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

[Anonymous]

If they roll the cash over they avoid capital gains tax too. Buying with cash is certainly different than paying off a mortgage early.

I hate debt so I have a hard time with this. But out mortgage rate is 2.6% so I understand why that’s cheap money. It’s just feel nice to not have that bill. This isn’t a discussion for us for awhile, but I certainly don’t want to wait 28 years to pay it off (we refinanced in 2020 at the rock bottom).

[Anonymous]

For us middle class peons, I think part of it is well if you could pay off your mortgage, at least you will have a roof over your head if something happens (spouse dies, medical emergency).

[Anonymous]

Remember preparing a mortgage is a risk free and tax free return. Stocks carry risk and taxes. You have to compare the mortgage rate to the after tax investment returns. If you can afford to do so I think it is reasonable to both invest outside of retirement accounts and payoff your mortgage for diversification.

[Anonymous]

Anonymous wrote:Remember preparing a mortgage is a risk free and tax free return. Stocks carry risk and taxes. You have to compare the mortgage rate to the after tax investment returns. If you can afford to do so I think it is reasonable to both invest outside of retirement accounts and payoff your mortgage for diversification.

That's what we did.

Paid off the mortgage as soon as we could. Invested the cash we would have paid to the bank into retirement and taxable accounts.

I can't imagine having a mortgage now.

[Anonymous]

America runs on leverage. Even if someone pays $4m in cash for speed or negotiating power, they will likely take out a mortgage after the sale I f they can get a good rate. And because of their banking/wealth management relationships, they can likely score a much better interest rate than your average person on the street.

I have enough to pay off my $1m mortgage in brokerage, but I will likely never do that because I have a sub-3% interest rate.

[Anonymous]

My current house I bought with a 15 year mortgage at 3.25%. Paid it off after 4 years with a lump sum payment. Same as OP only have basic expenses left.

No regrets.

[Anonymous]

Anonymous wrote: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.

Of course you can put your home in trust with a mortgage. You have to take it out to close on the loan but you can put it back in immediately afterward.

[Anonymous]

I grew up without a lot of money. Making rent was a constant challenge for my parents. I have a lot of money now, and one of the things I have bought for myself is the financial security of having a fully paid for house.

I understand leverage and have investment properties leveraged with mortgages. And I understand that I could pay off my mortgage several times over with investments. But there is just something freeing about knowing you own the roof over your family’s head.

[Anonymous]

Anonymous wrote:

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.

This is my plan. Our mortgage rate is incredibly low (2.625%), so upon retirement I plan to park a significant amount of assets in those types of accounts (2-3 years worth of payments in an online savings account, and the CD ladders, most likely), set it on autopay, and just forget about it. It has the same effect and comfort as paying it off, but provides enormous flexibility.

[Anonymous]

Anonymous wrote:I grew up without a lot of money. Making rent was a constant challenge for my parents. I have a lot of money now, and one of the things I have bought for myself is the financial security of having a fully paid for house.

I understand leverage and have investment properties leveraged with mortgages. And I understand that I could pay off my mortgage several times over with investments. But there is just something freeing about knowing you own the roof over your family’s head.

Same, I love having no mortgage on anything. If something happened to my DH, who makes more than I do, we could easily stay in place on my salary.

[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.

Like my corporate finance professor used to say -- it sounds like you invented a money machine!

You have a way to borrow at 6% and get a guaranteed 10% return? Great! Why doesn't everyone do it?

The answer of course is that there is no guaranteed 10% return. For example, if you put money exactly 1 year ago into QQQ (Nasdaq ETF) you'd be down 13.18% as of today.

[Anonymous]

Lol @ rich people and a mortgage. If you have a mortgage, you're not rich.

[Anonymous]

Anonymous wrote:Lol @ rich people and a mortgage. If you have a mortgage, you're not rich.

Wildly inaccurate take

[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?

First, when you are taking a Jumbo loan (anything over ~$750K---don't know the exact numbers, as we haven't had a mortgage on any of our 3 homes in the last decade), so you are not getting the ultra low rates for a mortgage. 2nd, even if mortgage is 5%, that is a guarantee, but the 10-15% in the stock market is NOT a guarantee.
So right now, it's much better that I do not have $8M tied up in mortgages, because I can get a GUARANTEED 5%+ from just Cds right now. That leaves the money essentially liquid (I can cash out my CDs at any time without a penalty, that's how it works when you have access to high net work financial manager) so I am free to purchase rental homes/artwork/whatever investments come up with that liquid cash.

So even when we were not "wealthy" we worked towards paying off our mortgage because it is a Guaranteed return on investment.
Also in many real estate markets, when there are 5+ bids on every good home, you will never get a home if you insist on a mortgage---the seller is always going to take one of the many cash bids because it simplifies the process---you can close in 2.5 weeks versus 4-6 weeks with a mortgage.

[Anonymous]

Most people would call us. We have a paid off $3m home. Rich people are not stupid. How do you think we got rich? Of course we understand economics, leverage, opportunity costs, capital investment, etc. If you have the $$ it's liberating to pay off of the primary family home.