If paying off your mortgage is dumb, why do so many rich people do it?

[Anonymous]

to answer the original question, I'd say because once you are wealthy enough, you don't have to optimize. you can afford the suboptimal (and arguably higher risk) decision to pay off your home.

I'm doing okay for my age, have enough investments to pay off my mortgage, but I'm much much much more comfortable with $xxxK of liquid assets and an $xxxK mortgage than I would be with $0 and $0. I'd be scared shitless to be debt free and have way too high a portion of my wealth tied up in my house.

quantitatively, risk free rates > my mortgage so any accelerated paydown is bad math that decreases my wealth and decreases my liquidity. and across most long time horizons under most scenarios, stocks/other risk assets going to beat a 2.875% 28 yr mortgage.

If I had $10mm NW instead of $x.xmm NW, then my piddly little $3,300/month of P&I wouldn't matter and I'd just pay it off for shits and giggle, knowing that it's a suboptimal decision that decreases my liquidity and decreases my investment returns.

rich people (and poor people for that matter) do plenty of things that aren't optimal or aren't quantitatively sound.

[Anonymous]

Investments tank. No one can take away a house I own.

I don’t need to optimize the return on every dollar. I need to sleep at night.

- 2 houses and 3 rentals, $1.5M in retirement, zero debt

[Anonymous]

We have two paid off homes that equal about 25% of our net worth. The homes minimize risk, and we take on plenty of risk in the rest of our portfolio.

[Anonymous]

Just because no one has mentioned it explicitly, another reason to forego accelerated pay down is that mortgages possess a very attractive call option held by the borrower and “shorted” by the lender. In financial speak they are negatively convex whereas bullet bonds are positively convex.

If one is financially risk averse one can buy treasuries/non callable muni’s/etc which defease the mortgage and earn slightly positive carry (assuming a legacy low rate mortgage) while getting lots of positive convexity/upside if rates fall. If they rise, you’re matched.

Paying off a mortgage early gets rid of this optionality. The government subsidizes credit risk of mortgages and demand for the almighty dollar subsidized lenders tolerance for the call option given for free to the borrower.

Rates go down, refi, bonds up in value.
Rates go up, reinvest cash flows from bonds at higher yields while your mortgage decreases in present value.

Staying a borrower leaves you long rate volatility and more liquid. Also to the extent you think home prices and mortgage rates are correlated, a fixed long term mortgage acts as a hedge to a decline in property values, as the decline in PV of your mortgage helps.


I have a spreadsheet that tracks the present value of my mortgage. It’s worth about 88% of par discounted at the zero coupon treasury curve. It declines in value bumpy about 10% for every rate increase.

[Anonymous]

basically american mortgages are so damn borrower friendly that it's risky to go without one until you have so much money that it doesn't matter any more.

[Anonymous]

Anonymous wrote:Investments tank. No one can take away a house I own.

I don’t need to optimize the return on every dollar. I need to sleep at night.

- 2 houses and 3 rentals, $1.5M in retirement, zero debt

agree, 2 houses and 5 rentals, & $4mil in various retirement accts..0 debt

[Anonymous]

Anonymous wrote:Investments tank. No one can take away a house I own.

I don’t need to optimize the return on every dollar. I need to sleep at night.

- 2 houses and 3 rentals, $1.5M in retirement, zero debt

The government can and will take away your home if you don’t pay the property taxes. If all your money has gone to pay your mortgage down and you have nothing left to live on when you lose your job you will either be forced to sell the property or stop paying some of your bills.

Not caring about optimizing your return is perfectly valid if it helps you sleep well at night.

[Anonymous]

Anonymous wrote:Investments tank. No one can take away a house I own.

I don’t need to optimize the return on every dollar. I need to sleep at night.

- 2 houses and 3 rentals, $1.5M in retirement, zero debt

Someone can always take your house: The government. You still need to pay your taxes.
But I understand how paying down your mortgage makes you sleep better at night.
I sleep better at night when I optimize the return of every dollar and end up with more money in my bank account.

[Anonymous]

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Anonymous wrote:Not paying off a mortgage is financially the right decision. However, the emotional aspect to finances is real and for some folks putting the mortgage in the rear view mirror brings a lot of relief. No judgement here.

In hot real estate markets, the only way to buy a house is to have a cash offer. And if you don't get the mortgage when you buy, you cannot just go get a mortgage on a home later.

+1000

Haven't had a mortgage in over a decade and haven't had a car loan in over 2 decades. It's nice to jump off the American way of financing everything.

You are #goals.

Thanks!

I was wrong—we did get one car loan, because only way to get the $1500 cash back was to “finance” at 0.9%. So I got the loan and paid it off the first month. Seemed silly to not get the $1500 rebate otherwise

Once you jump off the financing trail it’s liberating. And east to not take car loans—keep them 7-10 years, save for next one and sell the used car for $10-20k (we buy luxury cars now).

I had a car loan when it was 0% and there were rebates. I just put the cash for the car in an account earning more than that and set it on autopay. I do the same thing with my 2.49% mortgage I have more than that in 100% safe investments earning more than that and have set it at autopay. I'll walk away with 30k+ more that way.

I know I could earn more with safe investments, but now at point it doesn’t matter. At point where I only need 30-40% in stocks, rest can be in Mm and homes and still earn millions off the safe stuff yearly. Given we are still working, no reason to take more risks.

[Anonymous]

Anonymous wrote:

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Anonymous wrote:

Anonymous wrote:Not paying off a mortgage is financially the right decision. However, the emotional aspect to finances is real and for some folks putting the mortgage in the rear view mirror brings a lot of relief. No judgement here.

In hot real estate markets, the only way to buy a house is to have a cash offer. And if you don't get the mortgage when you buy, you cannot just go get a mortgage on a home later.

+1000

Haven't had a mortgage in over a decade and haven't had a car loan in over 2 decades. It's nice to jump off the American way of financing everything.

You are #goals.

Thanks!

I was wrong—we did get one car loan, because only way to get the $1500 cash back was to “finance” at 0.9%. So I got the loan and paid it off the first month. Seemed silly to not get the $1500 rebate otherwise

Once you jump off the financing trail it’s liberating. And east to not take car loans—keep them 7-10 years, save for next one and sell the used car for $10-20k (we buy luxury cars now).

I had a car loan when it was 0% and there were rebates. I just put the cash for the car in an account earning more than that and set it on autopay. I do the same thing with my 2.49% mortgage I have more than that in 100% safe investments earning more than that and have set it at autopay. I'll walk away with 30k+ more that way.

I know I could earn more with safe investments, but now at point it doesn’t matter. At point where I only need 30-40% in stocks, rest can be in Mm and homes and still earn millions off the safe stuff yearly. Given we are still working, no reason to take more risks.

If you’re at this point it doesn’t matter and you can choose the path of least resistance.

[Anonymous]

Anonymous wrote:

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Anonymous wrote:For us, paying off our house was freeing. We still saved for college and retirement but we had a lower-cost house. I don't see why you wouldn't pay it off. Now, if something happens we know we will be ok in terms of housing and can live on far less if we need to. Now instead of the mortgage, we can invest the money we would have spent on the mortgage or do things we might not have done otherwise.

I wouldn't pay it off because the math speaks in favor of keeping the mortgage due to low interest rates. I understand the emotional aspect of being mortgage free in case something happens. But I more of a risk taker and I value the returns more than the peace of mind. If I didn't have a risk taker mindset, I wouldn't have quit my good paying nine to five job to start my own business.
Most people are more conservative and play it safe. That's why most people aren't entrepreneurs. Just like they value the safety of a nine to five W2 job more, they will also value the safety of a mortgage free house more. People with entrepreneurial mindset think differently.

Wrong. I'm a business owner and value the security of a paid-off house precisely because I take more risk in my day job and my income is variable.

Wouldn't the amount of your mortgage in a higher interest-bearing account make you even more secure? Liquid cash/cash equivalents = more security than lack of low interest debt.

It would. People have been spoiled by a hot real estate market where houses sell quickly no matter what, so they don’t understand exactly how illiquid real estate can be.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Investments tank. No one can take away a house I own.

I don’t need to optimize the return on every dollar. I need to sleep at night.

- 2 houses and 3 rentals, $1.5M in retirement, zero debt

The government can and will take away your home if you don’t pay the property taxes. If all your money has gone to pay your mortgage down and you have nothing left to live on when you lose your job you will either be forced to sell the property or stop paying some of your bills.

Not caring about optimizing your return is perfectly valid if it helps you sleep well at night.

This is true but property taxes are typically a small amount of money. I live in a town with high taxes and pay $25k a year. I could float this for a very long time without even drawing down any principle. It’s roughly $2k a month and even unemployment where I live is more than that a month. $2k is very different than a $10k mortgage.

[Anonymous]

People do many things that are financially unwise but somehow make their lives better/make them emotionally better off. Eg: financing hobbies that have no tangible returns (for kids or for themselves); buying luxury cars versus Hondas; taking a business class flight or flying private rather than economy and staying at 5 stars hotels versus Holiday Inn. Why would prepaying a mortgage or not taking out one in the first place be any different?

[Anonymous]

Anonymous wrote:People do many things that are financially unwise but somehow make their lives better/make them emotionally better off. Eg: financing hobbies that have no tangible returns (for kids or for themselves); buying luxury cars versus Hondas; taking a business class flight or flying private rather than economy and staying at 5 stars hotels versus Holiday Inn. Why would prepaying a mortgage or not taking out one in the first place be any different?

As long as they recognize it as such and don't delude themselves/others that it is somehow 'less risky.'

[Anonymous]

Anonymous wrote:

Anonymous wrote:Investments tank. No one can take away a house I own.

I don’t need to optimize the return on every dollar. I need to sleep at night.

- 2 houses and 3 rentals, $1.5M in retirement, zero debt

The government can and will take away your home if you don’t pay the property taxes. If all your money has gone to pay your mortgage down and you have nothing left to live on when you lose your job you will either be forced to sell the property or stop paying some of your bills.

Not caring about optimizing your return is perfectly valid if it helps you sleep well at night.

Learn to read, PP. None of us mortgage-free posters put "all our money" into our homes. We simply chose to aggressively pay off debt while at the same time saving and investing.

Just as another PP noted, being debt free was a financial goal for us. We never fly first-class or stay in 5-star resorts, our newest car is 11 years old, those things were not a priority for us (and never will be).

Also, because we paid off our mortgage more than 15 years ago, the money we would have sent to the bank instead went into the market. Do that math.