POLL: Pay down 3.5% mortgage or invest in taxable?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.

What would you do?

Pay down mortgage
110
30%
Invest in taxable
132
36%
A combination of both
124
34%
 
Total votes: 366

Topic Author
sunnyday
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POLL: Pay down 3.5% mortgage or invest in taxable?

Post by sunnyday »

My wife and I have a $228,000 mortgage at a fixed rate of 3.5% with 28 years left. The after-tax rate is 3-3.5% depending on our itemized deductions.
We max out our tax-advantage accounts, have a solid emergency fund and have a high 5 figure taxable account. We should have some extra money each year that we can use towards paying down the mortgage or investing in a taxable account. Our tax-rate is 25% federal, 5.8% state.

I've read the wiki article (http://www.bogleheads.org/wiki/Paying_d ... _investing) along with many threads on the topic so realize there are many pros and cons to each. But I wanted to set up a poll for this specific scenario to see where Bogleheads (in general) lean.
livesoft
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by livesoft »

Lots of years left on the low-interest-rate mortgage in an environment where lots of folks think that interest rates will be higher in intermediate future. Plus no money to pay off mortgage in full.

So that means, …
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YttriumNitrate
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by YttriumNitrate »

Pay down the mortgage or invest that money? Both are good options. From a purely mathematical standpoint investing the money long term will probably have you come out ahead. However, if a paid-off house causes you to have less stress in your life then that's probably the better option.
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EvilHomer
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by EvilHomer »

I'm in a very similar situation. I went with the combo though. First, if you have PMI then pay down below that point. then, since I'm not in the "all loans are bad" camp, I would invest in the taxable. The after tax rate will slowly drift back to the real rate of the loan, but I believe that inflation will end up making that mortgage pretty cheap in the long run.
livesoft
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by livesoft »

Just ask yourself this:

If you invest in the taxable account instead of paying off the mortgage, then will there be some point in the next 28 years when the taxable account would have have gained more than double the mortgage rate on average, so that you could cash in the taxable, pay the taxes, pay off the mortgage then if desired, and still come out way ahead on the taxable account?

If there will not be such a point, then we are all screwed anyways.
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Rooster1
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by Rooster1 »

I have both a Vanguard taxable account and a low-interest mortgage. I view my mortgage as a 'negative bond'. There have been several threads on this forum regarding this approach. Opinions seem to vary. I can only offer my personal experience.

When I rebalance, in include the remaining mortgage as part of my bond calculation and consider it in my overall portfolio. I hold more bonds to compensate for the outstanding mortgage. I view the mortgage as part of my portfolio.

I voted for 'a combination of both' in your poll.
Last edited by Rooster1 on Sun Jun 07, 2015 10:16 am, edited 2 times in total.
stan1
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by stan1 »

Assuming you are many years from retirement I would plan to pay off the mortgage in 15-20 years and invest the rest in taxable.

If you have substantial salary growth in the intervening years due to promotions and annual raises you might decide at some point to simply pay it off.
Warning: I am about 80% satisficer (accepting of good enough) and 20% maximizer
john94549
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by john94549 »

3.4% here, with roughly 28 years to go (a re-fi). Tough call, as one should expect. However, since I can't find any sure-fire, can't miss, long-term investments yielding a guaranteed 3.4% or more (other than the Thirty, in which I am not interested), I'm paying it off. That's how I voted.
Topic Author
sunnyday
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by sunnyday »

livesoft wrote:Lots of years left on the low-interest-rate mortgage in an environment where lots of folks think that interest rates will be higher in intermediate future. Plus no money to pay off mortgage in full.

So that means, …
There's a chance we'll be in our current house for the next 28 years. But there's also a chance we'll move in the next 5 years to a HCOLA and either buy a more expensive house or even possibly rent. Too many factors to consider :D
EvilHomer wrote:I'm in a very similar situation. I went with the combo though. First, if you have PMI then pay down below that point. then, since I'm not in the "all loans are bad" camp, I would invest in the taxable. The after tax rate will slowly drift back to the real rate of the loan, but I believe that inflation will end up making that mortgage pretty cheap in the long run.
No PMI (~60% LTV). I've felt the same way for a while about loans but am starting to lean towards paying down the debt.

ChopWoodCarryWater wrote:I have both a Vanguard taxable account and a low-interest mortgage. A few years ago I used a fee-based advisor who suggested I view my mortgage as a 'negative bond'. This is now written into my investment policy statement. There have been several threads on this forum regarding this approach. Opinions seem to vary. I can only offer my personal experience.

For me, this has made all the difference. When I rebalance, I am forced to include the remaining mortgage as part of my bond calculation and consider it in my overall portfolio. I am forced to hold more bond funds in my 401K to compensate for the outstanding mortgage. I view the mortgage as part of my portfolio, not 'another bill' I deal with each month. Sometimes I don't like having to include it when I rebalance, but I have stuck to my IPS.

For me, the effect has been dramatic. I try to take additional principle off the mortgage each month. Over the past few years my mortgage has dwindled from 275K to 108K. I continue to contribute to my taxable account as well. I voted for 'a combination of both' in your poll.
I read a couple of threads about mortgage as a negative bond before posting. It's an interesting concept where I can see how it works for some, but not as well for others. For example, an investor starting out who has a $300k mortgage will just be buying bonds for many, many years to come (maybe that's fine for some?). I suppose it could also lead to big shifts in ones AA if they make big real estate transactions.

I don't include my mortgage as part of my AA, but also don't include my pension account, SS, 529 and emergency fund. It's probably close to evening out (at least close enough to where I'm not going to worry about it).
stan1 wrote:Assuming you are many years from retirement I would plan to pay off the mortgage in 15-20 years and invest the rest in taxable.

If you have substantial salary growth in the intervening years due to promotions and annual raises you might decide at some point to simply pay it off.
I'm hoping to be FI in 7 years. If I retire early, having a large taxable may be better than paying off the mortgage early because I wouldn't have to worry about IRA withdrawal penalties before 59 1/2.
DVMResident
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by DVMResident »

This is the best article on this subject:
http://financialmentor.com/financial-ad ... nvest/7478
Read it.

I voted taxable investment. IMO, there is no point in giving up liquidity to pay off the cheapest money of your life. A taxable account would provide you a liquidity that your retirement accounts are lacking and isn't subject to RMDs.

That being said, both moves are good and that is why you have an even split on the votes. Nice savings rate :beer
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midareff
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by midareff »

I would invest in taxable for the following reasons. 1. 3.5% is very cheap money and has a beneficial tax write off. 2. Inflation will eventually make the fixed interest rate mortgage payment look like dinner out money. 3. 3 to 3.5% is a reasonable expectation for the REAL return (over CPI) of a balanced portfolio. ..... that means you are making money on their money while inflation continues to erode the experienced cost of your mortgage payment. If Inflation runs only 2.5% for the next 20 years 63.9% of the real monthly mortgage cost will have been eroded and you will be paying an effective 36.1% of today's $$$. Average annual CPI December 1960 to December 2012 is 3.97% so 2.5% is VERY conservative.

FWIW, last May I closed a PenFed refi for 3.00% @ 30 years. I could have paid off the 5.75% note at Chase but that did not seem to be in my best $$$ interest.

Just my 2 cents on the topic.
Twins Fan
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by Twins Fan »

I voted a combo of both for you, OP. Normally I'm a debt averse type and would say pay it down before taxable, but that's more for my situation where paying down the mortgage is a good savings move. In your situation, I don't see it making much difference either way. You have a low interest mortgage, max out tax deferred, have a decent taxable account, and from your numbers the tax deduction part isn't much of a factor.

So, whatever you feel best about probably works. Pay down the debt while building up the taxable at whatever ratio you're comfortabe with.
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czeckers
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by czeckers »

Mathematically, assuming that you get the same after tax rate of return, the choices are equal over the remaining duration of your mortgage. However, assuming you are alive well beyond the duration of your mortgage, the compounding factor of investing the money vs paying down the mortgage swings the argument in favor of investing for me. You have 29 years of compound interest on the mortgage, but you may very well have 60 years of compound interest on the investments.

Furthermore, you will always have the option of taking the money from the taxable account and applying it towards the mortgage if the need arises so putting the money toward investing is not an irreversible step.

The possibility of moving to a high cost of living area in the future can add to the argument that you may be better off investing the money as you may not be able to maintain a high investment rate once you move. If you don't invest the money now, you may not have the opportunity later to make up for the lost opportunity.

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G-Money
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by G-Money »

sunnyday wrote:
livesoft wrote:Lots of years left on the low-interest-rate mortgage in an environment where lots of folks think that interest rates will be higher in intermediate future. Plus no money to pay off mortgage in full.

So that means, …
There's a chance we'll be in our current house for the next 28 years. But there's also a chance we'll move in the next 5 years to a HCOLA and either buy a more expensive house or even possibly rent. Too many factors to consider :D
If there's a chance you'll be moving, I'd consider that an additional reason to maintain greater liquidity.
Don't assume I know what I'm talking about.
berntson
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by berntson »

Think of your decision as a decision about whether or not you like the idea of investing on margin. After all, that's more or less what you're doing if you invest instead of paying off the mortgage.

Investors tend to not like using margin. The advantage in your situation is that the margin is really cheap. Try finding a brokerage that will loan you hundreds of thousands of dollars for 3.5% a year for 30 years, with no margin call when the markets drop. Since you can expect about 7.5% real return from a reasonable portfolio [Note: 7.5% is a mistake. 5% after capital gains taxes is a more reasonable number to use.], this is a good deal. Plus, you get some built-in protection from inflation. (If the markets drop and inflation spikes, your portfolio will drop but your loan will get cheaper in real terms.)
Last edited by berntson on Sat Jan 18, 2014 12:51 pm, edited 3 times in total.
MichaelM24
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by MichaelM24 »

Since you can expect about 7.5% real return from a reasonable portfolio
That looks high to me.

7.5% with a 5.5% real if you have 100% stocks.
berntson
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by berntson »

MichaelM24 wrote:
Since you can expect about 7.5% real return from a reasonable portfolio
That looks high to me. 7.5% with a 5.5% real if you have 100% stocks.
Ah, good catch. Not sure where 7.5% came from. I was thinking 4% real, but for some reason added 3.5% inflation instead of something more reasonable like 1.5%. I'll make a note in my post.
Topic Author
sunnyday
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by sunnyday »

berntson wrote:Think of your decision as a decision about whether or not you like the idea of investing on margin. After all, that's more or less what you're doing if you invest instead of paying off the mortgage.

Investors tend to not like using margin. The advantage in your situation is that the margin is really cheap. Try finding a brokerage that will loan you hundreds of thousands of dollars for 3.5% a year for 30 years, with no margin call when the markets drop. Since you can expect about 7.5% real return from a reasonable portfolio [Note: 7.5% is a mistake. 5% after capital gains taxes is a more reasonable number to use.], this is a good deal. Plus, you get some built-in protection from inflation. (If the markets drop and inflation spikes, your portfolio will drop but your loan will get cheaper in real terms.)
That's the way I've looked at it in the past. My portfolio is 75% equity and 25% bonds. Say I expect a 5.5% real return from it. Does anyone know how I estimate the rate after taxes (30.8% income, 15% cap gains)?
G-Money wrote: If there's a chance you'll be moving, I'd consider that an additional reason to maintain greater liquidity.
A few people mentioned this. I was actually thinking the opposite. If I move, I would sell my house so liquidity would be the same (assuming the returns are the same).

Is there something wrong with this reasoning?
Considering the chance of me getting another 3.5% 30 year fixed mortgage on my next house is very slim, wouldn't it be better to increase my home equity now to reduce the amount of my next mortgage. I realize I could take money from my taxable to reduce the mortgage, but I don't want to touch the taxable while my wife and I are working because of the higher taxes on cap gains.
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Sheepdog
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by Sheepdog »

I'm old school. I hated being in debt for anything, so I voted that I would pay it off, but I do understand the rationale to do otherwise. I know, though, that I would kick myself if I had invested the money today (at the present high stock valuations) and then see a major market collapse. I knew if I had done otherwise, I could have received, in effect, a guaranteed 3.5% by paying it off.
It would also be wonderful to have my home paid off, though, especially if I became incapacitated by illness or injury and could not work.
It's not really a bad decision either way, it is personal in regards to your own risk tolerance.
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Geist
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by Geist »

I'm in a similar situation... 15-yr mortgage with $120k/13.5yrs remaining at 2.75%, and I've got a $50k taxable account staring me in the face. Believe me it's exceedingly tempting to cut down my mortgage almost in half. I voted for both, however, and would lean more toward adding to the investments. You can reasonably expect to earn (after taxes) nearly double what your mortgage is costing you over the long term. With that said, I also pay a nominal amount ($100-$200) in additional principle to help slowly winnow down my mortgage. I don't like being in debt (even though it makes sense by the numbers), so the extra principle payments sate my appetite for getting out of debt faster. YMMV, but personally, I'm just paying my mortgage like a good boy, adding a little extra to principle each month, and investing heavily in taxable (and tax-advantaged) accounts.
chicagobear
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by chicagobear »

I am old enough to remember when a 3.5% fixed rate mortgage was a huge asset to have. Those days could come back. I would not pay it off early.
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market timer
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by market timer »

I would buy a 3% 5-year CD and reevaluate the decision once I know where rates are in 5 years.
berntson
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by berntson »

sunnyday wrote: That's the way I've looked at it in the past. My portfolio is 75% equity and 25% bonds. Say I expect a 5.5% real return from it. Does anyone know how I estimate the rate after taxes (30.8% income, 15% cap gains)?
This is just back of the envelope. Add 1.5% for inflation (roughly the Fed's expected rate) to get 7%. You'll lose something to taxes on dividends. Maybe .5%? This depends on the funds you hold and what percentage of their dividends are qualified. That gets us 6.5%. Subtracting capital gains gets us a nominal rate of 5.5%. Subtracting 1.5% inflation gets us an expected real return of 4%.
Topic Author
sunnyday
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by sunnyday »

Since the numbers are close and there are so many pros and cons to each, I think I'm going to work on paying down my mortgage. I don't think I'll regret it when I'm debt free, even if the market does soar, because I'll be investing so much in my tax-advantage accounts anyway. If the markets soar and I'm debt free, I'll be in very good shape. However, if the market crashes 5 years from now, I probably would regret funneling so much into it and not paying down any of the mortgage.

Psychologically the current market conditions probably plays the biggest a role (I know it's not suppose to). When the market is at an all time high, I'll want to pay down the debt. When there's another market crash, I'll likely want to buy low and hold off on extra prepayments towards the mortgage. <--- flame away :)
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WolfpackFan
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by WolfpackFan »

Hey, you guys/gals think these poll numbers might look a wee bit different if we weren't coming off a year where the S&P index shot up 30%?
placeholder
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by placeholder »

Those calculations of portfolio return mean nothing if you treat it as a negative bond as you'd be investing the extra in bonds not a balanced portfolio right?
Harold
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by Harold »

ChopWoodCarryWater wrote:I have both a Vanguard taxable account and a low-interest mortgage. A few years ago I used a fee-based advisor who suggested I view my mortgage as a 'negative bond'. This is now written into my investment policy statement. There have been several threads on this forum regarding this approach. Opinions seem to vary. I can only offer my personal experience.

For me, this has made all the difference. When I rebalance, I am forced to include the remaining mortgage as part of my bond calculation and consider it in my overall portfolio. I am forced to hold more bond funds in my 401K to compensate for the outstanding mortgage. I view the mortgage as part of my portfolio, not 'another bill' I deal with each month. Sometimes I don't like having to include it when I rebalance, but I have stuck to my IPS.

For me, the effect has been dramatic. I try to take additional principle off the mortgage each month. Over the past few years my mortgage has dwindled from 275K to 108K. I continue to contribute to my taxable account as well. I voted for 'a combination of both' in your poll.
I think this is an outstanding response.

This approach allows ChopWood to adequately account for his mortgage risk and execute a well-disciplined financial plan. If everyone had a well-disciplined plan, there would be far fewer of these "pay off mortgage or invest" threads -- since with a plan, that question answers itself.
Topic Author
sunnyday
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by sunnyday »

WolfpackFan wrote:Hey, you guys/gals think these poll numbers might look a wee bit different if we weren't coming off a year where the S&P index shot up 30%?
I was wondering the same thing. Maybe the poll numbers would have been different if I posted this at the end of 2008.

Harold wrote:
ChopWoodCarryWater wrote:I have both a Vanguard taxable account and a low-interest mortgage. A few years ago I used a fee-based advisor who suggested I view my mortgage as a 'negative bond'. This is now written into my investment policy statement. There have been several threads on this forum regarding this approach. Opinions seem to vary. I can only offer my personal experience.

For me, this has made all the difference. When I rebalance, I am forced to include the remaining mortgage as part of my bond calculation and consider it in my overall portfolio. I am forced to hold more bond funds in my 401K to compensate for the outstanding mortgage. I view the mortgage as part of my portfolio, not 'another bill' I deal with each month. Sometimes I don't like having to include it when I rebalance, but I have stuck to my IPS.

For me, the effect has been dramatic. I try to take additional principle off the mortgage each month. Over the past few years my mortgage has dwindled from 275K to 108K. I continue to contribute to my taxable account as well. I voted for 'a combination of both' in your poll.
I think this is an outstanding response.

This approach allows ChopWood to adequately account for his mortgage risk and execute a well-disciplined financial plan. If everyone had a well-disciplined plan, there would be far fewer of these "pay off mortgage or invest" threads -- since with a plan, that question answers itself.
I think it could work well for some but not for others. For example, say a 25 year old buys a house and has a $300k mortgage and starts investing. Even if the person has an AA of 100% stocks, he is only suppose to buy bonds until his portfolio reaches his mortgage balance, correct? This would likely take many years or possibly decades. It seems extremely conservative for me, especially considering the age.
Or consider someone who has a 90/10 equity-bond AA and a $350,000 portfolio. They buy a house with a $300k mortgage and when they close they are suppose to shift their portfolio from $315k equity - $35k bonds to $45k equity, $305k bonds? If I'm understanding correctly, that seems quite extreme especially considering market volatility
Last edited by sunnyday on Mon Jan 20, 2014 9:59 am, edited 2 times in total.
letsgobobby
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by letsgobobby »

sunnyday wrote:Since the numbers are close and there are so many pros and cons to each, I think I'm going to work on paying down my mortgage. I don't think I'll regret it when I'm debt free, even if the market does soar, because I'll be investing so much in my tax-advantage accounts anyway. If the markets soar and I'm debt free, I'll be in very good shape. However, if the market crashes 5 years from now, I probably would regret funneling so much into it and not paying down any of the mortgage.

Psychologically the current market conditions probably plays the biggest a role (I know it's not suppose to). When the market is at an all time high, I'll want to pay down the debt. When there's another market crash, I'll likely want to buy low and hold off on extra prepayments towards the mortgage. <--- flame away :)
what happens if your home price crashes?
poker27
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by poker27 »

I'm in a similar situation, but have a 4% mortgage. IMO its a bit harder to say pay off the mortgage when you have a 230k balance, I'm assuming that is something that would take you a minimum of 7-10 years to pay off. If you are unsure of what is better, I would do 50/50. This way if stocks continue their upward trend you can partly take advantage, and if they go down, you also can pat yourself on the back.
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Cosmo
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by Cosmo »

letsgobobby wrote:
sunnyday wrote:Since the numbers are close and there are so many pros and cons to each, I think I'm going to work on paying down my mortgage. I don't think I'll regret it when I'm debt free, even if the market does soar, because I'll be investing so much in my tax-advantage accounts anyway. If the markets soar and I'm debt free, I'll be in very good shape. However, if the market crashes 5 years from now, I probably would regret funneling so much into it and not paying down any of the mortgage.

Psychologically the current market conditions probably plays the biggest a role (I know it's not suppose to). When the market is at an all time high, I'll want to pay down the debt. When there's another market crash, I'll likely want to buy low and hold off on extra prepayments towards the mortgage. <--- flame away :)
what happens if your home price crashes?
Real estate crash or no crash, it does not make a difference, you are still stuck with the same depressed asset, whether you have a big mortgage left over or none at all.
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sunnyday
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by sunnyday »

letsgobobby wrote:
sunnyday wrote:Since the numbers are close and there are so many pros and cons to each, I think I'm going to work on paying down my mortgage. I don't think I'll regret it when I'm debt free, even if the market does soar, because I'll be investing so much in my tax-advantage accounts anyway. If the markets soar and I'm debt free, I'll be in very good shape. However, if the market crashes 5 years from now, I probably would regret funneling so much into it and not paying down any of the mortgage.

Psychologically the current market conditions probably plays the biggest a role (I know it's not suppose to). When the market is at an all time high, I'll want to pay down the debt. When there's another market crash, I'll likely want to buy low and hold off on extra prepayments towards the mortgage. <--- flame away :)
what happens if your home price crashes?
I'd be happy if home prices crash when I was planning to buy a more expensive house. It would allow me to buy more bang for my buck.
MrMatt2532
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by MrMatt2532 »

sunnyday wrote: I think it could work well for some but not for others. For example, say a 25 year old buys a house and has a $300k mortgage and starts investing. Even if the person has an AA of 100% stocks, he is only suppose to buy bonds until his portfolio reaches his mortgage balance, correct? This would likely take many years or possibly decades. It seems extremely conservative for me, especially considering the age.
Or consider someone who has a 90/10 equity-bond AA and a $350,000 portfolio. They buy a house with a $300k mortgage and when they close they are suppose to shift their portfolio from $315k equity - $35k bonds to $45k equity, $305k bonds? If I'm understanding correctly, that seems quite extreme especially considering market volatility
Well if you include your mortgage as a negative bond, especially as a young investor, it might not make sense to use the traditional rules for determining AA (such as age in bonds, or variants). The way I handle this issue is to factor in future income, or basically my human capital. Most would consider this overly complicated, but it actually solves the issue rather neatly.
Greentree
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by Greentree »

I look at paying down the mortgage as more of a personal preference than a financial decision. After we had maxed the 401ks, emergency fund, etc, we threw the rest at the mortgage. I would rather buy that than a fancy car or really nice house, and the savings are just a side benefit.

Financially, you will likely do better investing. But is that the question?

If you wanted to make as much money as possible, I recommend never taking a vacation (stocks will return more than vacations), living in a studio (savings into stocks), eating rice and beans (stocks will return more than better food), and getting a job that you hate but pays like crazy, maybe investment banking (more money for stock investing!).

We always compare this decision to stocks when it could also just be a quality of life decision. We paid it off last month and it is pretty nice. We hate debt. Does it matter to you? If not, there are probably better options.

And if you can't decide, splitting is probably your best option.
Grt2bOutdoors
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by Grt2bOutdoors »

Greentree wrote:I look at paying down the mortgage as more of a personal preference than a financial decision. After we had maxed the 401ks, emergency fund, etc, we threw the rest at the mortgage. I would rather buy that than a fancy car or really nice house, and the savings are just a side benefit.

Financially, you will likely do better investing. But is that the question?

We always compare this decision to stocks when it could also just be a quality of life decision. We paid it off last month and it is pretty nice. We hate debt. Does it matter to you? If not, there are probably better options.

And if you can't decide, splitting is probably your best option.
I voted for splitting - if you've maxed out your retirement options (pre-tax + IRA), 529/HSA plans (if applicable) - cash in the bank pays zilch, 5 year money even at Pen-Fed yields less after-tax than the mortgage after-tax and Long-Term Tax-Exempt Admiral may come close in yield but not without some level of risk - it may make sense to invest your taxable fixed income allocation into the mortgage (assuming you have a sufficient e-fund) and the rest into a tax-efficient equities index fund. I've been doing this myself - in a few years I should have enough to take it out completely - it will just be a decision of "do I want to sell taxable equities to do so", it will be nice to be able to have that option.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
manwithnoname
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by manwithnoname »

john94549 wrote:3.4% here, with roughly 28 years to go (a re-fi). Tough call, as one should expect. However, since I can't find any sure-fire, can't miss, long-term investments yielding a guaranteed 3.4% or more (other than the Thirty, in which I am not interested), I'm paying it off. That's how I voted.
Why not invest for the long term in a low cost index fund (S &P 500) which should gain an average of 2X the interest rate on the mortgage over the next 28 years assuming that you stay in the home for that period. If you sell before paying off the mortgage you will have wasted all the additional payments you made.

Also 3.5% is as good as it gets in cheap capital. And the interest payments reduce your taxes. Paying off your mortgage just means that you have more of your net worth invested in an illiquid asset with below average appreciation which doesn't exceed long term inflation, which is about 3% a year, or less than your mortgage rate.
letsgobobby
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by letsgobobby »

Cosmo wrote:
letsgobobby wrote:
sunnyday wrote:Since the numbers are close and there are so many pros and cons to each, I think I'm going to work on paying down my mortgage. I don't think I'll regret it when I'm debt free, even if the market does soar, because I'll be investing so much in my tax-advantage accounts anyway. If the markets soar and I'm debt free, I'll be in very good shape. However, if the market crashes 5 years from now, I probably would regret funneling so much into it and not paying down any of the mortgage.

Psychologically the current market conditions probably plays the biggest a role (I know it's not suppose to). When the market is at an all time high, I'll want to pay down the debt. When there's another market crash, I'll likely want to buy low and hold off on extra prepayments towards the mortgage. <--- flame away :)
what happens if your home price crashes?
Real estate crash or no crash, it does not make a difference, you are still stuck with the same depressed asset, whether you have a big mortgage left over or none at all.
Exactly, so one should invest the money optimally, not because of some idiosyncratic psychological beliefs.
placeholder
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by placeholder »

sunnyday wrote:I was wondering the same thing. Maybe the poll numbers would have been different if I posted this at the end of 2008.
3.5% would have been a heck of an interest rate then.
TRC
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by TRC »

Pay it off.
thisismyusername123
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by thisismyusername123 »

MrMatt2532 wrote: Well if you include your mortgage as a negative bond, especially as a young investor, it might not make sense to use the traditional rules for determining AA (such as age in bonds, or variants). The way I handle this issue is to factor in future income, or basically my human capital. Most would consider this overly complicated, but it actually solves the issue rather neatly.
If I follow you correctly, if you treat a mortgage as a negative bond, you would follow an asset allocation of something like 130% stock / -30% bond? This is breaking my brain a little. My investments at a 85/15 split roughly equal my mortgage. Excluding home value, this nets me at zero net worth. Now I would have to rebalance my investments to 30/70 to meet the "new* asset allocation. I'm screwed, because I have to put my excess cash into the mortgage in order to keep what little stock exposure I still have, and thus I can't afford to inject new capital into the total stock market. What am I missing?
Tamahome
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by Tamahome »

If you want to make a decision based on emotions, you know your emotions better than this board.

If we are looking at logic/math, I say to invest in taxable. Why? Over the next 28 years, do you anticipate that interest rates will be at historic lows? Me neither. If you stay in the same place, the low interest loan allows you a long term advantage. Further, because we are looking at a 30 year horizon, a diversified portfolio should make more than 3.5%. Your after tax, after inflation number will likely be greater than 3.5% (And this does not even take into account the mortgage interest deduction that brings that number to under 3% (using 25% or greater tax rate). Inflation also eats into that 3.5% you are paying.

Trust me, I like the idea of paying off the mortgage. Emotionally, I want to pay extra on mine. I did when it was 6.5% with a 9.5% second mortgage. When I refinanced to just under 4%, I did the math and realized that it is better to invest. I want to put more on the mortgage, because it makes me feel good and it is oddly fun for me. I do not, however. Financially, in the long term, it is better for me to maximize the expected return.

As a side note, if you move, do not count the value of the house as liquidity. You COULD sell, or you COULD wind up having trouble selling the house, making the move difficult. You will find that you will get better deals in real estate if you have greater flexibility. Having to sell your current house to get money decreases your flexibility. Increases in home value will affect your sales price whether you pay more on the mortgage or not. If you simply pay more on the mortgage, however, you are giving up certain flexibility.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
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sunnyday
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by sunnyday »

Well, I set up my first prepayment today for my mortgage. The math/predictions just weren't compelling enough for me to invest more in taxable instead. Plus with the market at an all time high...maybe if the market crashes, I'll change my mind. That's very anti-bogleheadish, but since the decision is basically a push, I don't see it having a negative impact.

Dulocracy wrote:
If we are looking at logic/math, I say to invest in taxable. Why? Over the next 28 years, do you anticipate that interest rates will be at historic lows? Me neither. If you stay in the same place, the low interest loan allows you a long term advantage. Further, because we are looking at a 30 year horizon, a diversified portfolio should make more than 3.5%. Your after tax, after inflation number will likely be greater than 3.5% (And this does not even take into account the mortgage interest deduction that brings that number to under 3% (using 25% or greater tax rate). Inflation also eats into that 3.5% you are paying.
I would need more proof with the math. I don't anticipate interest rates being this low but I also anticipate a bear market within 5-10 years and I don't know enough to anticipate anything :happy

The mortgage interest deduction is only applicable if I itemize deductions, and even if I do itemize this year, the savings doesn't equal my federal tax bracket. Also, factoring in taxes I would own on my taxable account (dividends and cap gains), my anticipated return rate of going with the taxable would be pretty close to 3.5%.
bucksfan2
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by bucksfan2 »

My wife and I started out with a 30 year mortgage @5.5%. Over the course of a couple of years we refinanced it down to 4.75% over 10 years. Over the course of a couple of years I had paid down the mortgage, added one extra payment a year, and got my mortgage down considerably. My grandma passed and left me a nice chunk of change and we decided that to honor my grandma (who always talked about living rent free) we would pay off the rest of the mortgage. It was a great feeling knowing that our monthly mortgage payment would be gone for as long as we wished. Over the next couple of months it felt that our "cash" was a little tight but that eased considerably.

I have found it is a personal decision. A 3.5% mortgage may look pretty good in 10 years or so. However what could you do with that added cash flow? I have felt that paying off your mortgage was a thankless thing to do in the short term but really paid dividends over the long haul. I may have given up some gains in the market by paying off my mortgage early, but then again there aren't really any "safe" places you can go to get a >4% yield to off set the mortgage.
enc0re
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by enc0re »

Pay down the mortgage.

Tax-implications: Assuming you get to itemized your entire interest, the 3.5% in after tax money you save on credit cost are reduced by your marginal tax rate. Your investment return is also reduced by your marginal tax rate. Therefore, you should ask the question whether your additional dollars can get a higher than 3.5% return in taxable investments. In other words, paying down an itemized mortgage is equivalent to a taxable return at the mortgage rate. For reasons outlined in the next paragraph, the preferential taxation of stocks is not relevant.

Risk adjusted return: Unless there's a significant probability that you can engage in a short-sale or that you will go through bankruptcy, your mortgage is a 'risk-free' asset to invest in. Comparing it to stock market returns is wrong because the risk profile is way different. Instead ask what your additional dollars can buy in 'risk-free' investments, i.e. government bonds.

Duration: The best return you can get on a bond right now is the 30-year Treasury with a yield of 3.74%. While slightly higher than your mortgage, the duration is also longer since there's a balloon at the end as opposed to the zero future value of your mortgage.

In conclusion, just pre pay the mortgage, save yourself a bunch of hassle, and feel good about moving towards being debt free.
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rob
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by rob »

In the end, it's about whether or not you COULD pay off the mortgage within a few days more than whether you do....... I have enough in a taxable account to pay off my 3.75% mortgage but choose not to pay it off for various reasons - I refinanced to 3.75 and just did std payments..... HOWEVER I paid it down aggressively when the interest rates were far higher (I think I started around 7.5%) and at this point I have maybe 85% equity.
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien
Tamahome
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by Tamahome »

bucksfan2 wrote:My grandma passed and left me a nice chunk of change and we decided that to honor my grandma (who always talked about living rent free) we would pay off the rest of the mortgage.
I am always a fan of doing what someone would have wanted you to do with money. If someone left me money with a statement that they wanted me to pay down my mortgage, I would do so even if I had 0% interest on it. I had a friend who received money on the condition that she never let any of it be invested in China (because of political reasons of the individual who was elderly and had unpleasant dealings with China in the past). We developed a portfolio with slightly lower expected returns, but that avoided China.

Also, if OP sleeps better at night or emotionally is tied to paying off the mortgage, then go for it. This board is not really able to evaluate the OP's emotions. What this board CAN do is evaluate what is likely the best situation. From OP's most recent comments on my original post, the OP has done the math to find that the mortgage interest deduction would not bring much value (I am guessing the 3.5% drops to 3% to 3.25%). OP looked at the OP's portfolio in order to determine a likely return of about 3.5%. Because of the deviation (risk) in investing, that extra 0.25% to 0.5% was not worth it to the OP. (Notwithstanding the OP's market timing fear of a significant bear market within 5 years, which would add additional concern, but as it is market timing, I will not let OP use that in OP's decision :wink: ... as the volatility vs. low advantage is enough to push OP over the limit.)
sunnyday wrote:Well, I set up my first prepayment today for my mortgage. The math/predictions just weren't compelling enough for me to invest more in taxable instead. Plus with the market at an all time high...maybe if the market crashes, I'll change my mind. That's very anti-bogleheadish, but since the decision is basically a push, I don't see it having a negative impact.
Congrats to OP on the decision! I really respect it when someone wades through the evaluation process rather than just saying "emotionally it feels good." While risk tolerance is quasi-emotional, it is at least a factor considered in conjunction with the other factors in play here. :sharebeer
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
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sunnyday
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by sunnyday »

^^^ You pretty much hit the nail on the head. Plus, I'll be investing so much in the stock market anyway (large tax-advantage space) that I figure putting a little extra towards my mortgage (with a return of ~3.5%) is a great way to hedge my bet.
Geist
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by Geist »

sunnyday wrote:Well, I set up my first prepayment today for my mortgage. The math/predictions just weren't compelling enough for me to invest more in taxable instead. Plus with the market at an all time high...maybe if the market crashes, I'll change my mind. That's very anti-bogleheadish, but since the decision is basically a push, I don't see it having a negative impact.
Excellent. Most importantly, you made a decision that is both reasonably sound and makes you comfortable with your actions. Honestly, I'm in a similar boat, and I'm starting to lean in a similar direction. Congrats on the decision, and look forward to enjoying your debt-free home!
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GerryL
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by GerryL »

I voted for combined.
Depending on your age (retire mortgage by the time you retire?) and plans for staying (intend to stay put?) you might want to put some of the money toward paying down the principal in the early years when you get more bang for the buck.
denovo
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Re: POLL: Pay down 3.5% mortgage or invest in taxable?

Post by denovo »

For me, what it comes down to is that most of the people advocate paying off the mortgage advocate doing it because "it feels good"

That's a generally bad principle to follow in investing and personal finance. I am sure it "felt good" to a lot of people to buy stocks after they went up 100 percent.
"Don't trust everything you read on the Internet"- Abraham Lincoln
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