting to see what his analysis yields. My guess is he will take a low interest rate mortgage over paying cash.
I would likely pay cash at this point ..i am no longer aggressive enough to make borrowing money have a large enough risk premium over a risk free govt bond to overcome market risk and sequence risk .. I am not interested in shelling out thousands more in interest in a down market and we know it’s coming , we just don’t know when or how long and how bad .
If I was 80-100% equities I would take a mortgage but not at my levels today.. just not aggressive enough anymore to make it worth it.
For someone who supposedly leaves emotions out of investing you certainly ran for the hills last year when you sold out to much lower levels of equities needlessly as emotions had you worry about what could be
It is not written in stone that one can only get 0.10% or less return on the money kept by getting a mortgage
Yeah, but in practical terms a person trying to decide if they should pay off the mortgage is probably not thinking of the stock or bond market as the alternative.
The 0.10% figure was just an illustration. You can put your money into a 60-month CD and earn as much as 0.30% but that's still way less than you're paying on the mortgage.
Mathjak seems to enjoy mudding the waters. This issue is really not that difficult. For the vast majority of situations investing instead of paying off a mortgage makes a lot of sense. It is almost impossible to lose and the yield can be very considerable. If Mathjak ever decides to buy a house or condo instead of renting, it will be interesting to see what his analysis yields. My guess is he will take a low interest rate mortgage over paying cash.
The recent mortgage rates are an anomaly. From the 1970s thru 2000 the rates were above 7% with averages much higher. Many years the market returns were below the mortgage rates. The situation with interest rates is quite different today with interest rates that are artificially being held low through significant policy intervention. There is great risk to the market when so much of its growth is tethered to low interest rates. What if rates are 8% or more in 2025? If you don't think it can happen, pull up a historical mortgage rate chart and look at the spikes, we may be ready to begin the climb now since there are a lot of public policy changes underway including global initiatives that will have inflationary effects. These low rates will correct and go up and the supernormal growth rates of equities will cool and go down, it always has. To me the risk of leveraging a hard asset by pulling money out of it and putting it into equities at this stage is substantial especially for someone like myself who is in their 50s. As interest rates rise many people, especially those at or near retirement age, will start shifting out of equities into savings instruments that pay a decent interest rate that they can use to supplement pensions, SS, and other retirement income. Having a paid off home (or two) in that environment is a big plus. A recession is a real risk for young people who leverage their mortgage payment. A job loss and inability to cover the payment and living expenses could force an equity sale which could be at the worst time and additional penalties as well. In my opinion, a balanced approach of investing AND paying down debt benefits in good times and in bad. YMMV.
When you have decades to go , markets have pretty much always done well as well as averaged within a few points the same thing whether it was the booming 80’s or the Great Depression.
So long term returns on diversified funds become less and less risky the longer you go out …they may be volatile but volatility is not the same as risky ….volatile becomes risky the shorter the time frame you are dealing with .
So I wouldn’t fear a mortgage at 4% or less over the long haul and investing at high equity levels …in fact I would only be 100% equities during my accumulation stage .
But I would have a different view to go with a totally different allocation through what kitces calls the red zone which extended from pre retirement to about 5-10 years in to retirement
The worst time frames in history , the ones that the 4% safe withdrawal rates are based on we’re
1907, 1929 ,1937 ,1965/66
For the 30 year retirement period
starting in 1907 , equities returned 7.77%
Starting in 1929 8.19%
Starting in 1937. 10.12%
Starting in 1966. 10.23%
The 140 year average was 10.35%
So long term stocks have always done close to the same .
However , every time frame above failed in the first 15 years when spending down into poor real returns as it ate up capital at an excessive rate .
So the shorter 15 year term caused every failure in our history . Inflation made the 1965/1966 group the worst ever ..so while every 30 year time frame was very close to normal for equities , what happened in sequencing over the first 15 years caused the failure at a 4%swr .
So average returns mean little once you are spending down ..it is all about the sequence of those long term returns , especially over the first 15 years .
Reinvesting and adding little bits isn’t the same thing as leverage via a mortgage ..not even close.
There are two situations here …one is making extra payments when you have a mortgage ….that is very different then paying cash and no mortage over what could be decades working for you .
An extra payment a year is not going to effect wealth growth like using cash and no mortgage will.
Extra payments still involve using leverage to invest , paying cash does not.
As far as accelerating the payments to quickly , remember all your future appreciation is already baked in to that house , mortgage or not .so missing growth is not a factor like it is investing elsewhere ..
You can miss the greatest run up in history elsewhere , so it is a very different story than the appreciation being locked in whether you have a mortgage or not
So at best by paying it off sooner you can save some interest ..but typically over time that interest is tiny compared to what that money can grow elsewhere.
Short term we have seen very nice appreciation in housing in many areas very untypical of the housing markets ….so you did not give up much by not investing elsewhere over the last few years .
But had you done both buying that house and taking the mortgage and investing elsewhere you would have had both going for you .
typically over time market investments have surpassed housing appreciation by 2 to 4x
Using leverage over decades as a mortgage is utilized will build far greater wealth more often than not , then just trying to use your own money …
Re: Bolded part. It's true that if a person has the choice, using your money to invest in equities rather than in your house will pay a better return in the long run. However, "in the long run" we're all going to be dead. For some people, that will happen sooner than others.
To compound that situation, most people don't even have the choice of paying all cash for their house until they are about 50 to 60 years old, and it's these precise people who may not have numerous decades to invest their money "for the long run". Some may have just a decade or two (if that) and if they chose the "investment" route and the market tanks shortly after they do the bulk of their investing, then their retirement years may not be their golden years. They could turn into their "penny pinching" years.
My basic money strategy is to categorize my money/assets/pensions/etc into three different categories: The first category is the "basics or necessities". That would include my primary residence and funds sufficient to live decently for the remainder of my life. I'm not going to gamble or risk these assets because it would be too difficult to get back if I had to start over again from scratch.
The second category is the "niceties". This category pays for things that are nice to have and do, but are not considered as necessities. I'll risk these funds, but do so somewhat conservatively.
The third category is my "play money". And although it's quite sizeable right now, I could lose every penny of it and still not affect my lifestyle in any meaningful way.
So, my advice to someone at or near retirement age is to take care of the necessities first. Don't put your house in hock just to have funds to gamble in the market. Take care of the basics and have sufficient extra for some niceties. Then, funds over and above that, invest for growth.
The way I see it is if you pay down the mortgage and have lots of equity and something bad happens you can still lose your home, but if you have that money in the bank you have many months or years worth of payments to keep yourself afloat through the tough time.
The only way it makes sense is if you can completely pay it off and still have some liquid cash.
Yeah, but in practical terms a person trying to decide if they should pay off the mortgage is probably not thinking of the stock or bond market as the alternative.
The 0.10% figure was just an illustration. You can put your money into a 60-month CD and earn as much as 0.30% but that's still way less than you're paying on the mortgage.
I personally would rather pay cash over having a mortgage or a loan. I pay off cars in a year after purchase, I do not carry a credit card balance from month to month while using credit cards for almost every purchase. When I got close enough to retirement having owned more than one house to include rental property and a commercial building I decided that we no longer needed to keep them and sold and consolidated by paying off my mortgage. When I decided that I created enough passive income to provide needs we liquidated rental property and sold commercial property to pay off remainder of primary residence as we entered our non-working part of our lives. So should I have taken all that money from the sale of my property and invested in the stock market or bond market because I think I already have enough (about 50% of my wealth) is in my 401k and my wife's IRA. I honestly understand that I should not take money from my savings as a rule just to broker myself. It is not what people with means do. If you have the means to live without paying interest on money borrowed I think you should. But I am just one family here and as have been said a few times there are many more ways of living life.
There are many seniors who live off ss and pensions and don’t rely on a paycheck from their own nest egg .
For them the pay check never really stopped and they can be as aggressive as they like .
Some may actually be investing more for legacy money then for living on .so in effect they are investing for their heirs life time not theirs .
so everyone’s goals and needs are going to be different..if that was my situation I would likely still be very high equity levels , but it is not our situation
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