Comment by arcticbull | Hacker News Reader

Comment by arcticbull | Hacker News Reader

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> Have you ever heard how you could pay off your mortgage a lot quicker by making bi-weekly payments instead of monthly? Or how you can include extra with your payment and instruct your bank to apply it directly to the premium, helping you reduce your interest?

Generally speaking you don't want to do that.

A mortgage with an interest rate of like 3% (to which anyone in the last year refinanced or, or got on purchase - mine's 2.675%) is well below inflation. This means that having the loan is actually earning you money. When inflation is 8.5% and you're paying 3% interest on that loan, you're actually making 5.5% per annum by paying back the loan with future, inflated dollars.

That's before you factor in the mortgage interest tax deduction, and opportunity cost.

All in, not paying off your mortgage faster is likely earning you 6-7% per annum before you factor into account opportunity cost. On a Series I savings bond, that opportunity cost is like [edit] 7.11% [1].

Each time you pay into a Series I bond instead of paying off your mortgage you're earning about 15% per annum on that money vs paying off early.

You want to keep your low-interest mortgage for as long as you possibly can, deduct the interest, and set aside anything you would have put towards early payments. If interest rates ever drop below what you're paying, refinance. Don't pay it off early unless your mortgage APR minus deductions is higher than inflation.

[1] https://www.treasurydirect.gov/indiv/products/prod_ibonds_gl...

You don’t want to do this now, but there’s a reasonable world we end up in where either inflation hovers at 1%, like most the last 5 years (so you earn 2% by paying down a mortgage, vs -1% when putting it into a savings account), or interest rates stabilize at 10%, or both!

Also some people just hate having debt, and so they want to pay down debts as quickly as possible. Even if it’s “irrational” their goal is to pay down their mortgage in the least amount of time. It is better for them to pay down principal than enqueue future payments.

Answering both you and GP I belong to the “some people” group you described in your post. It’s not that I don’t understand the math, it’s just that I don’t have the mental capacity and time in my life to take advantage of this arbitrage.

To illustrate - I have an acquaintance who transfers money between credit cards to take advantage of points, and sign-up offers etc. Were I to engage in such activity myself - assuming I know anything about myself at all, it is that I will 100% forget some detail or date and end up getting charged all of the delayed interest making me worse off than if I didn’t engage in such a scheme at all.

So it’s like that. Rather than chasing some optimization in a half-ass manner, I’d rather just pay off the debt and pay less of my money to the bank.

There's no other thing to do, however, other than what you're already doing with your otherwise unused savings (hopefully index funds). Put your money in that instead of paying the mortgage early, and you'll end up with more money at the end of the mortgage. It's about the simplest optimization possible.

The only optimization is don't pay off your mortgage early. It's actually less complicated haha.

Long term debt has a mental tax that does not show up in a bank statement. While it may be "smart" to pay the minimum amount on a subsidized student loan, there's nothing like just paying it off and being done with it, forever.

You have a rather sophisticated analysis here, yet, you left out the most important factor: risk. Something that every sophisticated investor must take into account. And in the case of your personal residence, you have to take into account not only investment risk, market risk and interest rate risk (which you alluded to re: refinancing, but you left out the fact that you are not guaranteed to be able to refinance and even when you do, there are fees associated), but you also have the risk of losing your home and being homeless. For many people, the latter risk is assigned a very high rate, so I don't think it is as simple (or complicated) as you make it out to be.

If they're banking cash they would have otherwise put into their mortgage, then that extra liquidity is going to be a good thing should it come to foreclosure.

If you are banking the cash, rather than investing it, then the whole plan goes out the window because your cash is losing value while you also pay interest.

You can buy Series I bonds as was mentioned but those are variable interest and have only been worth buying the last year or so. They have been low interest for the last 30 plus years. Also, you can only buy up to $10k in series I bonds per year.

This is a form of leverage, but how do you use it in a low-risk way? Fixed income investments seem to be near zero, and maybe people don’t want to invest more in stock.

If the alternative is cash sitting in a bank account, paying off the loan looks better.

Edit: I looked at Series I, and it's variable rate with a 3-month interest penalty for early withdrawal, so you're not going to get 7% in the end. It seems worth doing a more detailed calculation.

You get a 9.5% at the moment if you buy before April 30 and hold for about a year.

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