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

[Anonymous]

You always see it on the real estate forum: “Oh, that’s a $4 million house so interest rates don’t matter. At that price point, people are just paying cash.” Don’t those rich, smart people know that they can just take out a mortgage for 6% and invest the difference in the stock market at 10%? And then when interest rates drop, they can refinance to a lower mortgage rate.

I finally have enough saved up to pay off my mortgage, and it’s the greatest feeling in the world. I am actually violating my own rule a little bit – right now, I have the money in I Bonds and short-term Treasuries, but only because they’re risk free and paying a higher rate than my 4% mortgage. But the minute the interest rate drops below my mortgage rate, I’m cashing out and paying off my mortgage. It’s such a huge stress relief to have arrived at this point.

My only meaningful expenses going forward are going to be food, utilities, and property taxes, along with the occasional home repair. It feels incredible because I now require very little income to survive. And I assume super rich people also feel that way since many of them don’t use mortgages. To me, part of being rich (even though I’m not “rich” yet) is not having to make every decision purely based on maximizing money.

For example, you could say that some rich people are dumb because they take significant amounts of leisure time – don’t they know they could be working and earning more money? But at a certain point, it’s not all about the money - it’s about your lifestyle and how you feel getting from Point A to Point B. Thoughts?

[Anonymous]

Mainly because they’re more liquid and have more cash flow than the typical middle class SOB who goes into austerity mode in the near term to tie up their cash in an illiquid asset.

Also, money laundering.

[Anonymous]

Everyone is different and has different preferences to what kind of debt they want to carry if any.

I think that not having a mortgage because it helps your peace of mind is perfectly legit.

[Anonymous]

Of course. If everything were purely about economics, nobody would have children or pets.

[Anonymous]

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.

[Anonymous]

Paying off early still means paying more interest than you could have. We chose a shorter-term mortgage.

[Anonymous]

We paid off ours and its was freeing. Now we can save that money.

[Anonymous]

Most rich people don't do it. They know the power of cheap leverage. But some rich people do because they are not that smart about money. Others might not care about optimizing. Buying a house entirely in cash is also often a good negotiating tool and also can avoid transaction fees. That's different than paying down your mortgage sooner and can make sense.

I'm opposed to it because it's less secure tbh--I'd rather keep my 250k ibonds in the bank earning 6-11% right now, another 50k in a 5% cd etc. than pay off the remaining 200k on my mortgage at 2.49%. And it's not just because it's a better deal. I can pay off ANYTHING I need with those bonds/cd, if it goes into my house I just have no mortgage (still have to pay taxes and insurance). With 300k in "safe money" I feel confident to invest in other things that make even more.

[Anonymous]

Generally you cant put your home into a trust unless it is paid off. So if you are wealthy enough that you are estate planning in this manner, you want to pay off your house.

[Anonymous]

Anonymous wrote:Most rich people don't do it. They know the power of cheap leverage. But some rich people do because they are not that smart about money. Others might not care about optimizing. Buying a house entirely in cash is also often a good negotiating tool and also can avoid transaction fees. That's different than paying down your mortgage sooner and can make sense.

I'm opposed to it because it's less secure tbh--I'd rather keep my 250k ibonds in the bank earning 6-11% right now, another 50k in a 5% cd etc. than pay off the remaining 200k on my mortgage at 2.49%. And it's not just because it's a better deal. I can pay off ANYTHING I need with those bonds/cd, if it goes into my house I just have no mortgage (still have to pay taxes and insurance). With 300k in "safe money" I feel confident to invest in other things that make even more.

Same here.

[Anonymous]

OP, I'm with you. And I think peopel underestimate the intangible benefits of not owing money on your home. I feel differently about investment properties, where I think it makes sense to just look critically at how to maximize your profits. But I find the security and peace of mind of owning my home free and clear to be worth something. An investment property you can always sell if you need to liquidate or for some reason you couldn't cover the debt. But selling your house is different -- you need somewhere to live. Knowing that if I was suddenly without income, or if I needed to save a large sum very quickly, I could simplify other costs and live in my current home for very little money, is huge. Also, I genuinely love my home so I would hate to be in a situation where I feel like I have to sell it due to the mortgage. Even with a very high income, the idea of paying 10-20k a month on a mortgage just sounds dicey to me -- people who finance homes like that can get into cash flow problems very quickly, especially if they've structured their earnings to reduce ordinary income as much as possible. It might be "smart" financially, but it sounds stressful and having less stress is worth a lot of money to me.

[Anonymous]

We paid off ours. No regrets. Don't get my financial advice here either.

[Anonymous]

Diversification. Gotta park your $ somewhere, some people prefer to not have it all in the market.

[Anonymous]

Anonymous wrote:You always see it on the real estate forum: “Oh, that’s a $4 million house so interest rates don’t matter. At that price point, people are just paying cash.” Don’t those rich, smart people know that they can just take out a mortgage for 6% and invest the difference in the stock market at 10%? And then when interest rates drop, they can refinance to a lower mortgage rate.

I finally have enough saved up to pay off my mortgage, and it’s the greatest feeling in the world. I am actually violating my own rule a little bit – right now, I have the money in I Bonds and short-term Treasuries, but only because they’re risk free and paying a higher rate than my 4% mortgage. But the minute the interest rate drops below my mortgage rate, I’m cashing out and paying off my mortgage. It’s such a huge stress relief to have arrived at this point.

My only meaningful expenses going forward are going to be food, utilities, and property taxes, along with the occasional home repair. It feels incredible because I now require very little income to survive. And I assume super rich people also feel that way since many of them don’t use mortgages. To me, part of being rich (even though I’m not “rich” yet) is not having to make every decision purely based on maximizing money.

For example, you could say that some rich people are dumb because they take significant amounts of leisure time – don’t they know they could be working and earning more money? But at a certain point, it’s not all about the money - it’s about your lifestyle and how you feel getting from Point A to Point B. Thoughts?

Consider the “after tax” component of your investments and the state you live in, whether it’s long term or short term capital gains, etc. with interests rates hovering around 6% now and finished ability to deduct mortgage interest, it’s hard not to take the tax free 6%. Of course, the math changes greatly if you’ve locked in a sub 3% rate or whatever.

[Anonymous]

Anonymous wrote:OP, I'm with you. And I think peopel underestimate the intangible benefits of not owing money on your home. I feel differently about investment properties, where I think it makes sense to just look critically at how to maximize your profits. But I find the security and peace of mind of owning my home free and clear to be worth something. An investment property you can always sell if you need to liquidate or for some reason you couldn't cover the debt. But selling your house is different -- you need somewhere to live. Knowing that if I was suddenly without income, or if I needed to save a large sum very quickly, I could simplify other costs and live in my current home for very little money, is huge. Also, I genuinely love my home so I would hate to be in a situation where I feel like I have to sell it due to the mortgage. Even with a very high income, the idea of paying 10-20k a month on a mortgage just sounds dicey to me -- people who finance homes like that can get into cash flow problems very quickly, especially if they've structured their earnings to reduce ordinary income as much as possible. It might be "smart" financially, but it sounds stressful and having less stress is worth a lot of money to me.

I really want to understand how having more than your mortgage in a safe interest-bearing account (e.g. ibonds, cds etc) feels less safe to you than paying it off. If you have that, you could pay it off at any moment. That to me is a huge intangible benefit. Not only could I pay off my house at a moment's notice, I could also abandon my house if there was an emergency and have 300k to address anything that arose. I find the intangible benefit of that so so so much more secure.