mortgage length

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settlement12
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mortgage length

Post by settlement12 »

Hi all,

I used to always avoid housing as a place to put my money and did well out of ETFs for years. I'm now at the stage where I want to own my own place but am realising I don't know much about mortgages.

Intuitively, I know that paying off a mortgage in the shortest possible time seems like the best deal in the long run and being young and a relatively high earner with no other loans and no children etc this is tempting.

However, I'm also aware that some people say that due to inflation etc (I know that we can't really predict this) that it's a really good deal to deliberately pay the mortgage back over a very long time. It also means lower monthly repayments which has a lifestyle benefit, eg if I want to take time off.

Does anybody have any ideas about this or even just recommended reading?
pizzy
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Re: mortgage length

Post by pizzy »

settlement12 wrote: Mon Oct 18, 2021 5:29 pm Hi all,

I used to always avoid housing as a place to put my money and did well out of ETFs for years. I'm now at the stage where I want to own my own place but am realising I don't know much about mortgages.

Intuitively, I know that paying off a mortgage in the shortest possible time seems like the best deal in the long run and being young and a relatively high earner with no other loans and no children etc this is tempting.

However, I'm also aware that some people say that due to inflation etc (I know that we can't really predict this) that it's a really good deal to deliberately pay the mortgage back over a very long time. It also means lower monthly repayments which has a lifestyle benefit, eg if I want to take time off.

Does anybody have any ideas about this or even just recommended reading?
All the reading you do will come down to this:

Mathematically: long mortgage and invest

Emotionally: pay off mortgage
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willthrill81
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Re: mortgage length

Post by willthrill81 »

Paying your mortgage in a shorter time makes good sense if you would have otherwise used those funds to buy bonds paying a lower yield than your mortgage rate, assuming you have enough liquid funds (e.g., pay off/down a 2.75% mortgage rather than buy 1.4% bonds).

Paying your mortgage over a longer time makes good sense if you would rather buy stocks and can tolerate their volatility.
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docL
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Re: mortgage length

Post by docL »

Personally my wife and I could afford to pay off our mortgage, but choose not to. There are several benefits to having a mortgage at a relatively low interest rate. As you note, it is somewhat of a hedge against inflation as your payments are fixed in dollars for the life of it, even if inflation makes those dollars worth less. It also has favorable tax treatment which makes it a very cheap source of leverage to your retirement portfolio, and with a fixed rate mortgage it will never increase in rate but you may occasionally have the chance to lower that rate through refinancing. Lastly, if you take excess money that would go to your mortgage and instead invest it, you are moving from paying off simple interest to instead letting it grow as compound interest over time (so an investment with a lower interest rate can outperform a mortgage payment with a higher interest rate over a long enough time frame).
Last edited by docL on Mon Oct 18, 2021 5:52 pm, edited 1 time in total.
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Re: mortgage length

Post by willthrill81 »

When posters say "invest," they need to clarify what they mean.

For instance, it's very likely that paying down/off a 3% mortgage will provide a better return than buying bonds with a 1.4% starting yield, especially after taxes.
Last edited by willthrill81 on Mon Oct 18, 2021 8:00 pm, edited 1 time in total.
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Re: mortgage length

Post by docL »

willthrill81 wrote: Mon Oct 18, 2021 5:48 pm When say "invest," they need to clarify what they mean.

For instance, it's very likely that paying down/off a 3% mortgage will provide a better return than buying bonds with a 1.4% starting yield, especially after taxes.
The mortgage interest is tax deductible, so the exact cost depends on your marginal tax rate. And the compounding nature of even a bond investment can lead it to outperform a higher simple interest rate paid on a mortgage over a 30 year time frame. Gotta do the math on actual numbers with actual tax consequences to see what works for you.
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Re: mortgage length

Post by willthrill81 »

docL wrote: Mon Oct 18, 2021 5:55 pm
willthrill81 wrote: Mon Oct 18, 2021 5:48 pm When say "invest," they need to clarify what they mean.

For instance, it's very likely that paying down/off a 3% mortgage will provide a better return than buying bonds with a 1.4% starting yield, especially after taxes.
The mortgage interest is tax deductible, so the exact cost depends on your marginal tax rate. And the compounding nature of even a bond investment can lead it to outperform a higher simple interest rate paid on a mortgage over a 30 year time frame. Gotta do the math on actual numbers with actual tax consequences to see what works for you.
Few taxpayers are itemizing deductions anymore, only around 11% I believe.

Compounding doesn't overcome a lower yield.
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Re: mortgage length

Post by Nate79 »

docL wrote: Mon Oct 18, 2021 5:55 pm
willthrill81 wrote: Mon Oct 18, 2021 5:48 pm When say "invest," they need to clarify what they mean.

For instance, it's very likely that paying down/off a 3% mortgage will provide a better return than buying bonds with a 1.4% starting yield, especially after taxes.
The mortgage interest is tax deductible, so the exact cost depends on your marginal tax rate. And the compounding nature of even a bond investment can lead it to outperform a higher simple interest rate paid on a mortgage over a 30 year time frame. Gotta do the math on actual numbers with actual tax consequences to see what works for you.
Mortgage interest is not tax deductible to a vast majority of people and even then above the standard deduction the value is low to almost everyone. The return of paying off a mortgage is an after tax rate of the interest rate of the mortgage itself and should be compared to the interest rate after their tax rate of the bond fund itself. There is no magic compounding of a bond fund vs the mortgage interest rate.

These concepts have been discussed many times on here so a search could find many threads that walk thru the math. Members like David Gabiner have walked thru the details previously.
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Re: mortgage length

Post by Nate79 »

settlement12 wrote: Mon Oct 18, 2021 5:29 pm Hi all,

I used to always avoid housing as a place to put my money and did well out of ETFs for years. I'm now at the stage where I want to own my own place but am realising I don't know much about mortgages.

Intuitively, I know that paying off a mortgage in the shortest possible time seems like the best deal in the long run and being young and a relatively high earner with no other loans and no children etc this is tempting.

However, I'm also aware that some people say that due to inflation etc (I know that we can't really predict this) that it's a really good deal to deliberately pay the mortgage back over a very long time. It also means lower monthly repayments which has a lifestyle benefit, eg if I want to take time off.

Does anybody have any ideas about this or even just recommended reading?
Mortgage payments are fixed for the duration of the mortgage. The impact of inflation on your mortgage repayment is if you make more money (ie your income) increases with inflation and you just have more money to pay it back. I prefer 15 year fixed mortgages to get it paid off in a reasonable time (before retirement at least) and a low interest rate.
BogleFan510
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Re: mortgage length

Post by BogleFan510 »

Realize that there is no certain answer to this question, largely because all of the useful advice is assumption based. Many folks treat expected returns (e.g. stocks are expected to return more than bonds or your mortgage rate) as certaink but the truth is that they are based on past data. They are good inputs to model expected results, but not risk free. These assumptions are not certain. Inflation may or may not occur.

Please keep this in mind. Realize that a long mortgage to invest more is leveraged stock investing. It is not a bad strategy, but one should be comfortable with the fact that one possible outcome is that they do not gain any money from investments, but in fact lose money, and still pay interest on the loan. When I see people post that leveraged investing is mathematically better and paying off a mortgage is emotional, I cringe because it shows a lack of respect for the true risk stocks represent.
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Re: mortgage length

Post by dukeblue219 »

Paying off the mortgage early is a "sure thing" with low risk and low reward. Dragging it out adds risk that something will go wrong but probably increases your wealth at the end of your life.

Neither is right or wrong, but one may fit your life circumstances better than another.

I started with the former but moved to the latter as rates plummeted from the 4s to the 2s.
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Re: mortgage length

Post by MrJedi »

I prefer to hold the mortgage for increased liquidity.

Once my mortgage debt drops to about 10% of my liquid assets, I will start to pay down the mortgage even if the numbers suggest holding the loan to be better. Once it is less than 10%, it is likely not enough to matter anymore and I will work toward simplicity.
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Re: mortgage length

Post by grabiner »

docL wrote: Mon Oct 18, 2021 5:55 pm
willthrill81 wrote: Mon Oct 18, 2021 5:48 pm When say "invest," they need to clarify what they mean.

For instance, it's very likely that paying down/off a 3% mortgage will provide a better return than buying bonds with a 1.4% starting yield, especially after taxes.
The mortgage interest is tax deductible, so the exact cost depends on your marginal tax rate. And the compounding nature of even a bond investment can lead it to outperform a higher simple interest rate paid on a mortgage over a 30 year time frame. Gotta do the math on actual numbers with actual tax consequences to see what works for you.
Compounding works the same way for both bonds and a mortgage. If you buy a $10,000 bond yielding 3%, you will have $10,300 next year, and $10,609 one year later. If you pay down $10,000 on your 3% mortgage, your balance will be $10,300 less next year, and $10,609 less in two years because you pay $309 less interest when the balance is $10,300 lower. (Both numbers are approximate, since bond yields are computed based on six-month coupons, and mortgage payments are computed monthly.)

Thus selling a 10-year bond with a 3% after-tax yield to pay down a mortgage with 10 years left at a 3% after-tax rate is break-even. If the after-tax mortgage rate is higher than the yield on bonds of the same duration, selling bonds to pay down your mortgage gives a return equal to the difference, with no extra risk. This doesn't mean that you should always do it, but that the benefit should be weighed against the cost, particularly a loss of liquidity.

Also, make sure that you are computing after-tax yields correctly. Mortgage interest is only tax deductible if you itemize deductions, which requires either a large mortgage or a lot of charity. Bond yields are always taxable, unless you use munis with their lower yields.
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Re: mortgage length

Post by invest4 »

I'm also an advocate for the 30 year mortgage.

* historically low rates

* Inflation hedge

* provides me with options
BogleFan510 wrote: Mon Oct 18, 2021 6:15 pm Please keep this in mind. Realize that a long mortgage to invest more is leveraged stock investing. It is not a bad strategy, but one should be comfortable with the fact that one possible outcome is that they do not gain any money from investments, but in fact lose money, and still pay interest on the loan. When I see people post that leveraged investing is mathematically better and paying off a mortgage is emotional, I cringe because it shows a lack of respect for the true risk stocks represent.
I remember the "lost decade" (2000-2009). Returns for the S&P 500 during this period were -0.95%. For someone solidly in their accumulation phase, I'm not sure a sideways or down market is the worst thing to happen? No one knows the future, but appreciate the benefits and options my 30 year mortgage @2.625% offers me.
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Re: mortgage length

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upstate90
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Re: mortgage length

Post by upstate90 »

I was struggling with this question for about a year. I bought my home in 2018, refinanced in early 2020. I have no other debt and decided to pay down my mortgage with the big caveat that I keep 2 years worth of expenses as an emergency fund and put in 8% to my 401k to get my company match of 7%. Everything else gets thrown at the mortgage. I currently have about 50% equity in my home and expect to pay it off in 2-3 years when I would be 33-34 years old. Mathematically speaking this is probably a mistake, but the reason I decided to do it was that without any debt I could have greatly increased cashflow, less stress, and could live on much less income if it became necessary. If you decide to aggressively pay down a mortgage I would recommend keeping a larger emergency fund than the standard 3-6 months recommended.
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Re: mortgage length

Post by ApeAttack »

invest4 wrote: Mon Oct 18, 2021 8:51 pm I'm also an advocate for the 30 year mortgage.

* historically low rates

* Inflation hedge

* provides me with options
BogleFan510 wrote: Mon Oct 18, 2021 6:15 pm Please keep this in mind. Realize that a long mortgage to invest more is leveraged stock investing. It is not a bad strategy, but one should be comfortable with the fact that one possible outcome is that they do not gain any money from investments, but in fact lose money, and still pay interest on the loan. When I see people post that leveraged investing is mathematically better and paying off a mortgage is emotional, I cringe because it shows a lack of respect for the true risk stocks represent.
I remember the "lost decade" (2000-2009). Returns for the S&P 500 during this period were -0.95%. For someone solidly in their accumulation phase, I'm not sure a sideways or down market is the worst thing to happen? No one knows the future, but appreciate the benefits and options my 30 year mortgage @2.625% offers me.
That's if you lump summed in 2000?
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Re: mortgage length

Post by ApeAttack »

willthrill81 wrote: Mon Oct 18, 2021 5:59 pm
docL wrote: Mon Oct 18, 2021 5:55 pm
willthrill81 wrote: Mon Oct 18, 2021 5:48 pm When say "invest," they need to clarify what they mean.

For instance, it's very likely that paying down/off a 3% mortgage will provide a better return than buying bonds with a 1.4% starting yield, especially after taxes.
The mortgage interest is tax deductible, so the exact cost depends on your marginal tax rate. And the compounding nature of even a bond investment can lead it to outperform a higher simple interest rate paid on a mortgage over a 30 year time frame. Gotta do the math on actual numbers with actual tax consequences to see what works for you.
Few taxpayers are itemizing deductions anymore, only around 11% I believe.

Compounding doesn't overcome a lower yield.
Tax codes can change over 30 years.
May all your index funds gain +0.5% today.
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Re: mortgage length

Post by JoeRetire »

settlement12 wrote: Mon Oct 18, 2021 5:29 pm Intuitively, I know that paying off a mortgage in the shortest possible time seems like the best deal in the long run and being young and a relatively high earner with no other loans and no children etc this is tempting.

However, I'm also aware that some people say that due to inflation etc (I know that we can't really predict this) that it's a really good deal to deliberately pay the mortgage back over a very long time. It also means lower monthly repayments which has a lifestyle benefit, eg if I want to take time off.

Does anybody have any ideas about this
Read through this forum. You'll find that the subject comes up every few days with folks on both sides chiming in with their ideas, feelings and justifications.

If you are looking for a definitive choice between the two thoughts, you have come to the wrong place. You must look within.
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Re: mortgage length

Post by docL »

grabiner wrote: Mon Oct 18, 2021 8:36 pm

Compounding works the same way for both bonds and a mortgage. If you buy a $10,000 bond yielding 3%, you will have $10,300 next year, and $10,609 one year later. If you pay down $10,000 on your 3% mortgage, your balance will be $10,300 less next year, and $10,609 less in two years because you pay $309 less interest when the balance is $10,300 lower. (Both numbers are approximate, since bond yields are computed based on six-month coupons, and mortgage payments are computed monthly.)
If you have a 30 year mortgage for $100,000 at fixed 3% interest rate, over the course of that 30 years you will pay approximately $51,000 in interest. The first year you pay a little under $3000 in interest and by the last few years it is down to a few hundred in interest per year as your principal is quite low.

If you instead invested $100,000 at an annual return of 3%, over the course of 30 years you would collect approximately $140,000 in interest. You would collect $3000 interest the first year and then ever increasing amounts every year after to about $7000 per year at the end of 30 years.



(never mind the fact that few people invest in bonds for money they won't need for 30+ years)
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Re: mortgage length

Post by willthrill81 »

ApeAttack wrote: Tue Oct 19, 2021 12:56 am
willthrill81 wrote: Mon Oct 18, 2021 5:59 pm
docL wrote: Mon Oct 18, 2021 5:55 pm
willthrill81 wrote: Mon Oct 18, 2021 5:48 pm When say "invest," they need to clarify what they mean.

For instance, it's very likely that paying down/off a 3% mortgage will provide a better return than buying bonds with a 1.4% starting yield, especially after taxes.
The mortgage interest is tax deductible, so the exact cost depends on your marginal tax rate. And the compounding nature of even a bond investment can lead it to outperform a higher simple interest rate paid on a mortgage over a 30 year time frame. Gotta do the math on actual numbers with actual tax consequences to see what works for you.
Few taxpayers are itemizing deductions anymore, only around 11% I believe.

Compounding doesn't overcome a lower yield.
Tax codes can change over 30 years.
The tax law certainly will change, but we cannot predict what those changes will be.
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Re: mortgage length

Post by BogleFan510 »

invest4 wrote: Mon Oct 18, 2021 8:51 pm I'm also an advocate for the 30 year mortgage.

* historically low rates

* Inflation hedge

* provides me with options
BogleFan510 wrote: Mon Oct 18, 2021 6:15 pm Please keep this in mind. Realize that a long mortgage to invest more is leveraged stock investing. It is not a bad strategy, but one should be comfortable with the fact that one possible outcome is that they do not gain any money from investments, but in fact lose money, and still pay interest on the loan. When I see people post that leveraged investing is mathematically better and paying off a mortgage is emotional, I cringe because it shows a lack of respect for the true risk stocks represent.
I remember the "lost decade" (2000-2009). Returns for the S&P 500 during this period were -0.95%. For someone solidly in their accumulation phase, I'm not sure a sideways or down market is the worst thing to happen? No one knows the future, but appreciate the benefits and options my 30 year mortgage @2.625% offers me.
Agreed, but knowledge is power.

True story. In Japan it was agreed that real estate could only go up, stocks can only go up. I was living there in 1989 and as part of my package I received private tutoring in Japanese. My Japanese teacher was a successful small businessman (owned his own language school). At the time banks offered 100 year loans that passed on to your children, because property was so expensive. Rates were super low, 2-3%, but your assets were pledged, including income. Japanese inflation and bonds had very low nominal rates. But my teacher had a great business going so he bought a $1M building for his home and english/Japanese school in an up and coming neighborhood.

1990s swoon hit and his 1M building became worth 500k, his stock investments dropped, and his business income contracted significantly. Stocks values would not recover value for another 20- 30 years (we are still Facebook friends and Ive followed his life).

Think he wishes he had sold his stocks and borrowed less money?

He is fine, but stock SOR risk set him back a lot vs a more sure return via less leverage.
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Re: mortgage length

Post by KlangFool »

OP,

In my honest opinion, that is the WRONG question.

If a person buys too much house, the person is in trouble. The length of the mortgage would not matter.

If a person buys affordable house, the person is fine. The length of the mortgage would not matter.

So, the price of the house matters. Made that WRONG decision, the rest would not matter.

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Re: mortgage length

Post by willthrill81 »

KlangFool wrote: Tue Oct 19, 2021 10:58 am OP,

In my honest opinion, that is the WRONG question.

If a person buys too much house, the person is in trouble. The length of the mortgage would not matter.

If a person buys affordable house, the person is fine. The length of the mortgage would not matter.

So, the price of the house matters. Made that WRONG decision, the rest would not matter.

KlangFool
I agree that the price of one's home is of greater importance than the length of one's mortgage, but that doesn't mean that the length of one's mortgage does not matter.
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Re: mortgage length

Post by KlangFool »

willthrill81 wrote: Tue Oct 19, 2021 10:59 am
KlangFool wrote: Tue Oct 19, 2021 10:58 am OP,

In my honest opinion, that is the WRONG question.

If a person buys too much house, the person is in trouble. The length of the mortgage would not matter.

If a person buys affordable house, the person is fine. The length of the mortgage would not matter.

So, the price of the house matters. Made that WRONG decision, the rest would not matter.

KlangFool
I agree that the price of one's home is of greater importance than the length of one's mortgage, but that doesn't mean that the length of one's mortgage does not matter.
It is an order of magnitude difference in term of importance.

KlangFool
Last edited by KlangFool on Tue Oct 19, 2021 11:48 am, edited 1 time in total.
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Re: mortgage length

Post by LittleMaggieMae »

I will differ slightly on the basic pay off/pay long term theme:

Some things to consider:
You need a place to live.
Even a Paid off House is an expense: you have property taxes and insurance and upkeep.

The only thing that goes away when you pay off your house, is the Principal and Interest part of your loan.

Yes, your house may appreciate in value - but it might not (if housing prices drop OR if you neglect your house - you don't need to keep up with every decorating trend - you need to keep the "systems" in the house in good working order so that the "bones" of the house remain in good working condition.)

To access the "money" in your paid off house - you usually have to sell the house (which costs money to do - and then you have to find a new place to live) or use the equity via another loan (HEL or HELOC or new Mortgage) which could be at a higher interest rate than your original mortgage.

All that said - here's my variation on the theme: Consider how the cost of the house (aka the down payment and mortgage payment) fits into your spending plan AND your long term goals - you want your mortgage (PITI) to fit comfortably into your spending plan AND long term goals. You want as low an interest rate as you can get - as long as the COST of getting that interest rate fits comfortable into your spending plan and long term goals.
You want the term of the mortgage (15,20,30) to also fit comfortable into your spending plan and long term goals. You need to look at how the house fits into your LONG TERM goals - not just how it fits today (or for the next year).

In other words - you don't want you mortgage to keep you from being able to save/invest as much as possible for your future goals/plans. It doesn't matter if you get the biggest mortgage with the lowest possible rate if after paying the monthly mortgage and all your other bills - you have little left over to save/invest.

That's the balance point - your house/lifestyle (and mortgage) should be balanced against being able to save/invest for your future. Taking a mortgage that lets you save/invest big over 15 or 20 or 30 years - lets you build wealth AND have a consistent, stable place to live!! WIN!

Your mortgage payment may also take up less of your take home pay as the years pass - it keeps your 'fixed' expenses stable and maybe low - thus giving you more discretionary money for saving or spending (or allowing a SAHP or some other plan). This seems to be ultimate goodness of "owning a home" that's not "too much house" long term- especially if you do it with a mortgage.
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Re: mortgage length

Post by bhough »

15 year mortgage, don't pay it off early.
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Re: mortgage length

Post by ApeAttack »

willthrill81 wrote: Tue Oct 19, 2021 10:07 am
ApeAttack wrote: Tue Oct 19, 2021 12:56 am
willthrill81 wrote: Mon Oct 18, 2021 5:59 pm
docL wrote: Mon Oct 18, 2021 5:55 pm
willthrill81 wrote: Mon Oct 18, 2021 5:48 pm When say "invest," they need to clarify what they mean.

For instance, it's very likely that paying down/off a 3% mortgage will provide a better return than buying bonds with a 1.4% starting yield, especially after taxes.
The mortgage interest is tax deductible, so the exact cost depends on your marginal tax rate. And the compounding nature of even a bond investment can lead it to outperform a higher simple interest rate paid on a mortgage over a 30 year time frame. Gotta do the math on actual numbers with actual tax consequences to see what works for you.
Few taxpayers are itemizing deductions anymore, only around 11% I believe.

Compounding doesn't overcome a lower yield.
Tax codes can change over 30 years.
The tax law certainly will change, but we cannot predict what those changes will be.
I wonder how many people consider tax code risk into their analysis.
May all your index funds gain +0.5% today.
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Re: mortgage length

Post by nolesrule »

docL wrote: Tue Oct 19, 2021 9:52 am
grabiner wrote: Mon Oct 18, 2021 8:36 pm

Compounding works the same way for both bonds and a mortgage. If you buy a $10,000 bond yielding 3%, you will have $10,300 next year, and $10,609 one year later. If you pay down $10,000 on your 3% mortgage, your balance will be $10,300 less next year, and $10,609 less in two years because you pay $309 less interest when the balance is $10,300 lower. (Both numbers are approximate, since bond yields are computed based on six-month coupons, and mortgage payments are computed monthly.)
If you have a 30 year mortgage for $100,000 at fixed 3% interest rate, over the course of that 30 years you will pay approximately $51,000 in interest. The first year you pay a little under $3000 in interest and by the last few years it is down to a few hundred in interest per year as your principal is quite low.

If you instead invested $100,000 at an annual return of 3%, over the course of 30 years you would collect approximately $140,000 in interest. You would collect $3000 interest the first year and then ever increasing amounts every year after to about $7000 per year at the end of 30 years.



(never mind the fact that few people invest in bonds for money they won't need for 30+ years)
These are not equivalent comparisons. You are comparing 360 monthly contributions to an up front lump sum. That's why you get different numbers for the interest.
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Re: mortgage length

Post by Randolph Mortimer »

docL wrote: Tue Oct 19, 2021 9:52 amIf you have a 30 year mortgage for $100,000 at fixed 3% interest rate, over the course of that 30 years you will pay approximately $51,000 in interest. The first year you pay a little under $3000 in interest and by the last few years it is down to a few hundred in interest per year as your principal is quite low.

If you instead invested $100,000 at an annual return of 3%, over the course of 30 years you would collect approximately $140,000 in interest. You would collect $3000 interest the first year and then ever increasing amounts every year after to about $7000 per year at the end of 30 years.
This is not an apples to apples comparison. It's not a question of either taking a $100K mortgage to buy a home or investing $100K up front in a lump sum in marketable securities. Everyone has to live somewhere and you have to pay for that privilege. You can rent, pay cash for a property or get a mortgage. Once that decision is made, the question for people who hold a mortgage then becomes:

"What do I do with each extra dollar left over after the current mortgage obligation has been paid?"

So, with a choice between paying extra dollars on your mortgage or investing extra dollars in fixed income at the same rate, the compounding works exactly the same in both directions.

"A penny saved is a penny earned"
skierincolorado
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Re: mortgage length

Post by skierincolorado »

settlement12 wrote: Mon Oct 18, 2021 5:29 pm Hi all,

I used to always avoid housing as a place to put my money and did well out of ETFs for years. I'm now at the stage where I want to own my own place but am realising I don't know much about mortgages.

Intuitively, I know that paying off a mortgage in the shortest possible time seems like the best deal in the long run and being young and a relatively high earner with no other loans and no children etc this is tempting.

However, I'm also aware that some people say that due to inflation etc (I know that we can't really predict this) that it's a really good deal to deliberately pay the mortgage back over a very long time. It also means lower monthly repayments which has a lifestyle benefit, eg if I want to take time off.

Does anybody have any ideas about this or even just recommended reading?
You will almost certainly be a wealthier person 30 years from now with the 30 y mortgage and investing the difference.

Lifecycle investing proved that people under 40 with future earnings expected should be highly leveraged.
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Re: mortgage length

Post by grabiner »

docL wrote: Tue Oct 19, 2021 9:52 am
grabiner wrote: Mon Oct 18, 2021 8:36 pm

Compounding works the same way for both bonds and a mortgage. If you buy a $10,000 bond yielding 3%, you will have $10,300 next year, and $10,609 one year later. If you pay down $10,000 on your 3% mortgage, your balance will be $10,300 less next year, and $10,609 less in two years because you pay $309 less interest when the balance is $10,300 lower. (Both numbers are approximate, since bond yields are computed based on six-month coupons, and mortgage payments are computed monthly.)
If you have a 30 year mortgage for $100,000 at fixed 3% interest rate, over the course of that 30 years you will pay approximately $51,000 in interest. The first year you pay a little under $3000 in interest and by the last few years it is down to a few hundred in interest per year as your principal is quite low.

If you instead invested $100,000 at an annual return of 3%, over the course of 30 years you would collect approximately $140,000 in interest. You would collect $3000 interest the first year and then ever increasing amounts every year after to about $7000 per year at the end of 30 years.
The math in these two cases is not equivalent. In both cases, the interest is 3% of the current balance. However, the mortgage balance decreases over time, while the investment balance increases over time.

The equivalent comparison would be to take out a $100K mortgage and hold a $100K bond portfolio, then sell enough of the bond portfolio to make the mortgage payments each year. If the interest rates are the same, the interest on the bonds each year will be equal to the mortgage interest, and you will have to sell an amount in bonds equal to the principal portion of the mortgage payment. Thus selling the bonds to pay off the mortgage would be break-even if the durations match. (Matching durations would require a portfolio of bonds maturing in 1-30 years, not a single 30-year bond.)
(never mind the fact that few people invest in bonds for money they won't need for 30+ years)
Partially agreed. Most investors don't have a bond balance equal to their mortgage balance when they first take out their mortgages. However, they do usually have some bonds, and have the option of selling those bonds to get a lower mortgage balance.

However, I wouldn't normally recommend that they do this, because most investors who take out mortgages don't have the extra money liquid; putting more money down means putting less money in an IRA or 401(k) and losing a permanent tax benefit.
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Admiral
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Re: mortgage length

Post by Admiral »

upstate90 wrote: Tue Oct 19, 2021 12:48 am I was struggling with this question for about a year. I bought my home in 2018, refinanced in early 2020. I have no other debt and decided to pay down my mortgage with the big caveat that I keep 2 years worth of expenses as an emergency fund and put in 8% to my 401k to get my company match of 7%. Everything else gets thrown at the mortgage. I currently have about 50% equity in my home and expect to pay it off in 2-3 years when I would be 33-34 years old. Mathematically speaking this is probably a mistake, but the reason I decided to do it was that without any debt I could have greatly increased cashflow, less stress, and could live on much less income if it became necessary. If you decide to aggressively pay down a mortgage I would recommend keeping a larger emergency fund than the standard 3-6 months recommended.
Just pointing out that this "increased cashflow" argument is a bit more nuanced. If you have money that you use to pre-pay a loan, you could also use that money to make your mortgage payment. To wit:

I have a $1,000/mo mortgage
I have $10,000 in savings (or "extra" or whatever)
I can take $500 from savings and add it to my payment, so I'm out $1500 OR
I can take $500, send it to checking, and I'm out $1,000. There's no cashflow improvement, I've just shifted money around. Prepaying actually reduces current cashflow.

Pre-paying is using current dollars to improve future cashflow.

The difference is important, because current dollars are worth more than future dollars. So you're spending money today to save devalued dollars in the future (whenever your mortgage is paid off). Now, if you would otherwise SPEND the extra $500, then that's different. But if you instead invest it, you have present dollars plus growth, not future savings that are devalued when they are finally realized.

The argument for paying OFF a mortgage is different, because the gains are realized immediately.

As others point out, if you invest in something that pays less than your mortgage rate, that's a financial loser (ignoring liquidity concerns).

But pre-payment does nothing for you in the near-term except reduce your account balance.
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Re: mortgage length

Post by upstate90 »

Admiral wrote: Wed Oct 20, 2021 1:01 pm
upstate90 wrote: Tue Oct 19, 2021 12:48 am I was struggling with this question for about a year. I bought my home in 2018, refinanced in early 2020. I have no other debt and decided to pay down my mortgage with the big caveat that I keep 2 years worth of expenses as an emergency fund and put in 8% to my 401k to get my company match of 7%. Everything else gets thrown at the mortgage. I currently have about 50% equity in my home and expect to pay it off in 2-3 years when I would be 33-34 years old. Mathematically speaking this is probably a mistake, but the reason I decided to do it was that without any debt I could have greatly increased cashflow, less stress, and could live on much less income if it became necessary. If you decide to aggressively pay down a mortgage I would recommend keeping a larger emergency fund than the standard 3-6 months recommended.
Just pointing out that this "increased cashflow" argument is a bit more nuanced. If you have money that you use to pre-pay a loan, you could also use that money to make your mortgage payment. To wit:

I have a $1,000/mo mortgage
I have $10,000 in savings (or "extra" or whatever)
I can take $500 from savings and add it to my payment, so I'm out $1500 OR
I can take $500, send it to checking, and I'm out $1,000. There's no cashflow improvement, I've just shifted money around. Prepaying actually reduces current cashflow.

Pre-paying is using current dollars to improve future cashflow.

The difference is important, because current dollars are worth more than future dollars. So you're spending money today to save devalued dollars in the future (whenever your mortgage is paid off). Now, if you would otherwise SPEND the extra $500, then that's different. But if you instead invest it, you have present dollars plus growth, not future savings that are devalued when they are finally realized.

The argument for paying OFF a mortgage is different, because the gains are realized immediately.

As others point out, if you invest in something that pays less than your mortgage rate, that's a financial loser (ignoring liquidity concerns).

But pre-payment does nothing for you in the near-term except reduce your account balance.
You're not wrong, but one of the main factors of my decision is the fact that I will pay it off in 2-3 years at age 33-34. If I had to throw all extra money at it for 10-15 years to pay it off that would be completely different. I feel being debt free at a young age would give me far more options and freedom going forward. In addition I'm still investing through 401k and not house/cash poor due to large emergency fund.
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Re: mortgage length

Post by Miguelito »

I've always been a believer in lower lengths to lower interest and accumulate equity. We always tried to go with 15yr loans or to be done quicker, but today's rates are so low I am swinging in the other direction now. Although to be clear, I still don't like 30yr loans. They are just too long to make any real progress on principal.

About 10 years ago we bought our current home and went for a 15yr loan for that reason. Halfway through that loan, our equity was substantial and we could also pay off the mortgage if we wanted to. But with the lower rates, we refinanced to 10 years and then again recently, this time extending the term to 15yrs. In total, our mortgage payment (P&I) is lower by well over 50% compared to early 2020. It's actually less per month than our property tax. That's a lot of extra cashflow without having to touch any capital. We invest the savings, but it does increase the ability to accumulate a big pile of cash relatively quickly if needed. It also reduces fixes expenses for the purposes of the size of a EF.
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Re: mortgage length

Post by Admiral »

Miguelito wrote: Thu Oct 21, 2021 9:29 am I've always been a believer in lower lengths to lower interest and accumulate equity. We always tried to go with 15yr loans or to be done quicker, but today's rates are so low I am swinging in the other direction now. Although to be clear, I still don't like 30yr loans. They are just too long to make any real progress on principal.

About 10 years ago we bought our current home and went for a 15yr loan for that reason. Halfway through that loan, our equity was substantial and we could also pay off the mortgage if we wanted to. But with the lower rates, we refinanced to 10 years and then again recently, this time extending the term to 15yrs. In total, our mortgage payment (P&I) is lower by well over 50% compared to early 2020. It's actually less per month than our property tax. That's a lot of extra cashflow without having to touch any capital. We invest the savings, but it does increase the ability to accumulate a big pile of cash relatively quickly if needed. It also reduces fixes expenses for the purposes of the size of a EF.
If this works for you, great. But of course the payment is much lower: that's what happens when you extend the term and refinance a lower balance, and particularly at a lower rate. Whether the increased cost (i.e. more interest) and longer payment burden makes a difference is a personal matter. You also could have no mortgage payment much sooner if you had not extended the loan, which frees up even more cash (albeit potentially in inflated dollars). Yours is not a bad strategy if you can still get the loan paid off once you retire. I'm not a huge fan of refinancing loans ad infinitum til you're in the ground, though I know some people do this.
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Re: mortgage length

Post by BrandonBogle »

upstate90 wrote: Wed Oct 20, 2021 7:18 pm You're not wrong, but one of the main factors of my decision is the fact that I will pay it off in 2-3 years at age 33-34. If I had to throw all extra money at it for 10-15 years to pay it off that would be completely different. I feel being debt free at a young age would give me far more options and freedom going forward. In addition I'm still investing through 401k and not house/cash poor due to large emergency fund.
And there is nothing wrong with that; just know that you are making an emotionally-optimized decision and not a mathematically-optimized one.

IMO, making a decision that brings peace of mind and enables you to stay the course will result in a better end-result than chasing that last few bits of financial performance. For instance, what if chasing that last bit causes you to spend significant mental energy and you just don’t have the will to pursue some other activity that may also provide some sort of financial wealth.

Don’t let the perfect be the enemy of the good (enough).
Admiral wrote: Thu Oct 21, 2021 9:59 am Yours is not a bad strategy if you can still get the loan paid off once you retire. I'm not a huge fan of refinancing loans ad infinitum til you're in the ground, though I know some people do this.
Guilty as charged. I am on my 8th refi in the past 18 months lol.
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Re: mortgage length

Post by Admiral »

BrandonBogle wrote: Thu Oct 21, 2021 10:35 am
upstate90 wrote: Wed Oct 20, 2021 7:18 pm You're not wrong, but one of the main factors of my decision is the fact that I will pay it off in 2-3 years at age 33-34. If I had to throw all extra money at it for 10-15 years to pay it off that would be completely different. I feel being debt free at a young age would give me far more options and freedom going forward. In addition I'm still investing through 401k and not house/cash poor due to large emergency fund.
And there is nothing wrong with that; just know that you are making an emotionally-optimized decision and not a mathematically-optimized one.

IMO, making a decision that brings peace of mind and enables you to stay the course will result in a better end-result than chasing that last few bits of financial performance. For instance, what if chasing that last bit causes you to spend significant mental energy and you just don’t have the will to pursue some other activity that may also provide some sort of financial wealth.

Don’t let the perfect be the enemy of the good (enough).
Admiral wrote: Thu Oct 21, 2021 9:59 am Yours is not a bad strategy if you can still get the loan paid off once you retire. I'm not a huge fan of refinancing loans ad infinitum til you're in the ground, though I know some people do this.
Guilty as charged. I am on my 8th refi in the past 18 months lol.
What's curious is you seems to be countermanding your own advice not to spend your time "chasing that last few bits of financial performance."

Constant refinance churn seems draining and time consuming, especially to save a small amount (which I realize is relative, but you've noted in other threads you'll do it to save a few hundred bucks). For a refinance that saves me a few grand, I'd rather just leave my loan and rate as it is and pay it off a little sooner.

I've either paid rent or had mortgage payments for, maybe 35 years or so? They are not and have never been a financial burden but at some point, you just get tired of paying it. One more bill to eliminate. I don't foresee champagne corks popping once it's paid off. But I have no desire to keep it forever, either. To me the ideal loan is 15 years ASSUMING you don't plan to move. Most of the interest is paid by year 7 with these low rates, and when you have a few years left you can just pay it off if you've saved well.

Assuming the 15 year cost is not financially burdensome, natch.
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Re: mortgage length

Post by BrandonBogle »

Admiral wrote: Thu Oct 21, 2021 10:52 am
BrandonBogle wrote: Thu Oct 21, 2021 10:35 am
upstate90 wrote: Wed Oct 20, 2021 7:18 pm You're not wrong, but one of the main factors of my decision is the fact that I will pay it off in 2-3 years at age 33-34. If I had to throw all extra money at it for 10-15 years to pay it off that would be completely different. I feel being debt free at a young age would give me far more options and freedom going forward. In addition I'm still investing through 401k and not house/cash poor due to large emergency fund.
And there is nothing wrong with that; just know that you are making an emotionally-optimized decision and not a mathematically-optimized one.

IMO, making a decision that brings peace of mind and enables you to stay the course will result in a better end-result than chasing that last few bits of financial performance. For instance, what if chasing that last bit causes you to spend significant mental energy and you just don’t have the will to pursue some other activity that may also provide some sort of financial wealth.

Don’t let the perfect be the enemy of the good (enough).
Admiral wrote: Thu Oct 21, 2021 9:59 am Yours is not a bad strategy if you can still get the loan paid off once you retire. I'm not a huge fan of refinancing loans ad infinitum til you're in the ground, though I know some people do this.
Guilty as charged. I am on my 8th refi in the past 18 months lol.
What's curious is you seems to be countermanding your own advice not to spend your time "chasing that last few bits of financial performance."

Constant refinance churn seems draining and time consuming, especially to save a small amount (which I realize is relative, but you've noted in other threads you'll do it to save a few hundred bucks). For a refinance that saves me a few grand, I'd rather just leave my loan and rate as it is and pay it off a little sooner.

I've either paid rent or had mortgage payments for, maybe 35 years or so? They are not and have never been a financial burden but at some point, you just get tired of paying it. One more bill to eliminate. I don't foresee champagne corks popping once it's paid off. But I have no desire to keep it forever, either. To me the ideal loan is 15 years ASSUMING you don't plan to move. Most of the interest is paid by year 7 with these low rates, and when you have a few years left you can just pay it off if you've saved well.

Assuming the 15 year cost is not financially burdensome, natch.
It all depends on everyone’s circumstances. I spend at most 2-3 hours on each refi and I’m doing it during boring conference calls. Each refi has lowered my rate and the first 7 not only reduced my rate from 2.875% to 2.125%, but also netted me $23k above costs associated with the refi.

So in my personal circumstances, I haven’t chased optimizing holding VG ETFs in my Fidelity HSA or rebalancing between my current and old 401k to get access to Vanguard Total International institutional plus shares (I believe 0.05 ER) given how small that account is and the having to tweak my allocations elsewhere. Similarly, I haven’t shopped my insurance beyond the top few companies to get lower than my current $450/6-mo premium for full coverages. What I have done is spend 14-21 hours earning over $1k/hour. This all said, I’m a W2 earner with stable taxable & retirement accounts and low debts, so I’m a breeze for the refi process vs. what some folks might experience.
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Re: mortgage length

Post by TCG236 »

docL wrote: Tue Oct 19, 2021 9:52 am
grabiner wrote: Mon Oct 18, 2021 8:36 pm

Compounding works the same way for both bonds and a mortgage. If you buy a $10,000 bond yielding 3%, you will have $10,300 next year, and $10,609 one year later. If you pay down $10,000 on your 3% mortgage, your balance will be $10,300 less next year, and $10,609 less in two years because you pay $309 less interest when the balance is $10,300 lower. (Both numbers are approximate, since bond yields are computed based on six-month coupons, and mortgage payments are computed monthly.)
If you have a 30 year mortgage for $100,000 at fixed 3% interest rate, over the course of that 30 years you will pay approximately $51,000 in interest. The first year you pay a little under $3000 in interest and by the last few years it is down to a few hundred in interest per year as your principal is quite low.

If you instead invested $100,000 at an annual return of 3%, over the course of 30 years you would collect approximately $140,000 in interest. You would collect $3000 interest the first year and then ever increasing amounts every year after to about $7000 per year at the end of 30 years.



(never mind the fact that few people invest in bonds for money they won't need for 30+ years)
When I bought a car many years ago for $18,000. The interest rate on a car loan was 9% and my bank was paying me 6%. I wanted to pay cash, but the finance guy insisted paying 9% while getting paid 6% was better. He punched a bunch of numbers into his calculator and said the monthly payment was $572.40 for 36 months. So $572.40 X 36 = $20,606.40. If I kept the $18,000 in my bank, I would end up with $18,000 X (1.06)**3 = $21,438.29. I knew he was wrong, but did not know his trick. I politely declined his offer and paid cash. Once I got home, I realized I needed to withdraw $572.40 from the $18,000 (earning 0.5% a month) every month and the whole balance would be gone before 36 months.
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Re: mortgage length

Post by skierincolorado »

Do a 30y don’t pay it off and invest the difference in the stock market. Even a CD would probably have a positive arbitrage.
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Re: mortgage length

Post by docL »

grabiner wrote: Tue Oct 19, 2021 7:52 pm
The equivalent comparison would be to take out a $100K mortgage and hold a $100K bond portfolio, then sell enough of the bond portfolio to make the mortgage payments each year. If the interest rates are the same, the interest on the bonds each year will be equal to the mortgage interest, and you will have to sell an amount in bonds equal to the principal portion of the mortgage payment. Thus selling the bonds to pay off the mortgage would be break-even if the durations match.

That is mathematically incorrect. It is the difference between simple interest (mortgage) which decreases every single year, and compound interest (the investment) which gets larger every year. This is why a bond yield calculator will provide a higher annual/monthly/whatever payout with an equivalent interest rate to what a mortgage calculator will give you for a monthly payment.

That's why paying a lump sum off on your mortgage saves you less in fewer interest than you receive in investment return over time for an equivalent initial lump sum. The correct mathematical answer is to always invest the money and not pay off the mortgage. Paying off a mortgage early is an emotional benefit to some people. If you can get over the emotional aspect, it is always better to invest instead.
Last edited by docL on Thu Oct 21, 2021 5:47 pm, edited 1 time in total.
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Re: mortgage length

Post by docL »

ApeAttack wrote: Tue Oct 19, 2021 2:01 pm
willthrill81 wrote: Tue Oct 19, 2021 10:07 am
ApeAttack wrote: Tue Oct 19, 2021 12:56 am
willthrill81 wrote: Mon Oct 18, 2021 5:59 pm
docL wrote: Mon Oct 18, 2021 5:55 pm

The mortgage interest is tax deductible, so the exact cost depends on your marginal tax rate. And the compounding nature of even a bond investment can lead it to outperform a higher simple interest rate paid on a mortgage over a 30 year time frame. Gotta do the math on actual numbers with actual tax consequences to see what works for you.
Few taxpayers are itemizing deductions anymore, only around 11% I believe.

Compounding doesn't overcome a lower yield.
Tax codes can change over 30 years.
The tax law certainly will change, but we cannot predict what those changes will be.
I wonder how many people consider tax code risk into their analysis.

The most important thing with a fixed rate mortgage is that your interest rate can never go up, but it may have many opportunities to go down in the future. Think of your current rate as the absolute worst case scenario.
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Re: mortgage length

Post by TCG236 »

docL wrote: Thu Oct 21, 2021 5:39 pm
grabiner wrote: Tue Oct 19, 2021 7:52 pm
The equivalent comparison would be to take out a $100K mortgage and hold a $100K bond portfolio, then sell enough of the bond portfolio to make the mortgage payments each year. If the interest rates are the same, the interest on the bonds each year will be equal to the mortgage interest, and you will have to sell an amount in bonds equal to the principal portion of the mortgage payment. Thus selling the bonds to pay off the mortgage would be break-even if the durations match.

That is mathematically incorrect. It is the difference between simple interest (mortgage) which decreases every single year, and compound interest (the investment) which gets larger every year.

That's why paying a lump sum off on your mortgage saves you less in fewer interest than you receive in investment return over time for an equivalent initial lump sum. The correct mathematical answer is to always invest the money and not pay off the mortgage. Paying off a mortgage early is an emotional benefit to some people. If you can get over the emotional aspect, it is always better to invest instead.
Interest in a mortgage is compounded. The interest for next month is less than the interest for this month because your monthly payment is more than this month's interest (unless it's a balloon mortgage), thus reducing the balance used to calculate the interest for next month.

So you're saying having a car loan at 9% and investing the money at 6% is better than paying cash?
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Re: mortgage length

Post by grabiner »

docL wrote: Thu Oct 21, 2021 5:39 pm
grabiner wrote: Tue Oct 19, 2021 7:52 pm
The equivalent comparison would be to take out a $100K mortgage and hold a $100K bond portfolio, then sell enough of the bond portfolio to make the mortgage payments each year. If the interest rates are the same, the interest on the bonds each year will be equal to the mortgage interest, and you will have to sell an amount in bonds equal to the principal portion of the mortgage payment. Thus selling the bonds to pay off the mortgage would be break-even if the durations match.

That is mathematically incorrect. It is the difference between simple interest (mortgage) which decreases every single year, and compound interest (the investment) which gets larger every year. This is why a bond yield calculator will provide a higher annual/monthly/whatever payout with an equivalent interest rate to what a mortgage calculator will give you for a monthly payment.
Simple interest is a rather specialized concept; it means that interest is not calculated on the interest. But when the interest paid (or received) is reinvested at the same rate, there is not a real distinction between simple and compound interest.

A $1000 bond with a 3% yield pays simple interest in theory; you get $15 every six months. But if you invest that $15 in a new bond yielding 3%, you will get a compounded 3% yield.

Similarly, the mortgage interest effectively compounds, because it is computed on the current balance. If you pay down $10,000 on your 3% mortgage this year, and then make the same regular payments, your balance next year will be $10,300 lower because you accumulated $300 less in interest. Therefore, in the following year, you will pay $309 less in interest than if you had made no prepayment.

The reason a bond yield calculator gives more interest at the same rate is a different issue. If you buy a bond, you have the same value invested in the bond at all times. If you take out a mortgage, your balance decreases over time, and you pay fewer dollars in interest when the mortgage balance is smaller. This is why the example above is break-even: you buy a bond portfolio, and the size of the bond portfolio decreases each year by the same amount as the mortgage rate.
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