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Comment by brightball | Hacker News Reader

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.

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> 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.

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...

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.

>>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.

> 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.

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-...

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).

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...

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.

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.

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.

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.

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