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Comment by jlongster | Hacker News Reader

I've always wanted to make $200,000 or so from a successful personal project on the side, just so that I could pay off my mortgage so I didn't have to worry about it anymore.

But when I think about really getting that money, I realize I wouldn't do that. If my mortage is $1200/month, I just bought myself 166 months, or ~14 years. If the idea is to quit your job and invest in a company, that's not the smartest move. You're better off stocking away $72,000 so you don't have to worry about your mortgage in 5 years, and investing the rest in the company (you will not be making money for a while, and on top of paying your own salary, you will need to buy advertising).

If the idea is to avoid the interest on your loan, and be completely emotionally free from that debt, than by all means do it. This would work well if you are just going to do consulting since the cash flow swing isn't as dangerous.

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While I agree with you on that point, just looking from a cash flow perspective if you were to keep working for a little while after paying everything off you'd likely be able to save a huge amount of money very quickly. Save, invest, relax on a beach...any of it's easier without that mortgage eating away at you.

I remember when I finally got around to doing the math on my first mortgage and realized I was actually going to pay close to triple the sale price of the house if I waited the full 30 years. The real trick, if you don't want to pay off the whole thing, is to make a lump sum payment to pay down about half of the mortgage early. It's the first 10-15 years on a 30 year where the payments are so interest heavy that you're really just throwing away money.

Get about halfway to payoff as fast as you can though and those payments are a whole lot closer to just paying back a cash balance.

> I was actually going to pay close to triple the sale price of the house if I waited the full 30 years.

Did you adjust for inflation? Even at today's inflation rates, the dollars you pay in 30 years will be worth considerably less than the dollars you pay today. There's also an opportunity cost issue. Paying off your mortgage means not putting the money somewhere else.

> you're really just throwing away money.

No... you're paying for access to a resource that you don't have yourself. There's more utility in that than in literally throwing the money in the garbage.

Matter of perspective I guess. When I looked at my early mortgage payments and 85% of the payment was interest so after 10 years I would have barely paid down the principle at all. To me, that feels like waste.

I invested with steady 12-14% returns for 10 years and then watched it all get wiped out. The interest rate on paying of debt doesn't change. Granted, at current rates it's a lot tougher to make the argument for mortgage interest vs other types of debt.

Nobody ever shows a compound interest chart with anything other than a steady interest rate (aka - 30 years of 10% return = millionaire!). A single negative or downturn can have a pretty dramatic effect on those projections. If you look at those same projection charts and take the amount you'd look to invest over the first 10 years, but put into into debt payment instead of investing so that you get everything paid off, then take that same amount you would have been investing, start investing it plus the money that you're no longer paying in monthly expenses then you'll find the end of the 30 year period to be an almost identical result. The only difference is that after 10 years you've eliminated virtually any risk of personal bankruptcy.

If you can find something with a guaranteed long term return higher than the mortgage interest then it's another ballgame, but those are pretty hard to come by. Right now dividend investing seems to be the closest approach that generally lets you ignore the actual interest rates over time and instead focus on building cash flow.

But this is one of those topics that is part math, part point of view and part personal comfort level. This was just my perspective.

I largely agree with you on this. I focused on my mortgage and as a result I have less than a year of payments left. I didn't ignore investments either - roughly 10% of my income into the market - but I did not pay the minimum mortgage payment in favor of investments.

There was a point a few years ago where liquidating the investments could pay off the mortgage. To me it seems that you can get some of the benefits of the emotional release of being debt free if you have the capability to liquidate and clear debt.

While many people will make the argument that instead I should have paid the minimums and had more money invested with the net effect of reaching the liquidate/pay off point, I agree with the reasoning behind your argument: market volatility will not wipe out debt that has been cleared.

To fix the problem of all your payment going to interest, look at a shorter term. A 15 year mortgage is much less popular than a 30 year, but you start seeing a difference in the outstanding principle right away.

You can always get a 30 and pay extra. Why give up that flexibility. In today's market interest rates are so low the difference between the 15 and 30 rate are negligible. Also, ask yourself why the bank wants you to take the 15? It's because they make more money that way. Nit from you directly but they have more money they can loan out the faster you pay it back. Plus they have leverage with the fractional reserve system.

Exactly. NYTimes had an interesting visualization a few years ago that tracked the S&P 500 to show real-world results. It really shows the effect that doldrum years can have on returns:

http://www.nytimes.com/interactive/2011/01/02/business/20110...

>>I invested with steady 12-14% returns for 10 years and then watched it all get wiped out.

I'm guessing you mean that all your gains got wiped out, not that your investments all went to zero.

On the other hand, a lot of people spent years paying on a mortgage only to get foreclosed on and lose everything including their principal. ie, that investment went to zero, or maybe even negative.

There's a lot to be said for paying down your mortgage, but remember that until you've completely paid off the mortgage all of your equity is at risk.

Fair point. Getting it fully paid off is the only way around that.

Even if you have enough cash to pay off a mortgage, if you can invest it with better returns than the mortgage interest rate (not hard these days), then it makes better sense to do that.

Even Mark Zuckerberg has a mortgage...

Exactly this.

General rule of thumb when deciding between eliminating debt or investing is to compare if the debt interest is greater than investment interest (investment rate of return).

If (debt.interest > investment.interest ), pay off debt first. Else, invest.

That's the equation, but you also have to consider risk when you make it, and weigh it against your personal risk tolerance. Paying off a mortgage is like making a risk-free investment for the term of the mortgage with a (pre-tax) return equal to the interest rate. Right now, 10-year T-bills are yielding around 2.4%, most mortgage loans are in the 3-4% range. Your risk tolerance may be higher, in which case by all means put your mortgage principle toward investing in the stock market or your startup, but be aware that a market crash can leave you deep in debt.

If (debt.interest > investment.interest ), pay off debt first. Else, invest.

I disagree with this tremendously. With your strategy, essentially what you are doing is buying stocks on margin. This magnifies your profits if things goes your way and magnifies your losses if things go against you.

Think about it this way - Interactive Brokers is an online brokerage with extremely low margin rates which are often half of current mortgage rates (see https://www.interactivebrokers.com/en/index.php?f=interest&p...). Using your logic, the right thing to do is to leverage yourself to the hilt for every penny Interactive Brokers will loan you at 1.63% or less and cross your fingers you make the right investment choices otherwise you're bankrupt.

Buying investments on margin, no matter how it is done, is extremely risky. You might understand those risks and have a high enough risk tolerance but please don't pretend investing on margin is a general rule everyone should follow.

Sure, if you enjoy pedantry, please go ahead and assume that I mean that's the one golden rule and I'm sitting here blindly buying up mutual funds with every spare dollar I have.

You make the world a better place.

I thought he made a very interesting point. Your pseudocode looked good until I read that counterargument - now I've got food for thought.

When they said "investment.interest" I think they meant investment return percentage. I don't think they were advocating for investing on margin and maximizing leverage/risk, but rather deciding whether to put your $ towards your debt or towards an investment.

I don't think they were advocating for investing on margin and maximizing leverage/risk, but rather deciding whether to put your $ towards your debt or towards an investment.

It's the same thing. If it makes sense to keep $300,000 in debt to keep a $300,000 investment then it makes sense to go into $300,000 debt to make a $300,000 investment.

Whether that debt is a mortgage on a primary residence for a tax-equivalent-rate of 2.75% or margin interest for a tax-equivalent-rate of 1.63% makes little difference. This is what people who keep a high mortgage and invest the proceeds of that mortgage don't get. They are doing the equivalent of investing on margin which is extremely high risk. They could lose a large portion (or even all) of their investment and still be left with the debt.

From a google search: "Buying on margin is borrowing money from a broker to purchase stock. You can think of it as a loan from your brokerage. Margin trading allows you to buy more stock than you'd be able to normally."

That's not what I meant, definitely wouldn't borrow to invest so much as decide to invest (if I came into a new chunk of money) money on hand.

I'm not sure where the assumption is that I meant to invest on margin - it feels like I'm missing something.

The person you're replying to wasn't trying to say you meant to invest on margin but that what you are doing is the same as investing on margin.

When you do margin trading you take on debt to allow you to buy more stock. In your case, you aren't actually "taking on" debt technically, but you choose not to pay it off so that you can buy more stock.

After all, the scenarios break down to debt + more stocks or no debt + less stocks.

Obviously there are some differences, but I hope that explanation of the analogy made sense. The point is, by investing money instead of using it to pay off debt you are increasing your risk and reward whereas when you pay off debt you decrease it.

While the math doesn't really support paying off your mortgage first, I think for some people is more for the mental peace of mind that you don't have something hanging over your head. I can see why that would be the right choice for some people that are looking for a total change in their life.

> if you were to keep working for a little while after paying everything off you'd likely be able to save a huge amount of money very quickly. Save, invest, relax on a beach...any of it's easier without that mortgage eating away at you.

Except the money you spend on your mortgage is year 1 is worth a lot more than the money you spend on it in year 30. Especially with rates where they've been the past several years (our mortgage is 3.25%), cash flow is really the only upside to paying off a mortgage decades early.

> cash flow is really the only upside to paying off a mortgage decades early.

In my limited experience, the freedom of not having a mortgage and a car loan, or any other type of debt, far outweighs the benefits of just cash flow. We now have a sense of freedom we didn't have Before. I think it is going to be very individual how one reacts to it, but for us having a minimal mortgage or none has made a big difference for us. Taking risks, having run startups for the last 20 years, this was a major contribution to being able to do this.

Unfortunately, because of the way monetary policy is structured, it is not possible for all, or even most, to live without debt. Debt is fundamental to our economy. You can only be without it if someone else takes on some amount of debt.

Who takes on debt if you pay off your mortgage early?

In order for you to pay off your mortgage, you need to receive money. That money was generally created through the creation of debts.

So it is hard to say exactly who took on that debt, but someone probably did.

For more on how debt creates money, read up on http://en.wikipedia.org/wiki/Fractional-reserve_banking. And the person you replied to is exactly right - our entire economic system only works right if there is a lot of debt to go with it.

Paying off a mortgage destroys debt (and therefore, the money you used to pay it off).

It is interesting that in Sweden, the debt of the population in Sweden has not grown as fast as the assets. Since 1996 when the assets where 2x the dept, the gap has widened. The debt is now nearly 3x the debt. (The last graph in on the page, unfortunately in Swedish). It didn't say anything how this debt and assets are distributed though.

I am not saying debt isn't a fundamental part of policy, but in a place like Sweden actually not having more debt than you can handle is possible. http://www.scb.se/sv_/Hitta-statistik/Artiklar/Bostadslanen-...

Paying off a mortgage is just like any other investment - you need to look at the terms to see if it's worth doing. It's very illiquid, you can't get your cash back without getting another mortgage. On the other hand, it's a guaranteed rate of return that's probably significantly more than any other guaranteed rate you can find.

If you think you can do better with a different investment then go for it. But remember, someone with a lot more money than you decided that their best bet was to finance your mortgage.

The guaranteed rate of return is a crucial point. (There are admittedly also some tax reasons why not paying off the mortgage early can be relatively beneficial.) However, way too many people look at the overall stock market returns over the past few years and conclude that anyone who pays off their mortgage early is an idiot. By that logic, anyone who could should have taken out a HELOC and bet it on the market.

It would have indeed worked out over the past few years. The conclusion for guaranteed or very low risk investment returns is far less obvious and probably has more to do with liquidity and psychological factors.

>It's very illiquid, you can't get your cash back without getting another mortgage.

Well, you can take out a HELOC but you're right that's more or less the same thing as getting another mortgage--albeit with more flexibility.

The guaranteed rate on your equity is 0%. Got $500,000 in equity? Then that's $500,000 earning 0% interest. Of course you aren't paying mortgage interest but with mortgage rates at 3.5 - 4.25% it's easy to find investments with higher guaranteed returns.

Infinite Banking (using overfunded, dividend paying, whole life insurance) currently has 4.5% guaranteed floors with actual rates with dividends currently at 5.0 - 5.5%. Lots of other benefits as well, life insurance, and being able to borrow money against your policy any time you want for any reason, no questions asked.

Also, a 4% mortgage is only 4% of the whole balance in the beginning. At the end it is 4% of a very small balance. If you use level payments you effectively cut the interest rate in half to make comparison.

Taking out a $10,000 loan at 5% and investing it at 5% results in a profit.

Year 1 - Make a $1000 payment, $9000 balance (5% is $450). Your investment is $10000 at 5% or $500. $9000 loan and $10,500 in investments.

Year 2 - Make a $1000 payment, $8450 balance (5% is $423). Your investment is $10,500 at 5% $525. $8450 loan and $11,025 in investments.

...

Your math is wrong. The loan balance isn't reduced by the entire payment, the interest is subtracted first. And it's on the beginning balance, not the end balance. At one time there were progressive payment loans where the balance actually went up the first few years, because the payment didn't cover the entire interest.

Year 1 - Make a $1000 payment, lose $500 interest for a $9500 balance. Your investment yields $500 interest, but you had to withdraw $1000 to make the payment, so you're at $9500.

Year 2 - Make a $1000 payment, lose $475 interest for a $8975 balance. Your investment yields $475 interest, minus the $1000 withdrawal leaves you with $8975.

And so it goes, down to the end. Compound interest works both ways.

Remember what I said above: somebody thought that investing in your mortgage was the best return they could get. Are you willing to bet against them?

You can apply the interest before or after the payment, it doesn't really make that much difference, especially when you pay monthly and it compounds daily. The more often it compounds the less of a difference it makes between interest computed before or after the payment.

It's simpler and more accurate to say that the interest is added to the loan balance and then payments are subtracted. They don't subtract interest from payments, they add it to the balance. Extra payments don't have any interest applied to them, they go straight to principal.

The comparison though is between paying your extra cash flow towards a mortgage or investing it. You don't take money from the investment to pay the mortgage. You pay the minimum to the mortgage and then invest the difference.

As far as why banks want to do loans, you have to understand how banks work. What banks do is different.

Banks take money from deposits and then loan that out. They pay 1% interest on saving account deposits and charge 4% on loans. They are effectively purchasing something at $1 to sell for $4. That's a huge markup (400%). Of course banks want to do loans. They also have fractional reserve working in their favor. They can loan out more money than they actually have in deposits because the money is created out of thin air.

This is the same model used by savvy investors. They make investments using Other People's Money™.

OK, have it your way. Here's a spreadsheet to compare a loan+investment with simply saving the payments. I changed the payment from a nice round $1000 to $1010.24 so that the loan would be paid off in exactly 14 periods. On the left, you see the investment grow while the loan is paid down. On the right, you see an account grow as you add $1010.24 to it each time and collect 5% interest on the balance. They reach the same value at the end.

https://docs.google.com/spreadsheets/d/12NGCBeup3rCygMsSbcOn...

As for the origin of mortgage money, you're forgetting about the secondary market. Lots of loans originated by banks get bundled up and sold off. That's a very lucrative business for some banks, because they can collect fees for the origination and get their money back right away with no risk.

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