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

[Anonymous]

Anonymous wrote:

Anonymous wrote:I've never understood why it is considered "dumb" to pay off a mortgage. Not everyone is good at investments or following the stock market. If you have a mountain of cash doing nothing in a bank account then pay your mortgage off.

If you're that financially simple-minded, maybe so. I suppose mortgages are something even they can understand.

Being simple minded has nothing to do with it. Plenty of financial advisors, Wall Street experts and business professionals have lost all their money and ended up broke in the past.

There is nothing wrong in playing it safe.

[Anonymous]

Anonymous wrote:

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."

No, this is NOT an overlooked point. If anything, people who keep a mortgage irrationally *overestimate* their liquidity needs. When is the last time that you needed $700K at the drop of a hat and not in a timeframe that allowed you to reasonably plan for this need?

Part of the benefit of paying off a mortgage is that you actually don’t need to have much cash around once your biggest expense is gone.

[Anonymous]

Anonymous wrote:I've never understood why it is considered "dumb" to pay off a mortgage. Not everyone is good at investments or following the stock market. If you have a mountain of cash doing nothing in a bank account then pay your mortgage off.

I have a mountain of cash (OK, not a mountain, maybe a small hill) in the bank earning anywhere from 4.3% to 5% interest. My mortgage is 2.625% interest. It would be dumb for me to use that money to pay off the mortgage.

Now, if you have a lot of cash in a legacy checking account, earning 0.25% - *that* is dumb.

[Anonymous]

I think the advice is aimed at people who are throwing every extra dollar at their mortgage and are NOT investing in the market much at all.

It took some shifting mentally for me to do this, because I hate debt. But you can’t argue with market returns. And our mortgage is 2.45%. So, in our case it’s clear we should invest instead of pinching to pay off our mortgage. We still throw a little extra at the payment here and there, but mainly throw chunks into investments instead.

[Anonymous]

Anonymous wrote:

Anonymous wrote:I've never understood why it is considered "dumb" to pay off a mortgage. Not everyone is good at investments or following the stock market. If you have a mountain of cash doing nothing in a bank account then pay your mortgage off.

I have a mountain of cash (OK, not a mountain, maybe a small hill) in the bank earning anywhere from 4.3% to 5% interest. My mortgage is 2.625% interest. It would be dumb for me to use that money to pay off the mortgage.

Now, if you have a lot of cash in a legacy checking account, earning 0.25% - *that* is dumb.

Since you have a mountain of cash available (presumably after maxing retirement accounts), I’m going to assume you have a reasonably high income – let’s say you’re in the 32% federal marginal tax bracket. And let’s assume you’re in Maryland so you pay another 8% in state and local taxes. Also, to keep things simple, let’s assume you’re taking the standard deduction and are not itemizing.

If the average yield on your cash is 4.7%, then after taxes, your yield is 4.7% x 0.6 = 2.82%. Congrats, you’re earning less than 0.2% more than if you paid off your mortgage, and you’ve cramped your cash flow by keeping a bill that costs you thousands of dollars per month.

[Anonymous]

If you cannot pay your mortgage once you retire, you need to pay it off beforehand if you want to stay in your house. Its that simple for many people.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I've never understood why it is considered "dumb" to pay off a mortgage. Not everyone is good at investments or following the stock market. If you have a mountain of cash doing nothing in a bank account then pay your mortgage off.

I have a mountain of cash (OK, not a mountain, maybe a small hill) in the bank earning anywhere from 4.3% to 5% interest. My mortgage is 2.625% interest. It would be dumb for me to use that money to pay off the mortgage.

Now, if you have a lot of cash in a legacy checking account, earning 0.25% - *that* is dumb.

Since you have a mountain of cash available (presumably after maxing retirement accounts), I’m going to assume you have a reasonably high income – let’s say you’re in the 32% federal marginal tax bracket. And let’s assume you’re in Maryland so you pay another 8% in state and local taxes. Also, to keep things simple, let’s assume you’re taking the standard deduction and are not itemizing.

If the average yield on your cash is 4.7%, then after taxes, your yield is 4.7% x 0.6 = 2.82%. Congrats, you’re earning less than 0.2% more than if you paid off your mortgage, and you’ve cramped your cash flow by keeping a bill that costs you thousands of dollars per month.

Someone with a mortgage and high income in MD is almost certainly itemizing and therefore deducting that interest, ruining your hypo.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I've never understood why it is considered "dumb" to pay off a mortgage. Not everyone is good at investments or following the stock market. If you have a mountain of cash doing nothing in a bank account then pay your mortgage off.

I have a mountain of cash (OK, not a mountain, maybe a small hill) in the bank earning anywhere from 4.3% to 5% interest. My mortgage is 2.625% interest. It would be dumb for me to use that money to pay off the mortgage.

Now, if you have a lot of cash in a legacy checking account, earning 0.25% - *that* is dumb.

Since you have a mountain of cash available (presumably after maxing retirement accounts), I’m going to assume you have a reasonably high income – let’s say you’re in the 32% federal marginal tax bracket. And let’s assume you’re in Maryland so you pay another 8% in state and local taxes. Also, to keep things simple, let’s assume you’re taking the standard deduction and are not itemizing.

If the average yield on your cash is 4.7%, then after taxes, your yield is 4.7% x 0.6 = 2.82%. Congrats, you’re earning less than 0.2% more than if you paid off your mortgage, and you’ve cramped your cash flow by keeping a bill that costs you thousands of dollars per month.

This - thank you. People forget to take tax into the equation and also risk.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I've never understood why it is considered "dumb" to pay off a mortgage. Not everyone is good at investments or following the stock market. If you have a mountain of cash doing nothing in a bank account then pay your mortgage off.

I have a mountain of cash (OK, not a mountain, maybe a small hill) in the bank earning anywhere from 4.3% to 5% interest. My mortgage is 2.625% interest. It would be dumb for me to use that money to pay off the mortgage.

Now, if you have a lot of cash in a legacy checking account, earning 0.25% - *that* is dumb.

Since you have a mountain of cash available (presumably after maxing retirement accounts), I’m going to assume you have a reasonably high income – let’s say you’re in the 32% federal marginal tax bracket. And let’s assume you’re in Maryland so you pay another 8% in state and local taxes. Also, to keep things simple, let’s assume you’re taking the standard deduction and are not itemizing.

If the average yield on your cash is 4.7%, then after taxes, your yield is 4.7% x 0.6 = 2.82%. Congrats, you’re earning less than 0.2% more than if you paid off your mortgage, and you’ve cramped your cash flow by keeping a bill that costs you thousands of dollars per month.

This - thank you. People forget to take tax into the equation and also risk.

The PP rather conveniently factored in the taxes paid on the earnings, but assumed away the tax benefits of deducting mortgage interest. When you manipulate the facts, it's pretty easy to come up with a scenario that favors your position . . . and he still couldn't even do that. He also completely disregarded any liquidity benefit - having easy access to cash if needed.

But I'm more interested in your comment about "risk" - what risk do you see in the scenario above?

[Anonymous]

There is a reason so many people lose their homes. They think tgey are too smart to pay it off.

[Anonymous]

Anonymous wrote:There is a reason so many people lose their homes. They think tgey are too smart to pay it off.

Most people don’t have the ability to pay it off in the first place. And certainly the vast majority who lose their homes didn’t have that ability.

[Anonymous]

What is the evidence that rich people don’t have mortgages?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I've never understood why it is considered "dumb" to pay off a mortgage. Not everyone is good at investments or following the stock market. If you have a mountain of cash doing nothing in a bank account then pay your mortgage off.

If you're that financially simple-minded, maybe so. I suppose mortgages are something even they can understand.

Being simple minded has nothing to do with it. Plenty of financial advisors, Wall Street experts and business professionals have lost all their money and ended up broke in the past.

There is nothing wrong in playing it safe.

And it is all relative to How much you have. We haven't had mortgages for over 10 years. We paid it off once we became worth over $10M. Sure, we might come out ahead if we kept a mortgage and invested the rest. But the mortgage paid off is a guarantee and liquidity is not an issue.
Now we just focus on investing monthly, as there are two $2-3M homes paid off and main expenses are taxes and utlitilies, not a mortgage. We got a guaranteed rate of return (mortgage rates were 4%+ when we paid them off). So peace of mind, and now we can invest everything as we deem appropriate.

[Anonymous]

Anonymous wrote:I think the advice is aimed at people who are throwing every extra dollar at their mortgage and are NOT investing in the market much at all.

It took some shifting mentally for me to do this, because I hate debt. But you can’t argue with market returns. And our mortgage is 2.45%. So, in our case it’s clear we should invest instead of pinching to pay off our mortgage. We still throw a little extra at the payment here and there, but mainly throw chunks into investments instead.

But if you mortgage is 5-7%, you should be working to pay it off. As there is no guarantee you are getting 7%+ from the market. And once it's paid off, it's freeing to have all that extra to invest each month.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I've never understood why it is considered "dumb" to pay off a mortgage. Not everyone is good at investments or following the stock market. If you have a mountain of cash doing nothing in a bank account then pay your mortgage off.

I have a mountain of cash (OK, not a mountain, maybe a small hill) in the bank earning anywhere from 4.3% to 5% interest. My mortgage is 2.625% interest. It would be dumb for me to use that money to pay off the mortgage.

Now, if you have a lot of cash in a legacy checking account, earning 0.25% - *that* is dumb.

Since you have a mountain of cash available (presumably after maxing retirement accounts), I’m going to assume you have a reasonably high income – let’s say you’re in the 32% federal marginal tax bracket. And let’s assume you’re in Maryland so you pay another 8% in state and local taxes. Also, to keep things simple, let’s assume you’re taking the standard deduction and are not itemizing.

If the average yield on your cash is 4.7%, then after taxes, your yield is 4.7% x 0.6 = 2.82%. Congrats, you’re earning less than 0.2% more than if you paid off your mortgage, and you’ve cramped your cash flow by keeping a bill that costs you thousands of dollars per month.

This - thank you. People forget to take tax into the equation and also risk.

At high income, you likely loose most of the "itemizations" from your taxes (with AMT or other means---not an accountant, just know it disappears slowly over a certain income). So high income people do NOT actually get much tax benefits from mortgage interest. Yet you will have to pay taxes on your "income/gains" for investments outside of 529 or retirement plans.