Should we pay down our mortgage?

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Should we pay down our mortgage?

Postby newbees » Sun Jan 20, 2013 12:35 am

I and my husband (40 & 47 y.o) have around 200K cash in various saving accounts and CD's. So far they earn 0.3% interest annually max. We have maxed out our 401K, Sep IRA contribution. Our tax rate is 33 federal and 9% CA. For our primary home, we have a 500K mortgage with 3.99% 30 year fix. We have no credit cards or car debts. Should we use this cash to pay down our mortgage? We also own one rental property with 200K in mortgage (3.75% 15 year fix). We don't want to sell or buy more real estate. Do you have any recommendation for us on what to do with this money?
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Re: Should we pay down our mortgage?

Postby goodoboy » Sun Jan 20, 2013 1:44 am

newbees wrote:I and my husband (40 & 47 y.o) have around 200K cash in various saving accounts and CD's. So far they earn 0.3% interest annually max. We have maxed out our 401K, Sep IRA contribution. Our tax rate is 33 federal and 9% CA. For our primary home, we have a 500K mortgage with 3.99% 30 year fix. We have no credit cards or car debts. Should we use this cash to pay down our mortgage? We also own one rental property with 200K in mortgage (3.75% 15 year fix). We don't want to sell or buy more real estate. Do you have any recommendation for us on what to do with this money?



Hello,

What about ROTH IRA contributions, do ya'll have this growing as well? And what is balance remaining on the 500K and the 200K mortgage?

I would say max out all tax advantage accounts for you and husband, and then start aggressively getting rid of this mortgage debt before retirement age. Income levels will need to be known as well.
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Re: Should we pay down our mortgage?

Postby newbees » Sun Jan 20, 2013 1:51 am

With our incomes, we don't qualify for Roth IRA. We just refinance our mortgages, so for our balances are 500k and 200k for the primary and rental homes.
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Re: Should we pay down our mortgage?

Postby sscritic » Sun Jan 20, 2013 2:02 am

newbees wrote: We just refinance our mortgages,

And the best you could get was 3.99% 30 year fixed? You are in CA, so $500k should not be jumbo in most counties. Are you in the sticks? If so, pay down to $417,000 and refi closer to 3%. I have seen no cost 3.25% 30 year fixed loans; you probably could do better.
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Re: Should we pay down our mortgage?

Postby goodoboy » Sun Jan 20, 2013 3:18 am

newbees wrote:With our incomes, we don't qualify for Roth IRA. We just refinance our mortgages, so for our balances are 500k and 200k for the primary and rental homes.


If your retirement accounts is allocated properly and are growing toward your retirement goals, I would pay off the 200K home first, and then start paying off the 500K loan. I think the biggest question is are ya'll on track for retirement at your pre-planned age. If worried about will you have enough to retire, then can always sale the home and move to a cheaper home to save more as well.

This is just my opinion.
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Re: Should we pay down our mortgage?

Postby vtanzi » Sun Jan 20, 2013 5:27 am

What I would do is refinance and get a 15 year fixed Mortgage--this will take 15 years off your mortgage--then pay some extra each month to the mortgage but keep on investing in all your taxable and non-taxable accounts.
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Re: Should we pay down our mortgage?

Postby dbphd » Sun Jan 20, 2013 6:25 am

I'd guess that in a few years loans under 4% will seem to be inexpensive money, so I wouldn't be eager to pay them off nor reduce liquidity by doing so. Even a non-tax-advantaged simple three-fund portfolio that's properly allocated should do well in the future, likely better than 4%. And that 4% is reduced by its tax deductibility. Vanguard has a table that shows long-term average returns for various equity/fixed income allocations. At OP's age, something like 60/40 seems appropriate; IIRC expected return (in the statistical sense) might be around 8%.

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Re: Should we pay down our mortgage?

Postby heikejohn » Sun Jan 20, 2013 7:49 am

Are you allowed to do a non-deductible IRA and later on do the back-door-conversion?
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Re: Should we pay down our mortgage?

Postby Aptenodytes » Sun Jan 20, 2013 8:29 am

It is hard to answer out of context. It sounds like your investment plan doesn't have an element for taxable investments. Otherwise, how could you accumulate $200K in cash outside of your portfolio? The responsible thing to do is fill this gap in your plan, so you are taking into account the big picture and making choices within the full relevant menu. Right now your menu just has one option on it (pay down mortgage) when it should have many more.
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Re: Should we pay down our mortgage?

Postby NYBoglehead » Sun Jan 20, 2013 8:54 am

I would say more info is needed. How much in retirement savings have you accumulated? This money might be better directed in a taxable investing account, but it may very well make sense to pay down the mortgages.
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Re: Should we pay down our mortgage?

Postby Tigermoose » Sun Jan 20, 2013 9:49 am

Another option is to do a "backdoor" Roth IRA conversion. To do this, you contribute to a Traditional IRA (non-deductible at your income level), and then immediately convert that to a Roth IRA. It's easy and painless to do once you have your accounts setup at Vanguard or another brokerage. This is how high income earners get around the Roth IRA income disqualifier. Keep in mind that converted contribution cannot be withdrawn without penalty before 59 1/2 until 5 years have passed. You want to build up some post tax funds to keep your tax rate down during retirement.

15 yr refinance w/ extra contributions is a good idea. You need to make sure your investment capital is sufficiently started before contributing extra to home principal.

Keep at least 6 months expenses in secure and accessible savings, cds, ibonds.
Institutions matter
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Re: Should we pay down our mortgage?

Postby Dandy » Sun Jan 20, 2013 10:39 am

It is hard to tell since there are a lot of factors not disclosed. e.g. how is your retirement savings vs your goal, how secure are your jobs, your health and health insurance, do you have a nice cushion of monthly income vs monthly expenses, how easy is it to rent your rental property if it goes vacant, etc.

A couple of thoughts:
1. You can certainly earn more than 30 basis points on your CDs. You should be able to earn at least 1% on a short term CD ladder at Ally or Discover Bank or Pen Fed Credit Union. Not going to put you into a different tax bracket but not chump change either. Since Calif is a high state tax state you might look into muni bond funds for some of this cash.
2. I like the idea of refinancing your home mortgage for a shorter term - equal to or less than your planned retirement date. You can probably get a lower rate and use some of the cash, if necessary, to pay any increased monthly payment. (you can look into whether paying extra each month is a better deal also)
3. People often hate cash especially when it is earning so little. But it also isn't losing any (except to inflation). If/but probably when interest rates rise stocks and bonds will tend to lose value at least for awhile - cash will still be there , so will your mortgages, most monthly expenses and hopefully both of your jobs.
4. I guess I would not use the majority of the cash to pay down the mortgage.
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Re: Should we pay down our mortgage?

Postby newbees » Sun Jan 20, 2013 1:02 pm

Thank you everybody for your inputs. I think I should put this money in some taxable account. My sep IRA is with Vanguard, and I also have trading account with Ameritrade. Which one should I use to buy funds? Should I buy ITF or mutual funds?
Thank you.
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Re: Should we pay down our mortgage?

Postby porcupine » Sun Jan 20, 2013 1:26 pm

sscritic wrote:
newbees wrote: We just refinance our mortgages,

And the best you could get was 3.99% 30 year fixed? You are in CA, so $500k should not be jumbo in most counties. Are you in the sticks? If so, pay down to $417,000 and refi closer to 3%. I have seen no cost 3.25% 30 year fixed loans; you probably could do better.

+1!

- Porcupine
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Re: Should we pay down our mortgage?

Postby celia » Sun Jan 20, 2013 1:27 pm

When you refinanced, I hope you didn't start over with a 30-year loan. If you did, how old will you be when it is paid off? Will you still be working at that age or have enough income to pay the mortgages? Many people feel more secure going into retirement knowing that this big expense is paid off.

Whenever you refinance (or even take out the original loan), consider how old you will be when the loan ends, then consider a shorter term. By paying down part of it now, that will shorten the term, but the difference in remaining years wouldn't be as much as if you had a higher interest rate. Of course, you also need to hold onto liquid assets for emergencies.
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Re: Should we pay down our mortgage?

Postby sscritic » Sun Jan 20, 2013 1:32 pm

celia wrote:When you refinanced, I hope you didn't start over with a 30-year loan. If you did, how old will you be when it is paid off? Will you still be working at that age or have enough income to pay the mortgages? Many people feel more secure going into retirement knowing that this big expense is paid off.

Whenever you refinance (or even take out the original loan), consider how old you will be when the loan ends, then consider a shorter term. By paying down part of it now, that will shorten the term, but the difference in remaining years wouldn't be as much as if you had a higher interest rate. Of course, you also need to hold onto liquid assets for emergencies.

The easy way to get rid of a mortgage at retirement is to sell your house. That's what I did (well it took two months; I retired in June and the house wasn't sold until August).

But then I blew everything and bought a new house with a new mortgage to celebrate going on medicare. I used a 15 year mortgage. Is 80 too old to pay off a mortgage?

P.S. but I got mine at 3%, not 4%.
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Re: Should we pay down our mortgage?

Postby letsgobobby » Sun Jan 20, 2013 1:40 pm

You should definitely pay off your mortgage tout de suite if the alternative is letting it sit in a taxable bank account earning less than 1%.
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Re: Should we pay down our mortgage?

Postby Default User BR » Sun Jan 20, 2013 4:03 pm

Tigermoose wrote:Another option is to do a "backdoor" Roth IRA conversion.

The OP mentioned SEP IRAs, which get in the way of this.


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Re: Should we pay down our mortgage?

Postby nedsaid » Sun Jan 20, 2013 7:46 pm

I am a big fan of liquidity. Pay your mortgages on schedule. If you want to use some of your cash to pay down your mortgage, go ahead. It is always smart to keep a big cash reserve. Nothing wrong with good old fashioned money in the bank.

The problem is, do you want too much of your money tied up in your house? You may not always be able to refinance and get money back out if you need it again. Sometimes people get too obsessed with paying off their mortgage off early.

Another middle of the road strategy would be to make extra principle payments each month and leave your cash hoard intact. It sounds like you have the cash flow to do it.

These are not either/or decisions.
A fool and his money are good for business.
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Re: Should we pay down our mortgage?

Postby Recshooter » Tue Jan 22, 2013 10:04 pm

The economy killed my small business and pushed me into retirement this year. First, are your investments returning significantly more than the 4% cost of your mortgage? Mine weren't. Also, I have to live on my investments, not additional future earnings so the interest is just an unnecessary drain on my investments. Yet, I decided to pay down my mortgage to the last 5 years of a 30 year note where the payments are almost all principal with relatively small interest expenses to use the bank's money during the next 5 years. Just my 2 cents.
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Re: Should we pay down our mortgage?

Postby newbees » Fri Jan 25, 2013 6:14 pm

My primary home is actually a duplex. We live on 1 side and rent out the other, thus the best we can get for a 30 year mortgage is 3.99%. We live in the Bay area, so our rental market is pretty good. I have decided not to pay down mortgage or look into 15 year mortgage. I am looking to put some money in taxable account. So far I put some in CA long term tax exempt bond. Is it a good idea? What fund should I have? I am comfortable with 60/40 portfolio.
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