Discuss Latest WCI Blog Post: Benefits of Paying Off Your Mortgage — Evaluating the ROI

[The White Coat Investor]

Don't get trapped into thinking your money is "tied up" if you own a home and are paying a mortgage. There are plenty of benefits to doing so.

The post Benefits of Paying Off Your Mortgage — Evaluating the ROI appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.



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[Tangler]

Great read. Confirmation bias for me. I have a paid off mortgage at age 48.

He mentions it briefly but age = stage = important variable regarding the use of leverage / mortgage to invest.

I think of mortgage paid off as a negative bond (sort off).

Instead of buying bonds, we crushed mortgage at 3.375% a few years ago.

Debt = risk. with no mortgage i “feel” i can take more risks.

More risks = Invest in entrepreneurial ventures, higher stock allocation, lower bond allocation.

Other than I-bonds and a large cash EF we are almost all stocks.

Our IRAs are heavy stocks. Stock index funds with a 15-20 years time horizon.

I would feel less secure about this if we had a mortgage.

The borrower is slave to the lender.

Investing with borrowed money (mortgage $) into VTSAX is reasonable and perhaps wise for the young doc with lots of human capital but not for the older doc near retirement.

Thanks for taking the time to write a great article.

Man, you are a great writer and a talented dude!

Age / stage.

[Larry Ragman]

The "age/stage" formulation is a good short hand. I was following that plan without trying too hard to articulate it. I have a mortgage on my home. My plan has always been to invest more aggressively with savings during my working years and then pay off the mortgage lump sum when I retire, at which point I will want the security of knowing there is no debt. Similarly, the two rental properties are now paid off, because I want them to throw off income in retirement. (I mistimed this a bit since I am now thinking about pushing back retirement 2 years or so.) We might consider a mortgage on the second home in retirement just to keep some liquidity. Haven't decided.

[TheDangerZone]

Does it make sense to pay off the mortgage early if you aren't in your "forever" home? You can still take the equity with you and apply it to the next house but I think the peace of mind might not feel the same.

[Larry Ragman]

Does it make sense to pay off the mortgage early if you aren't in your "forever" home? You can still take the equity with you and apply it to the next house but I think the peace of mind might not feel the same.

Personal choice of course, but I would say no. Then again, I am not a big fan of early payoff per se. I suppose one could look at the next decade or so and conclude a 3% tax free return as a fixed income substitute would be a good idea regardless. Even then, one must be at a stage where tying up several hundred K in "fixed income" makes sense for the AA.

[Tangler]

Personal choice of course, but I would say no. Then again, I am not a big fan of early payoff per se. I suppose one could look at the next decade or so and conclude a 3% tax free return as a fixed income substitute would be a good idea regardless. Even then, one must be at a stage where tying up several hundred K in "fixed income" makes sense for the AA.

This. Age/stage. If you are 22, obvious no. If you are 72, obvious yes. If you are 42, it depends on you.

I would pay down mortgage before I bought into a vanguard total bond fund in taxable or some other bonds in taxable but I do not love debt.

Some people use leverage their whole life and love it and win.

Some use leverage, get burned and lose.

Most of us us it when young and shun it when old.

[JWeb]

"You don't get a pass on math" --WCI Well, unless its paying off your low interest mortgage early!

I don't understand how paying off a mortgage gives people more peace of mind. I mean, if you have $500k lying around to pay your mortgage off, I don't know how that $3200 monthly mortgage payment could make you uneasy.

I suppose when your net worth is high and your taxable account is very large, it may make sense to pay it off and treat it like a bond. Which means it's basically making your asset allocation more conservative.

[familydocPA]

"You don't get a pass on math" --WCI Well, unless its paying off your low interest mortgage early!

Where did he have inaccurate math in this post?

I paid off my $250k mortgage by the time I was 35. I didn't have any bonds (still don't) and didn't want to be levering up my portfolio further.

It's easy to be a big fan of interest rate arbitrage in prolonged bull markets. In a stretch like the lost decade, you'd come out ahead by paying off the mortgage. It's a balanced approach. I didn't want to be committed to levering a relatively small amount for decades, and it wasn't necessary to reach my financial goals.

That said, at the end of last year I did briefly consider re-mortgaging the house. The rates were even lower (2.5%) and inflation was heating up. However, I recognized that this was greed / FOMO - a sign I needed to stick to my long term plans.

[JWeb]

Where did he have inaccurate math in this post?

I paid off my $250k mortgage by the time I was 35. I didn't have any bonds (still don't) and didn't want to be levering up my portfolio further.

It's easy to be a big fan of interest rate arbitrage in prolonged bull markets. In a stretch like the lost decade, you'd come out ahead by paying off the mortgage. It's a balanced approach. I didn't want to be committed to levering a relatively small amount for decades, and it wasn't necessary to reach my financial goals.

That said, at the end of last year I did briefly consider re-mortgaging the house. The rates were even lower (2.5%) and inflation was heating up. However, I recognized that this was greed / FOMO - a sign I needed to stick to my long term plans.

None of his math was incorrect in the post.

If you run the numbers of paying mortgage off early versus investing the difference, you'll have more money 30 years later by keeping your mortgage most of the time. You definitely would have had more. I'm not saying that it was wrong for you to pay off your mortgage though. But the math does.

Someone could run a post analyzing paying mortgage off versus investing from different years; 2001, 2005, 2008, 2011, 2016 etc And see which years which method comes out ahead.

[Tangler]

None of his math was incorrect in the post.

If you run the numbers of paying mortgage off early versus investing the difference, you'll have more money 30 years later by keeping your mortgage most of the time. You definitely would have had more. I'm not saying that it was wrong for you to pay off your mortgage though. But the math does.

Someone could run a post analyzing paying mortgage off versus investing from different years; 2001, 2005, 2008, 2011, 2016 etc And see which years which method comes out ahead.

Age/stage.

if you are a wci forum nerd, at 35, new doc, keep mortgage & invest like crazy into VTI or VTSAX or VXUS.

Math = solid!

The issue is behavior trumps math.

Most/many keep the mortgage & don’t invest. They spend on status artifacts.

This is NOT at wci forum nerd issue.

[The White Coat Investor]

None of his math was incorrect in the post.

If you run the numbers of paying mortgage off early versus investing the difference, you'll have more money 30 years later by keeping your mortgage most of the time. You definitely would have had more. I'm not saying that it was wrong for you to pay off your mortgage though. But the math does.

Someone could run a post analyzing paying mortgage off versus investing from different years; 2001, 2005, 2008, 2011, 2016 etc And see which years which method comes out ahead.

You're looking at the investments and the mortgage in isolation. When you also consider how you live your life, make investment, business and career decisions, you may very well not have more.

For example, we paid off our mortgage in 2017. Perhaps not coincidentally that is when our net worth growth went exponential. One can argue chicken or egg, but certainly eliminating risk on the personal side allowed me to take risk on the business side, and that resulted in "more".

[The White Coat Investor]

The issue is behavior trumps math.

Most/many keep the mortgage & don’t invest. They spend on status artifacts.

This is NOT at wci forum nerd issue.

Yea, let's be honest. Everyone talks about the math but this is reality for most.

[Tangler]

You're looking at the investments and the mortgage in isolation. When you also consider how you live your life, make investment, business and career decisions, you may very well not have more.

For example, we paid off our mortgage in 2017. Perhaps not coincidentally that is when our net worth growth went exponential. One can argue chicken or egg, but certainly eliminating risk on the personal side allowed me to take risk on the business side, and that resulted in "more".

Same for me. Debt = risk.

Less debt means ability to take more risks elsewhere.

Not having debt (none, no mortgage, no loans) helped give me confidence to start a small business as a side hustle and have high stock allocation.

[JWeb]

For example, we paid off our mortgage in 2017. Perhaps not coincidentally that is when our net worth growth went exponential. One can argue chicken or egg, but certainly eliminating risk on the personal side allowed me to take risk on the business side, and that resulted in "more".

Of course that was a coincidence. Your net worth was going to go up exponentially no matter what.

You go heli skiing and rock climbing and spent many hours starting WCI before it made much sense financially. But it was paying your mortgage off that allowed you to take significant risk? I hope you find the humor in that.

[JWeb]

You're looking at the investments and the mortgage in isolation. When you also consider how you live your life, make investment, business and career decisions, you may very well not have more.

Correct, I am looking at the math only. For example, take someone with a conventional mortgage with a 2.5% interest rate. They have $5k extra each month to put somewhere. Should they pay the mortgage down or put it in taxable? That answer is taxable.

If you make a concerted effort to pay off your mortgage early and spend less so that you have more to put towards the mortgage, then you may come out ahead.

You also shouldn't pay your mortgage down early if you plan on borrowing any money for real estate investments or take a loan for a surgery center, etc. Because your mortgage will be the lowest interest rate you get.