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  • Zaphod
    replied





    First of all, your mortgage interest is deductible, so figuring 39.6% bracket (if you could save $190k/year that’s my guess), your “real” interest rate is 2.49%. Say you’ve got 304 months left (just a guess), you have $242,585 left to pay in interest…that plus your principal is 34.6% to lose over 30 years, annualized as if it were compound, 1.346^(1/30) = 1.18%. That’s the rate you’d have to beat for investing to be superior. Seems beatable to me. That’s like a 1-year CD. Now, it is guaranteed, won’t lose like equities and even bond funds can, and there are many advantages to eliminating debt beyond simply a better overall net worth, especially if you plan on early retirement. 
    Click to expand…


    Does 1-2% of inflation need to be factored in here?
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    While you could argue it cancels, its more than that especially given simple/compound. Dollars are worth far more today than in 30 years, if inflation stays at this low level theyll be worth twice as much as then.

    Now you can either hurry up and pay down this tax advantaged mortgage (filled with high transaction fees to access equity) so you can make sure to not pay 50% less in the future...or you can take these very valuable dollars and start their compounding asap.

    People will argue when you're done paying off the mortgage you can then invest, however you've not only missed the gains of those dollars in those years (and it will usually be several years) but you now have less time overall to compound period which will get you.

    Even the dividend yield on even the highly overvalued SP is higher than most mortgages after taxes.

    Leave a comment:


  • Dr. Mom
    replied
    I would recommend ignoring the business share and potential inheritance.  No way would I decrease retirement from 20%.  Be careful you don't give yourself enough excuses to dramatically increase your lifestyle, get used to the upgrades, and then watch the business or inheritance fall through.  Congrats on your success.

    Leave a comment:


  • DMFA
    replied

    Yeah, I did the math a bit wrong on that one.  Factored in the proportion of total paid to the principal incorrectly.  I guessed where you were at on the amortization table based on amount left ($700k) but was off on the time frame. Also didn't account for the slightly shorter term which would ensue which moves the goalposts up a little bit.

    Say you have the first image, copied from calculator.net and linked here.  I estimated with about $700k left on a loan that started at $770,000 with an effective interest rate of 2.49%, there would be 26.1667 years left and $253,528 left in interest to pay, that being what you'd "earn" over the frame you'd "earn" it, were you to pay it.

    So if you could pay it all off now, you'd "earn" (1 + 253528/700000)^(1/26.1667) = 1.3619^(1/26.1667) = 1.01187, or about 1.19%.

    On the other hand, say you had $10,000 to put toward it, and continue making the *same* monthly payment toward it.  This would end up speeding up the schedule by 6 months and save you $9,028 in interest over that time.  1.9028^(1/26.1667) = 2.49%, making it equal to your APR (rounded).

    Say you had $100,000 to put toward it; this would save you $80,003.62 in interest on it over the same time frame, 1.8003^(1/26.1667) = 2.27%, less than the APR.

    Put $200,000 toward it, $140,301.69 saved, (1 + 140301.69/700000)^(1/26.1667) = 2.05%.

    Say you paid an additional $2,000/month.  This would pay it off over 13.75 years, saving $126,836.57 in interest.  (1 + 126837/700000)^(1/13.75) = 1.22%.

    Basically, the less you put into the loan, the closer it is to an annualized compound gain to your APR, and the more you put into the loan, the less of a return you get.  It's diminishing returns.

    Play with this guy: http://www.calculator.net/mortgage-payoff-calculator.html and keep dividing what you'd "earn" over that period of time by the amount you put in.  I literally did this for ten minutes with this.

    Leave a comment:


  • MPMD
    replied


    Say you’ve got 304 months left (just a guess), you have $242,585 left to pay in interest…that plus your principal is 34.6% to lose over 30 years, annualized as if it were compound, 1.346^(1/30) = 1.18%. That’s the rate you’d have to beat for investing to be superior.
    Click to expand...


    sorry if this is dense, i'm not following this math:  Say you’ve got 304 months left (just a guess), you have $242,585 left to pay in interest…that plus your principal is 34.6% to lose over 30 years, annualized as if it were compound, 1.346^(1/30) = 1.18%. That’s the rate you’d have to beat for investing to be superior.

    Leave a comment:


  • DMFA
    replied





    First of all, your mortgage interest is deductible, so figuring 39.6% bracket (if you could save $190k/year that’s my guess), your “real” interest rate is 2.49%. Say you’ve got 304 months left (just a guess), you have $242,585 left to pay in interest…that plus your principal is 34.6% to lose over 30 years, annualized as if it were compound, 1.346^(1/30) = 1.18%. That’s the rate you’d have to beat for investing to be superior. Seems beatable to me. That’s like a 1-year CD. Now, it is guaranteed, won’t lose like equities and even bond funds can, and there are many advantages to eliminating debt beyond simply a better overall net worth, especially if you plan on early retirement. 
    Click to expand…


    Does 1-2% of inflation need to be factored in here?
    Click to expand...


    Yes and no. It's on both sides of the equation vis-à-vis mortgage and investment earnings, so it p much cancels itself out.

    Leave a comment:


  • adventure
    replied


    First of all, your mortgage interest is deductible, so figuring 39.6% bracket (if you could save $190k/year that’s my guess), your “real” interest rate is 2.49%. Say you’ve got 304 months left (just a guess), you have $242,585 left to pay in interest…that plus your principal is 34.6% to lose over 30 years, annualized as if it were compound, 1.346^(1/30) = 1.18%. That’s the rate you’d have to beat for investing to be superior. Seems beatable to me. That’s like a 1-year CD. Now, it is guaranteed, won’t lose like equities and even bond funds can, and there are many advantages to eliminating debt beyond simply a better overall net worth, especially if you plan on early retirement.
    Click to expand...


    Does 1-2% of inflation need to be factored in here?

    Leave a comment:


  • DMFA
    replied










    I’ve been fascinated by the FIRE concept and getting more so. I listen to Dave Ramsey (mostly for entertainment) and realize he’s FOS on a lot of stuff but boy howdy, thinking about some of those 40 year olds w/ paid for houses is starting to get to me. If we went after our house like we did the loans last year we could be 100% debt free by the time my wife was 40, I’m a bit older. We managed to pay like $120k back in one year and still take a ridiculous luxury vacation.
    Click to expand…


    Tell my why you think this would be advantageous for you to do versus putting that money in other places.  I’m not saying it won’t, but it depends on your goals and your understanding of the concepts of a mortgage.
    Click to expand…


    Well, physician loan for one. We were conservative w/ what we bought but we still owe $700k on a purchase price of $770k on a 30 year note at 4.12%.

    With our matches, savings, and retirement performance our nest egg grew by about $190k last year. We’ll have $1M just in retirement within 4 years or so and possibly sooner (barring a market catastrophe). I could up our savings rate but I feel like we’re already doing really well on that.

    I also just get a little sick when I look at the amortization table and realize that I’m paying like 3k a month in interest…
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    None of that is incorrect. I guess if you get more sick at seeing the interest you're paying on your amortization schedule is worse than seeing the earnings you're not getting in the market, then that's fine. Plus, you're right in that the market can go down, but over a 30-year time horizon, it's less likely.

    To find a way to compare apples to oranges, any amount paid over the minimum on the amortization schedule basically saves you in interest approximately what you'd return from compound gains in the market at an annualized rate just under half the nominal APR. That is, it's not an "automatic 4.12% gain," as some people put it. I noted you didn't, and I don't mean to put words in your mouth.

    First of all, your mortgage interest is deductible, so figuring 39.6% bracket (if you could save $190k/year that's my guess), your "real" interest rate is 2.49%. Say you've got 304 months left (just a guess), you have $242,585 left to pay in interest...that plus your principal is 34.6% to lose over 30 years, annualized as if it were compound, 1.346^(1/30) = 1.18%. That's the rate you'd have to beat for investing to be superior. Seems beatable to me. That's like a 1-year CD. Now, it is guaranteed, won't lose like equities and even bond funds can, and there are many advantages to eliminating debt beyond simply a better overall net worth, especially if you plan on early retirement.

    Again, you are not wrong to pay your mortgage or any debt ahead of the amortization schedule. I only wanted to illustrate how that money "earns" in comparison to a compounding annualized figure. It's often not nearly as much as one might think, the old "paying a X% loan is a X% guaranteed gain" mentality. Holdings with that low a guaranteed rate still have a place in a portfolio. Again, the scenario only holds true if the money which would be used to pay the mortgage is instead invested, ensuring to avoid the "comfortable debtor" psyche.

    Have you considered refinancing to a better rate, like a 15-year fixed? Depending on the transaction costs, that might be a better way forward.

    Leave a comment:


  • q-school
    replied
    Hopefully you are investing and getting a better rate of return than your tax adjusted net mortgage rate.

    I would argue there is some benefit to not having such a large amount of your net worth tied up in a fairly illiquid home.

    Also, if you believe in inflation over thirty years the benefits of paying off early would be less.

    Lots of choices. With your savings rate you should feel pretty good. No wrong choices, but you have to decide where you draw the line between emotionally feeling better about something and how much you value statistically optimized rate of return.

    Congrats on being a good saver. You should be proud of having a nice house that you worked hard for. Enjoy it whether you pay down early or invest the money in other ways.

    Leave a comment:


  • MPMD
    replied







    I’ve been fascinated by the FIRE concept and getting more so. I listen to Dave Ramsey (mostly for entertainment) and realize he’s FOS on a lot of stuff but boy howdy, thinking about some of those 40 year olds w/ paid for houses is starting to get to me. If we went after our house like we did the loans last year we could be 100% debt free by the time my wife was 40, I’m a bit older. We managed to pay like $120k back in one year and still take a ridiculous luxury vacation.
    Click to expand…


    Tell my why you think this would be advantageous for you to do versus putting that money in other places.  I’m not saying it won’t, but it depends on your goals and your understanding of the concepts of a mortgage.
    Click to expand...


    Well, physician loan for one. We were conservative w/ what we bought but we still owe $700k on a purchase price of $770k on a 30 year note at 4.12%.

    With our matches, savings, and retirement performance our nest egg grew by about $190k last year. We'll have $1M just in retirement within 4 years or so and possibly sooner (barring a market catastrophe). I could up our savings rate but I feel like we're already doing really well on that.

    I also just get a little sick when I look at the amortization table and realize that I'm paying like 3k a month in interest...

    Leave a comment:


  • DMFA
    replied




    I’ve been fascinated by the FIRE concept and getting more so. I listen to Dave Ramsey (mostly for entertainment) and realize he’s FOS on a lot of stuff but boy howdy, thinking about some of those 40 year olds w/ paid for houses is starting to get to me. If we went after our house like we did the loans last year we could be 100% debt free by the time my wife was 40, I’m a bit older. We managed to pay like $120k back in one year and still take a ridiculous luxury vacation.
    Click to expand...


    Tell my why you think this would be advantageous for you to do versus putting that money in other places.  I'm not saying it won't, but it depends on your goals and your understanding of the concepts of a mortgage.

    Leave a comment:


  • MPMD
    replied





    Lots of people discount a business like 30% if it is particularly illiquid. 
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    Agreed. Risk and liquidity factor in here. Also, if:



     
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    That implies the business may not be making sufficient funds to sustain itself. Will there be a capital call? Is this a good business? Does it make money now? Does it have a solid management? Will you have to pay in to the business for any reason? Are there any risks for taking on this (share of the) business?

    If someone handed me 500k of Microsoft stock, that’d be awesome. If someone handed me 500k of a business that doesn’t make any money – there is a chance I wouldn’t take it. It’d have to depend on the leaders, financials, and business plan.

    It’s likely a cool deal – just lacking all of the details. Congrats on the sound financial picture. … What is your 10 year plan? When do you want to retire? Work less? Work elsewhere? Work as parents? Go surfing? Run a non profit? Etc. Good time to re-review the future plan.
    Click to expand...


    Still working on the plan for 10, 20 years.

    Frankly the last 2 years have been an adjustment to having so much money left at the end of the month.

    I've been fascinated by the FIRE concept and getting more so. I listen to Dave Ramsey (mostly for entertainment) and realize he's FOS on a lot of stuff but boy howdy, thinking about some of those 40 year olds w/ paid for houses is starting to get to me. If we went after our house like we did the loans last year we could be 100% debt free by the time my wife was 40, I'm a bit older. We managed to pay like $120k back in one year and still take a ridiculous luxury vacation.

    So glad/thankful I found this website in residency. I hit the ground running and got my wonderful spouse on board. We definitely feel like we're in a great place and frankly that's mostly b/c of WCI.

    Leave a comment:


  • adventure
    replied


    Lots of people discount a business like 30% if it is particularly illiquid.
    Click to expand...


    Agreed. Risk and liquidity factor in here. Also, if:


    It’s actually a share in the business not a cash windfall. Business will generate income at some point in the future but not now.
    Click to expand...


    That implies the business may not be making sufficient funds to sustain itself. Will there be a capital call? Is this a good business? Does it make money now? Does it have a solid management? Will you have to pay in to the business for any reason? Are there any risks for taking on this (share of the) business?

    If someone handed me 500k of Microsoft stock, that'd be awesome. If someone handed me 500k of a business that doesn't make any money - there is a chance I wouldn't take it. It'd have to depend on the leaders, financials, and business plan.

    It's likely a cool deal - just lacking all of the details. Congrats on the sound financial picture. ... What is your 10 year plan? When do you want to retire? Work less? Work elsewhere? Work as parents? Go surfing? Run a non profit? Etc. Good time to re-review the future plan.

    Leave a comment:


  • The White Coat Investor
    replied
    Lots of people discount a business like 30% if it is particularly illiquid.

    Leave a comment:


  • MPMD
    replied




    Not sure you have any definite windfall yet. A business that doesn’t produce any income is far from a sure thing. I don’t view my business value as anywhere near a sure thing (generally discount it 30-50% when calculating net worth) and it produces lots of income.
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    interesting.

     

    is that a common practice in the FP world or is that just a WCI rule of thumb?

    Leave a comment:


  • The White Coat Investor
    replied
    Not sure you have any definite windfall yet. A business that doesn't produce any income is far from a sure thing. I don't view my business value as anywhere near a sure thing (generally discount it 30-50% when calculating net worth) and it produces lots of income.

    Leave a comment:

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