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Many people in my circle are proud of paying off mortgages, so I kind of assumed by default that it is a worthwhile thing. But looking at the numbers I'm not s

Many people in my circle are proud of paying off mortgages, so I kind of assumed by default that it is a worthwhile thing. But looking at the numbers I'm not so sure: it seems much better in current market to cash out as much as possible and let that money sit in an index fund. I guess the main issues are some risks with downturns and/or liquidity.

ISL 6y ago
That reality is a property primarily of the present-moment. Index funds don't always rise and property values sometimes fall. Interest rates are rarely this low. Leverage multiplies both the upside and the downside.
- jedberg 6y ago
  > and property values sometimes fall While this is true in the short term, except for very rare exceptions, you'd be hard pressed to find a property in the United States that is worth less now than 30 years ago (which is the standard length of a mortgage). I don't know about other countries, but I suspect it's the same in any modern economy. Land is scarce, and no one is making more of it.
  - ISL 6y ago
    Agreed -- what I had in mind was the underwater loans of 2008. A house bought with leverage can occasionally look real strange in the short-term.
jedberg 6y ago
You're right. None of those people account for the time value of money. If I could get an interest only mortgage I would (where I literally pay to rent the money). There are so many better things I can do with a few hundred thousand dollars now. If you have the money to pay off your mortgage, why not buy a second house with it and rent that out? Let someone pay your mortgage while you get the appreciation? Or invest it in something else? If you do the math, renting almost always comes out ahead of owning, as long as you invest the difference in something that gains in value. The main reason to own is for psychological reasons. It's great if you have kids and want a place for them, or yourself, to call home.
- bumby 6y ago
  I think the part that needs to be factored into your analysis is the volatility/risk aspect. A mortgage may be relatively low ROI but it’s also relatively low risk compared to the market. E.g., maybe somebody has a certain percentage invested into low risk bonds. Maybe it makes sense to pare back some of that and put it towards their mortgage during a period when bonds are being crushed. Neither bonds or the mortgage return will compete with a general index fund in terms of return over a long period of time, but the index fund is in a different (higher) risk category
  - splistud 6y ago
    The 'mortgage return' will compete very well over a long period of time, especially if you ensure the comparison is fair. For instance, 15 years in, when your mortgage note is 60 to 70% of prevailing rent or lease, consider the return on that savings as part of the 'mortgage return' - because this is part of the return in the form of inflation hedge.
- Y_Y 6y ago
  I think this statement is a bit strong. The price/rent ratio varies greatly between places and times. Around here it's between 30 and 40 years, that makes it very difficult to make money by borrowing to buy a place to rent out.
  - mywittyname 6y ago
    In such markets, the bulk of the ROI is not the rent checks, but tax savings and appreciation of the underlying asset. Real estate looks a lot like the stock market anymore. People value companies on metrics beyond simple revenue, profits, and dividends. With RE, investors understand that wage growth in a region flows into housing at a compounding rate due to leverage and are capitalizing on it. So long as Seattle or LA have companies that pay above average wages to enough employees, housing prices in those regions should continue to grow at a a rate somewhat relative to differences in wages. What constitutes "enough employees" seems to be relative to how constrained housing growth is. In LA, housing prices are driven by probably the top 20-30% of earners.
ryandrake 6y ago
One thing to keep in mind is that mortgage is the cheapest money you'll ever borrow. Low rates vs. other kinds of loans, and the interest is often the biggest tax deduction most middle class people have access to.
bikingbismuth 6y ago
I completely agree that it wasn't the right financial decision, but I don't regret it at all. I grew up working poor and watched multiple people lose their houses (some crash related, others not). This gave me a fairly conservative risk tolerance regarding debt. I feel "lighter" without debt hanging over me. The question that ultimately convinced me to just pay off my mortgage was "If someone gave you a house, free and clear, would you mortgage it to buy investments?". My gut reaction was "no, I would really like to have a free and clear house." I have considered buying a second home to rent, but I have some moral qualms about exacerbating the housing crisis where I live. Furthermore, the stress of tenants isn't something I really want to deal with. Everyone here has great points about maximizing returns, and I know I will have less money in the long run because of my decision. With that in mind, I am investing about half of my old mortgage payment, and the rest goes to the family vacation fund.
- foobarian 6y ago
  Just wanted to thank you for the comment and clarify I didn't mean to criticize your choices - my background is very similar and it's just a realization I've had after stepping back and trying to think without those constraints/influences. I also know many people who lost houses or struggled, some which actually did cash-out refinances but then unwisely spent the money on unnecessary luxuries. Those seem easy to avoid. Some may be harder to avoid, like when someone has unforeseen costs such as medical related bills. But in cases such as ours, it seems we are well enough off to have cash on hand to eliminate the mortgage; the question just becomes whether that is the best use for the money. It certainly seems a bad idea to just keep the cash on hand. The index fund returns have been very good for long periods of time now, so seem like a good low-risk option, given that they are liquid and can be redirected to a mortgage payoff at any time. Edit: having said that the difference is not that large (3-4% for the 30 year note, vs. 5-10% for the market return). Also, while I didn't pay off my mortgage, I probably won't put even more money where my mouth is and refinance in order to invest the cash-out into a fund.
  - bikingbismuth 6y ago
    No criticism or offense taken at all! I think these discussions are incredibly valuable for the participants and observers to help them decide what they want to do if/when they have a pile of money in front of them.
kelnos 6y ago
Right, the best financial decision is usually to take advantage of low interest rates, carry the debt, and keep the money in diversified investments. Yes, there's always the risk of a downturn or recession/depression that ruins that plan. And beyond that, there is often a great psychological benefit to being debt-free, even if that's not the best financial decision.

ISL 6y ago

That reality is a property primarily of the present-moment. Index funds don't always rise and property values sometimes fall. Interest rates are rarely this low. Leverage multiplies both the upside and the downside.

jedberg 6y ago
> and property values sometimes fall While this is true in the short term, except for very rare exceptions, you'd be hard pressed to find a property in the United States that is worth less now than 30 years ago (which is the standard length of a mortgage). I don't know about other countries, but I suspect it's the same in any modern economy. Land is scarce, and no one is making more of it.
- ISL 6y ago
  Agreed -- what I had in mind was the underwater loans of 2008. A house bought with leverage can occasionally look real strange in the short-term.

jedberg 6y ago

You're right. None of those people account for the time value of money. If I could get an interest only mortgage I would (where I literally pay to rent the money). There are so many better things I can do with a few hundred thousand dollars now. If you have the money to pay off your mortgage, why not buy a second house with it and rent that out? Let someone pay your mortgage while you get the appreciation? Or invest it in something else? If you do the math, renting almost always comes out ahead of owning, as long as you invest the difference in something that gains in value. The main reason to own is for psychological reasons. It's great if you have kids and want a place for them, or yourself, to call home.

bumby 6y ago
I think the part that needs to be factored into your analysis is the volatility/risk aspect. A mortgage may be relatively low ROI but it’s also relatively low risk compared to the market. E.g., maybe somebody has a certain percentage invested into low risk bonds. Maybe it makes sense to pare back some of that and put it towards their mortgage during a period when bonds are being crushed. Neither bonds or the mortgage return will compete with a general index fund in terms of return over a long period of time, but the index fund is in a different (higher) risk category
- splistud 6y ago
  The 'mortgage return' will compete very well over a long period of time, especially if you ensure the comparison is fair. For instance, 15 years in, when your mortgage note is 60 to 70% of prevailing rent or lease, consider the return on that savings as part of the 'mortgage return' - because this is part of the return in the form of inflation hedge.
Y_Y 6y ago
I think this statement is a bit strong. The price/rent ratio varies greatly between places and times. Around here it's between 30 and 40 years, that makes it very difficult to make money by borrowing to buy a place to rent out.
- mywittyname 6y ago
  In such markets, the bulk of the ROI is not the rent checks, but tax savings and appreciation of the underlying asset. Real estate looks a lot like the stock market anymore. People value companies on metrics beyond simple revenue, profits, and dividends. With RE, investors understand that wage growth in a region flows into housing at a compounding rate due to leverage and are capitalizing on it. So long as Seattle or LA have companies that pay above average wages to enough employees, housing prices in those regions should continue to grow at a a rate somewhat relative to differences in wages. What constitutes "enough employees" seems to be relative to how constrained housing growth is. In LA, housing prices are driven by probably the top 20-30% of earners.

ryandrake 6y ago

One thing to keep in mind is that mortgage is the cheapest money you'll ever borrow. Low rates vs. other kinds of loans, and the interest is often the biggest tax deduction most middle class people have access to.

bikingbismuth 6y ago

I completely agree that it wasn't the right financial decision, but I don't regret it at all. I grew up working poor and watched multiple people lose their houses (some crash related, others not). This gave me a fairly conservative risk tolerance regarding debt. I feel "lighter" without debt hanging over me. The question that ultimately convinced me to just pay off my mortgage was "If someone gave you a house, free and clear, would you mortgage it to buy investments?". My gut reaction was "no, I would really like to have a free and clear house." I have considered buying a second home to rent, but I have some moral qualms about exacerbating the housing crisis where I live. Furthermore, the stress of tenants isn't something I really want to deal with. Everyone here has great points about maximizing returns, and I know I will have less money in the long run because of my decision. With that in mind, I am investing about half of my old mortgage payment, and the rest goes to the family vacation fund.

foobarian 6y ago
Just wanted to thank you for the comment and clarify I didn't mean to criticize your choices - my background is very similar and it's just a realization I've had after stepping back and trying to think without those constraints/influences. I also know many people who lost houses or struggled, some which actually did cash-out refinances but then unwisely spent the money on unnecessary luxuries. Those seem easy to avoid. Some may be harder to avoid, like when someone has unforeseen costs such as medical related bills. But in cases such as ours, it seems we are well enough off to have cash on hand to eliminate the mortgage; the question just becomes whether that is the best use for the money. It certainly seems a bad idea to just keep the cash on hand. The index fund returns have been very good for long periods of time now, so seem like a good low-risk option, given that they are liquid and can be redirected to a mortgage payoff at any time. Edit: having said that the difference is not that large (3-4% for the 30 year note, vs. 5-10% for the market return). Also, while I didn't pay off my mortgage, I probably won't put even more money where my mouth is and refinance in order to invest the cash-out into a fund.
- bikingbismuth 6y ago
  No criticism or offense taken at all! I think these discussions are incredibly valuable for the participants and observers to help them decide what they want to do if/when they have a pile of money in front of them.

kelnos 6y ago

Right, the best financial decision is usually to take advantage of low interest rates, carry the debt, and keep the money in diversified investments. Yes, there's always the risk of a downturn or recession/depression that ruins that plan. And beyond that, there is often a great psychological benefit to being debt-free, even if that's not the best financial decision.