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There can be totally valid reasons for not getting rid of your mortgage even if you have the opportunity - if you have something better to do with the money. If

There can be totally valid reasons for not getting rid of your mortgage even if you have the opportunity - if you have something better to do with the money. If you are paying 3.5% on your mortgage but you can invest somewhere with a return greater than 3.5% after tax, why would you pay down your mortgage?

epx 12y ago
Freedom is priceless.
- jacquesm 12y ago
  And guaranteed returns aren't.
carsongross 12y ago
Here are some reasons: 1) It is difficult to take a house away from you if you are worried about "bail-in" type scenarios. 2) Paying off your mortgage is a guaranteed investment (there is no default risk) and so it should be compared with long term investing in very high quality government bonds when looking at rates of return, rather than what you can achieve more broadly. 3) It eliminates any future call risk, where your broader investments tank and it becomes difficult to meet your fixed mortgage obligation without liquidating investments at fire-sale prices. 4) It is perfectly hedged against future housing costs, which you will probably always need. 5) This is controversial, but if you believe, as I do, that a fractionally reserved monetary system is immoral, paying off your mortgage (and all the rest of your debt) is as hard a blow as you can land against it.
- throwaway283719 12y ago
  Yeah, I broadly agree that all of these are valid things to consider, particularly if you are quite risk averse. I take issue with (4) because if you have a mortgage you are already perfectly hedged against future housing costs. If you have a floating rate mortgage you are exposed to interest rates, but you can hedge against that by fixing your mortgage. I think a blanket "debt is bad" approach is naive, just as much as a "risk is bad" approach is naive. All other things being equal, you would rather not have any risk or any debt. But for the right price, you should be willing to take on both. What 'the right price' is will depend on many things, like your stage of life, your income, your safety nets (the state, your family) etc. If you take a "debt is bad" approach then you are saying that the right price is infinity, which doesn't seem sensible.
  - carsongross 12y ago
    Regarding #4, no you are not. If housing prices tank, you are levered the wrong way, as millions of underwater homeowners have discovered. Owning your house outright, somewhat paradoxically, makes it less awful if prices decline. I agree that "debt is bad" is simplistic, but good debt, in my mind, is self liquidating debt taken on for productive enterprise. Mortgages are not self liquidating, and consumer credit is of course much, much worse. Mortgages at least have the benefit of good rates and tax advantages, although the size of them can often make the practical cash-flow ramifications dicey. You are right, of course: at some rate of return, a sure thing at 3% becomes less attractive than an alternative investment. And you have to look at your broader investment basket to put together the appropriate mix of risk and returns. If paying off your mortgage involves say 20% of you net worth, that's different than 90% of it. So, as always, it depends. I do like the thought experiment where you ask yourself "If I had my house paid off, would I take out a mortgage to make this investment?"
brightsize 12y ago
Dave Ramsey, who, for lack of a better term, one might describe as a "personal finance turn-around guru and radio personality", poses the question you ask in a different way. I paraphrase: "If you owned your house outright, would you go out and get a mortgage on it so that you could invest in the stock market?". Financial management is about much more than maximizing returns. It's also about managing risk. For most people who have assets that they will depend on in the future, managing risk grows in importance as they grow in age. Taking on debt (a mortgage) in order to make speculative investments is a high-risk endeavor.
- throwaway283719 12y ago
  I didn't mention anything about the stock market. I said if you can invest somewhere with a return greater than 3.5% after tax. Implicit in that was that the investment is risk-free i.e. it's a government bond or something. But it could be a risky investment, if the risk-return trade-off is high enough. If I had the opportunity to invest at a 10% rate of return with a stdev of 5% then absolutely, I'd remortgage my house at 4% to do that!
  - timwaagh 12y ago
    3.5% is not risk free. with interest rates this low, that kind of investment cannot be offered risk free. government bonds that have such roi are not going to be safe either.
    - throwaway283719 12y ago
      Yes, that is why the sentence begins with the word "if".
  - tomp 12y ago
    If it's too good to be true, it probably is.
falcolas 12y ago
There's also the option of spending a bit of that "free" money to live a life worth living instead of spending all of your free money paying something down which only offers benefits to your life later. You might not be alive later. Don't put everything off until then.

epx 12y ago

Freedom is priceless.

jacquesm 12y ago
And guaranteed returns aren't.

carsongross 12y ago

Here are some reasons: 1) It is difficult to take a house away from you if you are worried about "bail-in" type scenarios. 2) Paying off your mortgage is a guaranteed investment (there is no default risk) and so it should be compared with long term investing in very high quality government bonds when looking at rates of return, rather than what you can achieve more broadly. 3) It eliminates any future call risk, where your broader investments tank and it becomes difficult to meet your fixed mortgage obligation without liquidating investments at fire-sale prices. 4) It is perfectly hedged against future housing costs, which you will probably always need. 5) This is controversial, but if you believe, as I do, that a fractionally reserved monetary system is immoral, paying off your mortgage (and all the rest of your debt) is as hard a blow as you can land against it.

throwaway283719 12y ago
Yeah, I broadly agree that all of these are valid things to consider, particularly if you are quite risk averse. I take issue with (4) because if you have a mortgage you are already perfectly hedged against future housing costs. If you have a floating rate mortgage you are exposed to interest rates, but you can hedge against that by fixing your mortgage. I think a blanket "debt is bad" approach is naive, just as much as a "risk is bad" approach is naive. All other things being equal, you would rather not have any risk or any debt. But for the right price, you should be willing to take on both. What 'the right price' is will depend on many things, like your stage of life, your income, your safety nets (the state, your family) etc. If you take a "debt is bad" approach then you are saying that the right price is infinity, which doesn't seem sensible.
- carsongross 12y ago
  Regarding #4, no you are not. If housing prices tank, you are levered the wrong way, as millions of underwater homeowners have discovered. Owning your house outright, somewhat paradoxically, makes it less awful if prices decline. I agree that "debt is bad" is simplistic, but good debt, in my mind, is self liquidating debt taken on for productive enterprise. Mortgages are not self liquidating, and consumer credit is of course much, much worse. Mortgages at least have the benefit of good rates and tax advantages, although the size of them can often make the practical cash-flow ramifications dicey. You are right, of course: at some rate of return, a sure thing at 3% becomes less attractive than an alternative investment. And you have to look at your broader investment basket to put together the appropriate mix of risk and returns. If paying off your mortgage involves say 20% of you net worth, that's different than 90% of it. So, as always, it depends. I do like the thought experiment where you ask yourself "If I had my house paid off, would I take out a mortgage to make this investment?"

brightsize 12y ago

Dave Ramsey, who, for lack of a better term, one might describe as a "personal finance turn-around guru and radio personality", poses the question you ask in a different way. I paraphrase: "If you owned your house outright, would you go out and get a mortgage on it so that you could invest in the stock market?". Financial management is about much more than maximizing returns. It's also about managing risk. For most people who have assets that they will depend on in the future, managing risk grows in importance as they grow in age. Taking on debt (a mortgage) in order to make speculative investments is a high-risk endeavor.

throwaway283719 12y ago
I didn't mention anything about the stock market. I said if you can invest somewhere with a return greater than 3.5% after tax. Implicit in that was that the investment is risk-free i.e. it's a government bond or something. But it could be a risky investment, if the risk-return trade-off is high enough. If I had the opportunity to invest at a 10% rate of return with a stdev of 5% then absolutely, I'd remortgage my house at 4% to do that!
- timwaagh 12y ago
  3.5% is not risk free. with interest rates this low, that kind of investment cannot be offered risk free. government bonds that have such roi are not going to be safe either.
  - throwaway283719 12y ago
    Yes, that is why the sentence begins with the word "if".
- tomp 12y ago
  If it's too good to be true, it probably is.

falcolas 12y ago

There's also the option of spending a bit of that "free" money to live a life worth living instead of spending all of your free money paying something down which only offers benefits to your life later. You might not be alive later. Don't put everything off until then.