5 ms·

>> Why would you pay off your house when you can keep the cash in an investment... I asked someone that in my mid 20's. He said "It's nice knowing I can suppor

>> Why would you pay off your house when you can keep the cash in an investment... I asked someone that in my mid 20's. He said "It's nice knowing I can support my family working at McDonalds if I have to." That stuck with me. Something fundamental changes in your life when you become debt-free.

sangnoir 5y ago
> Something fundamental changes in your life when you become debt-free. Being able to pay off a debt at anytime is equally freeing, for me at least. Paying off a loan with an interest rate significantly below inflation is not a great use of money[1] (and an opportunity loss). Putting that lumpsum into bonds (any bond with interest higher than the loan) is better, or even investing in stocks with a stop-loss. If I lose my job and have to flip burgers, that's when I'll pay off the loan and get a little extra from the investment/bond, thanks to the power of compounding interest. 1. Its the equivalent of someone offering you a 6- or 7-figure loan payable in 20/30 years at 2-3% when inflation is 6%, and you decline.
- r0s 5y ago
  The opportunity loss is what I don't get. Without the debt you can take on new debt that could be say a rental property or business loan. How is a bunch of money tied up in debt, and an equal amount invested to hedge that not a huge opportunity sink?
  - sangnoir 5y ago
    It's hard to argue in the abstract without figures and expected returns. If paying off the debt opens the door higher returns, then I'm all for it. All things being equal, I'll keep $250k cash with a $250k mortgage at 2.7% today, as opposed to a paid-off house and a $250k hole in my account.
  - jandrewrogers 5y ago
    There is no loss of opportunity. You can borrow against invested money at very low interest rates, lower than mortgage interest rates, and people often do. In today's crazy real estate market, when people make "all cash offers" that is often just cash borrowed against securities. It is some of the cheapest debt that exists.
- phkahler 5y ago
  >> Being able to pay off a debt at anytime is equally freeing, Let me remind you that in 2008 things were so screwed up, some lenders lost track of who owed what. Having a hard copy document that shows a debt was close out is not the same as having assets that could pay off the loan. Keep in mind too that it was also not a good time to trade investments for cash. There are risks in every approach. I can't imagine taking out a loan on a property today and investing the money thinking it will beat the interest payments over the next couple years. At other times, it's less risky but the rates will probably also be higher at those times.
Xcelerate 5y ago
Yeah, but if the market crashes while you’re still overpaying your mortgage, now you’re out of a job AND potential savings that you can’t get back. With even inflation outpacing mortgage rates now, I’m not certain in what situation—even from a risk perspective—it makes more sense to pay down a mortgage more quickly than necessary. (With current rates at ~3%. Obviously in the late 80s it made sense to pay the house off as quickly as possible.)
- foobarian 5y ago
  I keep looking over the historical graph for broad indexes and I don't really see any window longer then 2-3 years where 3% would come out better. You just need a buffer to withstand those downturns.
  - thedufer 5y ago
    VTSAX is a very popular broad-market index fund. Its price was overall flat from October 2007 to sometime in January 2013 - over 5 years - while returning dividends of around 1.5%. 3% beats that pretty handily.
jjav 5y ago
That doesn't mean literally paying off the low interest loan though. You can save up so that you have enough money invested to cover all the remaining loan payments and consider that having paid off the house. But don't send the money to the mortgage company, invest it into something stable that pays more than the mortgage interest and you're better off. (Not historically always possible, but with today's interest rates pretty easy.)
reedjosh 5y ago
> Something fundamental changes in your life when you become debt-free. This to me is the only legitimate criticism, and it really boils down to risk-reward. If you're holding cash for say a backup fund, great! That's good security and everyone should aspire to that. But also acknowledge that with 6% inflation, you're actually losing 6% on that backup fund. Inflation is insipid. You _must_ take risk with your funds just to not lose the value of it.
- simplestats 5y ago
  > Inflation is insipid. You _must_ take risk with your funds just to not lose the value of it. This certainly seems to be the case, but it's fustrating. I can think of no fundamental reason why it should be so. Other than speculators and govt policies backfiring to destroy the safety of alternative places to keep your money besides cash.
  - reedjosh 5y ago
    Couldn't agree more! Then add to that the fact that you're taxed on `gains` for investment. So buy an ounce of gold. 1 year later sell it for 6% more than you paid. Cool, beat inflation right? Well, no because now you pay capital gains on something that isn't really worth more than when you bought it. Inflation _is_ a tax... > govt policies backfiring Yeah sure, they're `backfiring`...
    - simplestats 5y ago
      I was being a little generous, yes. I wonder if that's what is triggering people. The stated goal of govt seems to be low (but positive) levels of inflation and high growth. The current situation with high inflation and low interest rates makes even tax-free govt bonds undesirable. And they will need to raise rates. So I'd say policies are backfiring, yes.
      - reedjosh 5y ago
        Yeah, I don't get the downvotes. It's worse that they won't reply why either. At least converse when you are in disagreement. > The stated goal of govt seems to be low (but positive) levels of inflation and high growth. Yes, and I disagree with that position too, but people are taught Keynesian economics, so even beginning to unfurl that mess is asking for a downvote storm. The same people that will argue inflation is beneficial for growth tend to believe they are also open minded, free thinking, and well `educated`. It makes for a difficult argument often resulting in a lot of pointing to `authorities` on the matter.

sangnoir 5y ago

> Something fundamental changes in your life when you become debt-free. Being able to pay off a debt at anytime is equally freeing, for me at least. Paying off a loan with an interest rate significantly below inflation is not a great use of money[1] (and an opportunity loss). Putting that lumpsum into bonds (any bond with interest higher than the loan) is better, or even investing in stocks with a stop-loss. If I lose my job and have to flip burgers, that's when I'll pay off the loan and get a little extra from the investment/bond, thanks to the power of compounding interest. 1. Its the equivalent of someone offering you a 6- or 7-figure loan payable in 20/30 years at 2-3% when inflation is 6%, and you decline.

r0s 5y ago
The opportunity loss is what I don't get. Without the debt you can take on new debt that could be say a rental property or business loan. How is a bunch of money tied up in debt, and an equal amount invested to hedge that not a huge opportunity sink?
- sangnoir 5y ago
  It's hard to argue in the abstract without figures and expected returns. If paying off the debt opens the door higher returns, then I'm all for it. All things being equal, I'll keep $250k cash with a $250k mortgage at 2.7% today, as opposed to a paid-off house and a $250k hole in my account.
- jandrewrogers 5y ago
  There is no loss of opportunity. You can borrow against invested money at very low interest rates, lower than mortgage interest rates, and people often do. In today's crazy real estate market, when people make "all cash offers" that is often just cash borrowed against securities. It is some of the cheapest debt that exists.
phkahler 5y ago
>> Being able to pay off a debt at anytime is equally freeing, Let me remind you that in 2008 things were so screwed up, some lenders lost track of who owed what. Having a hard copy document that shows a debt was close out is not the same as having assets that could pay off the loan. Keep in mind too that it was also not a good time to trade investments for cash. There are risks in every approach. I can't imagine taking out a loan on a property today and investing the money thinking it will beat the interest payments over the next couple years. At other times, it's less risky but the rates will probably also be higher at those times.

Xcelerate 5y ago

Yeah, but if the market crashes while you’re still overpaying your mortgage, now you’re out of a job AND potential savings that you can’t get back. With even inflation outpacing mortgage rates now, I’m not certain in what situation—even from a risk perspective—it makes more sense to pay down a mortgage more quickly than necessary. (With current rates at ~3%. Obviously in the late 80s it made sense to pay the house off as quickly as possible.)

foobarian 5y ago
I keep looking over the historical graph for broad indexes and I don't really see any window longer then 2-3 years where 3% would come out better. You just need a buffer to withstand those downturns.
- thedufer 5y ago
  VTSAX is a very popular broad-market index fund. Its price was overall flat from October 2007 to sometime in January 2013 - over 5 years - while returning dividends of around 1.5%. 3% beats that pretty handily.

jjav 5y ago

That doesn't mean literally paying off the low interest loan though. You can save up so that you have enough money invested to cover all the remaining loan payments and consider that having paid off the house. But don't send the money to the mortgage company, invest it into something stable that pays more than the mortgage interest and you're better off. (Not historically always possible, but with today's interest rates pretty easy.)

reedjosh 5y ago

> Something fundamental changes in your life when you become debt-free. This to me is the only legitimate criticism, and it really boils down to risk-reward. If you're holding cash for say a backup fund, great! That's good security and everyone should aspire to that. But also acknowledge that with 6% inflation, you're actually losing 6% on that backup fund. Inflation is insipid. You _must_ take risk with your funds just to not lose the value of it.

simplestats 5y ago
> Inflation is insipid. You _must_ take risk with your funds just to not lose the value of it. This certainly seems to be the case, but it's fustrating. I can think of no fundamental reason why it should be so. Other than speculators and govt policies backfiring to destroy the safety of alternative places to keep your money besides cash.
- reedjosh 5y ago
  Couldn't agree more! Then add to that the fact that you're taxed on `gains` for investment. So buy an ounce of gold. 1 year later sell it for 6% more than you paid. Cool, beat inflation right? Well, no because now you pay capital gains on something that isn't really worth more than when you bought it. Inflation _is_ a tax... > govt policies backfiring Yeah sure, they're `backfiring`...
  - simplestats 5y ago
    I was being a little generous, yes. I wonder if that's what is triggering people. The stated goal of govt seems to be low (but positive) levels of inflation and high growth. The current situation with high inflation and low interest rates makes even tax-free govt bonds undesirable. And they will need to raise rates. So I'd say policies are backfiring, yes.
    - reedjosh 5y ago
      Yeah, I don't get the downvotes. It's worse that they won't reply why either. At least converse when you are in disagreement. > The stated goal of govt seems to be low (but positive) levels of inflation and high growth. Yes, and I disagree with that position too, but people are taught Keynesian economics, so even beginning to unfurl that mess is asking for a downvote storm. The same people that will argue inflation is beneficial for growth tend to believe they are also open minded, free thinking, and well `educated`. It makes for a difficult argument often resulting in a lot of pointing to `authorities` on the matter.