FBG Money guys, mortgage over investing? Suze Orman.. (1 Viewer)

[DallasDMac]

I was reading this month's Money Magazine (yea, yea, look at me, I read Money). They had Suze Orman write an article from her privately owned island, so I guess she did pretty good for herself. Much of the stuff was the usual, but she had one idea that I really haven't seen much and I found it interesting. Stop investing so much and prioritize paying off your mortgage at all cost before you retire.

Her point was this. Invest enough to max out your employer match. But other than that, plow it in to your house to ensure you have it paid off when you retire. Her rationale was this (from the article): Lets say you have a $300k mortgage with a payment of $1,390 a month. You are going to retire with 10 years to go. You'll need $16,700 a month out of your retirement savings each year for those payments. If you have traditional IRAs and 401Ks, you'll have to withdrawal $22k a year pre-tax to make those payments. Assuming a $1M starting retirement savings, and a 4%withdrawal rate annually (standard thinking), more than half your cash would go just to that mortgage.

Now I have always prioritized savings over extra mortgage payments. But she is adamant about paying that mortgage off before you retire since you never know about market downturns, health issues, etc. Just wondering what FBGs think about this take?

p.s. I couldn't find a link to this particular article on the CNN Money Magazine site.

 

[eoMMan]

Check out the other personal finance threads. 

 

[Jayrod]

Since the days of sub 5% mortgages, I've been a pretty big supporter of NOT paying off mortgages early.

I basically have 3 reasons for this:

1. Home values can be just as volatile as the stock market (see 2008)
   
2. Converting equity in a home is not simple and requires either a loan (which you have to apply for) or selling.  Neither option is great in a financial crisis situation.
   
3. Traditionally, over time, investing returns will beat the current mortgage interest rates.
   

So if you don't have a payment in retirement, what was the true cost of those earlier payments?  In other words, how much less is in your retirement due to all of those extra payments?

 

[jfranco77]

Pay things off/invest in things based on their return rate.

She does make a good point that if you retire before your mortgage is paid off, you have to consider the tax hit you get to finish paying it off.

But holy #### my mortgage will be paid off when I'm 58 (knock on wood, fingers crossed, salt over shoulder) and I sure as hell ain't retiring at 48.

So for me, my mortgage at 4% is less interesting to invest in than any 10% credit cards, 7% student loans, 6% second mortgages, etc... and then I have to figure out whether my 401k is going to return me >4% or not.

(Yes, money in vs money out is not exactly 1:1 but close enough)

 

[mquinnjr]

Since the days of sub 5% mortgages, I've been a pretty big supporter of NOT paying off mortgages early.

I basically have 3 reasons for this:

1. Home values can be just as volatile as the stock market (see 2008)
   
2. Converting equity in a home is not simple and requires either a loan (which you have to apply for) or selling.  Neither option is great in a financial crisis situation.
   
3. Traditionally, over time, investing returns will beat the current mortgage interest rates.
   

So if you don't have a payment in retirement, what was the true cost of those earlier payments?  In other words, how much less is in your retirement due to all of those extra payments?

8% is the typical number I have seen thrown around for average equity returns over the long run. If the interest rate on your home is below 8%, you are better served investing in the market than in the house. The stock market boogeyman/"Equities are like roulette!" mentality serves the real estate industry well, but not the actual home owners in this scenario. It makes people feel more comfortable to plow away on the mortgage balance because it's a guaranteed return, but your return is capped at your mortgage interest rate. Over the long run, you could cost yourself and your family a  :X amount of upside in that delta between your mortgage interest rate and the average market return. Investing in the market is not gambling if you do so prudently, either on your own if you know what you're doing or with a fixed fee/non-commission financial advisor if not.

 

[E Street Brat]

Work it backwards

 If your home was paid off. Would you borrow money against it to invest?

 

[Jayrod]

Work it backwards

 If your home was paid off. Would you borrow money against it to invest?

At 3-4%?  Yes.

 

[dino259]

I couldn't imagine retiring before my mortgage was paid off.  I also don't plan on keep moving or refinancing into new 30 year mortgage loan much less buying a big house just for the sake of a big house.

I guess it is also about investing versus paying off the mortgage early.  As @eoMMan said, this has been hashed to death in other personal finance threads.  It all comes down to something that isn't just simple math.  It depends on your piece of mind of having no debt including no mortgage.

Any consumer debt, especially credit cards, should be paid off before any extra investing over the amount to get your 401k match.  When the last thing you have is your mortgage, then that is a more personal decision.

 

[Jayrod]

I couldn't imagine retiring before my mortgage was paid off.  I also don't plan on keep moving or refinancing into new 30 year mortgage loan much less buying a big house just for the sake of a big house.

I guess it is also about investing versus paying off the mortgage early.  As @eoMMan said, this has been hashed to death in other personal finance threads.  It all comes down to something that isn't just simple math.  It depends on your piece of mind of having no debt including no mortgage.

Any consumer debt, especially credit cards, should be paid off before any extra investing over the amount to get your 401k match.  When the last thing you have is your mortgage, then that is a more personal decision.

Any time I've gotten deep into the "pay off mortgage or not" discussion, it has always boiled down to personal preference and it doesn't really matter as you are in great shape at that point either way.

 

[DallasDMac]

What I am reading is exactly how my thinking has been over the years. That was why I was so surprised that she was absolutely adamant about paying it off before retiring.

As someone that served in the military for over 20 years, I was never able to stay long enough in any single home to build equity. Buy home, live in it three or four years, sell, give profit to realtor. Rinse, repeat. I am now old enough and well established enough that I suppose, if I truly wanted too, I could forgo any other investments (above maxing my IRAs and 401k matched amounts)  and just plow every single penny in to the house and maybe pay it off. But I just don't know that I am comfortable with doing that. One big factor being, I do not plan to retire in this home. I bought it because it was close to my new job. It is two story with all bedrooms upstairs. At retirement, we fully plan to move out in to the country in a single story home. Paying it off would really be for the purpose of selling it and rolling the money in to the new home. The only way I would stay here is if I were stuck. So it seems to me I am better off investing. But Suzy had me wondering if perhaps I was off base. Reading the replies, I'm not.

 

[DallasDMac]

But in this case, I think she knew her audience. She was writing an article specifically for Money Magazine. I doubt she expected the audience above to be the ones reading this article. I mean, if they were her target, would she really be talking about investing less to pay off a mortgage?

 

[Sand]

Now I have always prioritized savings over extra mortgage payments. But she is adamant about paying that mortgage off before you retire since you never know about market downturns, health issues, etc. Just wondering what FBGs think about this take?

You can't eat your house.  Being house rich and cash poor is a risk item.  

 

[tommyboy]

The other idea is that money you pay every month on the house can be saved and or invested with no mortgage. 

If you borrow at 4% and invest at 4% it's basically a wash other than the tax deduction. 

I'm in the pay it off early camp mainly because I hate debt. Imagine taking your entire paycheck and putting it wherever you want. That's a pretty liberating feeling of freedom

 

[Jayrod]

The other idea is that money you pay every month on the house can be saved and or invested with no mortgage. 

If you borrow at 4% and invest at 4% it's basically a wash other than the tax deduction. 

I'm in the pay it off early camp mainly because I hate debt. Imagine taking your entire paycheck and putting it wherever you want. That's a pretty liberating feeling of freedom

This is what I see as a big reason for people to pay off their mortgage early.  It is more psychological than dollar and cents.  And like I said earlier, if this is a discussion you are seriously having, you are in good enough shape it doesn't really matter what you do.

 

[RUSF18]

This is what I see as a big reason for people to pay off their mortgage early.  It is more psychological than dollar and cents.  And like I said earlier, if this is a discussion you are seriously having, you are in good enough shape it doesn't really matter what you do.

These threads always go the same way (which is a good thing).

We agree that ultimately even though the numbers tend to skew in favor of investing, it's a personal decision and many people will sleep better knowing their house is being paid off early than earning another % or two in the market. Perfectly fine rationale. 

Then someone comes in and says "you could also put half your excess into your mortgage and half into the market. Best of both worlds!"

Roll credits. 

 

[Sand]

This is what I see as a big reason for people to pay off their mortgage early.  It is more psychological than dollar and cents.  And like I said earlier, if this is a discussion you are seriously having, you are in good enough shape it doesn't really matter what you do.

This is why I have a 15 year note rather than a 30.  

But still, say you have to come up with 100k.  Then there is a big difference between illiquid assets (house) and liquid assets (most everything else).  

 

[Dentist]

I'm fairly math savvy and I paid off my mortgage.

That said, I'm about to take a new one on soon - it'll be a 15, and I hope to have it paid off in 5-7 years.

I invest plenty in the market.   The mortgage is my diversification of real estate.

 

[eoMMan]

Why not just do a 30 year mortgage and pay extra towards the principal if you wish?

You gain so much flexibility and have that additionally cash flow if you need it.

 

[Bull Dozier]

Why not just do a 30 year mortgage and pay extra towards the principal if you wish?

You gain so much flexibility and have that additionally cash flow if you need it.

Lower interest rate on the shorter mortgage for one.

 

[eoMMan]

Lower interest rate on the shorter mortgage for one.

By much though? I always thought the difference was fairly small.

 

[Warrior]

Not paying off your mortgage is giving up approx. 4%.

If you offered me a 4% guaranteed return on a savings account, I would be ALL OVER that. 4% risk-free is a no-brainer assuming you have a lot already invested in the market.

I completely agree with her. In addition to that, you get the peace of mind of actually owning your house (versus the bank owning it) when it's paid off, which is priceless.

 

[AhrnCityPahnder]

By much though? I always thought the difference was fairly small.

300k mortgage, with todays advertised rates:

30 year 4.13 % is 523,735.49 total cost.

15 year at 3.43% is 480,758.06 total cost.  

 

[eoMMan]

300k mortgage, with todays advertised rates:

30 year 4.13 % is 523,735.49 total cost.

15 year at 3.43% is 480,758.06 total cost.  

0.7% difference...okay. I didn't think it was that large of a difference. Good to know.

Regardless, I would personally prefer the flexibility of the 30 year mortgage.

 

[Zegras11]

300k mortgage, with todays advertised rates:

30 year 4.13 % is 523,735.49 total cost.

15 year at 3.43% is 480,758.06 total cost.  

Not picking on you, but that's not the total cost.  There are tax deductions that no one ever calculates into the total in these threads.

I personally have always paid a little extra when I can, simply because it creates a bigger and better opportunity down the road when I decide to buy more.

 

[AhrnCityPahnder]

Not picking on you, but that's not the total cost.  There are tax deductions that no one ever calculates into the total in these threads.
 

Doesn't that depend on if it's your primary residence?

 

[Zegras11]

Doesn't that depend on if it's your primary residence?

no, you can write it off as a rental also.  

 

[Jayrod]

Not paying off your mortgage is giving up approx. 4%.

If you offered me a 4% guaranteed return on a savings account, I would be ALL OVER that. 4% risk-free is a no-brainer assuming you have a lot already invested in the market.

I completely agree with her. In addition to that, you get the peace of mind of actually owning your house (versus the bank owning it) when it's paid off, which is priceless.

You know why you don't get that?  Because savings accounts are 100% liquid.  Your house?  Not so much.  Also, you are paying down a debt, not investing in an asset.  The value of the asset is not tied to the debt and will move up and down independently of the loan balance.

And again, the final argument to this (as I typically find) is a psychological one, not a financial one.  I get it and don't begrudge anyone that, but on a purely numerical basis, paying off a 4% mortgage is not typically the best decision.

 

[pantherclub]

Work it backwards

 If your home was paid off. Would you borrow money against it to invest?

yes

 

[DallasDMac]

3.52%, just since there is so much discussion on mortgage rates.

 

[Dentist]

Why not just do a 30 year mortgage and pay extra towards the principal if you wish?

You gain so much flexibility and have that additionally cash flow if you need it.

This is true.

But from what I see behaviorally,  the average person gets used to the cash flow that the 30 year mortgage offers and rarely makes the additional payments on the loan.

Forcing the savings via the 15 is the only way to go... and provided you buy a home well below what your are capable of affording, you aren't going to be jamming up said cash flow anyway.

 

[Buttonhook]

Why not get prepped to buy that single-story house you want in the country now, or if/when the housing market shifts down? Rent it out, someone else starts paying your mortgage.  This gives you flexibility when you start to plan to move out of your existing house.  Too many people sell their homes and then feel rushed to buy a new place and aren't able to time the market.  You can time your move out of your current house to maximize profits when the market's right and then take those profits to pay off your new house, and likely have some cash leftover, because your balance will be lower than the initial loan.  And assuming you've experienced some appreciation, you may even have some equity to borrow against.

 

[Buttonhook]

300k mortgage, with todays advertised rates:

30 year 4.13 % is 523,735.49 total cost.

15 year at 3.43% is 480,758.06 total cost.  

These numbers didn't look right, so I used a basic online mortgage calculator.

I came up with the exact same number you did for the 30-year, but much lower for the 15-year, which looks more realistic to me...

30 year 4.13 % is 523,735.49 total cost.

15 year at 3.43% is 384,182.97 total cost.  

Did I miss something?  If not, that's a much bigger difference.

EDIT:  I checked again and it looks like you plugged in 30-year at 3.43% to get the 480,758.

 

[Sand]

Not picking on you, but that's not the total cost.  There are tax deductions that no one ever calculates into the total in these threads.

Another reason I personally like the 15 year.  You'll tend to fall into the standard deduction envelope sooner than with the 30 and the impetus to keep the mortgage goes away as it has no further tax benefit.  Leaves one more motivated to save and pay it off.

 

[TheWalkmen]

For me, paying off 3%+ on $300k+ of mortgage as quickly as possible makes sense in addition to 10% of salary in 401k.

Maximize company match and minimize interest paid as much as possible. Also have plenty of cash for emergency.

It works for me and having plenty of cash reduces my stress level.

 

[DallasDMac]

For me, paying off 3%+ on $300k+ of mortgage as quickly as possible makes sense in addition to 10% of salary in 401k.

Maximize company match and minimize interest paid as much as possible. Also have plenty of cash for emergency.

It works for me and having plenty of cash reduces my stress level.

I didn't get in to details because I didn't want to it to become something that sounds like a bragging thread or whatever. But my contribution rate for my 401k is maxed out at 16%, and I take every bit of it because my company matches me dollar per dollar on all of it. So I basically double up every year on max 401k contributions. I think we can all agree I'd be crazy to not take that. I also max out an IRA for both me and the wife. The question comes after that.

We keep about 6 months in cash reserve at all times. Anything above that, I invest. Mostly mutuals. But given the price of the market and some of the dire forecasts, I was debating on putting some in cash, such as CDs. Those actually wouldn't beat the rate on my house (2.4% is the highest 5 year rate I found). So when I read the article, I started thinking. Better to keep investing? Or shift that extra investment money to the house? I do put a small extra amount each month towards the mortgage. That knocks just under 8 years off the 30 year mortgage. But I could really be making probably a full extra payment every other month or so if I dropped the extra investments. I waffle back and forth on what to do.

 

[TheWalkmen]

I didn't get in to details because I didn't want to it to become something that sounds like a bragging thread or whatever. But my contribution rate for my 401k is maxed out at 16%, and I take every bit of it because my company matches me dollar per dollar on all of it. So I basically double up every year on max 401k contributions. I think we can all agree I'd be crazy to not take that. I also max out an IRA for both me and the wife. The question comes after that.

We keep about 6 months in cash reserve at all times. Anything above that, I invest. Mostly mutuals. But given the price of the market and some of the dire forecasts, I was debating on putting some in cash, such as CDs. Those actually wouldn't beat the rate on my house (2.4% is the highest 5 year rate I found). So when I read the article, I started thinking. Better to keep investing? Or shift that extra investment money to the house? I do put a small extra amount each month towards the mortgage. That knocks just under 8 years off the 30 year mortgage. But I could really be making probably a full extra payment every other month or so if I dropped the extra investments. I waffle back and forth on what to do.

Based on what you've said, I would pay down the mortgage.

 

[DallasDMac]

Based on what you've said, I would pay down the mortgage.

My wife liked the sound of it. I still prefer investing, but am swaying some. The fact I do not want to retire here definitely taints my thinking some. I mean, investments are investments. Yes, they can lose value. But it is rare when talking a 10 year or even a 5 year period. When I need the money, it is there. With the house, I have to be able to sell it to realize the monetary value. Hence my quandry. Though I guess I have to sell it to be able to afford the other home either way.

 

[NutterButter]

Couldn't you must take a bunch of money out when you retire and just paid the mortgage off then or is that what she's saying?

 

[Sand]

My wife liked the sound of it. I still prefer investing, but am swaying some. The fact I do not want to retire here definitely taints my thinking some. I mean, investments are investments. Yes, they can lose value. But it is rare when talking a 10 year or even a 5 year period. When I need the money, it is there. With the house, I have to be able to sell it to realize the monetary value. Hence my quandry. Though I guess I have to sell it to be able to afford the other home either way.

If you have a decent interest rate (which are super low right now) I'd feel fine with keeping the cash.  i'm not paying off my 15 year faster than necessary.  I'm still itemizing, so once that goes away then I'll decide whether it's worth it to just pay this off (and I'm not taking money out of a raging bull market).  

On the other hand I love my house and have vowed (for about the fifth time) that I'm never moving again.

 

[AhrnCityPahnder]

These numbers didn't look right, so I used a basic online mortgage calculator.

I came up with the exact same number you did for the 30-year, but much lower for the 15-year, which looks more realistic to me...

30 year 4.13 % is 523,735.49 total cost.

15 year at 3.43% is 384,182.97 total cost.  

Did I miss something?  If not, that's a much bigger difference.

EDIT:  I checked again and it looks like you plugged in 30-year at 3.43% to get the 480,758.

well, damn.  good catch.   I thought offhand that 45k seemed low for a bottom line difference.   Thanks !  

 

[AhrnCityPahnder]

I didn't get in to details because I didn't want to it to become something that sounds like a bragging thread or whatever. But my contribution rate for my 401k is maxed out at 16%, and I take every bit of it because my company matches me dollar per dollar on all of it.

Good grief.  what line of work are you in?   16% match is pretty damn nice.  

 

[AhrnCityPahnder]

no, you can write it off as a rental also.  

I'm new as a landlord in 2017 and I didn't realize this.    Did some googling and I see you're right.  

Thanks, you just saved me a few nickels on next years return.  

 

[Zegras11]

I'm new as a landlord in 2017 and I didn't realize this.    Did some googling and I see you're right.  

Thanks, you just saved me a few nickels on next years return.  

get a cpa asap and set up depreciation allowance

 

[-OZ-]

What I am reading is exactly how my thinking has been over the years. That was why I was so surprised that she was absolutely adamant about paying it off before retiring.

As someone that served in the military for over 20 years, I was never able to stay long enough in any single home to build equity. Buy home, live in it three or four years, sell, give profit to realtor. Rinse, repeat. I am now old enough and well established enough that I suppose, if I truly wanted too, I could forgo any other investments (above maxing my IRAs and 401k matched amounts)  and just plow every single penny in to the house and maybe pay it off. But I just don't know that I am comfortable with doing that. One big factor being, I do not plan to retire in this home. I bought it because it was close to my new job. It is two story with all bedrooms upstairs. At retirement, we fully plan to move out in to the country in a single story home. Paying it off would really be for the purpose of selling it and rolling the money in to the new home. The only way I would stay here is if I were stuck. So it seems to me I am better off investing. But Suzy had me wondering if perhaps I was off base. Reading the replies, I'm not.

. We were in the same situation, moving every 1-4 years. Bought one house back in 2001 because we were going to stay there for 5 years and actually thought about getting out of the army. Thankfully the market soared right as we were selling so we did well. Didn't buy another house until last year when we retired. If your retirement plan doesn't include living in the house you're paying off, you're probably better off putting that money into the market. But I do believe in diversification, we bought some land and invest in REITs. 

Another thought with the military retirement is you have a guaranteed monthly income for the rest of your life. As long as it's enough to pay the mortgage and necessities, a lot of the objective reasons for paying off they mortgage become less relevant. That's the case for us, even if I lost my new job tomorrow, we would have the basics covered. Presumably you'll be in the same situation.

300k mortgage, with todays advertised rates:

30 year 4.13 % is 523,735.49 total cost.

15 year at 3.43% is 480,758.06 total cost.  

I see the math was already addressed, but the rates we were offered were .25% different. So we took the 30 at 3.25. between the tax benefit and investments I'm reasonably sure we're better off with the 30. 

Not picking on you, but that's not the total cost.  There are tax deductions that no one ever calculates into the total in these threads.

I personally have always paid a little extra when I can, simply because it creates a bigger and better opportunity down the road when I decide to buy more.

Yep. That's what we do, just a few hundred more each month. If we took the full 30 years I'd be almost 70 when it's paid off. I want to retire full time around 65 and plan to have the mortgage paid off by then. Honestly we don't know if we'll stay in this house at that point but it's possible.

This is true.

But from what I see behaviorally,  the average person gets used to the cash flow that the 30 year mortgage offers and rarely makes the additional payments on the loan.

Forcing the savings via the 15 is the only way to go... and provided you buy a home well below what your are capable of affording, you aren't going to be jamming up said cash flow anyway.

Who is talking about the average person? This is FBG. 

at"the only way to go". It's a fine plan but it's hardly the only way. 

 

[DallasDMac]

Good grief.  what line of work are you in?   16% match is pretty damn nice.  

My employer did away with pensions maybe a decade ago, before I began working there. At that time, they instituted a matching plan to make up for it. 8% matching for everyone. At a certain age, they kick in extra matching based on your age. The additional matching tops out at 9% at age 50. So at 50 years of age, it is essentially 17% in total. I hit the 401k cap at 16%, so that ends up being my ceiling. My employer is well known for taking care of both it's customers and members. I would never have left civil service otherwise.

 

[DallasDMac]

. We were in the same situation, moving every 1-4 years. Bought one house back in 2001 because we were going to stay there for 5 years and actually thought about getting out of the army. Thankfully the market soared right as we were selling so we did well. Didn't buy another house until last year when we retired. If your retirement plan doesn't include living in the house you're paying off, you're probably better off putting that money into the market. But I do believe in diversification, we bought some land and invest in REITs. 

Another thought with the military retirement is you have a guaranteed monthly income for the rest of your life. As long as it's enough to pay the mortgage and necessities, a lot of the objective reasons for paying off they mortgage become less relevant. That's the case for us, even if I lost my new job tomorrow, we would have the basics covered. Presumably you'll be in the same situation.

Yep. That's what we do, just a few hundred more each month. If we took the full 30 years I'd be almost 70 when it's paid off. I want to retire full time around 65 and plan to have the mortgage paid off by then. Honestly we don't know if we'll stay in this house at that point but it's possible.

Good post and this is almost exactly my situation. Except that due to a divorce, I get half my retirement. It would make the mortgage payment, but not much else. My wife also gets a sweet pension (more than my military retirement would be even if I got it all). But if she were to pass away, I'd lose that, so I can't count on it always being there.

If you don't mind me asking, which REITs? Was definitely considering that option. If that is to personal of a question, totally understand. Or if you'd prefer to PM....

 

[-OZ-]

Good post and this is almost exactly my situation. Except that due to a divorce, I get half my retirement. It would make the mortgage payment, but not much else. My wife also gets a sweet pension (more than my military retirement would be even if I got it all). But if she were to pass away, I'd lose that, so I can't count on it always being there.

If you don't mind me asking, which REITs? Was definitely considering that option. If that is to personal of a question, totally understand. Or if you'd prefer to PM....

A few, right now I'm in 2 in different accounts. First with a higher dividend in my oldest son's college account, the other in our retirement.

OHI - Omega Heathcare investors, got beat down yesterday but still pays a nice dividend.

VNQ - vanguard, like most vanguard funds it's a broad, cheap ETF.

 

[DallasDMac]

A few, right now I'm in 2 in different accounts. First with a higher dividend in my oldest son's college account, the other in our retirement.

OHI - Omega Heathcare investors, got beat down yesterday but still pays a nice dividend.

VNQ - vanguard, like most vanguard funds it's a broad, cheap ETF

Will look this one up. Already have my wife's IRA and some money there in Wellington. So no need for new account or banking setup. Thanks!