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

[Anonymous]

Anonymous wrote:Paying a mortgage means paying interest. Why pay interest if you don't have to? Pretty simple.

Because I have a 2.625% mortgage. I can put the repayment amount in my online savings account with a 3.4% interest rate, and make money. If I want to get crazy, I can buy a 1-year T-bill at 5%, and make, after the mortgage interest deduction, a 100% return over simply paying the mortgage off. Plus, I maintain liquidity, and can pay off the mortgage at any time. And those are just the risk free options.

In this situation, paying off the mortgage is the equivalent of having a match in your 401k, but investing in an IRA instead because someone, sometime, told you it was simpler, and safer. It isn't.

[Anonymous]

Anonymous wrote:Paying a mortgage means paying interest. Why pay interest if you don't have to? Pretty simple.

Because there are better ways to use that chunk of $ that you would use to pay off your mortgage early.

I get that the thought process it isn't as simple as "interest = bad, therefore must get rid of mortgage to avoid interest payments", but when you do the math it really does make more sense to just continue to pay the mortgage and use that money in an investment that pays more than the rate of the mortgage interest.

Maybe it is a generational thing? I grew up in a time when mortgage rates were crazy high-- like 15%! So these current 3% 30 year fixed interest rates are so low that I just can't bring myself to pay it off early, even though I could by selling mutual funds.

Besides, if the economy crashes, I will still have a crazy low interest rate on my mortgage locked in while everything else could get rocky. If, God forbid, if I lose my job and my mutual funds, I'm confident the bank will have far bigger fish to fry at that moment than to evict me from my home. The bank would likely be happy to keep it owner occupied and would renegotiate payments/interest, etc. It costs banks real money to go through the eviction process.

[Anonymous]

In inflationary times, having a big pile of low-income, fixed rate debt is pretty good!

[Anonymous]

Sometimes you just have "enough" in your investment/savings accounts, so why not get rid of that bill? My paid-off house is 12% of my net worth, so I don't worry about giving up potential returns or interest. The majority of my money is working for me in the market, and it's easier (for me) to ignore the inevitable ups and downs when I own my home free and clear.

[Anonymous]

Anonymous wrote: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.

Ditto!

[Anonymous]

Anonymous wrote:Sometimes you just have "enough" in your investment/savings accounts, so why not get rid of that bill? My paid-off house is 12% of my net worth, so I don't worry about giving up potential returns or interest. The majority of my money is working for me in the market, and it's easier (for me) to ignore the inevitable ups and downs when I own my home free and clear.

This. We do have enough and need to diversify, that plus the peace of mind of not having a mortgage payment, regardless of what the stock market is doing, is worth it to us. We are also at an age where we don't want to "gamble" with too much of our finances.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Sometimes you just have "enough" in your investment/savings accounts, so why not get rid of that bill? My paid-off house is 12% of my net worth, so I don't worry about giving up potential returns or interest. The majority of my money is working for me in the market, and it's easier (for me) to ignore the inevitable ups and downs when I own my home free and clear.

This. We do have enough and need to diversify, that plus the peace of mind of not having a mortgage payment, regardless of what the stock market is doing, is worth it to us. We are also at an age where we don't want to "gamble" with too much of our finances.

I see putting extra cash into your house as a gamble. I'd rather have that money diversified in other investments. Plus insurance and taxes are not a trivial amount so it's not like I'd be left with no housing costs

[Anonymous]

Anonymous wrote:Sometimes you just have "enough" in your investment/savings accounts, so why not get rid of that bill? My paid-off house is 12% of my net worth, so I don't worry about giving up potential returns or interest. The majority of my money is working for me in the market, and it's easier (for me) to ignore the inevitable ups and downs when I own my home free and clear.

This is fine. You set your priorities. Everyone doesn't want to maximize profit.
My friend told me that she doesn't want to contribute up to 6% to her 401k and get the company match. She feels like she already has enough locked up in retirement accounts and would rather put that money elsewhere in case she needs it before retirement. Maybe another peace of mind thing. I guess she is fine missing on the match. I'm learning that everyone doesn't want to maximize profit.

[Anonymous]

You are talking about math? Let me show you the math.

Assuming we both have $400k in cash, a house with a $400k mortgage financed for 15 years at 3.5%. Monthly Principal + Interests payment is $2,850
YOU: you decide to use your cash to pay off the mortgage. You can then invest the money ($2,850) you would have used for monthly payments in the market. Assuming a conservative annual return of 7%. you would have $919k after 15 years. That's good.

ME: I don't pay off the mortgage. I invest the $400k in the market instead. Assuming the same conservative annual return of 7%, I would have $1.1M after 15 years. The house would also be paid off. That's so much better. Paying off your mortgage early cost you 180k. That's the math. That's a lot of money lost just to buy your peace of mind.

Do the same math with a $4M mortgage and you are leaving $1.8M on the table.
This is why rich people take mortgages even when they can purchase million dollars houses in cash.

In your math you need to account for taxes for the 1.1M number.
The issue of discipline is the most important factor here. The liquid money is very unstable and a want might easily turn into a need. When your money is tied in a house you no option to waste it.

[Anonymous]

Anonymous wrote:

You are talking about math? Let me show you the math.

Assuming we both have $400k in cash, a house with a $400k mortgage financed for 15 years at 3.5%. Monthly Principal + Interests payment is $2,850
YOU: you decide to use your cash to pay off the mortgage. You can then invest the money ($2,850) you would have used for monthly payments in the market. Assuming a conservative annual return of 7%. you would have $919k after 15 years. That's good.

ME: I don't pay off the mortgage. I invest the $400k in the market instead. Assuming the same conservative annual return of 7%, I would have $1.1M after 15 years. The house would also be paid off. That's so much better. Paying off your mortgage early cost you 180k. That's the math. That's a lot of money lost just to buy your peace of mind.

Do the same math with a $4M mortgage and you are leaving $1.8M on the table.
This is why rich people take mortgages even when they can purchase million dollars houses in cash.

In your math you need to account for taxes for the 1.1M number.
The issue of discipline is the most important factor here. The liquid money is very unstable and a want might easily turn into a need. When your money is tied in a house you no option to waste it.

Of course you would pay taxes on the 1.1M. Or may even not pay taxes depending on how smart you or your tax advisor are.
Of course if you are undisciplined, you may want to the choice that you can handle even if it means leaving money on the table.
I would even argue that paying off your mortgage with the $400k as in the example above would require more discipline. Now that you are no longer paying a mortgage,
you have to be disciplined to invest that money every month instead of using it for other purposes.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

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.

You are talking about math? Let me show you the math.

Assuming we both have $400k in cash, a house with a $400k mortgage financed for 15 years at 3.5%. Monthly Principal + Interests payment is $2,850
YOU: you decide to use your cash to pay off the mortgage. You can then invest the money ($2,850) you would have used for monthly payments in the market. Assuming a conservative annual return of 7%. you would have $919k after 15 years. That's good.

ME: I don't pay off the mortgage. I invest the $400k in the market instead. Assuming the same conservative annual return of 7%, I would have $1.1M after 15 years. The house would also be paid off. That's so much better. Paying off your mortgage early cost you 180k. That's the math. That's a lot of money lost just to buy your peace of mind.

Do the same math with a $4M mortgage and you are leaving $1.8M on the table.
This is why rich people take mortgages even when they can purchase million dollars houses in cash.

7 percent is not a conservative assumption. There have been 15 year periods in many countries where 15 year returns are negative.

[Anonymous]

I think the posters using today’s rates for low risk investments have a short memory. I don’t think it’s accurate to say that there’s always or usually a low risk investment option that pays more than mortgage interest for a large loan.

[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?

IMO, once you’re “rich,” why bother with unnecessary leverage? You’re already rich and should be focused on capital preservation, not a narrow view of optimal returns. Also, how much return are you actually getting by not paying off your mortgage, and is it worth the headache? That said, I’m no longer aggressively paying off my mortgage given our current low fixed rate vs. ongoing inflation, and fully accept that i would have been better off not doing so for the past few years. But debt reduction takes a lot of the worst-case tail risks off the table and that has value even if the overall expected return is not optimal.

[Anonymous]

Anonymous wrote:I think the posters using today’s rates for low risk investments have a short memory. I don’t think it’s accurate to say that there’s always or usually a low risk investment option that pays more than mortgage interest for a large loan.

This is true, but one should react to today’s circumstances rather than history’s. And there’s not real cost to you if rates go back down. In fact if you are long longer term bonds against your mortgage, you will make lots of money in this scenario (but will lose money on a mark to market basis if rates go up).

[Anonymous]

Anonymous wrote:

Anonymous wrote:Sometimes you just have "enough" in your investment/savings accounts, so why not get rid of that bill? My paid-off house is 12% of my net worth, so I don't worry about giving up potential returns or interest. The majority of my money is working for me in the market, and it's easier (for me) to ignore the inevitable ups and downs when I own my home free and clear.

This is fine. You set your priorities. Everyone doesn't want to maximize profit.
My friend told me that she doesn't want to contribute up to 6% to her 401k and get the company match. She feels like she already has enough locked up in retirement accounts and would rather put that money elsewhere in case she needs it before retirement. Maybe another peace of mind thing. I guess she is fine missing on the match. I'm learning that everyone doesn't want to maximize profit.

But this is one of those things where people go with gut rather than thinking through the numbers--even on their own terms. The match is essentially a 50% return on your money instantly. You always have the option to put it in a "safe" investment like a FDIC insured account in the 401k or a MM or whatever if you're worried about investment risk. You can withdraw from your 401k other than retirement but there's a 10% penalty. 10%<50%. She could take the match and then withdraw it if she needed/wanted to for anything and the penalty would still be less than the gain. It's not just about optimizing profit, it's about aligning what you say you want with the actual numerical outcomes of your decision. People put "peace of mind" as an excuse to not deal with real numbers in a lot of ways--that's fine, of course, because we all contain a lot of psychological contradictions and are lazy--but it's not actually reasonable in any way if you work through the details.