Stupid Paying-Down-The-Mortgage Question Asked 1mil x before

[Hristo Botev]

Forgive me, but I'd love ya'lls help as I try to work this out, even though I know it's a topic that's been beat to death here and elsewhere.

Our family currently lives in a modest in-town townhouse walking distance from our kids' school and my and DW's work. We've been contributing $1,000 toward mortgage principal each month, and we have about 55% equity in the house, 1 year in to a 15-year mortgage at a 3.375 interest rate. Our youngest will finish at his K-8 school in May 2027, at which point we will have paid off the house if we continue contributing $1K/mo. extra toward principal. The high school the kids will likely go to is on the other side of our metro area, which means that there really won't be much reason for us to stay in our current house once our youngest matriculates to high school (I can work remotely, if I'm still working, and DW probably won't be working where she's at in 7 years), and in fact it might even make sense to move when our oldest starts high school (in 4 years), perhaps to an apartment somewhere in between our kids' K-8 school and the high school.

Once our kids finish high school I see no way DW and I will continue living anywhere near the city.

So, my question is, given that we plan to be in our current house for the next 4-7 years (and no longer and no shorter), does it really make sense to continue paying down the mortgage, or would it make more sense to put that money in some sort of liquid savings account, where it can be used for investing in stocks, in rural land, etc.?

FWIW, DW and I recently stopped contributing to our 401K accounts, except to get the match, because we realized that with the exception of our home equity, our net worth consists almost entirely of money in various age and investment-restricted retirement accounts, and we don't have a whole lot of confidence any longer in Warren Buffett's/Jack Bogle's buy-and-hold index fund investment strategy. We've instead started moving that money to a savings account, while we ponder what we want to do with it.

Also, renting out our current house is an option, and not a bad one given the current rental market in our town. The HOA has some restrictions on rentals, and I believe we'd have to get HOA approval; but the prior owner of our house was renting it out.

I'll just add that our property tax rate is about the highest in the state, because of the school system; so even when our house is paid off, we can still plan on having to pay somewhere between $700-$1,000/month just in taxes and insurance (and, again, our house is VERY modest for where we live).

Finally, I think our housing market is ridiculously overpriced, based almost entirely on a well-regarded public school system that gets worse every year, as it is busting at the seams as more and more white-flight yet gentrifying urban progressive types buy $1mil bungalows so they can feel good about their wokeness for sending their kids to an urban public school, even though the tiny municipal school district was created decades ago explicitly in response to integration--so given the astronomical property taxes, the school is private in all but name, and it's about as "diverse" from a socio-economic class standpoint as Eton.

[Alphaville]

white-flight yet gentrifying urban progressive types buy $1mil bungalows so they can feel good about their wokeness for sending their kids to an urban public school

really? $1mil wokeness fees? is that why they’re doing it for?

[Dream of Freedom]

Once our kids finish high school I see no way DW and I will continue living anywhere near the city.

Where do you want to live and why is that not your current choice?

Anyway having some liquid money is useful for handling life's little emergencies, but that doesn't take too much. I suppose given that the choice is between a plan and waiting for a new plan to materialize I would go with the plan.

[Hristo Botev]

really? $1mil wokeness fees? is that why they’re doing it for?

Yes. They want their kids to get a private-school level education, but without having to say they send their kids to private school.

[classical_Liberal]

My 2-cents

Primary residences are protected asset classes in our society. So it is nice to know that even in a SHTF personal financial crisis you still have your home. Other than that, in the current economic climate, I see no good reason to pay off your home.

I think we have reached a point in monetary policy that there is no choice but to stimulate inflation at any cost. Whether this be through government spending or direct federal reserve intervention in the form of helicopter money. They may not be successful (which will cause a different set of problems), but they have to try. Low rate leveraged real estate is traditionally one of the best investments during times of higher inflation. I don't even want a house, but have been trying to make the cashflow numbers work simply because I think leverage real estate will perform so well over the next decade.

Also worth consideration. In most states the bank shares the liability with you if your neighborhood goes to crap. They can't go after you for money above the value of the house. No capital gains. The potential of deductible interest. The potential of cash flow as a rental.

In your shoes, if I had equity, I'd be considering a cash out refi 15 yr at 2.5%.

[Hristo Botev]

Where do you want to live and why is that not your current choice?

Right now we want to live where we're at, because we want our kids to get a Catholic-school education, and we have a solid community here centered around our parochial school. But when the kids finish at the parochial school, there will be nothing left tying us to where we currently live. And at that point we'll want to move to the country or back home where we grew up.

As for the liquid money, it's not an emergency fund, it's an investment fund--e.g., I have friends who have businesses I'd like to be able to invest in; I want some money to try my hand at investing in the stock market, outside of index funds; I want some money to purchase rural property if the right tract comes up for sale. All of those ideas make more sense to me than paying down a mortgage in a place where I don't ever plan on living mortgage free.

[Hristo Botev]

In your shoes, if I had equity, I'd be considering a cash out refi 15 yr at 2.5%.

Admittedly I had to look up what this is, but it seems like an awful idea; the last thing I want is MORE debt. Cashflow to what end?

[Dream of Freedom]

All of those ideas make more sense to me than paying down a mortgage in a place where I don't ever plan on living mortgage free.

Sounds like you answered your own question. Just needed to solidify your thoughts I suppose.

[Alphaville]

Yes. They want their kids to get a private-school level education, but without having to say they send their kids to private school.

i’m familiar with strong PTA support of well-placed public schools, but from there to “without having to say...” seems a bit of an overjudgmental exercise in mind reading. it seems like you’re uncomfortable with your neighbors and it’s coming out the wrong way.

if you’re uncomfortable with the results of your upward social mobility, you could sell everything now and go back to the primordial boonies where you could perhaps feel comfortable again. subjecting yourself to 4-7 years of further social discomfort can’t be a good thing for your stress levels.

i understand the tensions of upward mobility, but there has to be a better solution to it than moralizing angrily about thy neighbor. a little patience and tolerance and adaptation can go a long way. maybe they want to feel virtuous helping the school just like you feel virtuous cooking hunks of pigmeat in the country? everybody needs something.

eta: this was just a long roundabout way to say that 4-7 years of the same seems like an unbearable horizon and consider maybe if you really want to stay or go sooner, but if you stay you need to adapt psychologically or you’ll burst.

[Hristo Botev]

this was just a long roundabout way to say . . . .
[/quote]
Indeed; helpful as always Alphaville.

[classical_Liberal]

Admittedly I had to look up what this is, but it seems like an awful idea; the last thing I want is MORE debt. Cashflow to what end?

If you owe money at 2.5%, your house retains its value, and inflation is at 2.5% you have a net 0 borrowing rate. Can you do better than 0% returns on your liquid assets? If inflation is at 4% you're being paid to borrow that money at a rate of 1.5% per year. On top of that, the home may appreciate in real value as well. Not just your equity, but by the entire levered value.

Edit: Historical inflation rates. Most of this pre-massive monetary stimulus. Does paying 2.5% seem unreasonable based on this history?

Edit #2: I stand corrected in my previous comment. Most states actually do allow for deficiency judgements. Just not any that I'm interested in owning, so I didn't realize it's fairly common. If your state does, then you are on the hook for the entire mortgage amount. https://www.nolo.com/legal-encyclopedia ... e-law.html

If you happen to be in a state that does not allow for deficiency judgements, then you have even more to gain(by virtue of less risk) by leveraging your property. The bank stands to lose if a general deflationary environment occurs, or even just a hyper local one in real estate. You are only risking your equity, so the less you have the better.

[basuragomi]

Investing in higher-return assets is superior to reducing low-cost debt, if the return exceeds the cost of debt. That's the most straightforward approach to take for this problem. Though I guess it isn't about the money in this case.

Scenario A: keep paying down 14-year mortgage. Sell at end of 7 years.
Scenario B: refinance immediately to 25 year mortgage and then again in 5 years. Invest the difference and reinvest gains. Sell both house and investments at end of 7 years.

In both cases: $300,000 house value, 3.375% interest rate for all mortgages, $135,000 loan principal

Assuming 5% discount rate, 5% investment returns, no real estate value increase, no transaction costs, annual compounding.

Scenario A: $85,000 paid, $26,000 in interest. $223,500 recovered from house sale (undiscounted total $112,500).
NPV5: $81,230

Scenario B: $54,000 paid, $29,000 in interest. $189,500 recovered from house sale (undiscounted total $106,500). Plus $35,500 of investments.
NPV5: $107,554

Difference: ~$26,000

Now assuming house value increases at same rate as mortgage rate:
Scenario A NPV5: $134,340
Scenario B NPV5: $160,665
Difference: ~$26,000

[Hristo Botev]

OK, that makes sense, and its interesting; thank you for taking the time to explain it to me. I think I just know I don't have the discipline to make something like that work in my favor; and the idea of using (more than I already am) my primary residence as a leverage tool makes me nervous. Is what you're proposing kind of the extreme of what I'm considering? I.e., I'm worried I'm putting too much towards equity by making extra principal payments; whereas you're proposing I cash out all (almost all) of the equity I currently have to invest in, something (that I haven't figured out yet, but not VTSAX/SPX).

[jacob]

As a general rule, the duration of your assets should always be matched to the duration of your liabilities!!

If you plan to get out of there in 4-7 years, what you currently have is a leveraged and apparently "ridiculously overpriced" asset with a duration of 4-7 years.

If you have most of your NW in that, that's crazy! If you only have a small amount (<10-15%) locked up in your residence (as you should have), it's more a matter of taste and opinion.

(In our case, we fully own our home. We bought in 2014 (cash) believing that US equity markets were already overvalued relative to the housing stock NAV. This turned out to be true too. Since then the house has increased by 110% and the stock market by 78% on paper. Cost of living is about half what we paid in rent. Not having to pay a mortgage is surely nice. However, we still have to pay what amounts to a substantial amount of our expenses in RE taxes. Ownership is always just a matter of degree---only difference is that we're one step beyond the bank. More importantly, this year we have so far grown 130 pounds of vegetables and we have some great neighbors. OTOH, it does feel much more like an anchor than when we rented. The inertia of ownership is much higher.)

[classical_Liberal]

Is what you're proposing kind of the extreme of what I'm considering?

I don't consider it extreme in the current economic circumstances. The Fed has flat out stated they will achieve 2% inflation by any and all means. If you have the opportunity to get long term, fixed leverage anywhere near that, it's going to work out in your favor. It's the difference between thinking as a businessman and thinking as a salaryman or even a renaissance man..

That being said, I certainly get your side of it. Security, less outbound cash flow, ect. It's just that it's probably going to cost you, a lot. Because you still have all the risk involved with owning the property, yet are not taking advantage of the subsidized leverage owning it offers you.

[Hristo Botev]

Investing in higher-return assets is superior to reducing low-cost debt, if the return exceeds the cost of debt. That's the most straightforward approach to take for this problem. Though I guess it isn't about the money in this case.

Thank you for running the numbers! It's good to see in black and white what's needed to make this a smart financial decision. Though, as you noted, and I'm slowly starting to realize, this isn't really a money decision. The main benefit of paying down a mortgage on your primary residence is almost entirely psychological, in my mind, and if we're not planning on staying in the house long term, then those psychological benefits aren't really there.

[Alphaville]

on the subject of zeroing out equity to invest in the market, i wouldn’t do it at this point. the market seems to be overvalued or at least the recovery seems already priced in. i know this is timing the market, which purportedly nobody can do right consistently, but still: when in doubt, abstain.if you’re sure of an asset that will shoot up in value, by all means do it—i’m not sure that the market won’t crater next.

cash seems to be a reasonable store of value in uncertain times. gold bugs are always predicting the end of the dollar, but if anything, the dollar becomes stronger relative to other currencies in times of global turmoil. if the turmoil were local and not global, it would be a different story; but when the usa gets the flu other countries catch pneumonia. waiting to see where things will go with some flexibility in one’s choices is probably a good thing right now.

[jacob]

Given the light of discussions in other threads, and since it's so very easy to get side/single-tracked, I'd be remiss to not point out that the value of a house goes beyond its accumulated equity or how much it ads to the NW. It's also not just about whether you like living there. There are other kinds of values which although harder to quantify and put a price on have real worth in terms of what kind of systems you can build and what kind of live you can live there.

[Alphaville]

what kind of systems you can build and what kind of live you can live there.

seems to me from his journals etc he’s very much wanting to build those systems elsewhere though. under those conditions, 7 years feels like a sentence.

[Hristo Botev]

As a general rule, the duration of your assets should always be matched to the duration of your liabilities!!

If you plan to get out of there in 4-7 years, what you currently have is a leveraged and apparently "ridiculously overpriced" asset with a duration of 4-7 years.

If you have most of your NW in that, that's crazy! If you only have a small amount (<10-15%) locked up in your residence (as you should have), it's more a matter of taste and opinion.

Our home equity is ~20% of our total NW. So, if I'm understanding you correctly (I had to look up what "duration of your assets . . . matched to the duration of your liabilities" means; so, permission to treat the witness as having limited mental capacity), it's not a good idea for us to increase that percentage by continuing to make extra payments toward principal; we're better served investing that money elsewhere.