Why it no longer makes sense for young people to pay off their mortgage early

[HLS]

You seemed to have missed the point completely AND do not understand that ‘banks’ usually do not lend their money for 30 years.
(That’s called lending long and borrowing short which is potential suicide)
It’s not going to happen at the same time.

Most 30yr mortgages are sold into 30yr bonds (MBS)
banks service loans they DO NOT own them.

Everybody who qualifies today can tie up money for 30yrs in 3% range and it is very possible (and likely) that CD rates will be considerably higher at some point, (obviously not today)in the future.

Having accelerated payments on low interest rate debt may prove to have been very foolish.

Banks are not in business to lose money. The fractional reserve banking system and the creation of money is simple yet complex.

The entire economic system is a Ponzi scheme that plods along until something goes wrong and then there is a scramble to put a band aid on the problem.

If mortgage rates were much higher it makes more sense to me to eliminate debt as CD rates are likely to decline.
When rates are low, it is more likely that CD/Bond rates will rise, although not a guarantee.

The system has never been as fragile as it currently is, regardless of what the ‘experts’ and govt are saying.

[bearishgurl]

[quote=livinincali] . . . Almost everybody thinks that somehow they can win at this game of borrow low and earn a spread on the return. Of course plenty of people end up rich doing that and plenty of people end up in bankruptcy doing that.[/quote]

livinincali, investors CAN win at this game, but will not be able to open both accounts simultaneously. If they have good credit and can otherwise qualify, they could theoretically take out a ~$200K 3.5% 30-yr FRM or a 2.75% 15-yr FRM TODAY and recover enough from their *safe* investments IN THE FUTURE to pay or almost pay these mortgages every month.

Joe and Jane6p soon-to-be-retiree or retiree could take these steps in the above order, and if interest rates eventually rise, they would likely be able to find safe passive investments which could very well pay them enough monthly to make their mortgage payments (and still keep the principal of their investment intact).

Lots of Joe and Jane6p’s in the past were able to pay down their (4-8% FRMs) for years, but this was undoubtedly on smaller balances (usually under $100K). It’s all relative … the borrowers of yesteryear had double or more the FRM interest rate of today but owed half or less of the mortgage balance that the bulk of today’s similarly-situated borrowers owe.

It is doable … if steps are taken in the right order and interest rates later rise at 3 or more points.

[bearishgurl]

[quote=HLS]You seemed to have missed the point completely AND do not understand that ‘banks’ usually do not lend their money for 30 years.
(That’s called lending long and borrowing short which is potential suicide)
It’s not going to happen at the same time.

Most 30yr mortgages are sold into 30yr bonds (MBS)
banks service loans they DO NOT own them.

Everybody who qualifies today can tie up money for 30yrs in 3% range and it is very possible (and likely) that CD rates will be considerably higher at some point, (obviously not today)in the future.

Having accelerated payments on low interest rate debt may prove to have been very foolish.

Banks are not in business to lose money. The fractional reserve banking system and the creation of money is simple yet complex.

The entire economic system is a Ponzi scheme that plods along until something goes wrong and then there is a scramble to put a band aid on the problem.

If mortgage rates were much higher it makes more sense to me to eliminate debt as CD rates are likely to decline.
When rates are low, it is more likely that CD/Bond rates will rise, although not a guarantee.

The system has never been as fragile as it currently is, regardless of what the ‘experts’ and govt are saying.[/quote]

Just saw this, HLS and agree with all. Thank you.

[earlyretirement]

[quote=CA renter][quote=matt]I am 36 (i consider that young :), currently working overseas with my former NCC primary home now rented. I still owe 400K on the property which likely appraises today at 950K or so. I bought in 2010 and have struggled to refi as it is very difficult to close a loan when you work for a non-US company overseas (despite having verifiable tax returns, pay stubs, etc)… so my current loan is 4.75% and payment 2600 / month, renting at 4K / month. I am thinking about paying this off to #1 assure my family a roof over our heads should we ever need it, #2 call me conservative but a guranteed 4.75% for me is a decent return. With the property paid off worst case i have an asset cash flowing me almost $3K / month and the security of a beautiful home in a great schol district to live in should we ever need it, with the sole pressure of generating enough income to pay for property taxes, bills, and food to provide a decent life for my family. This for me is compelling as I know life throws punches and i may not be able to generate the cash i can today in the future.[/quote]

Totally agree with this.[/quote]

Yep. As usual, I totally agree with CA Renter.

Look, the thing is that there is NOT a “one size fits all answer” to this question. It’s going to depend on each individual. And it depends on many factors like how well diversified you already are, what other assets and savings you have, etc.

You will always get people that tell you how it’s wise to take on debt and how they can make better returns in the stock market, or something else. I’ve mentioned this countless times but people mostly talk about their “winners” and rarely talk about their “losers”. We ALL have loser investments. Most people rarely talk about them but we all have them.

Is paying your mortgage off completely when you are younger conservative in nature. Sure. But there isn’t anything wrong with that. I’m one of those “not too old types” (I won’t say younger as I don’t consider myself too young anymore…ha ha) that paid off my mortgage while I was relatively younger.

For me, it made sense and I’m totally content with my decision to have paid it off. I actually have always waited until I had the cash to buy properties. Is it conservative? Sure but I’ve done very well even being this conservative.

I know MANY people like flyer mentioned, that made millions but were too aggressive and lost it all (and more as some took on leverage). The fact remains that MANY people out there have a NEGATIVE net worth.

Matt, I TOTALLY agree with your strategy for all the reasons you mentioned. There are VERY FEW investments out there where you can be guaranteed 4.75% TOTALLY risk free.

I know I won’t sell my property. Even when the kids move out and go to high school I’ll simply rent out the house probably with short-term vacation rentals and I’m confident I’ll do well. Or even if I did a longer term lease I’m confident I’ll be able to rent it out.

All my properties I hold mortgage free and I could care less what prices are doing in the interim while I own them. I don’t listen to the “noise” or stress about interest rates, values, sales, inventory, etc. The only thing I care about is cash flow on the rentals. That’s the only thing important to me and I don’t plan on selling them.

I also totally agree (as usual) with flyer’s point as well about trying to totally be on the path by the time you are 50 in trying to be more financially secure. I realize it’s not feasible for many people but it should be a personal goal of more people out there.

Many people make a ton of money but they spend all that money (and more) on a lavish lifestyle, expensive cars, etc. In my experience, I’ve seen that most people that make a lot of money think they will make a lot of money forever for all eternity…but the older you get, typically the harder it is to make money.

And the true danger is I’ve seen a LOT of people that as they get older and make less, still want to live that lifestyle when they made a lot of money. So they do whatever they have to do to continue to live it. Including using their credit cards, taking personal loans, cashing out retirement savings, or taking equity loans out of their homes. It’s a slippery slope.

Like flyer, my goal was to be totally financially secure by the time I hit 50 and part of that plan was not having a mortgage for the reasons flyer and UCGal mentioned.

[CA renter]

[quote=earlyretirement]

I know MANY people like flyer mentioned, that made millions but were too aggressive and lost it all (and more as some took on leverage). The fact remains that MANY people out there have a NEGATIVE net worth.

Matt, I TOTALLY agree with your strategy for all the reasons you mentioned. There are VERY FEW investments out there where you can be guaranteed 4.75% TOTALLY risk free.

I know I won’t sell my property. Even when the kids move out and go to high school I’ll simply rent out the house probably with short-term vacation rentals and I’m confident I’ll do well. Or even if I did a longer term lease I’m confident I’ll be able to rent it out.

All my properties I hold mortgage free and I could care less what prices are doing in the interim while I own them. I don’t listen to the “noise” or stress about interest rates, values, sales, inventory, etc. The only thing I care about is cash flow on the rentals. That’s the only thing important to me and I don’t plan on selling them.

I also totally agree (as usual) with flyer’s point as well about trying to totally be on the path by the time you are 50 in trying to be more financially secure. I realize it’s not feasible for many people but it should be a personal goal of more people out there.

Many people make a ton of money but they spend all that money (and more) on a lavish lifestyle, expensive cars, etc. In my experience, I’ve seen that most people that make a lot of money think they will make a lot of money forever for all eternity…but the older you get, typically the harder it is to make money.

And the true danger is I’ve seen a LOT of people that as they get older and make less, still want to live that lifestyle when they made a lot of money. So they do whatever they have to do to continue to live it. Including using their credit cards, taking personal loans, cashing out retirement savings, or taking equity loans out of their homes. It’s a slippery slope.

Like flyer, my goal was to be totally financially secure by the time I hit 50 and part of that plan was not having a mortgage for the reasons flyer and UCGal mentioned.[/quote]

Excellent post, ER. Just wanted to X2 the points above, and especially the part about young people thinking that their income will always go up.

What too many people in their 20s and 30s don’t realize is that they’ve probably already seen the greatest increase in the trajectory of their income-earning capacity for their lifetime by the time they hit 40 (sometimes, earlier than that). It’s just too easy for everything to go wrong at the very moment when you can’t afford to take any losses, like when you’re ~50 and lose your job.

[earlyretirement]

[quote=CA renter]

Excellent post, ER. Just wanted to X2 the points above, and especially the part about young people thinking that their income will always go up.

What too many people in their 20s and 30s don’t realize is that they’ve probably already seen the greatest increase in the trajectory of their income-earning capacity for their lifetime by the time they hit 40 (sometimes, earlier than that). It’s just too easy for everything to go wrong at the very moment when you can’t afford to take any losses, like when you’re ~50 and lose your job.[/quote]

Thanks CAR. As usual, I totally agree with you. The biggest mistake I’ve seen is that people in their late 20’s or even late 30’s go around and think they are “super YOUNG”. I always laugh a bit at that as I don’t think late 30’s is any spring chicken but many people I’ve met act like they are SO young and will be making this money forever.

Many of them don’t even bank up any significant savings as they think they will keep accumulating their salaries forever and it will always be this easy. Now granted, many of them have super great jobs and relatively high salaries but they just don’t understand the power of compound interest.

And during the financial collapse at the depths of the lows, I saw some older clients and friends REALLY panicked. By not saving up enough when they were younger, they were even more panicked because they couldn’t afford to lose the meager amounts that they saved up to begin with. (Many got a very late start in savings).

What I noticed was those people panicked much more. I saw this type jump out of the stock market precisely at the time when they should have just stayed the course and kept investing steadily. Then they miss the big run up and then all of a sudden now they feel like they have to jump back in the stock market watching all their friends do well in the stock market and real estate market. (Also part of the reason we see the stock market and real estate markets elevated as everyone is chasing yield).

I know some of our friends think we are stupid for having our house paid off. My wife gets comments sometimes when her friends hear we don’t have a mortgage and our house is paid off.

It is COMICAL because some of her friends spend everything they have and leveraged to the hilt yet they try to give her advice how we can be doing better things with the money and making a higher ROI!! LOL.

Sometimes we get a good laugh when we hear stuff like that. LOL. Granted these people don’t know our financial situation nor know what other assets we have. Yet, these people that just have to have the latest luxury cars every few years (leased), take equity out of their homes, or have a ton of debt trying to lecture her on how it makes more sense for us to be in debt.

[CA renter]

Yes, I’ve heard the lectures about leverage as well. IMHO, you can never go wrong by staying out of debt. We’ve made a point of doing this, and while we might drive older vehicles, take more “staycations” than vacations, and don’t wear jewelry or fancy clothes, we’ve managed to stay completely debt free, and that’s a feeling that is worth more to us than all the luxuries in the world.

[spdrun]

No thanks to “stankations.” I usually just rent my place out one month during summer, which helps quite a bit with costs.

(And it bothers me not at all to “time share” my home with someone off of Craigslist or rec’ed by a friend, since private papers and computers go in one file cabinet that gets locked in basement storage.)

[CA renter]

[quote=spdrun]No thanks to “stankations.” I usually just rent my place out one month during summer, which helps quite a bit with costs.

(And it bothers me not at all to “time share” my home with someone off of Craigslist or rec’ed by a friend, since private papers and computers go in one file cabinet that gets locked in basement storage.)[/quote]

I’d really love to rent our place out/exchange during vacations, but it’s really different when you have an established family home vs. a young person’s bachelor pad. Back in the day, I would have easily done it, too, but those days are over now (not complaining, just stating a fact).

[earlyretirement]

[quote=CA renter][quote=spdrun]No thanks to “stankations.” I usually just rent my place out one month during summer, which helps quite a bit with costs.

(And it bothers me not at all to “time share” my home with someone off of Craigslist or rec’ed by a friend, since private papers and computers go in one file cabinet that gets locked in basement storage.)[/quote]

I’d really love to rent our place out/exchange during vacations, but it’s really different when you have an established family home vs. a young person’s bachelor pad. Back in the day, I would have easily done it, too, but those days are over now (not complaining, just stating a fact).[/quote]

CAR,

Yes, it’s MUCH different when it’s your primary home that you live in. We own many rental properties that we DO use for home exchanges but my wife says we could never use our primary home for home exchanges or to rent out. (No matter how much we were offered to stay in it).

Still, we do a LOT of home exchanges in some AMAZING properties where it’s their primary residence. You’d be surprised how well it can work out. Before we moved here we did many home exchanges with primary residences in Point Loma, 3 in La Jolla, Cardiff by the Sea, and a few others that were GREAT!

I know it sounds difficult but we’ve had GREAT experiences with http://www.homeexchange.com. It makes traveling really amazing! Also, if you have a really nice place you can make some insane money. I have a friend that has a VERY nice smaller home (totally renovated with high end furniture) and he rents it during Del Mar Racetrack season for something like $15,000 or maybe $20,000 per MONTH.

It’s not his primary residence (he lives in Texas) but it is his place while he is in town and they don’t rent it besides during Del Mar Racetrack season.

You should check out HomeExchange.com We have done over 40 exchanges all around the world and never had any problems at all with the swap partners.

It’s the best way to travel!

[CA renter]

Thank you very much for posting this, ER. Because of some of your posts in the past, I had created an account and started a profile on HomeExchange.com a few months ago. Unfortunately, I got cold feet because I just can’t get my head around having strangers sleeping in our bed…and even worse, our kids’ beds. It just doesn’t feel right to me. So, I’ve been thinking more (also because of information from you) about buying a condo or something small that we could use to rent out on a short-term basis or use for vacation exchanges. Of course, with the recent frenzy, we’ve had to put that on hold for a bit, but it’s definitely on our radar. Thanks for all your input, ER! 🙂

[earlyretirement]

[quote=CA renter]Thank you very much for posting this, ER. Because of some of your posts in the past, I had created an account and started a profile on HomeExchange.com a few months ago. Unfortunately, I got cold feet because I just can’t get my head around having strangers sleeping in our bed…and even worse, our kids’ beds. It just doesn’t feel right to me. So, I’ve been thinking more (also because of information from you) about buying a condo or something small that we could use to rent out on a short-term basis or use for vacation exchanges. Of course, with the recent frenzy, we’ve had to put that on hold for a bit, but it’s definitely on our radar. Thanks for all your input, ER! :)[/quote]

You are TOTALLY welcome CAR!

That’s what these boards are for. Sharing valuable and helpful information. 🙂

I absolutely don’t blame you at all CAR for not being able to ‘pull the trigger’ on the Home Exchange thingy for your primary residence. That’s certainly understandable and my wife is the EXACT same as you.

An investment property is a GREAT idea. And keep in mind it doesn’t have to necessarily be here in San Diego. If you maybe have relatives in another desirable city where tourists might want to go yet is more affordable then that can often times work out.

Like you, I tried to buy an investment property. I made several offers last year and the beginning of this year. Smaller places in Carmel Valley but it didn’t work out and prices just went up too quickly to the point I’m not going to chase the market now.

Just keep in mind it can be a really small property. For example, MANY of the exchanges I do are for smaller 1 bedroom properties I have. Often times we’ll swap that for a large house where there is plenty of room for my family/kids. So don’t feel like it’s not a fair exchange even if it’s a smaller property.

You will find that many wealthy people own second properties or might be empty nesters that own LARGE primary properties that never sold their properties after all their kids moved out. They didn’t need to sell it so they still own it. We’ve done tons of exchanges like that. Especially when we were exchanging with properties here in the San Diego area before we moved here.

The whole beauty of Home Exchanges is that it doesn’t have to be an “even swap”. We’ve exchanged $175,000 one bedroom condos for $2-3 million houses. It’s great!

And of course, the beauty of that is you can do short-term rentals between home exchanges. That’s what we do. So there is always income coming in. As is typical with real estate it’s mostly location, location, location driven.

Feel free to email me if you need any other information on it CAR. By now I really feel like we are “Home Exchange Pros”. 😉

[CA renter]

Thanks for all the help and advice, ER. We’ll definitely be getting in touch with you as we move forward. 🙂

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