Pay off mortgage or keep flexibility

All the different ways of solving the shelter problem. To be static or mobile? Roots, legs, or wheels?
Post Reply
BenjaminF
Posts: 5
Joined: Fri Jun 05, 2015 3:33 pm

Pay off mortgage or keep flexibility

Post by BenjaminF »

I am in a position where I can pay off my mortgage in my early 30s.
This would obviously greatly reduce my monthly expenses. It would basically put me in a position where I could easily maintain my current lifestyle while working part-time (which I already do).

Because I already decided to work part-time, I can no longer save money but I can sustain the situation by using a 4% withdrawal rate. If I pay off the mortgage, I even have some room to start saving again whilst continuing to work part time. BUT I would significantly reduce my stash.

If I consider that the monthly mortgage payment consists of both "capital repayment" and "interest on the borrowed money", the maths tells me it would be an investment that yields 6% in terms of cash flow. However if I only count the "interest" part, the investment would yield a measly 2%.

So it kind of begs the question whether this is a sound financial investment. 2% seems really low and there is the opportunity cost of having a much smaller stash to invest in stocks which should yield 7% over the long term.

My rational self tells me it is a bad investment, but my emotional self likes the idea of reducing monthly expenses and having that sense of security.

What do you guys think of this situation and what would you do?

IlliniDave
Posts: 3845
Joined: Wed Apr 02, 2014 7:46 pm

Re: Pay off mortgage or keep flexibility

Post by IlliniDave »

My belief is that emotion trumps reason in long-haul financial outcomes for most of us, so it should be respected/factored in.

In your situation I'd work full-time until the debt is paid by throwing everything available (after meeting living expenses and putting 10-15% into long term savings) at the mortgage. But that's me and my values and my temperament, which don't necessarily project sensibly onto another person. What I wouldn't do is throw all my savings into it and continue working part time (unless I had quite a lot of savings left over after the payoff). YMMV

BenjaminF
Posts: 5
Joined: Fri Jun 05, 2015 3:33 pm

Re: Pay off mortgage or keep flexibility

Post by BenjaminF »

After the payoff, my annual expenses would be less than before the payoff. In that sense, I would have about 5x annual expenses covered after the payoff.

Working full time to throw more money at the debt is definitely a healthy approach. What makes it difficult for me is that I have trouble breathing in a structured 9-5 environment (hence the decision to work part time). I would love to be my own boss. I don't mind working hard or working odd hours. I just need a lot of mental stimulation and freedom to make odd decisions. So it would be more of a big experiment in which I am terrified I won't be able to make ends meet. So reducing expenses would put less pressure on having to make money. But I would still regret making the payoff if it would be a bad financial investment. Dilemma...

prognastat
Posts: 991
Joined: Fri May 04, 2018 8:30 pm
Location: Texas
Contact:

Re: Pay off mortgage or keep flexibility

Post by prognastat »

Is it the best financial decision? No.

Is it a terrible decision? No.

Of course this depends on the interest being charged for the mortgage, but in most cases your return for having that money invested in the market rather than your house is likely to earn higher returns if you purchase a house in the last 10 years or so.

You could do far worse things than having a paid off home though.

User avatar
Mister Imperceptible
Posts: 1669
Joined: Fri Nov 10, 2017 4:18 pm

Re: Pay off mortgage or keep flexibility

Post by Mister Imperceptible »

http://danielamerman.com/course/dkFOUR5kd.html

I will tell you that my funds not being used to pay off my mortgage are on the sidelines, waiting for a stock market downturn. Liquidity is nice to have.

“Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”
-Warren Buffett

Laura Ingalls
Posts: 668
Joined: Mon Jun 25, 2012 3:13 am

Re: Pay off mortgage or keep flexibility

Post by Laura Ingalls »

@mister imperceptible
The stock market returns from that same time also barely kept pace with inflation. CD’s might have been the wisest choice.

The perfect play is only going to be known in hindsight and then still only maybe. Circa 2005-2007 DH and I decided to aggressively pay off our mortgage (using a combo of cash flow and selling appreciated stock). In 2008 DH was laid off and we had a paid for house and the remaining money we had in stocks (both taxable and tax deferred) tanked. But the value of the house tanked too and it was a seriously illiquid pile of lumber when we wanted to sell. We ended up selling at the bottom (2012 in that market) and putting that money back in the stock market. The market did well and when we bought our next house (2015) it was funded in large part from the gains on the from the three years in the stock market. Fast forward to 2018 the real estate market in that area has finally caught up to its 2005 peak blasted right on to new highs. What was the right course of action, who knows?

The point of my long winded story is that trying to time two different markets simultaneously to your benefit is a fool’s errand. I don’t know much but being highly leveraged always works right up til it doesn’t. :? Paying down debt and investing for the long haul are going to yield more than consumption. There is no one size fits all answer.

User avatar
Mister Imperceptible
Posts: 1669
Joined: Fri Nov 10, 2017 4:18 pm

Re: Pay off mortgage or keep flexibility

Post by Mister Imperceptible »

@Laura Ingalls

I definitely don’t have a crystal ball. But your experience in 2008 shows it might have been nice to have cash or even gold on hand to sort of insulate oneself from a market crash. When so much money is tied up in a house, it limits liquidity and flexibility. When one’s funds outside of home equity are all in the stock market, then the stocks and the house value go down together. It would seem cash and gold are good to have to offset the mortgage. Gold might even go way up as your house value and stocks are going down.

Laura Ingalls
Posts: 668
Joined: Mon Jun 25, 2012 3:13 am

Re: Pay off mortgage or keep flexibility

Post by Laura Ingalls »

Mister Imperceptible wrote:
Sun Aug 26, 2018 1:24 am
@Laura Ingalls

I definitely don’t have a crystal ball. But your experience in 2008 shows it might have been nice to have cash or even gold on hand to sort of insulate oneself from a market crash. When so much money is tied up in a house, it limits liquidity and flexibility. When one’s funds outside of home equity are all in the stock market, then the stocks and the house value go down together. It would seem cash and gold are good to have to offset the mortgage. Gold might even go way up as your house value and stocks are going down.
We ended the layoff with more cash than we started with because we could live off one part time job due to low expenses, (paid for house and no child care) and DH had severance and then unemployment.

User avatar
Mister Imperceptible
Posts: 1669
Joined: Fri Nov 10, 2017 4:18 pm

Re: Pay off mortgage or keep flexibility

Post by Mister Imperceptible »

@Laura Ingalls

In no way was that a critique. Just a word of caution for BenF.

@BenF

Your portfolio is not in a vacuum. If the economy continues “going well,” you will continue earning. It is in a scenario where we have a downturn that you might be unemployed, which is when you will most want the flexibility that comes with liquidity and anti-correlated assets.

Laura Ingalls
Posts: 668
Joined: Mon Jun 25, 2012 3:13 am

Re: Pay off mortgage or keep flexibility

Post by Laura Ingalls »

@Mister

Not the least bit defensive. I see your point. While it was happening the house seemed like both an anchor in an economic storm and also like an anvil tied around your ankle. :lol:

I’m not hardwired to think that gold makes sense. More likely to horde beans, firewood, whiskey, or toilet paper.

Post Reply