This question is for everyone, but especially for those actually in the PP in 2008 I'd appreciate your input.
For the most part, long-term treasuries float close enough to mortgage rates nowadays that it's not too tempting to pay down your mortage (or auto loan for that matter), especially with LTT's in a tax-deferred account, but when the spread was huge in late 2008, did anyone get tempted to sell all their LTT's, or some of them, to pay down their mortgage?
I know this qualifies as PP tampering, but I think I would have been extremely temped giving the interest rate hit one would be taking. Let's say in 2008, after you rebalanced your PP back to 4x25 on December 30th or something, you now have $50k sitting in a LT bond earning 2.8% while your mortgage sits at 5%-6% if you're on a 30-year. If you have enough of the house already paid down to where "walking away" would never really be an option, I'd think it may not have been a bad idea at that point to take a risk and sell your LTT portion of the PP to pay down your mortgage. Here are the few scenarios I envision.
1) As it ended up happening, LTT yields rise back up in 2009 and it drops 20%, but you benefitted by paying down your morgage and your remaining 3x33 PP is now up far more than it would have been with LTT's bringing it down, and you can now rebalance as LTT's are paying decent rates again.
2) Or, the recession could have continued, and rates maybe could have fallen to 2%... 1.5? This would have resulted in 1) your Bond portion to have gain even further had you kept it in instead of paying your mortgage down, and 2) no LTT's with which to rebalance out of, since you used those funds to pay your mortgage down.
#2 is obviously not ideal, but keep in mind you still paid down a 5-6% in is what is sure to be a deflationary environment (Given the 1.5-2% interest rates on LT bonds).
I know this is tinkering, but I have a hard enough time with cash at such low rates, much less a whole other 25% of your portfolio at 2.6% while my mortgage is at 5-6%. I probably would have had to tweak the PP, but probably would have left 10-15% of my portfolio in LTT's just to be safe... kind of hedge my bets a bit.
LTT's vs Mortgage
Moderator: Global Moderator
LTT's vs Mortgage
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: LTT's vs Mortgage
And I guess I'd go onto ask if those that wouldn't have done it at 2.6%, what if it went down yet again per scenario 2 to 1.5%?
Are you really going to hold cash at near zero and LTT's at 1.5% while your mortgage is at 5-6%?
I guess the most conservative answer is to maintain a 4x25 portfolio and use funds from all 4 to pay it down.
Obviously this is assuming no taxes, which is possible with right mix of Roth IRA and depending on tax brackets.
Are you really going to hold cash at near zero and LTT's at 1.5% while your mortgage is at 5-6%?
I guess the most conservative answer is to maintain a 4x25 portfolio and use funds from all 4 to pay it down.
Obviously this is assuming no taxes, which is possible with right mix of Roth IRA and depending on tax brackets.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: LTT's vs Mortgage
How would you know when to buy back into LT bonds?
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
A: “Not unless round is funny.”
Re: LTT's vs Mortgage
Still trying to think through that... I suppose when the spread between your mortgage and LTT's tightened up a bit... I'm still digesting this. I figured I better do it now and have a better idea what I'm getting myself into if rates ever spread like that again.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: LTT's vs Mortgage
Personally, I would never pay off my mortgage unless it represented less than 10% of my net worth. I understand why people do it for peace of mind, but I don't like having that much capital tied up in a relatively illiquid asset.
Re: LTT's vs Mortgage
Wonk,
I can definitely understand that. I'm kind of in a position where I definitely want to have 20% skin in the game due to PMI, but I don't know if I'll ever fully pay off my mortgage, especially if I've surpassed my standard deduction and the rate spreads between the mortgage and treasury bonds (in my Roth) are in my favor.
That said, I think a lot of people are in a zone where they could very well benefit from paying down their mortgage, but their not underwater so that the idea of "walking away" is worth it.
The whole idea being that IF the economy recovers and rates pop back up, you've eliminated the LTT's -20% in 2009. If they stay down there, you're still earning 5% (albeit illiquid debt paydown instead of actual investment) instead of 2%.
I can definitely understand that. I'm kind of in a position where I definitely want to have 20% skin in the game due to PMI, but I don't know if I'll ever fully pay off my mortgage, especially if I've surpassed my standard deduction and the rate spreads between the mortgage and treasury bonds (in my Roth) are in my favor.
That said, I think a lot of people are in a zone where they could very well benefit from paying down their mortgage, but their not underwater so that the idea of "walking away" is worth it.
The whole idea being that IF the economy recovers and rates pop back up, you've eliminated the LTT's -20% in 2009. If they stay down there, you're still earning 5% (albeit illiquid debt paydown instead of actual investment) instead of 2%.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: LTT's vs Mortgage
I just don't think, even at a liquid return, I could invest in bonds yielding significantly less than my mortgage to a great degree. Cash, ok fine, since I'm 1) counting on it as an emergency fund, and 2) won't lose principal if rates rise. But I can't take half of my portfolio yielding less than my mortgage (at least I don't think I could have).
In 2008, upon seeing LTT's drop to a yield below 3%, I would have sold them and liquidated my roth contributions, and paid down maybe $20-30k of my mortgage (whatevery knocked my LTT holdings down to a relatively low level), and let my portfolio mostly consist of Gold, Stocks & Cash, despite the inherant risks.
By the end of 2009, or even before the end, I might have been comfortable (due to rate-spreads) taking 25% of my remaining investment portfolio (which has gained significantly more than my normal PP would have), and diving back into LTT's.
This is all hard-core PP tinkering beyond what most would be comfortable with, but I would truly hate my portfolio with LTT's yielding less than 3% (Even though I share MT's assertion that they could very well end up there in the long-term)while my mortgage is at 5%. I would take the added volatility, and know that by playing the interest rate arbitrage game (Paying down your "callable bond" (mortgage) with the non-callable bond (LTT's) that used to yield more, but no longer do), I'm probably going to benefit, or at the very least am in a better position to refinance if mortgage rates ever drop.
Blasphemy, I know, but I think I'd have to do it.
The other side of this coin is the option to refinance if mortgage rates were to be attractive enough to re-establish my favorable borrow/invest spread... but they weren't, as mortgage rates didn't dip nearly as far as treasuries by the end of 2008.
In 2008, upon seeing LTT's drop to a yield below 3%, I would have sold them and liquidated my roth contributions, and paid down maybe $20-30k of my mortgage (whatevery knocked my LTT holdings down to a relatively low level), and let my portfolio mostly consist of Gold, Stocks & Cash, despite the inherant risks.
By the end of 2009, or even before the end, I might have been comfortable (due to rate-spreads) taking 25% of my remaining investment portfolio (which has gained significantly more than my normal PP would have), and diving back into LTT's.
This is all hard-core PP tinkering beyond what most would be comfortable with, but I would truly hate my portfolio with LTT's yielding less than 3% (Even though I share MT's assertion that they could very well end up there in the long-term)while my mortgage is at 5%. I would take the added volatility, and know that by playing the interest rate arbitrage game (Paying down your "callable bond" (mortgage) with the non-callable bond (LTT's) that used to yield more, but no longer do), I'm probably going to benefit, or at the very least am in a better position to refinance if mortgage rates ever drop.
Blasphemy, I know, but I think I'd have to do it.
The other side of this coin is the option to refinance if mortgage rates were to be attractive enough to re-establish my favorable borrow/invest spread... but they weren't, as mortgage rates didn't dip nearly as far as treasuries by the end of 2008.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: LTT's vs Mortgage
Moda, I think you're looking at the bonds in a different way than the PP was designed. Sure, the coupon payments are nice, but they are not the primary reason bonds are in the PP. There is also the flight to safety factor which causes the price of bonds to jump during a deflationary cycle.
I think paying off 20% of your mortgage to avoid the PMI is a good goal, but I would actually draw down the entire PP equally in order to do so. By excluding bonds completely, you could end up getting burned really badly if we experience something like 2008 again, where stocks, gold, and even the value of your house goes down a lot. You would have nothing carrying your portfolio except cash, where others might get at 30% gain from their bonds increasing in value.
I think paying off 20% of your mortgage to avoid the PMI is a good goal, but I would actually draw down the entire PP equally in order to do so. By excluding bonds completely, you could end up getting burned really badly if we experience something like 2008 again, where stocks, gold, and even the value of your house goes down a lot. You would have nothing carrying your portfolio except cash, where others might get at 30% gain from their bonds increasing in value.
"I came here for financial advice, but I've ended up with a bunch of shave soaps and apparently am about to start eating sardines. Not that I'm complaining, of course." -ZedThou
Re: LTT's vs Mortgage
Storm,
I definitely see where your coming from. Regarding "another 2008," rest assured I wouldn't do this until another 2008 actually happened (and my LTT/Mortgage spreads are back
Further, I'd probably keep 10% of my portfolio in LTT's as "insurance" that rates drop even lower, because as you say, it's the price moves, not the coupon payments, that are what you're really looking for with LTT's (especially at 2.5% coupon). As LTT's potentially go from 2.5% to 1.5%, be assured we've entered a period of strong deflation, and paying down a 5% mortgage makes more and more sense the MORE deflationary environment we're in (unless you're approaching 80-100% LTV). I don't think I'd do this if I was sitting anywhere close to underwater on my home, because I don't want to be paying into a mortgage that I'll eventually walk away from.
Maybe in the world of 2% LT rates when you have a mortgage, that's a time to, as tax-efficiently as possible, evenly take down your 4x25 portfolio to pay down the mortgage, not just the LT portion.
I definitely see where your coming from. Regarding "another 2008," rest assured I wouldn't do this until another 2008 actually happened (and my LTT/Mortgage spreads are back
Further, I'd probably keep 10% of my portfolio in LTT's as "insurance" that rates drop even lower, because as you say, it's the price moves, not the coupon payments, that are what you're really looking for with LTT's (especially at 2.5% coupon). As LTT's potentially go from 2.5% to 1.5%, be assured we've entered a period of strong deflation, and paying down a 5% mortgage makes more and more sense the MORE deflationary environment we're in (unless you're approaching 80-100% LTV). I don't think I'd do this if I was sitting anywhere close to underwater on my home, because I don't want to be paying into a mortgage that I'll eventually walk away from.
Maybe in the world of 2% LT rates when you have a mortgage, that's a time to, as tax-efficiently as possible, evenly take down your 4x25 portfolio to pay down the mortgage, not just the LT portion.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: LTT's vs Mortgage
I think there are two big problems with interchanging bonds with home equity: (1) home equity and long term treasuries behave very differently at times, and (2) you need to consider your household's cash flow, not just the total return of your assets.
For (1), as Storm said, the main reason long term treasuries are in the PP is because their price swings up during a deflation. Generally home equity stays somewhat flat in a deflation, which is better than a lot of other assets but a far cry from the double digit increases that LTTs see. And of course there's the recent memory of 2008, a real estate-triggered deflation in which home equity got hammered. A portfolio of stocks, cash, gold, and real estate equity would've been skewered in 2008. Remember that no one can predict these things.
Also, treasuries are extremely liquid and real estate is extremely illiquid. Yes there are HELOCs but you pay interest on those.
For (2), any direct comparison of yields makes an underlying assumption that your household income and expenses are locked in and will never change. This is of course unrealistic. What happens if your wage income is disrupted, or you have a big unexpected expense? Paying down the mortgage doesn't help your cash flow balance sheet until it's paid in full. However you can stop making investment contributions at any time, and liquidate part of a portfolio at any time.
I agree with HB that a house is a consumption item, not an investment, and one should maintain a mental "firewall" between the two.
For (1), as Storm said, the main reason long term treasuries are in the PP is because their price swings up during a deflation. Generally home equity stays somewhat flat in a deflation, which is better than a lot of other assets but a far cry from the double digit increases that LTTs see. And of course there's the recent memory of 2008, a real estate-triggered deflation in which home equity got hammered. A portfolio of stocks, cash, gold, and real estate equity would've been skewered in 2008. Remember that no one can predict these things.
Also, treasuries are extremely liquid and real estate is extremely illiquid. Yes there are HELOCs but you pay interest on those.
For (2), any direct comparison of yields makes an underlying assumption that your household income and expenses are locked in and will never change. This is of course unrealistic. What happens if your wage income is disrupted, or you have a big unexpected expense? Paying down the mortgage doesn't help your cash flow balance sheet until it's paid in full. However you can stop making investment contributions at any time, and liquidate part of a portfolio at any time.
I agree with HB that a house is a consumption item, not an investment, and one should maintain a mental "firewall" between the two.
Re: LTT's vs Mortgage
Also worth noting that you don't own your house until the mortgage is paid in full--you only control it. Even when paid in full, your capital is still at the mercy of the local government. My opinion of house equity forever changed when I viewed it in terms of "control" rather than "ownership."
I agree with the other comments regarding LTT's volatility. Keep your house and your LTT's separate.
I agree with the other comments regarding LTT's volatility. Keep your house and your LTT's separate.
Re: LTT's vs Mortgage
Kev,
Great points.
I am definitely not trying to treat my home as an investment, and maybe trying to treat my mortgage as a callable bond falls into doing just that.
There's probably nothing more devastating to employment prospects than a deflationary recession, as well, so your points are even more pertinent.
I just think there's something fundamentally different between taking on a 5% 30-year debt (or maintaining such debt), while invested in bonds yielding about the same and continuing to stay invested in a 2% bond while continuing to maintain debt at 5%... even if that 2% bond has some possible favorable price-movements left in its arsenal.
The cash-flow piece is huge, and you'd want to feel comfortable that 1) you had enough cash on hand to whether a storm, and 2) hopefully had a pretty stable job.
Keep in mind LTT's are my favorite PP asset, it's just that it seems like you can play a game with interest rate arbitrage (since you can maintain LTT's in a tax-deferred account and take contributions out of Roth's while paying tax-deductible mortgage interest) that will, in the long-term play out in your favor if you're willing to take the risk.
Maybe, for a guy likeme that likes LTT's I should plunk them in a VP and wait for the swing in rates, if they ever occur, and quit trying to eff with my PP so much.
Great points.
I am definitely not trying to treat my home as an investment, and maybe trying to treat my mortgage as a callable bond falls into doing just that.
There's probably nothing more devastating to employment prospects than a deflationary recession, as well, so your points are even more pertinent.
I just think there's something fundamentally different between taking on a 5% 30-year debt (or maintaining such debt), while invested in bonds yielding about the same and continuing to stay invested in a 2% bond while continuing to maintain debt at 5%... even if that 2% bond has some possible favorable price-movements left in its arsenal.
The cash-flow piece is huge, and you'd want to feel comfortable that 1) you had enough cash on hand to whether a storm, and 2) hopefully had a pretty stable job.
Keep in mind LTT's are my favorite PP asset, it's just that it seems like you can play a game with interest rate arbitrage (since you can maintain LTT's in a tax-deferred account and take contributions out of Roth's while paying tax-deductible mortgage interest) that will, in the long-term play out in your favor if you're willing to take the risk.
Maybe, for a guy likeme that likes LTT's I should plunk them in a VP and wait for the swing in rates, if they ever occur, and quit trying to eff with my PP so much.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: LTT's vs Mortgage
IMO it's perfectly valid to reexamine prepaying a mortgage or other long-term debt vs investing. I struggle with this myself. However I think the decision should be debt vs 4x25 PP, not debt vs the bond part of the PP.
Interestingly, in "Inflation-Proofing Your Investments" I believe, HB suggested only using variable-rate mortgages. The rationale was that fixed rate mortgages infuse an inappropriate level of interest rate speculation into what should be a simple consumer purchase. Arbitraging interest rates should be a VP speculation, not part of putting shelter over your family's head. Food for thought.
Interestingly, in "Inflation-Proofing Your Investments" I believe, HB suggested only using variable-rate mortgages. The rationale was that fixed rate mortgages infuse an inappropriate level of interest rate speculation into what should be a simple consumer purchase. Arbitraging interest rates should be a VP speculation, not part of putting shelter over your family's head. Food for thought.
Re: LTT's vs Mortgage
I think Harry Browne might have reconsidered that advice if mortgage rates were in the 4-5% range rather than the 12%+ range they were in when he wrote that.KevinW wrote: Interestingly, in "Inflation-Proofing Your Investments" I believe, HB suggested only using variable-rate mortgages. The rationale was that fixed rate mortgages infuse an inappropriate level of interest rate speculation into what should be a simple consumer purchase. Arbitraging interest rates should be a VP speculation, not part of putting shelter over your family's head. Food for thought.
Also, I think it is easier to refinance today than it used to be.
The way I look at it, my fixed rate mortgage is ALSO a variable rate mortgage because if rates drop I can just refinance without much expense or hassle.
I don't think there is any good reason not to lock in today's rates on a mortgage if you can. If they go lower, you can refinance, if they go higher, you will be happy.
If mortgage rates were 12% right now, however, I would probably be saying the same thing that Harry Browne was saying.
Just my opinion, of course.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
A: “Not unless round is funny.”
Re: LTT's vs Mortgage
I analyzed this (similar question to mortgage pay down/buying bonds) for a long time and decided to pay down, then pay off a mortgage in 2009 on good 4-family I own which was mortgaged at 30 year for 5%. It was an even harder decision as it is investment property and most would say to keep mortgage. I so much wanted to add to the PP!
Considerations
1. You should have basic minimum level of cash (1 year or whatever your target) and pay down/off should not drain below your basic/emergency level. Also assumed is you should make full contributions to tax deferred accounts to the max before any pay down/off.
2. Paying down mortgage is RISK FREE RETURN – this is hugely underrated when getting fancy and comparing yields. Mortgage interest rates should not be compared directly against risk assets (including bonds). 8% market return is better than 5% mortgage rate, but is 8% certain? If there is only a 50% certainty, wouldn’t it really be 4% market vs. 5% mortgage rate?
3. You get the interest deduction so keep the mortgage? Well, you may not receive full deduction now -which many people don't know. Later, you don't know what circumstances will bring as far as future income / tax position. Also, there has been some talk about eliminating the property interest deduction, or phasing it out in the future, a risk to consider. Another way to look at it, you eliminate your dependence on the government in making your decision work.
4. Illiquid. Again, assuming you have emergency/basic level of liquidity, if you pay off mortgage completely, chances are you can get at least partial liquidity out of it via home equity. Yes bank can pull the line, but if you owe zero you can probably get something. You don’t get charged interest for an unused HELOC. If you really want full liquidity - sell the place and rent or buy smaller home or what have you. In any case, you don’t buy a house for mortgage derived liquidity, and probably should be using it for investing/living cash anyway.
5. Asset protection. For personal residences, depending on the state, homestead law can be taken advantage of to protect that portion of your assets. There are tradeoffs of course, just not a point usually brought up in these discussions.
6. The reverse mortgage question. If you could, would you take out a mortgage to put money into a PP or buy long term bonds (pick your asset) now? Is the decision to pay off / pay down your mortgage any different just because you already have a mortgage? Why? I answered I would not take out a mortgage to buy more PP (bonds or whatever). If you answer yes, why not keep going with this logic and get another mortgage or home equity loan (in theory).
7. If yes to #4. is taking another mortgage out for .5% to 2% (or whatever) in theoretical gain worth it in terms of sleep at night factor? I decided no because there are at times, months, maybe years where you worry due to the alternative asset price fluctuations.
8. Work involved constantly evaluating arbitrage as rates move around, both mortgage rates, and treasury rates. In other words, do you plan to do this analysis every month, year? Moving money around make you feel like you are doing something? Do you see Bill Gross taking out loans to buy bonds?
9. Debt is great in inflation. What happens in deflation? Inflation is not guaranteed.
10. I believe overall long term big picture risk is lower eliminating mortgage. Lose your job, your investments, and you still have a place to live and/or your bills are lower. Your worse case is not as bad when you have your mortgage paid off (again assuming basic savings established). Leverage something else if you want to place bets.
11. Housing is a consumption item. Should you have loans on consumption items? Shouldn’t the loan be eliminated as fast as possible?
Best reading on subject I found, both pro and con: http://www.early-retirement.org/forums/ ... .html along with on Bogleheads.
Debt is debt, and investments should be from savings.
I found after paying off mortgage, it helps make things clearer. I’m now wondering why I don’t sell the property and put all money into the PP. With a mortgage, it was easy to rationalize taking money I that I owed somebody else and investing it somewhere else.
I wouldn’t argue strongly with anyone who does something else.
Anyone want to purchase a nice rental property? I’ll give you some cash back with the deal to put in long term treasuries.
Considerations
1. You should have basic minimum level of cash (1 year or whatever your target) and pay down/off should not drain below your basic/emergency level. Also assumed is you should make full contributions to tax deferred accounts to the max before any pay down/off.
2. Paying down mortgage is RISK FREE RETURN – this is hugely underrated when getting fancy and comparing yields. Mortgage interest rates should not be compared directly against risk assets (including bonds). 8% market return is better than 5% mortgage rate, but is 8% certain? If there is only a 50% certainty, wouldn’t it really be 4% market vs. 5% mortgage rate?
3. You get the interest deduction so keep the mortgage? Well, you may not receive full deduction now -which many people don't know. Later, you don't know what circumstances will bring as far as future income / tax position. Also, there has been some talk about eliminating the property interest deduction, or phasing it out in the future, a risk to consider. Another way to look at it, you eliminate your dependence on the government in making your decision work.
4. Illiquid. Again, assuming you have emergency/basic level of liquidity, if you pay off mortgage completely, chances are you can get at least partial liquidity out of it via home equity. Yes bank can pull the line, but if you owe zero you can probably get something. You don’t get charged interest for an unused HELOC. If you really want full liquidity - sell the place and rent or buy smaller home or what have you. In any case, you don’t buy a house for mortgage derived liquidity, and probably should be using it for investing/living cash anyway.
5. Asset protection. For personal residences, depending on the state, homestead law can be taken advantage of to protect that portion of your assets. There are tradeoffs of course, just not a point usually brought up in these discussions.
6. The reverse mortgage question. If you could, would you take out a mortgage to put money into a PP or buy long term bonds (pick your asset) now? Is the decision to pay off / pay down your mortgage any different just because you already have a mortgage? Why? I answered I would not take out a mortgage to buy more PP (bonds or whatever). If you answer yes, why not keep going with this logic and get another mortgage or home equity loan (in theory).
7. If yes to #4. is taking another mortgage out for .5% to 2% (or whatever) in theoretical gain worth it in terms of sleep at night factor? I decided no because there are at times, months, maybe years where you worry due to the alternative asset price fluctuations.
8. Work involved constantly evaluating arbitrage as rates move around, both mortgage rates, and treasury rates. In other words, do you plan to do this analysis every month, year? Moving money around make you feel like you are doing something? Do you see Bill Gross taking out loans to buy bonds?
9. Debt is great in inflation. What happens in deflation? Inflation is not guaranteed.
10. I believe overall long term big picture risk is lower eliminating mortgage. Lose your job, your investments, and you still have a place to live and/or your bills are lower. Your worse case is not as bad when you have your mortgage paid off (again assuming basic savings established). Leverage something else if you want to place bets.
11. Housing is a consumption item. Should you have loans on consumption items? Shouldn’t the loan be eliminated as fast as possible?
Best reading on subject I found, both pro and con: http://www.early-retirement.org/forums/ ... .html along with on Bogleheads.
Debt is debt, and investments should be from savings.
I found after paying off mortgage, it helps make things clearer. I’m now wondering why I don’t sell the property and put all money into the PP. With a mortgage, it was easy to rationalize taking money I that I owed somebody else and investing it somewhere else.
I wouldn’t argue strongly with anyone who does something else.
Anyone want to purchase a nice rental property? I’ll give you some cash back with the deal to put in long term treasuries.
Re: LTT's vs Mortgage
RickV42 --
I very much agree, especially with #1 and #2. Reasonable liquidity and the RISK FREE RETURN calculation should, in most cases, be the overriding considerations. I also found that paying off my mortgage a few years back helped make other financial decisions much cleaner.
Financial services industry propaganda often makes having debt or a mortgage seem more sophisticated than being debt free. Often (perhaps usually) the reverse is true. A broker recently told my niece in Pennsylvania that paying off a mortgage (5.875% in her case, funded from her account at his firm) was "usually an emotional decision and not based on solid financial considerations." I then calculated that given her federal and state tax rate, she would have to earn north of 7% on a Treasury security to breakeven in terms of return with comparable security, even with the mortgage income tax break factored in. I hopes she asks him if he can find one.
I very much agree, especially with #1 and #2. Reasonable liquidity and the RISK FREE RETURN calculation should, in most cases, be the overriding considerations. I also found that paying off my mortgage a few years back helped make other financial decisions much cleaner.
Financial services industry propaganda often makes having debt or a mortgage seem more sophisticated than being debt free. Often (perhaps usually) the reverse is true. A broker recently told my niece in Pennsylvania that paying off a mortgage (5.875% in her case, funded from her account at his firm) was "usually an emotional decision and not based on solid financial considerations." I then calculated that given her federal and state tax rate, she would have to earn north of 7% on a Treasury security to breakeven in terms of return with comparable security, even with the mortgage income tax break factored in. I hopes she asks him if he can find one.