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

[Anonymous]

Anonymous wrote:People who feel a need to payoff a 3% mortgage for the “peace of mind” did not achieve their wealth by making smart financial decisions. They either inherited it or got lucky. If they earned it the hard way, they would know better.

No inheritance. You save after the mortgage is over. It’s freedom.

[Anonymous]

It’s obvious who the financially shrewd people are versus the trust fund babies

[Anonymous]

We have $6.5 milllion liquid invested and a $1 million interest only at 2.8% on a $2.5M house (we bought 10 years for $1.5M) so we never pay down principal. We worked out a retirement goal of $300k annual after tax passive income. To get there our wealth advisor uses rule of $300k x 30 = $9M liquid needed with 30/70 bond/stock. To get from $6.5 to $9 liquid faster we want compounding liquid returns which you don't get if you convert liquid capital to non-liquid capital in your house. $1,000 in the market will earn more compounding than if it was converted into your hardwood flooring. Plus you still live in your same house and its capital appreciation still is yours not the bank's. It makes sense to keep a low interest, interest only mortgage forever and never pay down principal. We basically have somebody else's $1M locked into our home at a 2.8% cost while we own the home apppreciation, mortgage interest tax benefit, compounding return on our mirror $1M liquid we keep compounding the market, maximize our monthly cash flow, and still wake up in the same house every day.

[Anonymous]

Nobody so far in this thread has mentioned how the truly wealthy families with generational money do it. The younger generation wanting to buy the house uses family loans to buy the properties outright in cash and then they pay the loans back to the family at extremely low low interest rates (because there is a legal requirement) and then any outstanding debt is forgiven at a later time (usually when the original older granter passes away). So the loan money stays within the family, as does the house. The bank is never involved.

[Anonymous]

Anonymous wrote:Nobody so far in this thread has mentioned how the truly wealthy families with generational money do it. The younger generation wanting to buy the house uses family loans to buy the properties outright in cash and then they pay the loans back to the family at extremely low low interest rates (because there is a legal requirement) and then any outstanding debt is forgiven at a later time (usually when the original older granter passes away). So the loan money stays within the family, as does the house. The bank is never involved.

That doesn't answer the question of why the family pays cash instead of investing.

[Anonymous]

Anonymous wrote:

Anonymous wrote:People who feel a need to payoff a 3% mortgage for the “peace of mind” did not achieve their wealth by making smart financial decisions. They either inherited it or got lucky. If they earned it the hard way, they would know better.

No inheritance. You save after the mortgage is over. It’s freedom.

You're right, it's free-dumb. You gave up substantial compound earnings over a critical financial growth time period, and you could have still paid off your mortgage later with the accumulated money.

[Anonymous]

When you have extremely high income in a non-financial job, you don't worry about optimizing small amounts of extra interest.
It takes effort to keep liquid funds in place to pay the bill each month, and time is money.

[Anonymous]

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.

I know plenty of people who have done that.

[Anonymous]

Anonymous wrote:We have $6.5 milllion liquid invested and a $1 million interest only at 2.8% on a $2.5M house (we bought 10 years for $1.5M) so we never pay down principal. We worked out a retirement goal of $300k annual after tax passive income. To get there our wealth advisor uses rule of $300k x 30 = $9M liquid needed with 30/70 bond/stock. To get from $6.5 to $9 liquid faster we want compounding liquid returns which you don't get if you convert liquid capital to non-liquid capital in your house. $1,000 in the market will earn more compounding than if it was converted into your hardwood flooring. Plus you still live in your same house and its capital appreciation still is yours not the bank's. It makes sense to keep a low interest, interest only mortgage forever and never pay down principal. We basically have somebody else's $1M locked into our home at a 2.8% cost while we own the home apppreciation, mortgage interest tax benefit, compounding return on our mirror $1M liquid we keep compounding the market, maximize our monthly cash flow, and still wake up in the same house every day.

I wish somebody would do this math for me. I need 150K to live on after taxes so if it's half, I'd need 5? I'm on target for that in 5 years. Did I get that right?

[Anonymous]

Anonymous wrote:

Anonymous wrote:Nobody so far in this thread has mentioned how the truly wealthy families with generational money do it. The younger generation wanting to buy the house uses family loans to buy the properties outright in cash and then they pay the loans back to the family at extremely low low interest rates (because there is a legal requirement) and then any outstanding debt is forgiven at a later time (usually when the original older granter passes away). So the loan money stays within the family, as does the house. The bank is never involved.

That doesn't answer the question of why the family pays cash instead of investing.

So the middle man doesn't get paid. Any mortgage costs money to get. When I got mine for 500K, it was thousands of dollars to just get the damn thing.

[Anonymous]

Anonymous wrote:

Anonymous wrote: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.

THis^^^

Then you are free to invest that money wherever you want to. Right now that money can earn a guaranteed 5%+ in CDs---$150K/year in cash guaranteed

Let's say you has a $1m mortgage, and the cash to pay it off immediately. Then you can start investing the $8 or so mortgage payment into a guaranteed 5% CD each month. That's great.

But now lets say you take that same $1m and invest it into the 5% CD all at once. You still have the same amount of security - you can pay off your home immediately, if you like - but you are earning interest on the $1m at the same time. And that $1m is available for other emergencies, without the time and expense of a HE loan.

Please explain how scenario 1 is better than scenario 2 *in financial terms*. .

[Anonymous]

Anonymous wrote:

Anonymous wrote:Nobody so far in this thread has mentioned how the truly wealthy families with generational money do it. The younger generation wanting to buy the house uses family loans to buy the properties outright in cash and then they pay the loans back to the family at extremely low low interest rates (because there is a legal requirement) and then any outstanding debt is forgiven at a later time (usually when the original older granter passes away). So the loan money stays within the family, as does the house. The bank is never involved.

That doesn't answer the question of why the family pays cash instead of investing.

Maybe because they’re dumb with money?

[Anonymous]

Anonymous wrote:We are 58/59, own two properties and haven't had a mortgage in over two decades.

I hated paying interest, when I could be investing that money instead of giving it to a bank. And not having that big bill every month gave us a lot of flexibility in terms of where we worked and how much we needed to earn.

Basically, we semi-retired the day we stopped having a mortgage payment, because we could.

Good lord. I don't have any opinion on your decision - you have to do what's right for you. But the notion that you couldn't have semi-retired before you paid off your mortgage, but you could have after you did, is just wrong, as a matter of basic math, and also is potentially misinformation for people trying to make the same decision.

[Anonymous]

Anonymous wrote:

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?

The rich have other ways to get liquidity. I don't, so I don't park my liquidity in home equity.

This is an important point that is overlooked often. We, and suspect many people here, are "rich" by any rational definition., But we aren't "rich" in that I can come up with the outstanding balance on our mortgage (~$700k) at the drop of a hat without adverse consequences. Sure, we have it, but we'd get smoked in taxes, and potentially other penalties. That's just a longer way of saying what the PP said - if I paid off my mortgage, I wouldn't have easy access to liquidity.

So for the really, rich, it's a non-issue - they have enough money so that any difference between paying off the mortgage or investing is a rounding error, and they have no concerns about immediate liquidity. We have a NW of about $5m, but most it's tied up in tax advantaged accounts, or would require a big tax hit if we needed it ASAP. So the money we keep in CDs, HYSAs or Treasuries that could be used to pay off the mortgage - which is earning more interest than we pay in mortgage interest - is marginally more lucrative, and provides more flexibility than if we'd paid off the mortgage, without sacrificing any "safety."

[Anonymous]

The wealthy has not time for mortgage. They have several homes, they can buy several more, they can stay in a hotel. Super wealthy don't have time to think about mortgage. They make millions in month in other investments.
It's the couple of million NW group that will calculate paying it off vs investing.