Taking money off the table

I participate in a personal finance sub-reddit, and there is often a question of whether someone should pay off their mortgage (completely, or make some lump sum payments).

The mathematical answer is that if your interest rate is lower than the expected returns of some kind of portfolio you have, than you'll make more money investing.

But I like to bring up what Morgan Housel, author of the book The Psychology of Money, said on paying down his mortgage:

> It just increased our independence, even if it made no sense on paper. So that's another element of debt that I think goes misunderstood. And a lot of that for both of those points is this idea that people don't make financial decisions on a spreadsheet. They don't make them in Excel. They make financial decisions at the dinner table. That's where they're talking about their goals and their own different personalities and their own unique fears and their own unique skills and whatnot. So that's why I kind of push people to say like, it's okay to make financial decisions that don't make any sense on paper if they work for you, if they check the boxes of your psychology and your goals that makes sense for you. And for me, extreme aversion, what looks like an irrational aversion today, and I would say is an irrational aversion to debt, is what works for me and what makes me happy, so that's why I've done it.

* https://rationalreminder.ca/podcast/128

* https://www.youtube.com/watch?v=NSaRb-iFwPA&t=12m48s

If you have a 2.6% mortgage which is less than inflation, then you are making money from the bank. Paying that off would be ridiculous.

Paying off if possible, but I'd not put everything into paying it down. Pay a chunk of it down for comfort, and put some into emergency reserves with some reasonable level of return that could be accessed in the future in case of need. Early payments don't really matter that much if you have a period of unemployment/underemployment before it's fully paid off.

I mean there are other factors right? How long the rate is fixed for, penalty for paying off early, what you think the rate will be after term is over, you and your family's circumstances etc.

Paying your mortgage off comes with no risk, it’s not going to come back again. Meanwhile your investments could collapse tomorrow.

> The mathematical answer is that if your interest rate is lower than the expected returns of some kind of portfolio you have, than you'll make more money investing.

You maximise expected value not by putting everything into the single highest-EV bet, but by sizing your bets according to https://en.wikipedia.org/wiki/Kelly_criterion

Just to reiterate the point the person above you made, but in far simpler terms: independence can be far greater return on your personal well-being then maximizing gains. I'm willing to "lose" out on $50-$100k over the lifetime of my mortgage in exchange for never needing to make a payment on the house again

The point being made is good though.

Owing no one anything is incredibly liberating. It changes how you behave and what you are risking.

Sure, I’d be richer on paper if I had kept the first house and rented it out, buying the second house with debt. But the worry and hassle and was my concern and I’m far happier. Perhaps 20 years from now my position would be different.

If my federal money market account at one of the largest, most respected financial institutions in the world collapses, I don't know that the piece of paper saying this house belongs to me is going to be worth all that much anyway.

The gov and insurance company will still want their taste. I think my escrow portion is probably at least 1/5 of my mortgage payment.

Cash flow is another facet of paying off your mortgage early, and I think it’s underrated. Eliminating thousands of dollars from your monthly expenses dramatically increases your flexibility. Since most people have “cash / reserve fund” and “retirement investments (do not touch)” as their major financial categories, it optimizes the one you interact with the most. You don’t need to always make the maximum possible to keep a comfortable amount of cash on hand, which gives you more flexibility to take time off between jobs, or tank a layoff, or take that startup job that pays less (but damn if it doesn’t look fun). Personally I recently bought a second apartment adjacent to my first in order to combine them into a 3br. Paying off the first mortgage years ago was the difference between being able to afford the monthly expenses and not.

Obviously you need to consider both net worth and cash flow when making a decision like that, but don’t underrate the difference that improved cash flow makes!

> […] then you are making money from the bank.

Yes, that is the mathematically correct answer.

If you make that big of a decision at the dinner table without excel, it implies that you make the decision without doing the math, which implies you are stupid.