Gyroscopic Investing

I "grew up" my investing mindset from the Bogleheads forum and my parents who are both very debt averse. Compared to the Fatwallet Finance crowd who likes to maximize leverage to generate greater wealth-creating opportunities.

On Bogleheads, people tell you to max out your tax sheltered accounts and prepay your mortgage. Retiring without a mortgage is much easier and getting rid of that mortgage debt helps Bogleheads sleep at night.

I'm proposing an argument to keep as little equity in your home as possible. Never prepay the mortgage. Put a downpayment down as little as necessary to qualify for the mortgage and avoid PMI. Take out HELOCs as you are able to.

1) Mortgage interest is tax deductible. Even if you're "retired", you can use this tax deduction to perform Roth IRA conversions for free to a certain level.

2) Interest rates are at historic lows and you can probably beat the tax-adjusted mortgage interest rate in returns from your HBPP.

3) It serves as a hedge against rising interest rates with a built-in put option for declining interest rates. If interest rates rise, your low-interest rate loan is fantastic. If interest rates drop, you may be able to refinance.

4) It serves as a hedge against real estate inflation with a possible built-in put option for collapse. In many states you can walk away from your underwater home without real penalty.

5) You never really own your home anyway, so why pretend by having a paid off mortgage. If you stop paying your property taxes, the government will seize your house. If you stop paying your insurance and there's a fire/flood/etc, the house is gone. If you stop putting money into maintenance (new roof every 20 years, etc), the house will be uninhabitable. The fantasy of having a paid-off house is pure fantasy. Even once it's paid off, there's mandatory financial payments involved. They are just smaller. Wouldn't you have more piece of mind having the money you would have put into prepaying the mortgage in the HBPP instead of locked into an illiquid piece of property in a very specific geographic area?

6) In most states, creditor protection for homes is nonexistent or very limited. If you live in one of those states, your HBPP gold coins are much more creditor protected than your home. Take all that money you would have prepaid into the mortgage and instead put them into gold coins, and rebalance out of Gold ETFs from your 401k/IRA. Your 401k and IRA is creditor protected and your gold coins are creditor invisible. Buying 6 months worth of canned food to store would also be creditor invisible and a better use of money than prepaying the mortgage

7) You're better hedged against zombie apocalypse by not prepaying the mortgage. Once it hits, your equity in the house is meaningless. But the gold coins you bought instead of prepaying mortgage could be of value.

8 ) You retain the option of buying out the mortgage at any time. Suppose you lived in an area with very high rents that increases over time like San Francisco. If you bought a home, but didn't prepay the mortgage and instead invested extra money into HBPP, and you wind up living there a while and your house is now worth double of what you paid, you have the option to liquidate your HBPP holdings and buy out the rest of the mortgage in one shot, if that makes sense at the future time. No need to do it in little increments every month, especially if your HBPP return is greater than the tax-adjusted interest rate of the mortgage.

I'm a big fan of renting for financial reasons but like the idea of owning a home for other interesting reasons (more options to be sustainable by growing food in a backyard, having a nice fire proof safe for your gold coins, etc).

Curious to hear thoughts on this strategy and real-world examples of how it works. Point 5 (never really own the home anyway) is my biggest reason to avoid paying down a mortgage. If you truly could go buy a house in the middle of the woods and it was there and you owned it forever without additional payments to the government, then that would be very interesting to me. But even if you never set foot on the land you buy, and never use local government resources, you're expected to pay, forever, or they seize it. That's a huge discouraging factor for me to want to buy anything.

Counter-points appreciated.

excellent succinct summary

You mentioned liquidity issues, but it bears repeating that the day you need to turn to a HELOC might be the very day the bank cancels your HELOC.

I bought my house in cash but don't really have any counter-points to your arguments, especially #5. I think about this a lot as well. I tend to see being mortgage-free as reducing the number of landlords. With a mortgage, my landlords are the bank and the local government. With a "paid off" house, the local government is my only landlord.

The major reason why I did it was to minimize my ongoing monthly costs in anticipation of ERE. In that respect, I'm happy with my decision. I tend to not care about the opportunity costs of less investment capital since investment returns are uncertain but all the costs associated with debt are not.

Excellent summary and very financially logical.  However, I went the "sleep easier at night" route which I could not begin put a price on how good it feels, and paid the sucker off quite a while back.  I have no regrets, I would do it again in a heartbeat.

... Mountaineer

I agree with most everything you say and I had a mortgage of my own up until I left my job for early retirement.  When the mortgage was a larger percentage of my assets and I was busy growing my nest egg, it made a lot of sense.  Today my house value is small relative to my invested assets, and even if I kept the mortgage and the PP earned 5% a year over my interest rate the "bonus" to my total portfolio would be only about 0.6%* a year. The mortgage interest deduction doesn't apply to me, either, as the standard deduction is by far the better deal for us.  Basically, the risk-adjusted return no longer does a lot for me in my personal situation, so I've chosen to live completely debt-free and turn my attention to more interesting things.

One of my favorite quotes:

“Indebtedness could discipline workers, keeping them at routinized jobs in factories and offices, graying but in harness, meeting payments regularly.”?  Lears, The New Basis of Civilization

(*)  People tend to over-simpify this and rarely talk about amortization when discussing the delta between interest rates and average returns. Note that the 0.6% is weighted heavily towards the first half of the mortgage and will shrink as the principal is paid off.  If returns in the first half are worse than average, I may lose more money than I am able to regain later on.  Making 10% on $20k won't make up for losing 5% on $150k, even if the investment percentages average out to that 5% premium over time.  It could go the other way, too, but I've chosen to be more conservative knowing that I'll be just fine not playing. 

Sounds good to me. It's also one of the very few (only?) ways to short the dollar without having to worry about a margin call!

TripleB wrote: 5) You never really own your home anyway, so why pretend by having a paid off mortgage. If you stop paying your property taxes, the government will seize your house. If you stop paying your insurance and there's a fire/flood/etc, the house is gone. If you stop putting money into maintenance (new roof every 20 years, etc), the house will be uninhabitable. The fantasy of having a paid-off house is pure fantasy. Even once it's paid off, there's mandatory financial payments involved. They are just smaller. Wouldn't you have more piece of mind having the money you would have put into prepaying the mortgage in the HBPP instead of locked into an illiquid piece of property in a very specific geographic area?

I see this as a good argument to rent instead of buy.  But once you make the purchase decision, the tax and repair liabilities are yours regardless of if it's your name or the bank on the deed.  I don't think it should influence one's mortgage decision in the slightest. 

My thinking exactly, except for the HELOC part which strikes me as going against HB's rule #7 if you're using the borrowed money to invest (or was that actually allowed - it says don't use margin "other than your home"?).

As for the sleeping better at night thing that Mountaineer spoke of, I say to each his own. I sleep better having my money in liquid investments.

madbean wrote: My thinking exactly, except for the HELOC part which strikes me as going against HB's rule #7 if you're using the borrowed money to invest (or was that actually allowed - it says don't use margin "other than your home"?).

As for the sleeping better at night thing that Mountaineer spoke of, I say to each his own. I sleep better having my money in liquid investments.

I agree on the liquid investment comment making for good sleeping - but then that brings up the matter of owning physical gold, most any type of real estate or business - topics for another discussion of prudent investments to promote good sleeping. 

Back to the investment part: based on several decades of having and not having mortgages and a few years of renting early on, my advice would be to never think of your home as an investment - it is mostly just customizable shelter, hopefully in a safe location with good neighbors.  In the long run, it may turn out to be a little cheaper than renting since "you" are the landlord and thus are not paying for someone else to take on a lot of the hassle, but to me that isn't a significant factor.  I am more of "enough is enough" type of guy who does not need or want to go after every last penny that is possible; not worth my time or effort.  As someone else said, not having a mortgage hanging over me is a good way to free up mental energy and to spend more time doing the things I like.  I don't think of my home as an investment any more than I do my car; they are both just comfortable places in which to spend a lot of my time so I might as well customize both to my and my wife's tastes and needs.  But that is just us.  Mortgage or not - depends on your values.

... Mountaineer

Very well said TripleB.  I agree with all your points.  I sold my house last year and took a loss just to get out of the shit-hole state of Illinois.  Best move of my live.  Now I'm renting in Florida for far less the cost of ownership. 

IMO the biggest item is the opportunity cost.  For example, you may own a house worth $200K and have no mortgage, however, I get about 10% annual return on my investment portfolio.  So by renting, I can generate $20K per year instead of owning, which pays for rent, plus I have total mobility.

Curious to hear thoughts on this strategy and real-world examples of how it works.

Interesting to read this thread because:

* Although I bought my house in cash, I took out the first loan of my life, a home equity loan (is that what all this HELOC talk is?) last year for renovation. Nearly a total rebuild.
* Loan was for $100,000 at 3.59%
* Every month I pay ~ $1,000, part interest part principal.


I still can't decide whether to pay it off. When we're done buying furniture, I might still have enough in cash to swing it, but:

+ I'm making more than 3.59% on my investments.
+ I can afford the monthly payments.
+ 3.59% feels cheap and it will look cheaper still in the future, I think.
+ As you said, TripleB, I have property taxes, anyway. It's just an illusion that the property is mine.

On the other hand:

- I've got that boglehead urge to pay it off. Any leftover cash will feel like mine.
- I won't be paying interest on a loan that I don't need.
- No tax consquences / I am getting no benefits, taxwise, from keeping this loan.

dualstow wrote:
* Loan was for $100,000 at 3.59%

Is this fixed?  There's definitely more risk when investing vs. a variable rate loan.

Yep, fixed. In fact, it was priority #1 for us.

dualstow wrote:

Curious to hear thoughts on this strategy and real-world examples of how it works.

Interesting to read this thread because:

* Although I bought my house in cash, I took out the first loan of my life, a home equity loan (is that what all this HELOC talk is?) last year for renovation. Nearly a total rebuild.
* Loan was for $100,000 at 3.59%
* Every month I pay ~ $1,000, part interest part principal.


I still can't decide whether to pay it off. When we're done buying furniture, I might still have enough in cash to swing it, but:

+ I'm making more than 3.59% on my investments.
+ I can afford the monthly payments.
+ 3.59% feels cheap and it will look cheaper still in the future, I think.
+ As you said, TripleB, I have property taxes, anyway. It's just an illusion that the property is mine.

On the other hand:

- I've got that boglehead urge to pay it off. Any leftover cash will feel like mine.
- I won't be paying interest on a loan that I don't need.
- No tax consquences / I am getting no benefits, taxwise, from keeping this loan.

dualstow,

Your post reminded me of one more reason I paid off our mortgage.  Since I'm retired and on a fixed income, all money I pay in interest is definitely gone vs. the possible gain from being able to do better than the loan interest rate with my portfolio.

... Mountaineer

Possible gain indeed, Mountaineer. This bumper crop can't last forever.

What if you could qualify for one of those super-low-rate loans that rich people sometimes get?  I want to say Zuckerberg's mortgage interest rate is 1%.  Probably he's agreed to keep some amount of money with the bank.

We keep 25% in cash anyway.  I wonder how much cash it would take on deposit in order to get a 1% mortgage rate.

I'm surprised that no one has noticed (or at least corrected) the split infinitive in the title. 

Xan wrote: What if you could qualify for one of those super-low-rate loans that rich people sometimes get?  I want to say Zuckerberg's mortgage interest rate is 1%.  Probably he's agreed to keep some amount of money with the bank.

We keep 25% in cash anyway.  I wonder how much cash it would take on deposit in order to get a 1% mortgage rate.

Blaspheme!!!

FDIC is a four-letter word my friend, not real cash!

JK... not a time/place for that debate.  That's insane, though!  I'd love to see the terms of that agreement.

Triple B,

I definitely agree with most of your points.  Very well-put (pardon the pun).  I love all the "put option" stuff you talk about.

Perhaps this is implied in your post, but I'd add that having less equity actually puts you in a BETTER bargaining position with a bank if something pops up (never-mind the fact that having liquidity will put you in a FAR better position to make mortgage payments if something bad happens... so I'm FAR more against paying "down" a mortgage than paying "off" a mortgage). 

Liquidity can certainly be a double-edged sword for those who have behavioral spending problems, so if we put THAT issue aside for a second (because any proposed "solution" to that problem has to be something that the person will be NATURALLY motivated to do, and NOT undo when they need the money), we're pretty much left with a couple remaining arguments.

1) "I can't get a guaranteed return like this in my investments."

2) "It makes me sleep better at night"

The first argument's a little easier to tackle than the second, since the second one wreaks of the whole "But it's just how I FEEEEL" arguments that leave me baffled when I debate women .... sorry that was simultaneously sexist and offensive to those making that argument.

But regarding #1, yes, the 4% mortgage, even if adjusted for taxes, is higher than 30 year T-bonds... especially now with bonds on a tear.  But for the purposes of this debate, let's say you're looking at a 1.5% spread loss on 30 year T-bonds vs your mortgage.  It's not usually that big (especially if you use a 7 or 10 year ARM, which I like!), but I want to really test my theory here. 

You can also make some arguments to compare the PP rather than just 30-year bonds.  I prefer the 30-year bond comparison, because that's a closer economic match, IMO.  The PP has all sorts of economic protections to your portfolio (and risks) that paying down your mortgage simply doesn't have.

So let's say I'm going to LOSE 1.5% to my mortgage.  Just to get my head round this a bit, $100,000 losing 1.5% costs me $1,500 per year, but gives me $100,000 of "gas" to throw on an emergency or opportunity.  The question is, to me, what is the value of that liquidity?  Well I'd argue that the less you have, the more it's worth, as it is far-more likely to be used to mitigate an emergency or take advantage of an opportunity.  Combine that with the fact that you are tying your money up for FAR more years early in your mortgage than later, then it probably is a situation where if it DOES make sense to pay down/off your mortgage, it makes far MORE sense when you have less years on the mortgage and have more liquidity (aka, when you are older). 

So I don't even look at it as using leverage to invest, but as another sort of "insurance."  Is it worth $1,500 per year to have the potential gains that could come along with having $100k on hand and ready to pounce on an emergency or opportunity that could yield or save me FAR more than $1,500 per year?  There are so many more drastic scenarios than losing $1,500 per year ($125 per month) that could come as a result of not having cash-on-hand (well, not literally "cash," but some sort of liquid security).  To me, the whole "but I can get better return out of the market" is a bullshit one.  That's using debt to exacerbate risk.  I totally agree that this is a disaster waiting to happen.  With the exception of the potential opportunities that could arise (things that offer a much better risk/reward proposition than the stock market), I think of it as using leverage/debt to REMOVE risk from my overall economic scenario.  For every situation a "Dave Ramsey" can come up with where having a paid off home is the best economic scenario to be in, I can show him 10 where having liquidity is a FAR better position to be in than a paid-off home.  And a lot of times, scenarios people invent where they assert a paid-off home is the "best scenario," usually liquidity is a better one, in reality.  See this article for a great example of that kind of garbage: http://www.forbes.com/sites/deborahljac ... -received/





To the "it makes me feel better" argument, I say "Why?  Are your feelings in accordance with reality, or are you letting them trump logic rather than working WITH logic (as HB would suggest)?"

Some things we don't really have to ask ourselves "why" it feels good.  A back-rub.  Working out.  A good night's sleep.  A good movie.  We just have to be aware of what we enjoy on a pure consumption basis.

But other things, I think it behooves us to ask ourselves, "WHY DOES THIS MAKE ME FEEL GOOD."  Especially with money.  Because if we are going to acknowledge that a LOT of people are "feeling good" that aren't in a balanced position (nobody here, of course! haha), then shouldn't we really, truly dig in and ask ourselves if we're essentially falling back on that same thing?  It's easy to snap back and say "hey dude, lay off.... I paid off my debt and that's a GOOD thing!!  Next topic, buddy."  They raise a good point.  But we could play that little argument-stopper all day with people who are going to FAIL!  "Hey dude, lay off... I contribute 3% to my 401(k) and it's growing and that's a GOOD thing!" or "He dude, lay off... I am taking care of 3 kids and giving them a life they enjoy and that's a GOOD thing."

See what I mean?  This isn't an argument about whether Motorhead is a better metal band than Metallica (they're not even close)... this is a debate around the fundamentals of economics, and we can't just let our "feeeeelings" guide us through everything.  We have to consistently apply fundamental economic principles, and those things don't just shut down when we get to the topic of debt.

Yes, it's one less financial obligation.  Yes, it's one less cash-flow drain.  Yes, now you don't have to stare at a 30-year treasury or TLT and watch it wag up and down with the market. Yes, now you're less likely (if things go fine) to have to worry about trying to figure out how to get your assets to generate income.  But if we look at the fundamentals of what it does to your economic scenario in terms of risk, return, and the ability to make cash flow, usually, if we're running all the little monte-carlo scenarios through our head, and actually walk ourselves through the scenarios that could present themselves (if we can remove the temptation to spend the money on bullshit as a variable, which I'll acknowledge is a BIG variable for SOME people), I can think of FAR, FAR more scenarios where bad things have actually HAPPENED and I'm sleeping FAR better with liquid cash than a paid-off (or God-forbid paid-down-but-not-off) mortgage.  In fact, one has to go through some pretty solid mental gymnastics to present a scenario where the paid-off home is a drastically better position to be in.

I don't know if I've shared with you guys when I had a rental burn down and since I'd moved out of it and didn't change the insurance, I went through about 5-6 months of turmoil on whether I'd get paid out.  Probably the most "not sleeping at night" type of shit I've been through (I can't even imagine having health issues with a young spouse or children... cuz that would be about 1,000x worse).  This is both directly and indirectly related to the mortgage stuff, as 1) the mortgage actually protected my net worth from being more exposed if they hadn't paid out, and 2) putting attention on how I sleep at night is FAR more important if something bad happens than in a current scenario.  Simply put, what's more important, taking an 8.0 quality-slept night to an 8.5 quality-slept night, or arranging your situation where if SHTF, you sleep at a 5.0 instead of a 2.0?  If I'm sleeping ok now, it's not materially important to me to improve that sleep.  It's materially important to me to arange my affairs to improve my sleep IF I were getting awful sleep.  And that's why I want liquidity over a paid-off/down mortgage.

People's hatred of "bills" in their budget (when usually their spending problem is a discretionary one), liabilities on their balance sheet (when it's really their decision around a purchase/consumption that is usually the problem and a persistent liability is going to be a natural result), fear of investing large sums of money and watching volatility (which pales in comparison to the economic "volatility" associated with a bad diagnosis or emergency or liquidity-need), and the fear of having to take income from their assets on a consistent basis (something I've witnessed that people HATE doing once they get to retirement), I think this is where the whole "I sleep better at night" comes from.  It's simultaneously completely understandable, and, IMO, if fully analyzed in the context of all the volatility that life can present to us, something HB (who might disagree with me so I might be using his own term against him) has described as an Emotional Trap. 



Sorry if I've condescended upon anyone.  I have a ton of respect for the financial prowess of a lot of the "debt free" people on this board so please accept this as just one area of micro-disagreement.  I've worked with a lot of people in their finances, and I've come to have an allergic reaction to "false idols" in people's financial lives when the MAIN underlying problem is simply that they either bought way too much house or spend way too much money on discretionary daily buying decisions.  That, or they ARE good savers, but think that being debt-free is SO economically powerful that they are very likely to screw up their income planning in retirement.  Having a strong, diversified NET WORTH in the face of a modest lifestyle and well-managed risk is what gives you financial horsepower in retirement.  Being "debt-free" is only one possible part of that, and to the degree that it's blinding you towards far-more costly risks that require fast money, it's actually a distraction of mental energy, which should be focused on growing your net worth via 1) being good at a job/career/business, 2) keeping expenses low and controlled, and 3) diversifying your investments. 

Interesting thread!  This is debated a lot on the bogleheads forum as well, and it seems like it boils down to a personal vs rational choice.  Over time, investments would indeed be more productive than reducing mortgage interest payments.  I know that rationally, but for peace of mind I want to see the mortgage gone.  I don't want to be beholden to a bank.  And debt has a way of reducing your options.  Basically I'm with dualstow.

Regarding the rent vs buy argument...I don't get the rent vs buy calculators because they miss something very, very important.  With my current apartment, I get to deduct both the mortgage interest and 70% of maintenance, and a big chunk of monthly payments goes to paying mortgage principle and thus increases equity.  These deductions are worth a lot due to the high income taxes in my state/city.  I also get tax abatements from the state amounting to a bit more than one month's worth of maintenance.  And don't forget that other things become deductible that otherwise wouldn't (e.g. charitable donations) because they'd be swallowed up by the standard deduction.  If I were to rent out this apartment, I'd not only have to pay sublet fees (10% of maintenance) but I would lose the tax deductions and the abatements.  All costs would have to be covered by the rent.  Thus, a renter effectively does not get any of these deductions and on top of that has to pay for the landlord's profit & the extra fees.  There is almost no situation where this makes any kind of fiscal sense, except maybe transient (< 5 year) occupancy where buy/sell costs become relatively large.

WiseOne wrote: Interesting thread!  This is debated a lot on the bogleheads forum as well, and it seems like it boils down to a personal vs rational choice.  Over time, investments would indeed be more productive than reducing mortgage interest payments.  I know that rationally, but for peace of mind I want to see the mortgage gone.  I don't want to be beholden to a bank.  And debt has a way of reducing your options.  Basically I'm with dualstow.

Regarding the rent vs buy argument...I don't get the rent vs buy calculators because they miss something very, very important.  With my current apartment, I get to deduct both the mortgage interest and 70% of maintenance, and a big chunk of monthly payments goes to paying mortgage principle and thus increases equity.  These deductions are worth a lot due to the high income taxes in my state/city.  I also get tax abatements from the state amounting to a bit more than one month's worth of maintenance.  And don't forget that other things become deductible that otherwise wouldn't (e.g. charitable donations) because they'd be swallowed up by the standard deduction.  If I were to rent out this apartment, I'd not only have to pay sublet fees (10% of maintenance) but I would lose the tax deductions and the abatements.  All costs would have to be covered by the rent.  Thus, a renter effectively does not get any of these deductions and on top of that has to pay for the landlord's profit & the extra fees.  There is almost no situation where this makes any kind of fiscal sense, except maybe transient (< 5 year) occupancy where buy/sell costs become relatively large.

I think you are neglecting the possibility that you will have to move (possibly due to job loss) and won't be able to find a renter to pay the mortgage, etc. In such a case, you are totally screwed as an owner but obviously not as a renter.

I've had to move for jobs several times in the last 15 years, but fortunately my house payment was low enough that maintaining it as well as my new residence (rented) was not too big a financial burden. Otherwise I would have been in trouble when I lost my job.

WiseOne,

Any buy vs rent calculator that doesn't factor in an eventual equity position is not doing it's job, IMO.

Now if you're doing a CASH-FLOW calculation (very important, especially for young folks who can't afford much in terms of CF hiccups), then that's fine to not "factor-in" home equity.

But for a buy vs rent calculation, it should look something like this, IMO:

RENT:

Cost of rent, rising at some assumed rate of inflation
Cost of any renting-specific expenses (perhaps laundry?  Garage?  Renting the party room twice per year?  Etc) also rising with inflation.


BUY:

Up front cash-flows:

Down Payment
Closing-costs (including escrow-funding, I use a rule of thumb of 4%)
(Potential "Looking" and moving costs, and "furnishing costs" if you want)

On-going cash-flow:

Mortgage payment NOT rising with inflation and only go for 30 years (or term of mortgage)
Increased utilities (if you're considering moving to a bigger place than you rent). Main ones are:

- Gas
- Electric
- Water/Sewer
- Garbage

All rise with inflation

Maintenance (rises with inflation) (RoT: 1%-2%)
Taxes (rises with inflation) (RoT: 1%- 1.5%)
Insurance (rises with inflation) (RoT: .5%)
(last two are included with escrow, so either remove from closing costs or reflect escrow accordingly in first year of this cash-flow)
(Can also includ home IMPROVEMENTS if you wish, and reflect them in sale price)

Back-End Flows:

Sale price of home based on appreciation assuming inflation rate
Less: 6-7% Realtor commission
(Potential other incidental costs of moving, if you want)



Other things to keep in mind:

Are you using the same inflation rate for everything, or trying to make rent and the property value grow at 7%, but your taxes/maint/etc grow only at 3% (if so, you're cheating) .
What is your "opportunity cost of capital?"  Most people wouldn't make such an illiquid investment at 6%, but I think it's still fair.
How easily could you rent it, if you needed to... either a room or the whole thing?  Would that make it cash-flow positively?
If you need to sell after 2 years or so, what kind of loss are you going to recognize on the scenario?

Beyond those, there are obvious scenarios you can invent where renting or buying would have been the FAR better scenario (zombie apocalypse... job relocation after 6 months... etc).  The thing about a paid-off home I don't like, in some senses, is a lot of the SHTF scenarios that you can invent where you're hunkering down in your home, if you change one or two facts of that scenario, you might just as well be piling the family into your Hummer never to see the home again. 

Also, it's a-ok to compare apples to oranges.  In most of my analyses, based on the MN markets, renting a 1 BR apartment and getting 6% on the rest is a far better scenario than owning a single family home with no renters.  You're not JUST testing the financials of the scenario, but if something IS going to cost you, it's OK to still pick it if it's where you want to push your priorities, financially.  You just have to mark it in the "consumption decision" portion of your brain, rather than "investment" or "financial improvement."  And if you do that, you can compare it to things like taking another vacation every year, buying a new car, etc, and ask yourself which will make you happier.

Xan wrote: What if you could qualify for one of those super-low-rate loans that rich people sometimes get?  I want to say Zuckerberg's mortgage interest rate is 1%.  Probably he's agreed to keep some amount of money with the bank.

We keep 25% in cash anyway.  I wonder how much cash it would take on deposit in order to get a 1% mortgage rate.

In the UK, offset mortagages are pretty much standard (or were). http://www.moneysupermarket.com/mortgag ... -mortgage/
It's a sort of compromise between paying off your mortgage and not doing so. It means you don't pay any mortgage interest but also have that cash on hand in case you want to spend it ever. We've gone down that route but its more down to inertia than any assessment that it makes much sense.

Having a 3.5% mortgage might become a bit of a burden in a full blown deflationary depression. Perhaps the bond market is now hinting that such a scenario isn't impossible? Even if LTT yields fell to say 0.5% yield but gold and stocks both fell 80% and stayed down, the HBPP wouldn't be better than not having a 30year 3.5% mortgage would it?

stone wrote:

Xan wrote: What if you could qualify for one of those super-low-rate loans that rich people sometimes get?  I want to say Zuckerberg's mortgage interest rate is 1%.  Probably he's agreed to keep some amount of money with the bank.

We keep 25% in cash anyway.  I wonder how much cash it would take on deposit in order to get a 1% mortgage rate.

In the UK, offset mortagages are pretty much standard (or were). http://www.moneysupermarket.com/mortgag ... -mortgage/
It's a sort of compromise between paying off your mortgage and not doing so. It means you don't pay any mortgage interest but also have that cash on hand in case you want to spend it ever. We've gone down that route but its more down to inertia than any assessment that it makes much sense.

Having a 3.5% mortgage might become a bit of a burden in a full blown deflationary depression. Perhaps the bond market is now hinting that such a scenario isn't impossible? Even if LTT yields fell to say 0.5% yield but gold and stocks both fell 80% and stayed down, the HBPP wouldn't be better than not having a 30year 3.5% mortgage would it?

A mortgage could indeed be a big burden in a deflationary depression... but not if it is non-recourse, as mine is. 

stone wrote:

Xan wrote: What if you could qualify for one of those super-low-rate loans that rich people sometimes get?  I want to say Zuckerberg's mortgage interest rate is 1%.  Probably he's agreed to keep some amount of money with the bank.

We keep 25% in cash anyway.  I wonder how much cash it would take on deposit in order to get a 1% mortgage rate.

In the UK, offset mortagages are pretty much standard (or were). http://www.moneysupermarket.com/mortgag ... -mortgage/
It's a sort of compromise between paying off your mortgage and not doing so. It means you don't pay any mortgage interest but also have that cash on hand in case you want to spend it ever. We've gone down that route but its more down to inertia than any assessment that it makes much sense.

Having a 3.5% mortgage might become a bit of a burden in a full blown deflationary depression. Perhaps the bond market is now hinting that such a scenario isn't impossible? Even if LTT yields fell to say 0.5% yield but gold and stocks both fell 80% and stayed down, the HBPP wouldn't be better than not having a 30year 3.5% mortgage would it?

Well the economic risk/rewards of paying off debt mimics LTT's more than anything else.  Like I pointed out in a previous post, if you can imagine yourself "losing" $1,500 (1.5% spread) by investing in LTT's instead of paying down $100k of a mortgage, and we have a deflationary collapse, you will be in one of two different situations.

1) Your $100,000 earning 2.4% (in the U.S.) is now earning 1.5%, and is worth $121,000 (or whatever it would be worth... I kinda suck at bond calculators so I could have entered stuff wrong (can someone confirm for me)), and you have $100,000 of mortgage @ (for my example) 3.9%.  You also have a mortgage payment.  Let's say $1,500 per month.

2) You have a paid-off mortgage and no mortgage payment.

Keep in mid, this is a deflationary depression, so if there's ever been a strong-chance that you be sh!t-canned, it is now.  If there's ever been a time your kid needs to move back home @ the age of 24, it is now. 

Also, in a deflationary depression, if you somehow have good job security, you're probably looking at some pretty spectacular opportunities in the real estate markets or perhaps stock market, that you could pounce into (but by no means have to).


I'll take the $120k of liquidity @ 1.5% (that I can do ANYTHING with) and a mortgage payment over the paid-off mortgage every time.  You almost can't invent a scenario where paying off the mortgage leaves you in the best possible position.