Hacker News Reader

Comment by granshaw | Hacker News Reader

Yup, if, say, you have a mortgage at 3.5%, paying principal off early is ~equivalent to a 3.5% risk-free rate

The risk free rate is the interest rate you’re paying on loan minus interest that would be earned in a FDIC insured saving account (around 2.1% currently). Can use money market or high yield corporate bonds yields too.

If you’re an educated, skilled professional who isn’t living a risky life, paying off a 3.5% mortgage is way too risk averse in my opinion. If you’re that worried, save 24 months of mortgage payments/expenses in a savings account, but if you’re not able to bounce back with even some income in 2 years (assuming you didn’t overbuy and aren’t paycheck to paycheck), then something has gone horribly wrong and you probably need to worry about more pressing matters than mortgage debt, like securing food.

It’s even more favorable than that given the mortgage interest tax deduction.

That's irrelevant for the vast majority of Americans today due to the TCJA changes. It'll be interesting to see the final numbers when the IRS publishes the statistics, but it was estimated that 90% of households took the standard deduction in 2018.

Quantitatively you're right. Qualitatively it is more complex than an Excel spreadsheet can reveal.

Which is to say, what you're saying makes financial sense, but people aren't robots, and we have negative feelings associated with debts/financial liabilities. For example a lot of people worry about losing/changing jobs exactly because of these kind of financial burdens.

If being "mortgage free" gave people more confidence to take more risk (e.g. change jobs, take a work-break, start a business) it could ultimately still be more beneficial than the alternatives, even if the maths doesn't show that.

Paying off a mortgage also reduces your liquidity, which is a risk itself.

The post above was contrasting it against medium or higher risk investments, so in both cases your liquidity is compromised. Leaving it as cash (or near-cash) is even more conservative than paying off a mortgage.

How so? Cash is mobile, cash lets you move, invest, make changes to your life. Paying off a home ties you down, and you don’t immediately get evicted for missing a mortgage payment.

My point is % return is not everything. I would gladly give up a 1.5% return in exchange for the ability to up and move when I need to, or respond to emergencies such as legal/health/family/political and resource instability/etc.

And paying off a mortgage improves your ability to move when you need to or respond to legal/health/family/etc issues. You're now "ahead" on mortgage payments allowing you to miss several without incurring penalties, giving you more flex while not incurring proportional loss from inflation as you would with near-cash holdings.

By definition, paying off a mortgage reduces liquidity. As a store of value, real estate is less liquid than cash, and many other types of assets. There is no way that exchanging a more liquid asset for a less liquid asset (giving up cash to gain equity in a home) improves one's ability to "move when you need to".

Also, there is no reason to assume home values in general protect against inflation better than savings accounts or other "safe" investments".

Only if you completely ignore the mortgage itself. The mortgage puts you into effectively negative liquidity as you have to meet the liability using liquid assets. By paying it off and gaining a home you can sell you've increased your liquidity relative to the mortgage but not relative to raw cash.

But as I said above raw cash (or near-cash) is even more conservative than mortgage repayments.

> Also, there is no reason to assume home values in general protect against inflation better than savings accounts or other "safe" investments".

History gives us a good reason to believe that. Cash depreciates. Homes on average appreciate.

I believe most lenders require you to make a payment each month regardless of whether you've paid extra or not. I don't have a mortgage yet but have read this. Really odd, in my opinion.

I agree that paying early improves your ability to move, though. You're less likely to be "underwater" (lose money) selling the house with more equity.

The question is - what else would you do with the money?

I wouldn't stick money in a low-interest mortgage if I was willing to tolerate some risk for a better return. Paying down a mortgage @ 3.5% is not a 'great' investment as you've pointed out, but the key is that it's risk free AND a better return than other no-risk investments (cash).

You may want a no-risk investment if you plan to use the money in the short-term after liquidation, say for another home purchase/deposit.

If you want zero risk you will not get much or any return. Your only options are high yield savings, CDs, and extremely short term treasuries/bonds (e.g., EE or I bonds).

Small correction, EE and I bonds are long term bonds (20 years to get the value doubling on EE bonds, which is the only reason to own them, but the implied ~3.5% of that makes them very competitive with other long term options atm). But the general point of your comment is right, 3.5% risk free isn't bad at all compared to most options.

You're right, I should have used "and" instead of "e.g." there for the EEs in particular.

I-bonds are not necessarily long-term bonds, other than the 12 month non-liquidity window up front. No?

Good point, I-bonds can be redeemed after 12 months, but they have a 3 month interest penalty if you redeem them before 5 years. But that's really not bad at all. So they're long term in that they guarantee their base rate for a long time, but are unusually liquid in that they can be redeemed very flexibly.

I really like those two bonds. I guess that's why they're limited to $10k/yr each :-)

Not if you can deduct the mortgage interest. At a 32% marginal rate your 3.5% mortgage only costs you 2.4%. At that point you'd be better off putting the money in a high yield CD or savings than in mortgage principal.

Don’t forget to account for taxes when evaluating the CD rate as well! Compare apples to apples.

Reply on news.ycombinator.com