How does retirement play into this for you? Are you aiming to pay off the house by the time you retire to save the monthly expense? If you wanted to retire early, would the accelerated payoff still be a terrible idea?
Funny, this exact stuff (accelerated mortgage payoff, and the idea of the equity you'd put down on a mountain place being better used in other ways) is all coming up as we have some consultations with financial advisors. This thread has been good input & food for thought.
It all depends on cash and cashflow. Another saying is that cash is king and cashflow is queen. If I have assets generating cashflow well above my mortgage payment, then those assets are paying my liabilities instead of my labor hours.
Accelerated payoff (e.g. 15 year vs. 30 year) relies on the idea that you pay far less interest in the shorter loan, but it costs you cashflow that could be invested in liquid assets that are generating a return. It’s mostly a question of financial discipline - as I had quoted before, people buy payments not house price, and longer term mortgages are usually leveraged to buy more expensive houses - we all qualify on payments not purchase price. If one could afford the 15 year mortgage payment from a cashflow perspective but say chose a 40 year with an automatic deduction of the difference into a diversified investment fund, that diversified fund would be worth a lot more than the early buyout of equity over time. But nobody does this, and that’s the challenge.
I think that one of the best ways to think about this issue at a macro level is in the popularity, or better said necessity, of reverse mortgages.
Buying equity when cashflow is tight throughout the earning years can easily lead to being house rich and cash poor. Being cash poor means needing to increase cashflow, and the reverse mortgage is having your equity disbursed back to you in exchange for your house. Here you are using old dollars earned In the past against current prices with resulting drastically reduced purchasing power. It’s using say 2003 dollars to buy price inflated 2030 goods and services - the same thing as cash under the mattress. From an investment time value of money perspective, this is the inverse of what we should be doing.
U.S. homeowner rates are artificially high in part due to the mortgage interest deduction and heavily subsidized energy production to enable us to live far away from work and certain resources (aka the American Dream). Another housing crisis is inevitable because of the over-reliance on houses for asset appreciation and savings plus the relative equality of a mortgage vs. renting due to the tax subsidy. And that younger generations don’t have real wage (wage growth vs. inflation) growth certainty to make the leap that income will sufficiently outgrow the liability commitment as other costs increase drastically. This is smart as an economic reality, but it is going to expose the lack of economic fundamentals in house prices, unless of course the fed keeps printing free money to prop up the house of cards.
The latest tax bill should somewhat hasten the cliff, because it punishes larger families with bigger houses with the changes in personal and dependent exemptions.
Anyway, we are all going to live off cashflow from assets if we intend to retire, and a house is negative cashflow independent of its financing and can only provide cash through borrowing against equity, which further increases negative cashflow. That’s a downward spiral that should not be at the centerpiece of anybody’s retirement strategy.
Cash is king and cashflow is queen. A house produces neither, unless it has positive investment cashflow from rental income.
I wonder how many people’s retirement strategy will include the word “Airbnb” because the only large potential asset has to produce cashflow?
It's like having the key to the vault.
