Anyone regret paying off mortgage early?

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KlangFool
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Re: Anyone regret paying off mortgage early?

Post by KlangFool »

sreynard wrote: Thu Aug 09, 2018 9:38 am
KlangFool wrote: Wed Aug 08, 2018 10:14 pm
sreynard wrote: Wed Aug 08, 2018 9:57 pm
grabiner wrote: Tue Aug 07, 2018 7:44 pm And this is an important issue. Liquidity is valuable. Paying down (or even paying off) the mortgage reduces your liquid funds available for living expenses, as you may lose access to your home-equity line of credit if you have lost your job.
Except that when I pay off my mortgage in 4 or 5 years, my need for liquidity will immediately drop in half. It is generally really easy to find at least a temporary job paying half as much.
I wouldn't consider money I have invested in the stock market as liquid.
sreynard,

1) What if the recession hit and laid off happened before you pay off the mortgage in 4 to 5 years?

<<I wouldn't consider money I have invested in the stock market as liquid. >>

2) Unless your AA is 100/0, your money would not be 100% invested in the stock market.

3) I have 500K (100% stock) in my taxable account and I have a 300K mortgage. My PITI is about 20K per year. My AA is 61/39. Even if the stock drop 80%, I can last longer if I do not pay off the mortgage.

KlangFool
1) I am at risk for the next 4 years. Just like anyone else that looses their job and has large fixed expenses. It will be a race to see if I can get a new high paying job before my savings runs out.

But after those 4 years, I will be financially independent. I will no longer be dependent on any employer. I could retire and never work again. I could be free. Then "At Will" employment will be at both my will and my employers will. Not just one way.

2) So? What does total allocation have to do with it? As you perhaps recall, I am one of those that look at a mortgage as a negative bond. So paying an extra $1000 a month the same, to me, as buying $1000 a month in bonds. I don't look at it as mortgage vs. investing. I look at both as investing. Both have the same effect on my net worth. The difference is in risk and expected return. Only the mortgage option is known.

Let's see, my current asset allocation would be about 110/-10. :P

3) Your $500K in stocks are close to an all time high, probably with a lot of capital gains. Using them to pay off a mortgage now would be to pay with cheap money. If the market really did drop 80%, and especially if you lost your job and were forced to live off your brokerage account, that $20K a year would be with very expensive money.

You are correct, not paying off your mortgage, your savings will last longer. Clearly. But then what? What's the next step? You need to generate an extra $20K per year, over and above your other living expenses. Where is that going to come from once your savings are gone? What's Plan B?

I'm sorry Klang. I just can't comprehend your thinking and you can't comprehend mine. We'll just have to agree to disagree on this.
sreynard,

1) My taxable account is 500K. It generates 10K of dividend every year. Even it drops 80%, it would generate at least 5K per year.

2) My PITI is 20K per year. The TI portion is 5K per year. Even if I pay off the mortgage, I still have to pay 5K per year.

If I do not pay off my mortgage, I only need to generate 10K per year to pay the mortgage.

If I pay off the mortgage, I still need to pay 5K per year.

<<2) So? What does total allocation have to do with it? As you perhaps recall, I am one of those that look at a mortgage as a negative bond. >>

Which does not work when you look at the cash flow.

<<1) I am at risk for the next 4 years. Just like anyone else that looses their job and has large fixed expenses. It will be a race to see if I can get a new high paying job before my savings runs out.

But after those 4 years, I will be financially independent. >>

No, after 4 years, you could work part-time. It is not financially independent. Meanwhile, you may not survive if a recession hit over the next 4 years.

You need to survive in order to succeed.

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Re: Anyone regret paying off mortgage early?

Post by willthrill81 »

wolf359 wrote: Thu Aug 09, 2018 1:15 pm
sreynard wrote: Thu Aug 09, 2018 9:38 am

1) I am at risk for the next 4 years. Just like anyone else that looses their job and has large fixed expenses. It will be a race to see if I can get a new high paying job before my savings runs out.

But after those 4 years, I will be financially independent. I will no longer be dependent on any employer. I could retire and never work again. I could be free. Then "At Will" employment will be at both my will and my employers will. Not just one way.

2) So? What does total allocation have to do with it? As you perhaps recall, I am one of those that look at a mortgage as a negative bond. So paying an extra $1000 a month the same, to me, as buying $1000 a month in bonds. I don't look at it as mortgage vs. investing. I look at both as investing. Both have the same effect on my net worth. The difference is in risk and expected return. Only the mortgage option is known.

Let's see, my current asset allocation would be about 110/-10. :P

3) Your $500K in stocks are close to an all time high, probably with a lot of capital gains. Using them to pay off a mortgage now would be to pay with cheap money. If the market really did drop 80%, and especially if you lost your job and were forced to live off your brokerage account, that $20K a year would be with very expensive money.

You are correct, not paying off your mortgage, your savings will last longer. Clearly. But then what? What's the next step? You need to generate an extra $20K per year, over and above your other living expenses. Where is that going to come from once your savings are gone? What's Plan B?

I'm sorry Klang. I just can't comprehend your thinking and you can't comprehend mine. We'll just have to agree to disagree on this.
I don't see why you both can't be right.

1. Klang is correct. While paying DOWN your mortgage, you take a risk because you have fewer liquid funds during the 4 years it takes.

2. Sreynard is correct. After paying OFF your mortgage (at the 4 year mark), your expenses drop significantly and you are FI.

Therefore:

Don't pay down your mortgage directly. Put the extra payments into a "sinking fund" that is asset allocated appropriate to your goal. (You could simply buy reducing CD ladders that all mature 4 years from now. Or you could get a target date fund for 4 years from now, and receive some equity appreciation. Or whatever risk level you find appropriate.)

During the 4 year pay-down period, you have liquidity and avoid the risks Klang mentioned. Should you lose your job, you have an affordable mortgage payment and extra funds to stretch out your "hang time" (your time between jobs without any other financial support.) After the 4 year period, your reap the benefits of fully paying off the mortgage all at once. You can have your cake and eat it, too.
:thumbsup

I agree that a sinking fund for a mortgage makes a lot of sense. CD rates and short-term bond yields are likely to be lower than your mortgage rate (but not necessarily), but that may be a small price to pay in return for maintaining liquidity.

The argument that a paid-for home is bad for liquidity because it ties up capital in the home makes no sense to me. Having a paid-for home significantly reduces your financial obligations going forward, so you don't need as much liquidity as you would if you still had a mortgage.
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Re: Anyone regret paying off mortgage early?

Post by grabiner »

willthrill81 wrote: Thu Aug 09, 2018 4:04 pm I agree that a sinking fund for a mortgage makes a lot of sense. CD rates and short-term bond yields are likely to be lower than your mortgage rate (but not necessarily), but that may be a small price to pay in return for maintaining liquidity.
For a long-term mortgage, you can use a longer-term fund. If there are 15 years left on your mortgage, you could (in theory) buy a portfolio of bonds maturing in 1 to 15 years, so that you would get enough each year to make your mortgage payments. You wouldn't care what happened to interest rates, as the bonds would cover the payments.

A more practical alternative would be to buy a fund such as Vanguard Long-Term Tax-Exempt, which has the same 7-year duration as the mortgage and example bond portfolio. You would then be in a neutral situation with respect to interest rates; if rates rise, your bond portfolio would lose value, but your negative bond portfolio (the mortgage) would gain an equal amount.
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Re: Anyone regret paying off mortgage early?

Post by willthrill81 »

grabiner wrote: Thu Aug 09, 2018 7:57 pm
willthrill81 wrote: Thu Aug 09, 2018 4:04 pm I agree that a sinking fund for a mortgage makes a lot of sense. CD rates and short-term bond yields are likely to be lower than your mortgage rate (but not necessarily), but that may be a small price to pay in return for maintaining liquidity.
For a long-term mortgage, you can use a longer-term fund. If there are 15 years left on your mortgage, you could (in theory) buy a portfolio of bonds maturing in 1 to 15 years, so that you would get enough each year to make your mortgage payments. You wouldn't care what happened to interest rates, as the bonds would cover the payments.

A more practical alternative would be to buy a fund such as Vanguard Long-Term Tax-Exempt, which has the same 7-year duration as the mortgage and example bond portfolio. You would then be in a neutral situation with respect to interest rates; if rates rise, your bond portfolio would lose value, but your negative bond portfolio (the mortgage) would gain an equal amount.
Good point. Another option would be to ladder Guggenheim BulletShares.
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Re: Anyone regret paying off mortgage early?

Post by GAAP »

There's something of an inherent trade-off between the value of pure liquidity (cash in the bank) and future cash-flow improvements (no mortgage payments).

For nearly anyone these days, paying down the mortgage will yield more in absolute terms than a truly liquid cash-equivalent account. It will also be tax-free yield. Using a sinking fund -- particularly if inflation indexed -- offers a reasonable alternative with greater flexibility.

The relative value of pure liquidity vs cash-slow is likely to change over time. As you get closer to retirement, the cash-flow improvements add more net value to your retirement than the investment returns. Your portfolio needs a multiple of the mortgage payment to support keeping the mortgage after retirement. As you get closer to that date, your net portfolio additions have a decreasing effect on total portfolio value. Reducing future outlays by retiring later or paying off the mortgage are both likely to have much more effect.
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Re: Anyone regret paying off mortgage early?

Post by jvini »

I just paid mine off. After considering the variables, including peace of mind, it made sense.

I want to retire (or at least feel very comfortable doing so) in 5 years. For the past 19 years we have never paid extra on our mortgage, but rather invested any extra, along with maxing 401ks and contributing to a brokerage account, every month. Now that we have about 2 million saved, also have enough for two private colleges, and have benefited from one of the longest bull markets in history, we felt it was time.

Rather than rebalance into bonds this year (I rebalance yearly usually) we sold 300k in etfs and paid off the house (worth about 1 million).

Yes, I could have left that 300k invested and kept the mortgage (3.75%). But as we near retirement, we didn't want to risk retiring just as the market crashed and we watched our portfolio lose that 300k. We would have kept invested, knowing it would come back, but all things considered, it just seemed like the right time. And going forward we keep investing a large amount each month, including the extra money that was going towards the mortgage. It's a never ending debate on this great site, with good points on both sides. Thoughts on this post are very welcome. Thanks!
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Re: Anyone regret paying off mortgage early?

Post by EdNorton »

cherijoh wrote: Tue Aug 07, 2018 8:42 am
Hawaiishrimp wrote: Thu Jun 21, 2018 11:24 pm No, I will not pay off my mortgage early. I am at 2.5% fixed. I rather grow my portfolio than wasting the opportunity cost to build wealth. That "sense of security" is too costly.
Smart decision. I'm always amazed at the number of people who buy into the "guaranteed return" argument and then compare the return on a 2-year CD to their 30-yr mortgage. :oops:
That "guaranteed return" looks pretty good right now.
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Re: Anyone regret paying off mortgage early?

Post by Grt2bOutdoors »

EdNorton wrote: Mon Mar 16, 2020 9:51 am
cherijoh wrote: Tue Aug 07, 2018 8:42 am
Hawaiishrimp wrote: Thu Jun 21, 2018 11:24 pm No, I will not pay off my mortgage early. I am at 2.5% fixed. I rather grow my portfolio than wasting the opportunity cost to build wealth. That "sense of security" is too costly.
Smart decision. I'm always amazed at the number of people who buy into the "guaranteed return" argument and then compare the return on a 2-year CD to their 30-yr mortgage. :oops:
That "guaranteed return" looks pretty good right now.
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"Nobody's ever regretted paying off the mortgage."

Post by Triple digit golfer »

[Thread merged into here --admin LadyGeek]

I see this argument a lot when people favor paying down their mortgage in place of taxable investing.

I also see the argument that you wouldn't take a mortgage on a paid off house to invest. At least, most people wouldn't. So why would you invest rather than pay down the mortgage? This, to me, is a much better argument than the first.

To be clear, I'm not talking about tax-advantaged accounts, only taxable investments.

Every so often, when I look at my mortgage balance, I get tempted to direct some new money there instead of to taxable investments. However, I know that I am seeing one side of the balance sheet, the mortgage liability, and taking for granted the larger opposite side, the assets I've built up in my taxable account. I know that I am likely to do much better investing, even at 80% stocks and 20% bonds, than the 2.99% that I'm paying on the mortgage. I think this is fairly basic and simple to understand.

Why, then, do so many very respected financial gurus, the most well known being Dave Ramsey, but also many others, advocate so hard for mortgage paydown before taxable investing? Is it simply to appeal to the masses because the masses would likely not be disciplined, so the mortgage paydown is forced savings, which is better than buying a boat and expensive vacations?

Ramsey's argument is basically the title of my post: Nobody's ever regretted paying off the mortgage. I doubt anybody's ever regretted investing tens of thousands of dollars in the S&P 500 and holding for 20 years, either.

I know most answers will be, "Don't listen to Ramsey for investing advice." That's not really what I'm asking. I know deep down that he knows investing will yield a higher rate than a 30 year mortgage. I'm asking why, in your opinion, is this advice to pay down the mortgage so prevalent in the personal finance industry?
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Re: "Nobody's ever regretted paying off the mortgage."

Post by TheLaughingCow »

It reduces risk.
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Re: "Nobody's ever regretted paying off the mortgage."

Post by MMiroir »

We paid down out mortgage years ago, although back then the interest rate was in the 6 to 7 percent range, not the sub 3 percent rates common today. Our rationale was that paying down the mortgage replaced investing in bonds in an 80/20 portfolio. If effective mortgage rates are similar to bond yield rates, I don't see why one would have a mortgage and hold bonds at the same time.
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Re: "Nobody's ever regretted paying off the mortgage."

Post by scout1 »

I agree with you OP. I think there is an emotional aversion to debt. There's a reason most companies tend to holds some debt if they can, it's beneficial. I don't think it really reduces risk either since you lose the liquidity.
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Re: "Nobody's ever regretted paying off the mortgage."

Post by Jack FFR1846 »

I cite 2 guys often who are well known and have clear, outspoken, opposite opinions.

Dave Ramsey: You're an idiot if you don't pay off your mortgage. It's just debt.

Ric Edelman: You're an idiot to pay off your mortgage. You make more money in the market. Keep that low interest money invested.

Personally, I paid off my mortgage years ago and have never had a regret. Ric Edelman recently took a new mortgage on his house. So he has put his money where his mouth is.
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Re: "Nobody's ever regretted paying off the mortgage."

Post by Hyperchicken »

This argument appeals to minimizing regret. Thus it is fundamentally emotion-based, and as such, is beyond logical analysis. Ultimately, everyone is entitled to use their money in a way that pleases them the most. It however helps to be aware of the costs of doing so.
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Re: "Nobody's ever regretted paying off the mortgage."

Post by TheTimeLord »

For people who view things from a cash-flow perspective paying off a mortgage greatly improves monthly cashflow substantially by eliminating what is for most people by far the largest line item in their monthly budget.
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Re: "Nobody's ever regretted paying off the mortgage."

Post by Flashes1 »

Reducing my mortgage balance is mental for me. I get as much joy seeing it decline as I get from seeing my TSM increase. What I've done with my excess after-tax money is I put 2/3's of it in TSM and 1/3 to mortgage reduction.

Will all the uncertainties out there, it will be comforting to know that no matter what happens, we own the roof over our heads (assuming property taxes are paid).
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Re: "Nobody's ever regretted paying off the mortgage."

Post by Big Dog »

Triple digit golfer wrote: Wed Apr 14, 2021 11:49 am I see this argument a lot when people favor paying down their mortgage in place of taxable investing.

I also see the argument that you wouldn't take a mortgage on a paid off house to invest. At least, most people wouldn't. So why would you invest rather than pay down the mortgage? This, to me, is a much better argument than the first.

To be clear, I'm not talking about tax-advantaged accounts, only taxable investments.

Every so often, when I look at my mortgage balance, I get tempted to direct some new money there instead of to taxable investments. However, I know that I am seeing one side of the balance sheet, the mortgage liability, and taking for granted the larger opposite side, the assets I've built up in my taxable account. I know that I am likely to do much better investing, even at 80% stocks and 20% bonds, than the 2.99% that I'm paying on the mortgage. I think this is fairly basic and simple to understand.

Why, then, do so many very respected financial gurus, the most well known being Dave Ramsey, but also many others, advocate so hard for mortgage paydown before taxable investing? Is it simply to appeal to the masses because the masses would likely not be disciplined, so the mortgage paydown is forced savings, which is better than buying a boat and expensive vacations?

Ramsey's argument is basically the title of my post: Nobody's ever regretted paying off the mortgage. I doubt anybody's ever regretted investing tens of thousands of dollars in the S&P 500 and holding for 20 years, either.

I know most answers will be, "Don't listen to Ramsey for investing advice." That's not really what I'm asking. I know deep down that he knows investing will yield a higher rate than a 30 year mortgage. I'm asking why, in your opinion, is this advice to pay down the mortgage so prevalent in the personal finance industry?
bcos you are comparing apples and oranges. A mortgage 'return' should not be compared with stock returns, but with bonds. Moreover, paying down your mortgage is a guaranteed return of 2.99%; such a guarantee is only available in Treasuries. From an investment perspective, IMO, you should compare like assets.

OTOH, there are plenty of folks on BH that have no issue with leveraging their mortgage to invest in equities.
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Re: "Nobody's ever regretted paying off the mortgage."

Post by Yarlonkol12 »

I paid off my house, but I am also 100% invested in equity, I don’t have any bonds like you do. I also took the standard tax deduction so my investments would have needed to outperform after subtracting the tax liability from them. On a risk adjusted return basis, it just felt like the right decision in my situation

After it was paid off, I used the increased cash flow from not having a mortgage to fund after tax 401k->megabackdoor roth ira contributions, and am now able to to the full 52k max 401k contribution (pretax + after tax)
Last edited by Yarlonkol12 on Wed Apr 14, 2021 12:12 pm, edited 1 time in total.
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Re: "Nobody's ever regretted paying off the mortgage."

Post by bluebolt »

In the 15+ years since I've had a mortgage, the IRR of my investments has been over 8% (excluding contributions).
My average mortgage rate over that time has been about 3.75% and is now under 3%.

So, I can say I don't regret not paying off my mortgage.

Sure it's one data point, but it's over a pretty long time period that includes a market correction. Plus we have historically low mortgage interest rates. So, that leads me to believe I should stay the course.
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Re: "Nobody's ever regretted paying off the mortgage."

Post by BrooklynInvest »

Another reason perhaps -

When I paid my mortgage off it felt GREAT! I'd accomplished a very specific thing. Yay me.

Had I invested those extra payments in my 60-40 instead I may have quite a bit more money in my 60-40 but there's no SPECIFIC accomplishment to celebrate.

I'm savoring my accomplishment of paying off the mortgage while not thinking about the opportunity cost... or calculating the opportunity cost in dollars which might put a damper on the celebration in effect ;-)

Human nature?
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Re: "Nobody's ever regretted paying off the mortgage."

Post by Tingting1013 »

Big Dog wrote: Wed Apr 14, 2021 12:09 pm
Triple digit golfer wrote: Wed Apr 14, 2021 11:49 am I see this argument a lot when people favor paying down their mortgage in place of taxable investing.

I also see the argument that you wouldn't take a mortgage on a paid off house to invest. At least, most people wouldn't. So why would you invest rather than pay down the mortgage? This, to me, is a much better argument than the first.

To be clear, I'm not talking about tax-advantaged accounts, only taxable investments.

Every so often, when I look at my mortgage balance, I get tempted to direct some new money there instead of to taxable investments. However, I know that I am seeing one side of the balance sheet, the mortgage liability, and taking for granted the larger opposite side, the assets I've built up in my taxable account. I know that I am likely to do much better investing, even at 80% stocks and 20% bonds, than the 2.99% that I'm paying on the mortgage. I think this is fairly basic and simple to understand.

Why, then, do so many very respected financial gurus, the most well known being Dave Ramsey, but also many others, advocate so hard for mortgage paydown before taxable investing? Is it simply to appeal to the masses because the masses would likely not be disciplined, so the mortgage paydown is forced savings, which is better than buying a boat and expensive vacations?

Ramsey's argument is basically the title of my post: Nobody's ever regretted paying off the mortgage. I doubt anybody's ever regretted investing tens of thousands of dollars in the S&P 500 and holding for 20 years, either.

I know most answers will be, "Don't listen to Ramsey for investing advice." That's not really what I'm asking. I know deep down that he knows investing will yield a higher rate than a 30 year mortgage. I'm asking why, in your opinion, is this advice to pay down the mortgage so prevalent in the personal finance industry?
bcos you are comparing apples and oranges. A mortgage 'return' should not be compared with stock returns, but with bonds.
I disagree. Of course a mortgage return can be compared to stock returns, it just can’t be compared 1:1. You need to discount the stock returns somewhat for risk.

Stocks have returned 9-10% for the past few decades. Risk adjust that to be comparable with treasuries and you probably get 4-5%. Still higher than mortgage rate.
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Re: "Nobody's ever regretted paying off the mortgage."

Post by bertilak »

TheTimeLord wrote: Wed Apr 14, 2021 12:06 pm For people who view things from a cash-flow perspective paying off a mortgage greatly improves monthly cashflow substantially by eliminating what is for most people by far the largest line item in their monthly budget.
There were two overriding reasons for me paying off my mortgage, besides the fact that I had enough to do so:
  1. Improved cash flow. That surly helps with any worry over surprise expenses.
  2. Security/impendence. I don't like the idea of paying someone for the right to live in my house.
I make a distinction between paying off and paying down. Paying down does not improve cash flow by one penny. If I can't pay it off I would rather invest and grow my liquid worth to the point where I can pay it off.
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Re: "Nobody's ever regretted paying off the mortgage."

Post by Abe »

Triple digit golfer wrote: Wed Apr 14, 2021 11:49 am I'm asking why, in your opinion, is this advice to pay down the mortgage so prevalent in the personal finance industry?
Some people sleep better at night knowing they don't have to make a mortgage payment.
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Re: "Nobody's ever regretted paying off the mortgage."

Post by Tingting1013 »

I do not pay off my mortgage because that would be tying up too much of my net worth into my house.

If my $2M house ever becomes an insignificant part of my net worth, I would be happy to pay it off.
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Re: "Nobody's ever regretted paying off the mortgage."

Post by carminered2019 »

no mortgage allows me to take on more investment risks. I was able to build a NW of 130x my yearly expenses by the age of 51 with a W-2 average salary of 85k per year by not having a mortgage from age 31 until now and went aggressive in equities and NO BONDS.
Last edited by carminered2019 on Wed Apr 14, 2021 1:32 pm, edited 7 times in total.
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Re: "Nobody's ever regretted paying off the mortgage."

Post by Lee_WSP »

If mortgage rates were 6%, we'd be having a very different discussion. Low rates are a historical anomaly.
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Re: "Nobody's ever regretted paying off the mortgage."

Post by KlangFool »

OP,

Let me give you one more. Folks that pay off the low interest- rate mortgage and then take a more expensive student loan for their kids.

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Triple digit golfer
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Re: "Nobody's ever regretted paying off the mortgage."

Post by Triple digit golfer »

bertilak wrote: Wed Apr 14, 2021 12:21 pm
TheTimeLord wrote: Wed Apr 14, 2021 12:06 pm For people who view things from a cash-flow perspective paying off a mortgage greatly improves monthly cashflow substantially by eliminating what is for most people by far the largest line item in their monthly budget.
There were two overriding reasons for me paying off my mortgage, besides the fact that I had enough to do so:
  1. Improved cash flow. That surly helps with any worry over surprise expenses.
  2. Security/impendence. I don't like the idea of paying someone for the right to live in my house.
I make a distinction between paying off and paying down. Paying down does not improve cash flow by one penny. If I can't pay it off I would rather invest and grow my liquid worth to the point where I can pay it off.
Good points here that should not be missed if one is considering paying down/off debt or investing.

We have more than enough to pay it off, but would incur about $110k in long-term capital gains to do so.

Here's another idea, keep refinancing so it goes further and further out, then wait until retirement when I have a 0% LTCG rate and pay it off then!
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Re: "Nobody's ever regretted paying off the mortgage."

Post by Big Dog »

Tingting1013 wrote: Wed Apr 14, 2021 12:20 pm
Big Dog wrote: Wed Apr 14, 2021 12:09 pm
Triple digit golfer wrote: Wed Apr 14, 2021 11:49 am I see this argument a lot when people favor paying down their mortgage in place of taxable investing.

I also see the argument that you wouldn't take a mortgage on a paid off house to invest. At least, most people wouldn't. So why would you invest rather than pay down the mortgage? This, to me, is a much better argument than the first.

To be clear, I'm not talking about tax-advantaged accounts, only taxable investments.

Every so often, when I look at my mortgage balance, I get tempted to direct some new money there instead of to taxable investments. However, I know that I am seeing one side of the balance sheet, the mortgage liability, and taking for granted the larger opposite side, the assets I've built up in my taxable account. I know that I am likely to do much better investing, even at 80% stocks and 20% bonds, than the 2.99% that I'm paying on the mortgage. I think this is fairly basic and simple to understand.

Why, then, do so many very respected financial gurus, the most well known being Dave Ramsey, but also many others, advocate so hard for mortgage paydown before taxable investing? Is it simply to appeal to the masses because the masses would likely not be disciplined, so the mortgage paydown is forced savings, which is better than buying a boat and expensive vacations?

Ramsey's argument is basically the title of my post: Nobody's ever regretted paying off the mortgage. I doubt anybody's ever regretted investing tens of thousands of dollars in the S&P 500 and holding for 20 years, either.

I know most answers will be, "Don't listen to Ramsey for investing advice." That's not really what I'm asking. I know deep down that he knows investing will yield a higher rate than a 30 year mortgage. I'm asking why, in your opinion, is this advice to pay down the mortgage so prevalent in the personal finance industry?
bcos you are comparing apples and oranges. A mortgage 'return' should not be compared with stock returns, but with bonds.
I disagree. Of course a mortgage return can be compared to stock returns, it just can’t be compared 1:1. You need to discount the stock returns somewhat for risk.
Right, and the proper discount rate is a guaranteed bond rate.
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queso
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Re: "Nobody's ever regretted paying off the mortgage."

Post by queso »

I used to redirect additional money toward it just to make myself feel better ($1k/mo extra on the mortgage payment), but refinanced into a 15 year @ 2% last year. I stopped extra contributions completely now and everything is going into taxable. I don't mind holding 2% debt on a balance I could pay off if I were so inclined.
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Re: "Nobody's ever regretted paying off the mortgage."

Post by prd1982 »

Paying off your mortgage may not be the best financial decision, but it won’t be the worst investment decision you make.
Triple digit golfer
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Re: "Nobody's ever regretted paying off the mortgage."

Post by Triple digit golfer »

Tingting1013 wrote: Wed Apr 14, 2021 12:22 pm I do not pay off my mortgage because that would be tying up too much of my net worth into my house.

If my $2M house ever becomes an insignificant part of my net worth, I would be happy to pay it off.
This is a good point, too. How much is too much? Obviously subjective.

Right now our net worth is pushing $1.2 million:

$700k tax-advantaged retirement accounts
$360k taxable investments
$40k 529 plan
$75k home equity - this is only around 6% of our net worth

Mortgage balance is $302k.

Ramsey would be telling me I should have been putting the taxable investment money into the mortgage all along, but it is very clear that I have more money because I did not do that over the last 5 years.

I wonder what Ramsey would say now, considering that I have enough to pay it off but would incur $100k+ capital gains and around $20k in federal+state income taxes to do so.
runner3081
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Re: "Nobody's ever regretted paying off the mortgage."

Post by runner3081 »

I don't regret it one but, but it was NOWHERE near as exciting (or relieving) as people make it out to be!
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Re: "Nobody's ever regretted paying off the mortgage."

Post by Fat-Tailed Contagion »

I don't see many people consider the inflation factor in a fixed-rate mortgage.

Every year you are paying your fixed-rate mortgage with less valuable dollars.

At very low rates, it seems like a winning strategy to take out as much debt as possible for the longest possible term.
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MishkaWorries
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Re: "Nobody's ever regretted paying off the mortgage."

Post by MishkaWorries »

Triple digit golfer wrote: Wed Apr 14, 2021 12:34 pm
Tingting1013 wrote: Wed Apr 14, 2021 12:22 pm I do not pay off my mortgage because that would be tying up too much of my net worth into my house.

If my $2M house ever becomes an insignificant part of my net worth, I would be happy to pay it off.
This is a good point, too. How much is too much? Obviously subjective.

Right now our net worth is pushing $1.2 million:

$700k tax-advantaged retirement accounts
$360k taxable investments
$40k 529 plan
$75k home equity - this is only around 6% of our net worth

Mortgage balance is $302k.

Ramsey would be telling me I should have been putting the taxable investment money into the mortgage all along, but it is very clear that I have more money because I did not do that over the last 5 years.

I wonder what Ramsey would say now, considering that I have enough to pay it off but would incur $100k+ capital gains and around $20k in federal+state income taxes to do so.
Are you holding bonds? If you liquidated all your bond holdings in taxable and tax advantaged accounts, would you have enough to pay off the house?

Why hold something like total bond market with interest rate risk and paying dividends less than your mortgage?
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LittleMaggieMae
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Re: "Nobody's ever regretted paying off the mortgage."

Post by LittleMaggieMae »

I'm asking why, in your opinion, is this advice to pay down the mortgage so prevalent in the personal finance industry?
When I looked at Dave Ramsey and his target audience about 10 years ago, it was people who had more debt/monthly expenses than paycheck income. Often, the debt/monthly expenses were for "everyday things" - a house, cars, family life. Their Credit Cards make up for lack of income. This all works great until the minumum balance on the credit card becomes difficult to pay OR some sort of a "known but unprepared for" emergency happens.

I suspect that it takes more than 2 or 3 months to 'fix' ones financial missteps (it took me a year and then some to change the way I spend money in order to save more for retirement (I was in the 5% to 401K and no other savings category) and I wasn't paying off a big pile of debt (I had a manageable mortgage and car loan payment)... I was just trying to change my lifestyle so I wasn't frittering every penny in my take home pay.)

I suspect that if someone IS paying down consumer debt, doing the 'snowball' method, and taking a few years to accomplish it... that seeing that large snowball amount when they are done and then looking at the remaining balance on their Mortgage (maybe they are 10 or 15 or 20 or 25 years into the mortgage) it looks like not a bad plan to take another 12 or 24 months to finish off the mortgage.

That's the thing - I don't anyone suggests aggressively pre paying a newly minted mortgage over the course of 10 or 15 years. That's 10 or 15 or more years where you miss out on the returns the "pre payments" might have gotten for those years. I can see someone in the final 10 or 5 years of mortgage feeling like paying it off would be a "good thing" especially if they could accomplish this in a year or two or three.

I think THAT's why the whole "pay off the mortgage" thing is so prevalent - it's NOT for just taken out mortgages - it's about mortgages nearing the end of their terms. And in DR's case - the person following his plan probably has a substantial "snowball" amount that was being applied to debt AND an existing mortgage that they are possibly 10 or more years into. If they are 20 years into the mortgage why not throw the extra $500 or $1K (their snowball amount) towards the mortgage and knock it out in 12 or 24 or 36 months? I suspect DR's target audience is a median or a bit above median income family... they aren't going to have $5K extra per month to throw at their mortgage when they finish their Consumer Debt pay off plan and have their monthly expenses under control (aka a budget/spending plan). They also probably didn't have a 500K or higher mortgage.
Last edited by LittleMaggieMae on Wed Apr 14, 2021 12:48 pm, edited 1 time in total.
Triple digit golfer
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Re: "Nobody's ever regretted paying off the mortgage."

Post by Triple digit golfer »

MishkaWorries wrote: Wed Apr 14, 2021 12:44 pm
Triple digit golfer wrote: Wed Apr 14, 2021 12:34 pm
Tingting1013 wrote: Wed Apr 14, 2021 12:22 pm I do not pay off my mortgage because that would be tying up too much of my net worth into my house.

If my $2M house ever becomes an insignificant part of my net worth, I would be happy to pay it off.
This is a good point, too. How much is too much? Obviously subjective.

Right now our net worth is pushing $1.2 million:

$700k tax-advantaged retirement accounts
$360k taxable investments
$40k 529 plan
$75k home equity - this is only around 6% of our net worth

Mortgage balance is $302k.

Ramsey would be telling me I should have been putting the taxable investment money into the mortgage all along, but it is very clear that I have more money because I did not do that over the last 5 years.

I wonder what Ramsey would say now, considering that I have enough to pay it off but would incur $100k+ capital gains and around $20k in federal+state income taxes to do so.
Are you holding bonds? If you liquidated all your bond holdings in taxable and tax advantaged accounts, would you have enough to pay off the house?

Why hold something like total bond market with interest rate risk and paying dividends less than your mortgage?
I am holding bonds. If I liquidated all bonds I would still have around $90-100k in mortgage debt.

I hold bonds as a stock diversifier. We're a single income household and my job is just average stability. Private sector, PE-owned company. I could be employed for the next 20 years or I could be jobless tomorrow. So, the idea of holding bonds is if the market crashes 50% and I lose my job, I have a lot of bonds to spend before I'm back balanced at 80/20. Or, I can rebalance to 80/20 and am not selling anything at a large loss.

Maybe not logical, but it helps me sleep at night.
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Re: "Nobody's ever regretted paying off the mortgage."

Post by ensign »

Triple digit golfer wrote: Wed Apr 14, 2021 11:49 am I see this argument a lot when people favor paying down their mortgage in place of taxable investing.

I know that I am likely to do much better investing, even at 80% stocks and 20% bonds, than the 2.99% that I'm paying on the mortgage. I think this is fairly basic and simple to understand.
Will you feel the same way if we have a 10-year bear market?
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Re: "Nobody's ever regretted paying off the mortgage."

Post by muffins14 »

Let me know when the 10-year bear market is going to begin. Until you let me know the precise dates, I'll use the expectation values of returns
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Wrench
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Re: "Nobody's ever regretted paying off the mortgage."

Post by Wrench »

Triple digit golfer wrote: Wed Apr 14, 2021 12:34 pm
Tingting1013 wrote: Wed Apr 14, 2021 12:22 pm I do not pay off my mortgage because that would be tying up too much of my net worth into my house.

If my $2M house ever becomes an insignificant part of my net worth, I would be happy to pay it off.
This is a good point, too. How much is too much? Obviously subjective.

Right now our net worth is pushing $1.2 million:

$700k tax-advantaged retirement accounts
$360k taxable investments
$40k 529 plan
$75k home equity - this is only around 6% of our net worth

Mortgage balance is $302k.

Ramsey would be telling me I should have been putting the taxable investment money into the mortgage all along, but it is very clear that I have more money because I did not do that over the last 5 years.

I wonder what Ramsey would say now, considering that I have enough to pay it off but would incur $100k+ capital gains and around $20k in federal+state income taxes to do so.
Seems to me there is a big difference depending on your age and/or whether you are retired or close to it. In the accumulation phase of your life, you can take more risk because you have income that will cover you. So a mortgage may be fine. In the de-accumulation (distribution) phase of your life, not having a mortgage allows you to lower your expenses and therefore your withdrawal rate. So, among other things, it decreases sequence of return risk. Of course, if you are more risk tolerant having a mortgage in retirement may be fine for you. I suspect not for most.

For me? I always said I would keep my mortgage because it was one of the few tax breaks that I got because mortgage interest was deductible. When that rule changed for me b/c standard deduction was more advantageous, I paid it off. I must say, I don't regret it - it makes a huge difference in cash flow.

Wrench
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Re: "Nobody's ever regretted paying off the mortgage."

Post by hoofaman »

Why would you hold bonds while also having a mortgage?
Triple digit golfer
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Re: "Nobody's ever regretted paying off the mortgage."

Post by Triple digit golfer »

ensign wrote: Wed Apr 14, 2021 12:51 pm
Triple digit golfer wrote: Wed Apr 14, 2021 11:49 am I see this argument a lot when people favor paying down their mortgage in place of taxable investing.

I know that I am likely to do much better investing, even at 80% stocks and 20% bonds, than the 2.99% that I'm paying on the mortgage. I think this is fairly basic and simple to understand.
Will you feel the same way if we have a 10-year bear market?
Hard to say. Humans are emotional creatures and none of us are immune. I very likely would be thinking that the market has been down but always pops back up. After 10 years, some faith in that may be lost. Hard to say.

Doing something completely arbitrary with extra money like half to taxable investments and half to mortgage seems prudent here, or some other percentage like 2/3 and 1/3 like a poster up above. I would say that this is especially true at market highs, but that would be market timing. Besides, the market is usually at market highs, and if it wasn't it wouldn't be a very good investment.

Another thing I could do is put all new "bond" money to the mortgage and keep my current bonds at the level they're currently at. Ultimately, if I keep my portfolio at 80/20 and then starting paying down the mortgage, I've got less going into stocks, which seems like maybe not the best thing. The idea is to keep risk steady. Maybe I compute what my mortgage balance is and what it would have been without additional paydown and count that difference as "bond" money.

Just thinking out loud. The latter seems to be the prudent decision. Equate the mortgage paydown with bonds because if I treat it as a completely separate thing, then I'm less stock-heavy than I would have been otherwise.
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Re: "Nobody's ever regretted paying off the mortgage."

Post by carminered2019 »

hoofaman wrote: Wed Apr 14, 2021 12:57 pm Why would you hold bonds while also having a mortgage?
+1, I don't get this logic either ?
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Re: "Nobody's ever regretted paying off the mortgage."

Post by ShaftoesSpreadsheet »

We took on a sizable mortgage in 2007 at 6% for our 'forever home'. During the great recession we were underwater on the house for a few years. That was super stressful.

Anybody who bought after ~2011 as a first time buyer has had an easy time of it. The last decade has been a golden decade for homes, rates dropping, prices appreciating steadily.

Here is what motivated me:

* The amount I was paying to the bank each year in INTEREST as a percent of my income was ~20% of my gross. To me that seemed nuts in terms of a financial drag coefficient.

* The stock market tanked badly during the great recession. Paying down / off my mortgage was a guaranteed return of 6%! That is hard to come by.

* No mortgage = sleep better at night.

* No mortgage = great cash flow.

* No mortgage = career flexibility, don't have to take the soul sucking corporate job that pays the most.

Mortgage = leverage, which cuts both ways.
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Re: "Nobody's ever regretted paying off the mortgage."

Post by sport »

carminered2019 wrote: Wed Apr 14, 2021 12:58 pm
hoofaman wrote: Wed Apr 14, 2021 12:57 pm Why would you hold bonds while also having a mortgage?
+1, I don't get this logic either ?
It all depends on interest rates. There was a time in the 1970's where my mortgage was 6.75% and my money market fund was yielding 18%, and CDs were about 16%. It would have been very foolish to pay it off early.
carminered2019
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Re: "Nobody's ever regretted paying off the mortgage."

Post by carminered2019 »

sport wrote: Wed Apr 14, 2021 1:03 pm
carminered2019 wrote: Wed Apr 14, 2021 12:58 pm
hoofaman wrote: Wed Apr 14, 2021 12:57 pm Why would you hold bonds while also having a mortgage?
+1, I don't get this logic either ?
It all depends on interest rates. There was a time in the 1970's where my mortgage was 6.75% and my money market fund was yielding 18%, and CDs were about 16%. It would have been very foolish to pay it off early.
it's better then 100% equities, no bonds with no mortgage ?
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Re: "Nobody's ever regretted paying off the mortgage."

Post by MishkaWorries »

Triple digit golfer wrote: Wed Apr 14, 2021 12:48 pm
MishkaWorries wrote: Wed Apr 14, 2021 12:44 pm
Triple digit golfer wrote: Wed Apr 14, 2021 12:34 pm
Tingting1013 wrote: Wed Apr 14, 2021 12:22 pm I do not pay off my mortgage because that would be tying up too much of my net worth into my house.

If my $2M house ever becomes an insignificant part of my net worth, I would be happy to pay it off.
This is a good point, too. How much is too much? Obviously subjective.

Right now our net worth is pushing $1.2 million:

$700k tax-advantaged retirement accounts
$360k taxable investments
$40k 529 plan
$75k home equity - this is only around 6% of our net worth

Mortgage balance is $302k.

Ramsey would be telling me I should have been putting the taxable investment money into the mortgage all along, but it is very clear that I have more money because I did not do that over the last 5 years.

I wonder what Ramsey would say now, considering that I have enough to pay it off but would incur $100k+ capital gains and around $20k in federal+state income taxes to do so.
Are you holding bonds? If you liquidated all your bond holdings in taxable and tax advantaged accounts, would you have enough to pay off the house?

Why hold something like total bond market with interest rate risk and paying dividends less than your mortgage?
I am holding bonds. If I liquidated all bonds I would still have around $90-100k in mortgage debt.

I hold bonds as a stock diversifier. We're a single income household and my job is just average stability. Private sector, PE-owned company. I could be employed for the next 20 years or I could be jobless tomorrow. So, the idea of holding bonds is if the market crashes 50% and I lose my job, I have a lot of bonds to spend before I'm back balanced at 80/20. Or, I can rebalance to 80/20 and am not selling anything at a large loss.

Maybe not logical, but it helps me sleep at night.
Under those circumstances I wouldn't pay it off either. Sleeping well at night is much more important than maximizing every investment decision.
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Ramjet
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Re: "Nobody's ever regretted paying off the mortgage."

Post by Ramjet »

KlangFool wrote: Wed Apr 14, 2021 12:26 pm OP,

Let me give you one more. Folks that pay off the low interest- rate mortgage and then take a more expensive student loan for their kids.

KlangFool
This is a great one
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JoeRetire
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Re: "Nobody's ever regretted paying off the mortgage."

Post by JoeRetire »

Triple digit golfer wrote: Wed Apr 14, 2021 11:49 amSo why would you invest rather than pay down the mortgage?
Because you expect a better return on your money. Or because you prefer to keep your capital liquid.
I'm asking why, in your opinion, is this advice to pay down the mortgage so prevalent in the personal finance industry?
It's simplistic and emotionally appealing. People like simplistic. It's easier for personal finance industry workers/writers to give people simplistic guidance, rather than explain more difficult concepts.
Last edited by JoeRetire on Wed Apr 14, 2021 1:19 pm, edited 3 times in total.
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Re: "Nobody's ever regretted paying off the mortgage."

Post by HootingSloth »

I made my first mortgage prepayment this month.

I have viewed things in terms of reaching a few different goals simultaneously and pushing on whichever one gives the greatest marginal benefit for my next dollars: (i) having enough in retirement; (ii) having enough liquidity to meet all my current objectives (including things like being prepared for extended unemployment); and (iii) paying off the mortgage. These goals, more or less, have corresponded to my desire to: (i) acquire more stocks; (ii) acquire more bonds (and cash); and (iii) make mortgage prepayments. Once goal (i) seemed to be about halfway there with 20+ years to go (if needed), I started on a slow and automated portfolio-size-based glidepath towards a more conservative asset allocation. In a growing market, that has meant buying a bunch of bonds lately. That naturally led to problem (ii) being solved.

Liquidity concerns aside, mortgage prepayments look more advantageous than more bonds at the moment. So, with the liquidity goal now achieved, when my automatic glidepath tells me to buy more fixed income, I use the money as it comes in to make a mortgage prepayment. I updated my spreadsheet to keep a running tally of a "prepaid mortgage" asset (calculated as prepayments plus avoided interest) that counts towards fixed income in my asset allocation.

If the market falls enough, the spreadsheet will tell me to start buying more stocks instead (or a combination of both stocks and mortgage prepayments). Or, if I have some need for more liquidity, I may start buying more bonds (or holding more cash) instead of making mortgage prepayments. But, for now, the mortgage is the goal that is winning out.

This approach lets me make a small number of big picture decisions (what do I want in retirement? how much liquidity do I want?) and then let the market and my asset allocation spreadsheet make all of the day-to-day decisions for me. It also helps to mostly avoid all-or-nothing thinking by making decisions on the margin. The decision to make mortgage prepayments might feel hard or confusing because you should start doing it when you feel roughly indifferent between making the prepayments and using the money to do other things.
Last edited by HootingSloth on Wed Apr 14, 2021 1:15 pm, edited 1 time in total.
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