# 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:** 7
**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:** [April 1, 2011, 4:25pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/121 "2011-04-01T16:25:09Z")
> [@Hampshire](#): > > Actually the difference is about a million dollars. > Starting with an initial $200K over 30 years compounded annually at 8% will give you about $1.8 million. > Taking the same $200K and slowly investing it a month at a time ($200K / 30 years = 360 monthly payments of $556) at the same 8% will give you about $827K. That’s true. However, the number I used (because I thought it was a fairer comparison) was to invest what the monthly mortgage payment would have been ($1073.64) into the market, and I was getting numbers closer to $240K. The mortgage deduction tax advantage of this should add another $40K or thereabouts to the difference. ---
**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:** [April 1, 2011, 4:40pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/122 "2011-04-01T16:40:39Z")
> [@bump](#): > > You’ve already got the debt! You took out the mortgage before the windfall. Fix your math and try 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:** [April 1, 2011, 4:42pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/123 "2011-04-01T16:42:08Z")
> [@Hampshire](#): > > Actually the difference is about a million dollars. > Starting with an initial $200K over 30 years compounded annually at 8% will give you about $1.8 million. > Taking the same $200K and slowly investing it a month at a time ($200K / 30 years = 360 monthly payments of $556) at the same 8% will give you about $827K. Fix your math and try again. ---
**Author:** ![Crackrat](https://avatars.discourse-cdn.com/v4/letter/c/919ad9/32.png) [@Crackrat](https://boards.straightdope.com/u/Crackrat)\ **Post date:** [April 1, 2011, 5:23pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/124 "2011-04-01T17:23:12Z")
> [@bump](#): > > How? This doesn’t make sense unless you’re selling all of them and buying the shares back at reduced value. > > If I own 100 shares of X-Corp today, and each share is worth $100 bucks today, I have $10,00 invested, and I own 100 shares. > > If next year, the stock price goes to $50, then I still own 100 shares of X-Corp. It just happens that the worth of the stock at this point in time is $50 per share, and my 100 shares _can be sold_ for $5000. No profit or loss has been realized at this point. > > If a year later, the stock price goes back up to $110 per share, I still own 100 shares of X-Corp, but they could be sold for $11000. > > It’s all about when you sell the stocks, not what you do in the meantime. You don’t gain and lose money when the market goes up and down; the portfolio gains and loses value IF YOU SOLD THE STOCKS RIGHT THEN. > > So over the 3 year period I describe, you’d actually have made 10% on your stocks. If you sold over the first 2 years, you’d have lost 50%. How is going from $50 to $110 a 50% increase? The hypothetical was that the market goes down 50% then up 50%. The numbers should look like this: You invest your $10,000 in 100 shares at $100 each. Share price drops 50% to $50 - you now have $5,000 worth of stock. Share price increases 50% to **$75** - you now have $7,500 worth of stock. So now you’ve lost $2,500 worth of stock value. ---
**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:** [April 1, 2011, 5:40pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/125 "2011-04-01T17:40:31Z")
> [@Labrador\_Deceiver](#): > > Fix your math and try again. My math is fine, what do you come up with? ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [April 1, 2011, 6:16pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/126 "2011-04-01T18:16:36Z")
> [@Labrador\_Deceiver](#): > > If you’re investing in liquid investments, you’re giving up a great many of the tax advantages associated with long-term investments. As a matter of fact, this whole scenario pretty much falls apart if you’re talking about the short term, since your risk is increased even more. I should have said semi-liquid investments. You are certainly not going to get good returns in a money market fund or anything else you can write checks on. If you have to cash it out early, then you have a worse tax picture on the earnings. But that is another part of the risk calculation. Someone whose job was in jeopardy should probably neither pay off the house nor make any high yield investments, but keep the money available to pay the mortgage and living expenses if something happens. > [@](#): > > If your retirement goals are already on track, then there isnt an advisor worth his salt who would recommend taking money out of a paid-off house to invest in the market. The level of risk involved is too high to justify the puny difference in return. Debt is a terrible way to try and increase wealth in the world of personal finance. That my first reaction was to absolutely agree shows that I’m as prone to this as anyone else. I certainly agree that no financial planner would recommend it. But people do take out mortgages to fund certain investments (usually risky startups, I suppose). And, after all, isn’t a home equity loan to pay off high credit card debt exactly this. The problem with that isn’t paying off the debt, it is that people accumulate more. There is also a factor in that you are worsening your cash flow situation instead of just not improving it, and studies of loss aversion tell us that this isn’t going to fly with people. To make up for it you’d need a better return on the investment made than in the case of investing a windfall. Psychologically speaking, that is. ---
**Author:** ![Susanann](https://avatars.discourse-cdn.com/v4/letter/s/7ab992/32.png) [@Susanann](https://boards.straightdope.com/u/Susanann)\ **Post date:** [April 1, 2011, 6:17pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/127 "2011-04-01T18:17:57Z")
> [@Hampshire](#): > > I don’t care to spend my days cowering in fear of the doomsday that may or may not ever arrive.) If you actually think the USA can continue to run $ multi-trillion dollar deficits each year, year after year, borrowing more and more\*\* additional\*\* trillions every year, while at the same time it dismantles its manufacturing capacity and it continues to add additional millions more unskilled illiterate third world immigrants to its population each year, year after year, without doomsday being a certainty, then that speaks volumes about whatever else you might say. There is no question about the coming doomsday. It is the most inevitable and predictable economic collapse in world history. Anyone who thinks the USA can continue to borrow more and more trillions forever has lost all reality - the debt will very soon be too much for any country to lend us, and when the USA goes bankrupt and the world economy collapses, you can forget about your nice little stock charts, your fanciful fictional predictions, and all of your \*\*Hope and Change \*\* of 8% . ---
**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:** [April 1, 2011, 6:34pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/128 "2011-04-01T18:34:44Z")
> [@Hampshire](#): > > My math is fine, what do you come up with? No, it isn’t. You don’t pay $200k over 30 years on a $200k mortgage. That’s so basic, I shouldn’t have to point it out. ---
**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:** [April 1, 2011, 6:36pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/129 "2011-04-01T18:36:07Z")
> [@Voyager](#): > > I should have said semi-liquid investments. You are certainly not going to get good returns in a money market fund or anything else you can write checks on. If you have to cash it out early, then you have a worse tax picture on the earnings. But that is another part of the risk calculation. Someone whose job was in jeopardy should probably neither pay off the house nor make any high yield investments, but keep the money available to pay the mortgage and living expenses if something happens. > That my first reaction was to absolutely agree shows that I’m as prone to this as anyone else. I certainly agree that no financial planner would recommend it. But people do take out mortgages to fund certain investments (usually risky startups, I suppose). And, after all, isn’t a home equity loan to pay off high credit card debt exactly this. The problem with that isn’t paying off the debt, it is that people accumulate more. There is also a factor in that you are worsening your cash flow situation instead of just not improving it, and studies of loss aversion tell us that this isn’t going to fly with people. To make up for it you’d need a better return on the investment made than in the case of investing a windfall. Psychologically speaking, that is. Good post. ---
**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:** [April 1, 2011, 7:01pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/130 "2011-04-01T19:01:43Z")
> [@Labrador\_Deceiver](#): > > No, it isn’t. You don’t pay $200k over 30 years on a $200k mortgage. That’s so basic, I shouldn’t have to point it out. You don’t pay $200K over 30 years on a $200K mortgage? Sure you do. The rest is called interest. ---
**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:** [April 1, 2011, 7:04pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/131 "2011-04-01T19:04:03Z")
> [@Susanann](#): > > There is no question about the coming doomsday. It is the most inevitable and predictable economic collapse in world history. Care to give any hard predictions as to when this will happen other than "It’s a comin’ " ---
**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:** [April 1, 2011, 7:05pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/132 "2011-04-01T19:05:11Z")
> [@Hampshire](#): > > You don’t pay $200K over 30 years on a $200K mortgage? Sure you do. The rest is called interest. No kidding. You pay interest too, and that interest must be taken into consideration as available capital if the loan is paid off. The math was done on page one. ---
**Author:** ![bump](https://avatars.discourse-cdn.com/v4/letter/b/7c8e57/32.png) [@bump](https://boards.straightdope.com/u/bump)\ **Post date:** [April 1, 2011, 7:29pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/133 "2011-04-01T19:29:32Z")
> [@Crackrat](#): > > How is going from $50 to $110 a 50% increase? The hypothetical was that the market goes down 50% then up 50%. The numbers should look like this: > > You invest your $10,000 in 100 shares at $100 each. > Share price drops 50% to $50 - you now have $5,000 worth of stock. > Share price increases 50% to **$75** - you now have $7,500 worth of stock. > So now you’ve lost $2,500 worth of stock value. Sure, if your 50% is on the 50% that’s left. I was taking as 50% loss on the original amount, and 50% gain on the original amount, which would be a wash. It’s common sense- nobody would dispute that. I assumed that Susanann was somehow trying to say that if you lost 50% of the stock value and gained that same 50% back, then you’d somehow lose money, which isn’t true. If you lose 50% of your value, then gain back 50% of what you have left, then sure, you’re down 25% compared to where you originally were. That’s like 6th grade math. ---
**Author:** ![bump](https://avatars.discourse-cdn.com/v4/letter/b/7c8e57/32.png) [@bump](https://boards.straightdope.com/u/bump)\ **Post date:** [April 1, 2011, 7:32pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/134 "2011-04-01T19:32:43Z")
> [@Susanann](#): > > If you actually think the USA can continue to run $ multi-trillion dollar deficits each year, year after year, borrowing more and more\*\* additional\*\* trillions every year, while at the same time it dismantles its manufacturing capacity and it continues to add additional millions more unskilled illiterate third world immigrants to its population each year, year after year, without doomsday being a certainty, then that speaks volumes about whatever else you might say. > > There is no question about the coming doomsday. It is the most inevitable and predictable economic collapse in world history. > > Anyone who thinks the USA can continue to borrow more and more trillions forever has lost all reality - the debt will very soon be too much for any country to lend us, and when the USA goes bankrupt and the world economy collapses, you can forget about your nice little stock charts, your fanciful fictional predictions, and all of your \*\*Hope and Change \*\* of 8% . What the hell are you talking about? This doesn’t have anything to do with our hypothetical 200k windfall and investing vs. paying off the mortgage, except for extremely tangentially, and then, only in loon land. I bet you’re afraid of the Amero too… ---
**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:** [April 1, 2011, 7:35pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/135 "2011-04-01T19:35:26Z")
> [@Labrador\_Deceiver](#): > > No kidding. You pay interest too, and that interest must be taken into consideration as available capital if the loan is paid off. The math was done on page one. If you want to go by that game then I should be allowed to add the extra $518 (your available interest payment capital) each month to my initial $200K investment. That gives me $2.9 million at the end of 30 years compared to your $1.6 million. Still over a million ahead my way. ---
**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:** [April 1, 2011, 7:40pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/136 "2011-04-01T19:40:07Z")
> [@Hampshire](#): > > If you want to go by that game then I should be allowed to add the extra $518 (your available interest payment capital) each month to my initial $200K investment. > That gives me $2.9 million at the end of 30 years compared to your $1.6 million. > Still over a million ahead my way. Nope. It’s already added to your investment in the form of, get this, an interest payment. Youre in over your head in this discussion. Way over. ---
**Author:** ![Evil\_Economist](https://avatars.discourse-cdn.com/v4/letter/e/c89c15/32.png) [@Evil\_Economist](https://boards.straightdope.com/u/Evil_Economist)\ **Post date:** [April 1, 2011, 10:24pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/137 "2011-04-01T22:24:49Z")
> [@bump](#): > > In thread after thread, people on here say that if they won the lottery or otherwise came into a lot of money, they’d pay off their mortgages as one of the first things they’d do. > > Why? Considering the normal rather low interest rate of most mortgages, and the historically higher rate of return, this isn’t necessarily a particularly good decision in that situation. > > Essentially you can invest that 200k, pay your mortgage off over 30 years and end up with more money at the end of the 30 years, than if you’d paid the house off immediately. > > Extremely simplified, if you’re investing at a return of 8%, and paying 6% on the same amount of money, you can pocket 2%. > > Obviously if your taxes are exorbitant or your rate of return isn’t very high, you could easily lose money by not paying it off immediately, but I don’t think this is the case very often. I’m of mixed opinions about this. On the one hand, I do something like this (in my version, I rent rather than buy, and invest the difference). So far it’s worked out for me, but from reading your post, you grossly underestimate the risk. There are two big types of risk for stock investments: 1. The risk that the stock market will undergo a long-term decline. People are using S&P500 data to demonstrate that this hasn’t happened over any 30-year period in U.S. history. This is of course wrong, first because you’re cherry-picking data by only considering U.S. stocks, and second because you’re assuming that your 100 or so data points constitute proof. You can easily spin a roulette wheel 100 times and never have 5 show up. That doesn’t mean that you should bet your life that a 5 will never show up (especially when you have evidence of other roulette tables where 5s have shown up!) 2. The risk that the stock market will be down in the year that you need the money. This risk never goes away, no matter how long you hold stocks. And if you don’t think this is a real risk, talk to the people who were scheduled to retire in 2008 (or, worse, wanted to retire in 1929 on the strength of their stocks). I personally recognize these risks, and so I don’t invest entirely in stocks. I also hold bonds, and there’s lots of evidence that having bonds in your portfolio gives you equivalent returns with less risk. If you think of a house as a bond, then the efficient frontier might one where you pay off your house but also hold stocks. You’re suggesting using leverage to essentially push your stock holdings as a percentage of your total wealth to over 100% (and your bond holdings negative). That’s very very risky. It might pay off, but you should educate yourself what the word “risk” means. ---
**Author:** ![bump](https://avatars.discourse-cdn.com/v4/letter/b/7c8e57/32.png) [@bump](https://boards.straightdope.com/u/bump)\ **Post date:** [April 1, 2011, 10:38pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/138 "2011-04-01T22:38:00Z")
> [@Evil\_Economist](#): > > I’m of mixed opinions about this. On the one hand, I do something like this (in my version, I rent rather than buy, and invest the difference). So far it’s worked out for me, but from reading your post, you grossly underestimate the risk. > > There are two big types of risk for stock investments: > > 1. The risk that the stock market will undergo a long-term decline. People are using S&P500 data to demonstrate that this hasn’t happened over any 30-year period in U.S. history. This is of course wrong, first because you’re cherry-picking data by only considering U.S. stocks, and second because you’re assuming that your 100 or so data points constitute proof. You can easily spin a roulette wheel 100 times and never have 5 show up. That doesn’t mean that you should bet your life that a 5 will never show up (especially when you have evidence of other roulette tables where 5s have shown up!) > > 2. The risk that the stock market will be down in the year that you need the money. This risk never goes away, no matter how long you hold stocks. And if you don’t think this is a real risk, talk to the people who were scheduled to retire in 2008 (or, worse, wanted to retire in 1929 on the strength of their stocks). > > I personally recognize these risks, and so I don’t invest entirely in stocks. I also hold bonds, and there’s lots of evidence that having bonds in your portfolio gives you equivalent returns with less risk. If you think of a house as a bond, then the efficient frontier might one where you pay off your house but also hold stocks. > > You’re suggesting using leverage to essentially push your stock holdings as a percentage of your total wealth to over 100% (and your bond holdings negative). That’s very very risky. It might pay off, but you should educate yourself what the word “risk” means. Well, we’ve discussed diversifying- at least to me, that means a combination of things beyond just stock investments- t-bills, bonds, etc… The thing that I didn’t quite understand was that blindly paying off your mortgage is not necessarily the best thing that can be done with that 200k windfall. It seems like (IMO) a silly aversion to risk is what drives most of the mortgage payers, whether it’s a fear of societal collapse, lack of understanding of financial markets, or just plain fear of everything. ---
**Author:** ![Evil\_Economist](https://avatars.discourse-cdn.com/v4/letter/e/c89c15/32.png) [@Evil\_Economist](https://boards.straightdope.com/u/Evil_Economist)\ **Post date:** [April 1, 2011, 11:22pm UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/139 "2011-04-01T23:22:35Z")
> [@bump](#): > > Well, we’ve discussed diversifying- at least to me, that means a combination of things beyond just stock investments- t-bills, bonds, etc… > > The thing that I didn’t quite understand was that blindly paying off your mortgage is not necessarily the best thing that can be done with that 200k windfall. It seems like (IMO) a silly aversion to risk is what drives most of the mortgage payers, whether it’s a fear of societal collapse, lack of understanding of financial markets, or just plain fear of everything. Aversion to risk isn’t silly unless you think the risk premium is some sort of free lunch. For fun you should read Taleb’s [Fooled by Randomness](http://en.wikipedia.org/wiki/Fooled_by_Randomness). Do you think he would recommend that a person invest or pay off their house? He said this: “Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require” Of course, my own behavior is the opposite of this, so maybe I shouldn’t point fingers. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [April 2, 2011, 1:08am UTC](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895/140 "2011-04-02T01:08:26Z")
> [@Evil\_Economist](#): > > Aversion to risk isn’t silly unless you think the risk premium is some sort of free lunch. For fun you should read Taleb’s [Fooled by Randomness](http://en.wikipedia.org/wiki/Fooled_by_Randomness). Do you think he would recommend that a person invest or pay off their house? He said this: One interesting thing here is that while any investment you make is going to have a return that is a function of risk, your mortgage investment will have a return which is a function of the risk as perceived by the bank when you got the loan. That I think is why the return you get from paying off your mortgage, which is dependent on risk from the point of view of the bank, can be so out of whack with investment alternatives. If you can tolerate risk at a higher level than the bank tolerated in you when you got the mortgage, you’d be better off to not pay it off. If you can’t, paying it off will give a better return. Isn’t renting rather than buying a bet on the future housing market? [Previous page](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895.md?page=6) [Next page](https://boards.straightdope.com/t/why-the-eagerness-to-pay-off-long-term-debt/575895.md?page=8)