7 ms·

I've always wanted to make $200,000 or so from a successful personal project on the side, just so that I could pay off my mortgage so I didn't have to worry abo

I've always wanted to make $200,000 or so from a successful personal project on the side, just so that I could pay off my mortgage so I didn't have to worry about it anymore. But when I think about really getting that money, I realize I wouldn't do that. If my mortage is $1200/month, I just bought myself 166 months, or ~14 years. If the idea is to quit your job and invest in a company, that's not the smartest move. You're better off stocking away $72,000 so you don't have to worry about your mortgage in 5 years, and investing the rest in the company (you will not be making money for a while, and on top of paying your own salary, you will need to buy advertising). If the idea is to avoid the interest on your loan, and be completely emotionally free from that debt, than by all means do it. This would work well if you are just going to do consulting since the cash flow swing isn't as dangerous.

brightball 11y ago
While I agree with you on that point, just looking from a cash flow perspective if you were to keep working for a little while after paying everything off you'd likely be able to save a huge amount of money very quickly. Save, invest, relax on a beach...any of it's easier without that mortgage eating away at you. I remember when I finally got around to doing the math on my first mortgage and realized I was actually going to pay close to triple the sale price of the house if I waited the full 30 years. The real trick, if you don't want to pay off the whole thing, is to make a lump sum payment to pay down about half of the mortgage early. It's the first 10-15 years on a 30 year where the payments are so interest heavy that you're really just throwing away money. Get about halfway to payoff as fast as you can though and those payments are a whole lot closer to just paying back a cash balance.
- mschaef 11y ago
  > I was actually going to pay close to triple the sale price of the house if I waited the full 30 years. Did you adjust for inflation? Even at today's inflation rates, the dollars you pay in 30 years will be worth considerably less than the dollars you pay today. There's also an opportunity cost issue. Paying off your mortgage means not putting the money somewhere else. > you're really just throwing away money. No... you're paying for access to a resource that you don't have yourself. There's more utility in that than in literally throwing the money in the garbage.
  - brightball 11y ago
    Matter of perspective I guess. When I looked at my early mortgage payments and 85% of the payment was interest so after 10 years I would have barely paid down the principle at all. To me, that feels like waste. I invested with steady 12-14% returns for 10 years and then watched it all get wiped out. The interest rate on paying of debt doesn't change. Granted, at current rates it's a lot tougher to make the argument for mortgage interest vs other types of debt. Nobody ever shows a compound interest chart with anything other than a steady interest rate (aka - 30 years of 10% return = millionaire!). A single negative or downturn can have a pretty dramatic effect on those projections. If you look at those same projection charts and take the amount you'd look to invest over the first 10 years, but put into into debt payment instead of investing so that you get everything paid off, then take that same amount you would have been investing, start investing it plus the money that you're no longer paying in monthly expenses then you'll find the end of the 30 year period to be an almost identical result. The only difference is that after 10 years you've eliminated virtually any risk of personal bankruptcy. If you can find something with a guaranteed long term return higher than the mortgage interest then it's another ballgame, but those are pretty hard to come by. Right now dividend investing seems to be the closest approach that generally lets you ignore the actual interest rates over time and instead focus on building cash flow. But this is one of those topics that is part math, part point of view and part personal comfort level. This was just my perspective.
    - cfeduke 11y ago
      I largely agree with you on this. I focused on my mortgage and as a result I have less than a year of payments left. I didn't ignore investments either - roughly 10% of my income into the market - but I did not pay the minimum mortgage payment in favor of investments. There was a point a few years ago where liquidating the investments could pay off the mortgage. To me it seems that you can get some of the benefits of the emotional release of being debt free if you have the capability to liquidate and clear debt. While many people will make the argument that instead I should have paid the minimums and had more money invested with the net effect of reaching the liquidate/pay off point, I agree with the reasoning behind your argument: market volatility will not wipe out debt that has been cleared.
- United857 11y ago
  Even if you have enough cash to pay off a mortgage, if you can invest it with better returns than the mortgage interest rate (not hard these days), then it makes better sense to do that. Even Mark Zuckerberg has a mortgage...
  - fideloper 11y ago
    Exactly this. General rule of thumb when deciding between eliminating debt or investing is to compare if the debt interest is greater than investment interest (investment rate of return). If (debt.interest > investment.interest ), pay off debt first. Else, invest.
    - nostrademons 11y ago
      That's the equation, but you also have to consider risk when you make it, and weigh it against your personal risk tolerance. Paying off a mortgage is like making a risk-free investment for the term of the mortgage with a (pre-tax) return equal to the interest rate. Right now, 10-year T-bills are yielding around 2.4%, most mortgage loans are in the 3-4% range. Your risk tolerance may be higher, in which case by all means put your mortgage principle toward investing in the stock market or your startup, but be aware that a market crash can leave you deep in debt.
    - 300bps 11y ago
      If (debt.interest > investment.interest ), pay off debt first. Else, invest. I disagree with this tremendously. With your strategy, essentially what you are doing is buying stocks on margin. This magnifies your profits if things goes your way and magnifies your losses if things go against you. Think about it this way - Interactive Brokers is an online brokerage with extremely low margin rates which are often half of current mortgage rates (see https://www.interactivebrokers.com/en/index.php?f=interest&p=schedule2 https://www.interactivebrokers.com/en/index.php?f=interest&p...). Using your logic, the right thing to do is to leverage yourself to the hilt for every penny Interactive Brokers will loan you at 1.63% or less and cross your fingers you make the right investment choices otherwise you're bankrupt. Buying investments on margin, no matter how it is done, is extremely risky. You might understand those risks and have a high enough risk tolerance but please don't pretend investing on margin is a general rule everyone should follow.
- pc86 11y ago
  > if you were to keep working for a little while after paying everything off you'd likely be able to save a huge amount of money very quickly. Save, invest, relax on a beach...any of it's easier without that mortgage eating away at you. Except the money you spend on your mortgage is year 1 is worth a lot more than the money you spend on it in year 30. Especially with rates where they've been the past several years (our mortgage is 3.25%), cash flow is really the only upside to paying off a mortgage decades early.
  - bjelkeman-again 11y ago
    > cash flow is really the only upside to paying off a mortgage decades early. In my limited experience, the freedom of not having a mortgage and a car loan, or any other type of debt, far outweighs the benefits of just cash flow. We now have a sense of freedom we didn't have Before. I think it is going to be very individual how one reacts to it, but for us having a minimal mortgage or none has made a big difference for us. Taking risks, having run startups for the last 20 years, this was a major contribution to being able to do this.
    - jsprogrammer 11y ago
      Unfortunately, because of the way monetary policy is structured, it is not possible for all, or even most, to live without debt. Debt is fundamental to our economy. You can only be without it if someone else takes on some amount of debt.
      - pc86 11y ago
        Who takes on debt if you pay off your mortgage early?
        btilly 11y ago
        In order for you to pay off your mortgage, you need to receive money. That money was generally created through the creation of debts. So it is hard to say exactly who took on that debt, but someone probably did. For more on how debt creates money, read up on http://en.wikipedia.org/wiki/Fractional-reserve_banking http://en.wikipedia.org/wiki/Fractional-reserve_banking. And the person you replied to is exactly right - our entire economic system only works right if there is a lot of debt to go with it.
mark-r 11y ago
Paying off a mortgage is just like any other investment - you need to look at the terms to see if it's worth doing. It's very illiquid, you can't get your cash back without getting another mortgage. On the other hand, it's a guaranteed rate of return that's probably significantly more than any other guaranteed rate you can find. If you think you can do better with a different investment then go for it. But remember, someone with a lot more money than you decided that their best bet was to finance your mortgage.
- ghaff 11y ago
  The guaranteed rate of return is a crucial point. (There are admittedly also some tax reasons why not paying off the mortgage early can be relatively beneficial.) However, way too many people look at the overall stock market returns over the past few years and conclude that anyone who pays off their mortgage early is an idiot. By that logic, anyone who could should have taken out a HELOC and bet it on the market. It would have indeed worked out over the past few years. The conclusion for guaranteed or very low risk investment returns is far less obvious and probably has more to do with liquidity and psychological factors.
- bcheung 11y ago
  The guaranteed rate on your equity is 0%. Got $500,000 in equity? Then that's $500,000 earning 0% interest. Of course you aren't paying mortgage interest but with mortgage rates at 3.5 - 4.25% it's easy to find investments with higher guaranteed returns. Infinite Banking (using overfunded, dividend paying, whole life insurance) currently has 4.5% guaranteed floors with actual rates with dividends currently at 5.0 - 5.5%. Lots of other benefits as well, life insurance, and being able to borrow money against your policy any time you want for any reason, no questions asked. Also, a 4% mortgage is only 4% of the whole balance in the beginning. At the end it is 4% of a very small balance. If you use level payments you effectively cut the interest rate in half to make comparison. Taking out a $10,000 loan at 5% and investing it at 5% results in a profit. Year 1 - Make a $1000 payment, $9000 balance (5% is $450). Your investment is $10000 at 5% or $500. $9000 loan and $10,500 in investments. Year 2 - Make a $1000 payment, $8450 balance (5% is $423). Your investment is $10,500 at 5% $525. $8450 loan and $11,025 in investments. ...

brightball 11y ago

While I agree with you on that point, just looking from a cash flow perspective if you were to keep working for a little while after paying everything off you'd likely be able to save a huge amount of money very quickly. Save, invest, relax on a beach...any of it's easier without that mortgage eating away at you. I remember when I finally got around to doing the math on my first mortgage and realized I was actually going to pay close to triple the sale price of the house if I waited the full 30 years. The real trick, if you don't want to pay off the whole thing, is to make a lump sum payment to pay down about half of the mortgage early. It's the first 10-15 years on a 30 year where the payments are so interest heavy that you're really just throwing away money. Get about halfway to payoff as fast as you can though and those payments are a whole lot closer to just paying back a cash balance.

mschaef 11y ago
> I was actually going to pay close to triple the sale price of the house if I waited the full 30 years. Did you adjust for inflation? Even at today's inflation rates, the dollars you pay in 30 years will be worth considerably less than the dollars you pay today. There's also an opportunity cost issue. Paying off your mortgage means not putting the money somewhere else. > you're really just throwing away money. No... you're paying for access to a resource that you don't have yourself. There's more utility in that than in literally throwing the money in the garbage.
- brightball 11y ago
  Matter of perspective I guess. When I looked at my early mortgage payments and 85% of the payment was interest so after 10 years I would have barely paid down the principle at all. To me, that feels like waste. I invested with steady 12-14% returns for 10 years and then watched it all get wiped out. The interest rate on paying of debt doesn't change. Granted, at current rates it's a lot tougher to make the argument for mortgage interest vs other types of debt. Nobody ever shows a compound interest chart with anything other than a steady interest rate (aka - 30 years of 10% return = millionaire!). A single negative or downturn can have a pretty dramatic effect on those projections. If you look at those same projection charts and take the amount you'd look to invest over the first 10 years, but put into into debt payment instead of investing so that you get everything paid off, then take that same amount you would have been investing, start investing it plus the money that you're no longer paying in monthly expenses then you'll find the end of the 30 year period to be an almost identical result. The only difference is that after 10 years you've eliminated virtually any risk of personal bankruptcy. If you can find something with a guaranteed long term return higher than the mortgage interest then it's another ballgame, but those are pretty hard to come by. Right now dividend investing seems to be the closest approach that generally lets you ignore the actual interest rates over time and instead focus on building cash flow. But this is one of those topics that is part math, part point of view and part personal comfort level. This was just my perspective.
  - cfeduke 11y ago
    I largely agree with you on this. I focused on my mortgage and as a result I have less than a year of payments left. I didn't ignore investments either - roughly 10% of my income into the market - but I did not pay the minimum mortgage payment in favor of investments. There was a point a few years ago where liquidating the investments could pay off the mortgage. To me it seems that you can get some of the benefits of the emotional release of being debt free if you have the capability to liquidate and clear debt. While many people will make the argument that instead I should have paid the minimums and had more money invested with the net effect of reaching the liquidate/pay off point, I agree with the reasoning behind your argument: market volatility will not wipe out debt that has been cleared.
United857 11y ago
Even if you have enough cash to pay off a mortgage, if you can invest it with better returns than the mortgage interest rate (not hard these days), then it makes better sense to do that. Even Mark Zuckerberg has a mortgage...
- fideloper 11y ago
  Exactly this. General rule of thumb when deciding between eliminating debt or investing is to compare if the debt interest is greater than investment interest (investment rate of return). If (debt.interest > investment.interest ), pay off debt first. Else, invest.
  - nostrademons 11y ago
    That's the equation, but you also have to consider risk when you make it, and weigh it against your personal risk tolerance. Paying off a mortgage is like making a risk-free investment for the term of the mortgage with a (pre-tax) return equal to the interest rate. Right now, 10-year T-bills are yielding around 2.4%, most mortgage loans are in the 3-4% range. Your risk tolerance may be higher, in which case by all means put your mortgage principle toward investing in the stock market or your startup, but be aware that a market crash can leave you deep in debt.
  - 300bps 11y ago
    If (debt.interest > investment.interest ), pay off debt first. Else, invest. I disagree with this tremendously. With your strategy, essentially what you are doing is buying stocks on margin. This magnifies your profits if things goes your way and magnifies your losses if things go against you. Think about it this way - Interactive Brokers is an online brokerage with extremely low margin rates which are often half of current mortgage rates (see https://www.interactivebrokers.com/en/index.php?f=interest&p=schedule2 https://www.interactivebrokers.com/en/index.php?f=interest&p...). Using your logic, the right thing to do is to leverage yourself to the hilt for every penny Interactive Brokers will loan you at 1.63% or less and cross your fingers you make the right investment choices otherwise you're bankrupt. Buying investments on margin, no matter how it is done, is extremely risky. You might understand those risks and have a high enough risk tolerance but please don't pretend investing on margin is a general rule everyone should follow.
pc86 11y ago
> if you were to keep working for a little while after paying everything off you'd likely be able to save a huge amount of money very quickly. Save, invest, relax on a beach...any of it's easier without that mortgage eating away at you. Except the money you spend on your mortgage is year 1 is worth a lot more than the money you spend on it in year 30. Especially with rates where they've been the past several years (our mortgage is 3.25%), cash flow is really the only upside to paying off a mortgage decades early.
- bjelkeman-again 11y ago
  > cash flow is really the only upside to paying off a mortgage decades early. In my limited experience, the freedom of not having a mortgage and a car loan, or any other type of debt, far outweighs the benefits of just cash flow. We now have a sense of freedom we didn't have Before. I think it is going to be very individual how one reacts to it, but for us having a minimal mortgage or none has made a big difference for us. Taking risks, having run startups for the last 20 years, this was a major contribution to being able to do this.
  - jsprogrammer 11y ago
    Unfortunately, because of the way monetary policy is structured, it is not possible for all, or even most, to live without debt. Debt is fundamental to our economy. You can only be without it if someone else takes on some amount of debt.
    - pc86 11y ago
      Who takes on debt if you pay off your mortgage early?
      - btilly 11y ago
        In order for you to pay off your mortgage, you need to receive money. That money was generally created through the creation of debts. So it is hard to say exactly who took on that debt, but someone probably did. For more on how debt creates money, read up on http://en.wikipedia.org/wiki/Fractional-reserve_banking http://en.wikipedia.org/wiki/Fractional-reserve_banking. And the person you replied to is exactly right - our entire economic system only works right if there is a lot of debt to go with it.

mark-r 11y ago

Paying off a mortgage is just like any other investment - you need to look at the terms to see if it's worth doing. It's very illiquid, you can't get your cash back without getting another mortgage. On the other hand, it's a guaranteed rate of return that's probably significantly more than any other guaranteed rate you can find. If you think you can do better with a different investment then go for it. But remember, someone with a lot more money than you decided that their best bet was to finance your mortgage.

ghaff 11y ago
The guaranteed rate of return is a crucial point. (There are admittedly also some tax reasons why not paying off the mortgage early can be relatively beneficial.) However, way too many people look at the overall stock market returns over the past few years and conclude that anyone who pays off their mortgage early is an idiot. By that logic, anyone who could should have taken out a HELOC and bet it on the market. It would have indeed worked out over the past few years. The conclusion for guaranteed or very low risk investment returns is far less obvious and probably has more to do with liquidity and psychological factors.
bcheung 11y ago
The guaranteed rate on your equity is 0%. Got $500,000 in equity? Then that's $500,000 earning 0% interest. Of course you aren't paying mortgage interest but with mortgage rates at 3.5 - 4.25% it's easy to find investments with higher guaranteed returns. Infinite Banking (using overfunded, dividend paying, whole life insurance) currently has 4.5% guaranteed floors with actual rates with dividends currently at 5.0 - 5.5%. Lots of other benefits as well, life insurance, and being able to borrow money against your policy any time you want for any reason, no questions asked. Also, a 4% mortgage is only 4% of the whole balance in the beginning. At the end it is 4% of a very small balance. If you use level payments you effectively cut the interest rate in half to make comparison. Taking out a $10,000 loan at 5% and investing it at 5% results in a profit. Year 1 - Make a $1000 payment, $9000 balance (5% is $450). Your investment is $10000 at 5% or $500. $9000 loan and $10,500 in investments. Year 2 - Make a $1000 payment, $8450 balance (5% is $423). Your investment is $10,500 at 5% $525. $8450 loan and $11,025 in investments. ...