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

[Anonymous]

Anonymous wrote:

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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.

This is not true. Please stop posting when you don’t know what you’re talking about.

[Anonymous]

The standard deduction in 2024 for married is 29.2k. S&L taxes are still limited to 10k. That means you need over 19.2k in other deductions to get any benefit of itemizing.

Unless you have a huge mortgage or lots of charity, most will not itemize especially as you get further into the mortgage and the interest piece declines.

I stopped itemizing a few years ago. The SD keeps going up and the mortgage interest kept going down. Most people only have those and charity to itemize. Few take the health/business deductions which have thresholds.

[Anonymous]

I love conversations about whether you should pay off your mortgage or not. It shows that there is no right or wrong, it's often an emotional thing.

As for me, my mortgage rate is 4.25 and I owe $130K. I have enough to pay it off and still have 2 years worth of savings liquid.

Should I pay my mortgage off?

[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.

??? PP's "cramped" cash flow is available and sitting in a bank earning interest. They don't need to wait for every paycheck to have it metered out.

[Anonymous]

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Anonymous wrote:I have about $1 million in my retirement account, plus another $500,000 in Vanguard mutual funds, plus enough in 529s to pay for my kids' college.

My monthly principal and interest payment on my mortgage is $1,750, and I have a $428,000 balance.

And with those number, I feel a lot more secure and free with $500,000 of liquid funds and a monthly mortgage bill of $1,750 than I would if I paid off my mortgage and had no monthly payment but only $80,000 of liquid investments

What if your 500k dropped to 250k in a deep recession amid layoffs and you still owed 400k?

If this happens I will deal with the situation. As long as I owe the $400k at an interest rate lower than what I can make with my $250k on the market, I’m fine because I know it’s the better position from a pure financial angle. I’m able to put emotions aside.

Can you care to elaborate how to the non-savvy folks who are paying off their mortgages ? IMHO this is the missing piece why folks pay off the mortgages as they dont how how to handle such scenarios

DP: Um, with a bank account and ibonds earning more interest than my mortgage. How are the folks paying off their mortgage going to handle a financial emergency if say you lose your job and need to move to get a new job but the housing market is currently terrible? Liquid safe cash is safer than a paid-off mortgage. The more the better.

Once the mortgage is paid off, you have more cash, (The PI from the PITI), that you are automatically saving. It adds up quick and also please note that the monthly expenses are lower owing to the paid off house. In the event that you have to move, you can always rent out the house that is paid in full.

Have you ever been a landlord?

[Anonymous]

Anonymous wrote:I love conversations about whether you should pay off your mortgage or not. It shows that there is no right or wrong, it's often an emotional thing.

As for me, my mortgage rate is 4.25 and I owe $130K. I have enough to pay it off and still have 2 years worth of savings liquid.

Should I pay my mortgage off?

I would. That's me, though. I'm anti debt.

[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.

??? PP's "cramped" cash flow is available and sitting in a bank earning interest. They don't need to wait for every paycheck to have it metered out.

+1. Also taxes are incremental. Your math is all wrong.

[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.

Maybe you should refrain from offering financial advice until you learn how income taxes work. Your analysis sucks.

[Anonymous]

If using an LLC to obscure home ownership, then an ordinary residential mortgage is not possible. It would have to be a commercial loan and usually at a higher interest rate.

[Anonymous]

I own a 4M+ home with 2.1% interest on a 2M loan but I also have 15M in investments. I can pay off the 2M loan anytime but it is wise for me to use that 2M to invest for a much better return. I've been lucky because I turned that 2M into 6M from investing during Covid pandemic. There is no reason for me to pay off the 2M loan on the mortgage when interest is 2.1%. It is almost like "free money". YMMV.

[Anonymous]

Because we have enough money that paying of the mortgage was worth the emotional benefit/peace of mind. At some point, you just have enough money that you want to use it for things like ease, freedom, mental health, etc. it’s like flying business instead of coach, or staying at at nicer or more convenient hotel when traveling. It doesn’t make a lot of objective financial sense, but it makes for a more pleasurable life.

[Anonymous]

Only poor rich people hang on to debt while claiming they're doing so because it's the financially smart thing to do. If you are "choosing" not pay off your mortgage it's because you're not rich enough to pay it off early and save for retirement. There's no shame in that.

[Anonymous]

Anonymous wrote:Only poor rich people hang on to debt while claiming they're doing so because it's the financially smart thing to do. If you are "choosing" not pay off your mortgage it's because you're not rich enough to pay it off early and save for retirement. There's no shame in that.

Lol no. Rich rich people use debt responsibly, to maximize their overall financial position.

[Anonymous]

Anonymous wrote:Only poor rich people hang on to debt while claiming they're doing so because it's the financially smart thing to do. If you are "choosing" not pay off your mortgage it's because you're not rich enough to pay it off early and save for retirement. There's no shame in that.

Is Mark Zuckerberg poor?

https://www.fool.com/the-ascent/mortgages/articles/why-did-mark-zuckerberg-get-a-mortgage-on-his-home/

How about Elon Musk?

https://www.fool.com/the-ascent/mortgages/articles/elon-musk-has-billions-but-still-took-out-mortgages-heres-why/

[Anonymous]

Anonymous wrote:

Anonymous wrote:Only poor rich people hang on to debt while claiming they're doing so because it's the financially smart thing to do. If you are "choosing" not pay off your mortgage it's because you're not rich enough to pay it off early and save for retirement. There's no shame in that.

Is Mark Zuckerberg poor?

https://www.fool.com/the-ascent/mortgages/articles/why-did-mark-zuckerberg-get-a-mortgage-on-his-home/

How about Elon Musk?

https://www.fool.com/the-ascent/mortgages/articles/elon-musk-has-billions-but-still-took-out-mortgages-heres-why/

This is one of those facts that is very true but does not tell the whole story.

Simply put, people are willing to loan them money against a portion of their vast stock holdings.

They never sell a share and as long as the stock continues to rise they are making money, and if their stock tanks they hand over the number of shares without any cash. And since they never sell the shares, it does not affect the stock price, as wall street hates when founders sell shares.

Here's the magic part for them: Since it is a loan, it is 100% tax free. Yeah, they will have to pay the taxes someday, when they liquidate, but the value of the assets they bought with the cash are likely more than higher to make up the difference.

As they say, good deal if you can get it.