Paying off mortgage

[wrbtrader]

Anyone on a trading/investing forum who can't beat the 3.5-4% rate on a mortgage should have their trader's card revoked and be banned for life.

I took out several hundred thousand dollars 10 years ago and have netted hundreds of thousands. I can at any time pay off the debt, but why?? Rates are at a 100+ year low!

The advice to pay down your mortgage and not borrow against house equity is appropriate for a Suze Orman or gardening forum, not here. Sophisticated investors borrow at low rates and turn it into income. I thought ETers are all sophisticated?

Those I know that paid off their home...they all (every one of them) ended up purchasing a 2nd home for vacation purposes or such, other properties, investments, business startups and on.

Simply, the cash went to good use. In fact, I've never met anyone that paid off their home and then did nothing with the freed up money. Yet, I guess those in their 70's or 80's that pay off their home...they usually use the money for some fancy senior citizen place where they are well taken care with all the extras and give some away to family as part of an inheritance.

 

[Sig]

Those I know that paid off their home...they all (every one of them) ended up purchasing a 2nd home for vacation purposes or such, other properties, investments, business startups and on.

Simply, the cash went to good use. In fact, I've never met anyone that paid off their home and then did nothing with the freed up money. Yet, I guess those in their 70's or 80's that pay off their home...they usually use the money for some fancy senior citizen place where they are well taken care with all the extras and give some away to family as part of an inheritance.

How does putting $500K that you had in cash into your house "free up" money? You went from having $500K to invest to having $2,000/month to invest. At best six of one half dozen of another. I'd have to echo several of the posters here, for an investing forum the basic concepts of money seem pretty elusive here!

 

[ironchef]

Wow I wasn't expecting to start a flame war between hyper-sensitive millennials and 0.1 percenters.

Yes it is all your fault.

I think we have fun with your thread. The topics of mortgage, debt and general money management are quite pertinent to us traders.

Another comment, timing and luck mean everything when it comes to life in general. As boomers you and I do have advantages over millennials. We take all the goodies, spend like drunken sailers and they have to clean up the mess. So, I do feel bad for them but I think they will do fine, just have to give them time, they can use the power of compounding like we did.

Regards,

 

[stevegee58]

This discussion has been very useful to me and others too. I really appreciate everyone's input!

 

[ironchef]

How does putting $500K that you had in cash into your house "free up" money? You went from having $500K to invest to having $2,000/month to invest. At best six of one half dozen of another. I'd have to echo several of the posters here, for an investing forum the basic concepts of money seem pretty elusive here!

Actually it makes sense. I think he said using the free up monthly cash flow to pay the mortgage on a vacation/income property.

It is another variant of Taleb's barbell strategy: Put your money in a safe place (your home) and use the $2000 monthly savings to trade options or other riskier assets expecting a bigger payoff from the trades/investments.

 

[volente_00]

Actually it makes sense. I think he said using the free up monthly cash flow to pay the mortgage on a vacation/income property.

Except the % down and interest rate is going to be higher on a vacation or income property compared to a cash out refi on your homestead. Call me old school but you should not be holding a rental property if the expenses are not covered by the monthly rent.

 

[Sig]

Actually it makes sense. I think he said using the free up monthly cash flow to pay the mortgage on a vacation/income property.

It is another variant of Taleb's barbell strategy: Put your money in a safe place (your home) and use the $2000 monthly savings to trade options or other riskier assets expecting a bigger payoff from the trades/investments.

My point is you didn't "free up" anything. If you have $500K plus $2,000 a month to put toward something it doesn't matter if you you use the $500K to buy the vacation home and use the $2,000 a month to pay your mortgage, use the $500K to pay off your house and the $2,000 a month to pay for your vacation home, put the $500K in Treasuries, taken out $2,000 a month to pay your mortgage and use your $2,000 a month to pay for the vacation home, or flip that, or....there are infinite permutations here but the point is that money is fungible and it really matters very little how you allocate it between several investments. You also need to take into account that if you have a choice between paying $500K into your house immediately or putting $500K in an account that has about the same interest as you are paying on your house (taking into account your tax shield) and drawing from that to that to make your $2,000 a month payment, you actually lose a call option on interest rate and a bunch of flexibility if you opt to sink it all into your house and pay off your mortgage.

 

[Xela]

the % down and interest rate is going to be higher on a vacation or income property compared to a cash out refi on your homestead.

This is true.

Call me old school but you should not be holding a rental property if the expenses are not covered by the monthly rent.

I agree in principle, but in practice this tends to rest on an assumption or two about the reliability and security of the property's occupancy - there's often information available on the basis of which to make such judgments, but there's typically some luck involved as well.

 

[stevegee58]

Except the % down and interest rate is going to be higher on a vacation or income property compared to a cash out refi on your homestead.

Actually we refied our primary residence in 2011 to purchase a townhouse for our college kid to live in. The townhouse is now an income producing rental property. We didn't have to kick in more money and our rate was reduced . The bank did want documentation on the property but there were no additional hoops.

Call me old school but you should not be holding a rental property if the expenses are not covered by the monthly rent.

The increase in mortgage payment was much smaller than the prevailing rent we'd have to pay. Since we started renting it out we have positive cash flow and it's appreciated about 40% in value.

I'd like to take credit for being a genius but good luck was a factor in the timing of that purchase.

 

[wrbtrader]

How does putting $500K that you had in cash into your house "free up" money? You went from having $500K to invest to having $2,000/month to invest. At best six of one half dozen of another. I'd have to echo several of the posters here, for an investing forum the basic concepts of money seem pretty elusive here!

Not sure what you're talking about nor if you're actually talking to me.

500k and then you said "You" ? I think we should stay away from fabrication of numbers before someone else reads it as "fact".

These are a list of things people I know that have done AFTER paying off their home:

Pay for their children or grand kids college education so that they don't have debts right out of college

Purchased an RV to travel the way they wanted to

Purchased a 2nd home (vacation home) - I myself fall into this category and the 2nd home has doubled in value

Purchased rental properties - Family friend of my old man did this and it has generated a nice income for him and his adult children. Also, close friend in the states is currently doing this via the money her parents gave her AFTER they paid off their home.

Moved into some sort of luxury senior citizen location with the perks (e.g. golf course)

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Regardless to what people do with their money after they pay off their debts...they can choose to purchase or invest instead of letting the extra cash sit in a bank account.

On a side note, when I pay off my 2nd home...I plan on getting an RV. I had a friend in college that lived out of a luxury RV...coolest thing I ever saw although I plan to travel and harass relatives spread out across North America. On the other extreme, I knew someone else in college that lived out of her car just to save money and pay for her education.

P.S. This is a trading forum although there are topics at this forum about investing. A moderator a few years back schooled me on the forum theme.