# Why the eagerness to pay off long-term debt? **URL:** \ **Category:** Factual Questions\ **Created:** [March 24, 2011, 9:58pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895 "2011-03-24T21:58:37Z")\ **Posts on this page:** 20\ **Page:** 3
**Author:** ![SmartAlecCat](https://avatars.discourse-cdn.com/v4/letter/s/67e7ee/32.png) [@SmartAlecCat](https://boards.straightdope.com/u/SmartAlecCat)\ **Post date:** [March 25, 2011, 3:29pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/41 "2011-03-25T15:29:33Z")
> [@Susanann](#): > > Lastly, stocks have always traditionally done VERY poorly in periods of high inflation, and America is now entering into a period of very high inflation, if not hyperinflation. > > On the other hand, paying off the mortgage, paying off all debts, is generally good sense, esp when entering into troubled economic times. Paying off a 30 year fixed loan with an historic all time low interest rate (and tax deductible interest no less) with today’s dollars is the truly the best way you can come up with to combat coming very high inflation? ---
**Author:** ![Machine\_Elf](https://avatars.discourse-cdn.com/v4/letter/m/82dd89/32.png) [@Machine\_Elf](https://boards.straightdope.com/u/Machine_Elf)\ **Post date:** [March 25, 2011, 3:32pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/42 "2011-03-25T15:32:07Z")
> [@Susanann](#): > > Both stocks, and real estate, are not capable any more of producing and 8% return. Furthermore, both stocks and real estate are now both risky places to put money. I wonder how many times this has been uttered in the past century… > [@](#): > > Anyone who says you cant lose these days by owning stocks and real estate is just plain wrong. Haven’t said you _can’t lose._ In the short term, you can lose big, as 2008 showed. In the long term, you can still lose (i.e. see total returns less than a bond fund would have delivered), but it’s _very unlikely_. > [@](#): > > Lastly, stocks have always traditionally done VERY poorly in periods of high inflation, and America is now entering into a period of very high inflation, if not hyperinflation. > > On the other hand, paying off the mortgage, paying off all debts, is generally good sense, esp when entering into troubled economic times. As noted, if hyperinflation hits, the value of your fixed-rate mortgage debt tends toward zero. If you think that’s going to happen, then you would be smart to delay paying it off. When my salary skyrockets to a million dollars per year (to keep up with the hyperinflation), I’ll be able to pay off my mortgage with just a couple of months of my salary; not the case right now. ---
**Author:** ![Susanann](https://avatars.discourse-cdn.com/v4/letter/s/7ab992/32.png) [@Susanann](https://boards.straightdope.com/u/Susanann)\ **Post date:** [March 25, 2011, 3:37pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/43 "2011-03-25T15:37:58Z")
> [@Truman\_Burbank](#): > > Not even\*\* PhD economists\*\* are unamimously going to agree on the proposition “we are (certain) to be entering a period of hyper-inflation”. … PHD economists? You mean the guys who did not at all foresee the (bank,housing,stock) financial collapse of the past few years? You mean the guys who said real estate prices can only go up? You mean the guys who think the Federal Reserve has done a good job in the past 80 years? Do you have any idea what the value of the dollar has done since the creation of the Federal Reserve (esp compared to the stable value of the dollar from 1789 - 1912)? You mean the guys who say that all of our problems that were caused by too much spending and too much debt can only be solved by borrowing and spending more? ---
**Author:** ![Morgenstern](https://avatars.discourse-cdn.com/v4/letter/m/f9ae1b/32.png) [@Morgenstern](https://boards.straightdope.com/u/Morgenstern)\ **Post date:** [March 25, 2011, 3:40pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/44 "2011-03-25T15:40:33Z")
To me it’s simple math. By paying off a mortgage, I’d get a basically tax free $1100 per month raise. Imagine how much an $1100/month raise would help most of us right now. ---
**Author:** ![Susanann](https://avatars.discourse-cdn.com/v4/letter/s/7ab992/32.png) [@Susanann](https://boards.straightdope.com/u/Susanann)\ **Post date:** [March 25, 2011, 3:44pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/45 "2011-03-25T15:44:58Z")
> [@Machine\_Elf](#): > > As noted, if hyperinflation hits, the value of your fixed-rate mortgage debt tends toward zero. If you think that’s going to happen, then you would be smart to delay paying it off. When my salary skyrockets to a million dollars per year (to keep up with the hyperinflation), I’ll be able to pay off my mortgage with just a couple of months of my salary; not the case right now. Perhaps, but not necessarily. Dont count on it. After hyper inflation, the old US dollar will be replaced with a new currency. The government “could”, mandate that all previous dollar denominated debts are to be converted into debts denominated by the new currency, in which case, the actual value of the debt, the actual cost, will be unchanged. One has to ask: \*\* Historically, has the government EVER legislated in favor of banks? \*\* Has there ever been such a thing as **"bank bailouts**"? Before anyone out there takes on debt in the hopes that the little guy will get something for nothing and that the big banks will be losers, I say dont count your chickens before they are hatched. Betting against big banks, betting against big government, is the riskiest thing you can do. ---
**Author:** ![Susanann](https://avatars.discourse-cdn.com/v4/letter/s/7ab992/32.png) [@Susanann](https://boards.straightdope.com/u/Susanann)\ **Post date:** [March 25, 2011, 3:46pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/46 "2011-03-25T15:46:16Z")
> [@Morgenstern](#): > > To me it’s simple math. By paying off a mortgage, I’d get a basically tax free $1100 per month raise. Imagine how much an $1100/month raise would help most of us right now. Isnt it great to be debt-free? ---
**Author:** ![Lasciel](https://avatars.discourse-cdn.com/v4/letter/l/e79b87/32.png) [@Lasciel](https://boards.straightdope.com/u/Lasciel)\ **Post date:** [March 25, 2011, 3:47pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/47 "2011-03-25T15:47:50Z")
I’m going to jump onto the column of people who know that the return may not be as good financially speaking, but the emotional security is important enough that we would do it anyway. We just bought this house, and right now, the emotional power of saying - here ya go - that’s our balance on the house, now give us the clear title - that’s nice. Sure we could make more money in the long term if we invested carefully and the markets keep improving and we are on top of it, but honestly, that’s a lot of uncertainty. Not saying that it’s risky, just that because of the time and multiple factors involved, the quick “instant security” of having a long-term debt paid off becomes more emotionally accessible than investing that same amount. It’s like a large-scale version of the experiment where you give a kid two marshmallows and tell him not to eat them, and you walk off for 30 minutes. Some kids can wait, and they get the marshmallows later, and then a reward of more marshmallows (that they weren’t sure they would get at first). Some kids can’t, and they get their marshmallows now. It’s not like they lose their two marshmallows either way, you know? People are motivated by different things, and most people aren’t usually rational or efficient in matters of finance. ---
**Author:** ![Labrador\_Deceiver](https://avatars.discourse-cdn.com/v4/letter/l/7c8e57/32.png) [@Labrador\_Deceiver](https://boards.straightdope.com/u/Labrador_Deceiver)\ **Post date:** [March 25, 2011, 3:53pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/48 "2011-03-25T15:53:26Z")
> [@Susanann](#): > > PHD economists? > > You mean the guys who did not at all foresee the (bank,housing,stock) financial collapse of the past few years? > > You mean the guys who said real estate prices can only go up? > > You mean the guys who think the Federal Reserve has done a good job in the past 80 years? Do you have any idea what the value of the dollar has done since the creation of the Federal Reserve (esp compared to the stable value of the dollar from 1789 - 1912)? > > You mean the guys who say that all of our problems that were caused by too much spending and too much debt can only be solved by borrowing and spending more? Perhaps you could tell us who said the things you’ve listed above. That’s what I thought. ---
**Author:** ![Susanann](https://avatars.discourse-cdn.com/v4/letter/s/7ab992/32.png) [@Susanann](https://boards.straightdope.com/u/Susanann)\ **Post date:** [March 25, 2011, 3:56pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/49 "2011-03-25T15:56:40Z")
> [@Lasciel](#): > > Sure we could make more money in the long term if we invested carefully and the markets keep improving and we are on top of it, but honestly, that’s a lot of uncertainty. . There are many examples of rich people, even very rich people, even American movie stars, even Lottery winners, who at one time could afford the very best personal financial advisors, who did not pay off their mortgages, and subsequenty who lost their homes. Most people who think that they are smarter than everyone else, who think they are smarter than the banks, who think that they can get higher rates of return with less risk, who think that “they” cannot lose, are just fools. ---
**Author:** ![Hampshire](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/hampshire/32/4887_2.png) [@Hampshire](https://boards.straightdope.com/u/Hampshire)\ **Post date:** [March 25, 2011, 4:00pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/50 "2011-03-25T16:00:48Z")
> [@Susanann](#): > > Both stocks, and real estate, are not capable any more of producing and 8% return. Really? Have you seen the S&P 500 return the past two years? 2010- 14.32% 2009- 27.11% Granted much of that was recovering from 2008’s -37.22% return but you can’t really watch these things play out short term since the whole market is cyclical. What you can do is look long term at the market and see what kind of returns you’ll get in any rolling 20 year period. 1991-2011: 11.04% 90’-10’: 10.16% 89’-09’: 10.4% 88’-08’: 13.09% 87’-07’: 13.11% and so on… Now I guess if you want to be all doom and gloom and think the market has forever changed from what it has been over the past 100 years and we will be watching these 20 year rolling averages slowly disintegrate into nothing then go ahead. But I’ll trust history and take my chances that my long term investment will come out somwhere in the historical 8-12% range. ---
**Author:** ![Isabel8](https://avatars.discourse-cdn.com/v4/letter/i/48db29/32.png) [@Isabel8](https://boards.straightdope.com/u/Isabel8)\ **Post date:** [March 25, 2011, 4:01pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/51 "2011-03-25T16:01:58Z")
> [@Hampshire](#): > > I’m with **bump** and **pulykamell** on this one. It’s basic math. > If my choices are to > (A) pay off a $200K 5% 20 year mortgage today with $200K cash leaving me with a $200K house and $0 cash 20 years from now, vs. > (B) making 8% compounded anually on $200K over 20 years while continually paying 5% on my mortgage (difference being +3% in my favor) leaving me at the end of 20 years with a $200K house and $125K in cash, > > guess which choice I’m going to make. By your logic, after you’ve paid off your house in scenario B, you should immediately take out another mortgage on it and invest the money. In fact, why wait until your house is paid off? Once you’ve acquired, say $30K additional equity in your house, you ought to take out a another loan. After all, that 30K will earn more in investments than you’re paying on the loan. Right? Bottom line: Anyone who wouldn’t trade in their home equity to fund investments ought to understand why some people would rather pay off their houses than invest. It’s the exact same decision being made in either case. ---
**Author:** ![kayaker](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/kayaker/32/441_2.png) [@kayaker](https://boards.straightdope.com/u/kayaker)\ **Post date:** [March 25, 2011, 4:09pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/52 "2011-03-25T16:09:14Z")
I paid off my 30 year mortgage as quickly as I could (4 1/2 years) because CHASE screwed up my account repeatedly and I wanted rid of the bastards. ---
**Author:** ![bump](https://avatars.discourse-cdn.com/v4/letter/b/7c8e57/32.png) [@bump](https://boards.straightdope.com/u/bump)\ **Post date:** [March 25, 2011, 6:09pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/53 "2011-03-25T18:09:14Z")
> [@Labrador\_Deceiver](#): > > You’ve eliminated risk in your hypothetical. In a real world situation, you’re taking on 30 years worth of market risk, as well as 30 years worth of risk associated with having to make a monthly mortgage payment. No I didn’t - the risk is that the old man isn’t home, or doesn’t answer the door, or you lose the $1.25, and consequently, your brother beats your ass when you don’t pay up at the end of the week. The decision is basically whether you pay off your brother early for fear that something might happen, and he’ll beat your ass, and you can avoid that (risk averse), or whether you’ll delay paying him off immediately and make some money with your new found $1.25,and risk losing it, not being able to make money,etc… This isn’t really a hypothetical discussion- companies do this all the time; that’s often why they don’t pay off long term debts that they could easily pay off- that money’s working for them by having that debt, rather than just not having the debt AND not making any money. ---
**Author:** ![Labrador\_Deceiver](https://avatars.discourse-cdn.com/v4/letter/l/7c8e57/32.png) [@Labrador\_Deceiver](https://boards.straightdope.com/u/Labrador_Deceiver)\ **Post date:** [March 25, 2011, 6:17pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/54 "2011-03-25T18:17:16Z")
> [@bump](#): > > This isn’t really a hypothetical discussion- companies do this all the time; that’s often why they don’t pay off long term debts that they could easily pay off- that money’s working for them by having that debt, rather than just not having the debt AND not making any money. Of course companies do it all the time, but other companies (Microsoft, for example) take the opposite approach and are much more secure during economic downturns. Nobody has added the risk component into their mathematical calculations, but most companies do. ---
**Author:** ![SmartAlecCat](https://avatars.discourse-cdn.com/v4/letter/s/67e7ee/32.png) [@SmartAlecCat](https://boards.straightdope.com/u/SmartAlecCat)\ **Post date:** [March 25, 2011, 6:17pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/55 "2011-03-25T18:17:30Z")
> [@Isabel8](#): > > By your logic, after you’ve paid off your house in scenario B, you should immediately take out another mortgage on it and invest the money. > > In fact, why wait until your house is paid off? Once you’ve acquired, say $30K additional equity in your house, you ought to take out a another loan. After all, that 30K will earn more in investments than you’re paying on the loan. Right? > > Bottom line: Anyone who wouldn’t trade in their home equity to fund investments ought to understand why some people would rather pay off their houses than invest. It’s the exact same decision being made in either case. That’s exactly what I do/did – refinance back to 30 years every time interest rates drop more than 1%. Now I’m at 3.875%, 30 year fixed. If sometime in the next 30 years rates drop below 2.875%, you bet I will jump to refinance again. If after 30 years, rates that low, and interest is still tax deductible, I’ll borrow more ultra-cheap money again. I’m doubting we’ll ever see such favorable rates in my life, but if we do, I’ll take advantage again. ---
**Author:** ![Labrador\_Deceiver](https://avatars.discourse-cdn.com/v4/letter/l/7c8e57/32.png) [@Labrador\_Deceiver](https://boards.straightdope.com/u/Labrador_Deceiver)\ **Post date:** [March 25, 2011, 6:23pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/56 "2011-03-25T18:23:59Z")
> [@SmartAlecCat](#): > > That’s exactly what I do/did – refinance back to 30 years every time interest rates drop more than 1%. Now I’m at 3.875%, 30 year fixed. If sometime in the next 30 years rates drop below 2.875%, you bet I will jump to refinance again. If after 30 years, rates that low, and interest is still tax deductible, I’ll borrow more ultra-cheap money again. I’m doubting we’ll ever see such favorable rates in my life, but if we do, I’ll take advantage again. There’s a difference between refinancing in an attempt to save some interest and always maxing out the amount you have borrowed against your home. ---
**Author:** ![Truman\_Burbank](https://avatars.discourse-cdn.com/v4/letter/t/ecc23a/32.png) [@Truman\_Burbank](https://boards.straightdope.com/u/Truman_Burbank)\ **Post date:** [March 25, 2011, 6:34pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/57 "2011-03-25T18:34:12Z")
> [@Susanann](#): > > There are many examples of rich people, even very rich people, even American movie stars, even Lottery winners, who at one time could afford the very best personal financial advisors, who did not pay off their mortgages, and subsequenty who lost their homes. > > Most people who think that they are smarter than everyone else, who think they are smarter than the banks, who think that they can get higher rates of return with less risk, who think that “they” cannot lose, are just fools. Note that this is not the same thing as claiming they _followed_ the advice they were given. “Most people who think that they are smarter than everyone else…are just fools” I agree with your last quote, and yet you seem awfully sure of yourself. Where did you study economics? If you haven’t, upon what do you base your sense of ‘knowing better’ than those who have? ---
**Author:** ![septimus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/septimus/32/410_2.png) [@septimus](https://boards.straightdope.com/u/septimus)\ **Post date:** [March 25, 2011, 7:36pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/58 "2011-03-25T19:36:51Z")
> [@pulykamell](#): > > Historically, I don’t think there’s been a 30-year period [of the U.S.A. stock market] ever that has returned less than [8%] … [edited for clarity by septimus] Google “selection bias.” IIRC, there was never a 30-year period of the German stock market throughout 1890-1970 which returned more than 0%. I’m not necessarily predicting poor future U.S. performance, but get tired of the constant repetition of the “never for 30 years” claim, without realizing that it is classic and clearcut selection bias. ETA: To believe U.S. losing a major war is almost impossible may be valid; I just want to see the assumption made explicit. ---
**Author:** ![pulykamell](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/pulykamell/32/3166_2.png) [@pulykamell](https://boards.straightdope.com/u/pulykamell)\ **Post date:** [March 25, 2011, 7:47pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/59 "2011-03-25T19:47:17Z")
> [@septimus](#): > > Google “selection bias.” IIRC, there was never a 30-year period of the German stock market throughout 1890-1970 which returned more than 0%. > > I’m not necessarily predicting poor future U.S. performance, but get tired of the constant repetition of the “never for 30 years” claim, without realizing that it is classic and clearcut selection bias. > > ETA: To believe U.S. losing a major war is almost impossible may be valid; I just want to see the assumption made explicit. I know well what selection bias is. I picked “30 years” because that’s the number relevant to the discussion: the mortgage is 30 years. Is there a better way you propose to judge historical long-term performance of the stock market? ETA: And I’m not saying we might not see a period where there is a decline in the stock market over a certain 30-year period. But, like I said above, if that’s the case, then I think I will have a lot more to worry about than these investments. Those 30-year numbers cover all periods, including the Great Depression, the World Wars, the recessions, etc. Yes, there is an element of risk. I think it’s minimal given the numbers I know, but your personal investment calculus might lead you to a different conclusion. Also, as I said above, I still wouldn’t put all my eggs in that basket, either. I’d split the risk between the house and the market, because I _am_ conservative in my investments. ---
**Author:** ![Hampshire](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/hampshire/32/4887_2.png) [@Hampshire](https://boards.straightdope.com/u/Hampshire)\ **Post date:** [March 25, 2011, 7:53pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/60 "2011-03-25T19:53:21Z")
> [@septimus](#): > > Google “selection bias.” IIRC, there was never a 30-year period of the German stock market throughout 1890-1970 which returned more than 0%. > > I’m not necessarily predicting poor future U.S. performance, but get tired of the constant repetition of the “never for 30 years” claim, without realizing that it is classic and clearcut selection bias. > > ETA: To believe U.S. losing a major war is almost impossible may be valid; I just want to see the assumption made explicit. 30-year, 25-year, 20-year, 15-year, your choice. Pick a “long term” period and give me a start date. [Previous page](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895.md?page=2) [Next page](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895.md?page=4)