Mortgage, PP or both?

[Wonk]

The "pay down mortgage or not" debate is always interesting and I like seeing the alternate viewpoints.  One of Harry Browne's golden rules is never use leverage.  In an ironic way, we're all breaking that rule if we have a mortgage payment and a permanent portfolio.  In essence, we're saying "I believe the PP will outperform the interest rate on my mortgage."  Otherwise, we would all pay down our mortgages before investing in the PP.  Instead, we are using borrowed money (the mortgage) to pay for an investment portfolio.

I've looked at it both ways and with the cost of money at 3% and inflation nearly the same, I can't be convinced to pay off the mortgage.  Anyone else agree or disagree?

[BearBones]

Love the logic! I put a high premium on paying off debt, since this is essentially a risk-free, tax-free, guaranteed return. Even the PP cannot boast those characteristics. Furthermore, even a year's supply of cash will not help much if you lose your job for an extended period of time and the bank owns your house.

[Pkg Man]

I think it all depends on the interest rate, and the term.  While there is no guarantee that the PP will earn 3%, it seems very likely that it will.  If I had a mortgage that was in the 5-6% range, and I could not refi, then I would throw at least some money towards paying it down.  If I had a 30 year I'd consider swapping it for a 15 or a 20.

When faced with any choice where the odds seem close to 50-50 as to what the right answer is, don't make it a binary decision if it doesn't have to be.  Do some of each. 

[Coffee]

I paid off the mortgage last year (at age 39). I had a couple of really good years with my business-- and just decided to save up the cash and pay it off.

For one, it has allowed me to fund my PP more aggressively since being free of a mortgage  Secondly-- because my business model is highly unstable, I wanted the peace of mind to know that I didn't have to worry about paying the bank, should the business (or the economy) completely fall apart.

That being said: This McMansion is way too expensive to run... even without a mortgage  (Pool guy, lawn guy, HOA, two AC units, tax, insurance, etc...) So, I'm in the process of selling it and finding something smaller that I can put a couple of solar panels on and call it a day.

[cowboyhat]

If you are a person who worries about an abrupt dollar collapse, a mortgage about the size of the long term bond and the cash portion of your PP could act as a kind of hedge, since the nominal value of the LB and cash parts could be used to convert nominal mortgage debt into real home equity.

Buying your mortgage back with your LB and cash post crash, and then re-balance the remainder of your PP, would allow you to replace the worthless parts of your PP with something tangible and lower your monthly expenses, which would be useful if you were unemployed at that point. You would be selling gold to buy New Dollars or SDRs or whatever, and LB with 17% yields.

Might be a good plan if you are employed now and willing to forfeit the 4% interest on your mortgage for the time being.

[BearBones]

If you are a person who worries about an abrupt dollar collapse, a mortgage about the size of the long term bond and the cash portion of your PP could act as a kind of hedge, since the nominal value of the LB and cash parts could be used to convert nominal mortgage debt into real home equity.

How is that different from "leverage?" You are borrowing from the bank at a fixed interest rate in order to invest in a 50/50 combination of cash and LTB. That the combination of cash/LTB will yield a predictable tax-free return higher than the mortgage seems speculative to me.

[AgAuMoney]

Scenario 1:  paying on a mortgage and have a permanent portfolio
Scenario 2:  paying rent and have a permanent portfolio
Scenario 3:  own free and clear and much smaller (or no) permanent portfolio

I don't see much difference between #1 and #2.  Possible exception in that for #1 I'd have a fixed rate mortgage and so the house payment part would be known.  Property taxes, insurance, maint and repair expenses are all unknown so total housing costs are unknown, making it not much different from #2.

#3 is where I'd be if I paid off my mortgage.  Not going to happen for another 12+ years (on a 20yr note).

So far staying in #1 has been far and away the correct decision for me.

And one CAUTION:  Either pay off your mortgage entirely or keep the cash.  Prepayment will not save your house unless you pay it all off.  It does you absolutely no good to prepay almost all but not all of your mortgage.  If you still owe anything you have to keep making the payments come hell or high water.  Prepayment may even encourage the bank to foreclose as it is a lot better for them to take your home if/when you are more paid off rather than mortgaged to the hilt.  Oh, OK, sure if you prepay some at first then you can save a lot of interest at the end.  But even then it is safer to have cash in the bank to make at least 6 months of house payments BEFORE prepaying anything.  And by the time your payments are 50% or more allocated to principal it makes very little difference to prepay on each payment.  Just accumulate assets until you can wipe out the whole thing.

Disclaimer:  My opinion applies to typical U.S. mortgage amortization, other countries do it differently and I'm not familiar enough with them to know what approach might be better or worse.

[AgAuMoney]

If you are a person who worries about an abrupt dollar collapse, a mortgage about the size of the long term bond and the cash portion of your PP could act as a kind of hedge, since the nominal value of the LB and cash parts could be used to convert nominal mortgage debt into real home equity.

Interesting thought.  I hadn't considered it that way.