Mortgage payoff instead of fixed income?

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Mortgage payoff instead of fixed income?

Postby am » Sun Jan 27, 2013 10:29 am

I have a 30 year fixed at 3.5% and about 340k left. Does it make sense to take my bond and some of my cash allocation and pay off mortgage given the poor expected returns of bonds in the future- specifically TBM? I will then be 100% stocks but maybe the volatility will be easier to stomach given that I will have no debt at all?
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Re: Mortgage payoff instead of fixed income?

Postby Cut-Throat » Sun Jan 27, 2013 10:36 am

I would !.......3.5% is hard to come by these days.

I don't know your situation whether you are still working/accumulating or retired. Whether you are planning on staying in your place.

either way, it's hard to get 3.5% guaranteed.
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Re: Mortgage payoff instead of fixed income?

Postby john94549 » Sun Jan 27, 2013 10:36 am

Question: where will CD rates be in 10 years?

That 3.5% loan might look pretty tasty down the road.
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Re: Mortgage payoff instead of fixed income?

Postby Cut-Throat » Sun Jan 27, 2013 11:05 am

john94549 wrote:Question: where will CD rates be in 10 years?

That 3.5% loan might look pretty tasty down the road.


That might be, but most of his house payments over those first 10 years will be made up of Interest, and he'd still owe most of the principal.
He could bank that money saved and buy one of those CDs that you speak of.
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Re: Mortgage payoff instead of fixed income?

Postby SpaceCommander » Sun Jan 27, 2013 11:17 am

That's exactly what I did. No regrets. Consider a tip from Dave Ramsey: go ahead and pay it off, and if you don't like it, you can always remortgage yourself in the future.
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Re: Mortgage payoff instead of fixed income?

Postby Toons » Sun Jan 27, 2013 11:26 am

SpaceCommander wrote:That's exactly what I did. No regrets. Consider a tip from Dave Ramsey: go ahead and pay it off, and if you don't like it, you can always remortgage yourself in the future.


+1 Great Advice,,,,especially the "Remortgage " if you have any regrets :shock: which I doubt you will
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Re: Mortgage payoff instead of fixed income?

Postby Rainier » Sun Jan 27, 2013 11:31 am

What if you need the cash? You'd have to sell stock or get equity out of your house somehow.

Also, if you "remortgage" the interest is not tax deductible. That's not a reason not to pay off, but something to think about when doing calculations.
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Re: Mortgage payoff instead of fixed income?

Postby john94549 » Sun Jan 27, 2013 11:36 am

SpaceCommander wrote:That's exactly what I did. No regrets. Consider a tip from Dave Ramsey: go ahead and pay it off, and if you don't like it, you can always remortgage yourself in the future.


However, the rate might be? Point being, the 3.5% loan is fixed. The interest rate you might earn in the future is not. Once you pay off a 3.5% loan, there is also no assurance you will qualify for another. Funds used to pay off a 3.5% loan today might well be earning quite a bit more in the future. Or not. It's always a calculated risk.

Run the numbers under various scenarios, then do what seems logical. I would simply posit that the odds for a successful arbitrage of that 3.5% loan in the future look good. It wasn't all that long ago that 4% CDs were common.
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Re: Mortgage payoff instead of fixed income?

Postby JPH » Sun Jan 27, 2013 11:47 am

I would pay off the mortgage, but I would not stay at 100% equities.
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Re: Mortgage payoff instead of fixed income?

Postby Cut-Throat » Sun Jan 27, 2013 11:49 am

Rainier wrote:What if you need the cash? You'd have to sell stock or get equity out of your house somehow.

Also, if you "remortgage" the interest is not tax deductible. That's not a reason not to pay off, but something to think about when doing calculations.


Why wouldn't the interest be tax deductible if you got another mortgage?
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Re: Mortgage payoff instead of fixed income?

Postby sscritic » Sun Jan 27, 2013 11:55 am

Acquisition debt is treated differently. The answer will depend on the size of the mortgage. The deduction might be limited.
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Re: Mortgage payoff instead of fixed income?

Postby bogleblitz » Sun Jan 27, 2013 12:10 pm

How would one rebalance? If stocks fall 20%, and I need to rebalance. so I need to keep track of how much money I put back in mortgage as the bond part.
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Re: Mortgage payoff instead of fixed income?

Postby G-Money » Sun Jan 27, 2013 2:04 pm

Rainier wrote:Also, if you "remortgage" the interest is not tax deductible. That's not a reason not to pay off, but something to think about when doing calculations.

Only partially true. $100,000 would be tax deductible regardless of how you use it. You could deduct even more if you use it on home improvements. See Pub 936.
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Re: Mortgage payoff instead of fixed income?

Postby Random Walker » Sun Jan 27, 2013 4:02 pm

I did it and have never regretted it. I went through the same exact thought process. Mortgage rate was higher than bonds. Moreover, the interest saved by paying off mortgage is guaranteed while the bonds have some risk. The best side effect of the mortgage payoff is what you mentioned. It creates a certain financial strength that makes you better able to stomach the wild swings of the market. If you are in accumulation phase and paying off the mortgage makes you 100% equities, then I would just start using new additions to start building up your bond allocation again.

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Re: Mortgage payoff instead of fixed income?

Postby RenoJay » Sun Jan 27, 2013 4:12 pm

I did a hybrid of what you're considering. I paid off about half the mortgage, and of the remaining fixed income allocation I put some of it into higher yielding fixed income classes like P2P lending and hard money lending.
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Re: Mortgage payoff instead of fixed income?

Postby am » Sun Jan 27, 2013 5:13 pm

Just to go into some more detail about what I am thinking about. I have a taxable account worth about 250k which would be sold. I would take the remainder from cash to pay off the mortage. My IRAs which now have mostly bonds would be used to convert to stocks. Thereby I would never be out of the stock market or significantly decrease my allocation to stocks. I would essentially be left with 100% total us and international in the IRAs and enough cash for 1 year of living expenses. Future investments could balance out my portfolio between stocks and bonds to say 70/30. I am paying about 1,000 in interest right now per month. What do you guys think- does this make sense? I would be left with no debt and decrease my monthly expenses by roughly $1627.
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Re: Mortgage payoff instead of fixed income?

Postby Random Walker » Sun Jan 27, 2013 5:27 pm

I like the idea

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Re: Mortgage payoff instead of fixed income?

Postby veerain » Sun Jan 27, 2013 5:34 pm

Are you selling stocks to pay off the mortgage ? if then you would have to consider the capital gain taxes as well. One option to consider is be to refinance for lower period - I bet you can get 15 year mortgage for 2.7, and 10 year for even lower.
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Re: Mortgage payoff instead of fixed income?

Postby retiredjg » Sun Jan 27, 2013 5:35 pm

It sort of makes sense in terms of numbers. But it leaves you with a new and different problem - more volatility and greater losses during a crash. That's an emotional thing, not a numbers thing. And emotions tend to overshadow numbers in ways that are not pleasant for your mind or your body or your loved ones. Why risk that?

Also, it doesn't leave you with any bonds for the times that bonds make more money than stocks. I wouldn't do it myself. But I might accelerate payments so that the total amount of interest is less in the long run.
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Re: Mortgage payoff instead of fixed income?

Postby stemikger » Sun Jan 27, 2013 5:50 pm

I just paid off my mortgage and I have to tell you it feels good being completely debt free.

There are many ways you can look at things especially investing. Like you said, you can either afford to take more risk for hopes of a higher return and when the fluctuations that will happen to your stock heavy portfolio do happen, without a mortgage you can stomach those downturns better.

Or, you can stick to the same stock/bond AA you always had and invest more money since you don’t have a mortgage payment, sleep better at night.

Now that I have my $350 to 400K house paid off, I can afford to be a little more aggressive with my AA. I’m still holding bonds, but not as much as I had before the paid off home.

I know many experts argue with paying off a mortgage, but to me it really is common sense. For the average Joe a mortgage will be their biggest expense, without that big nut you have more freedom in your life. You can afford to try something different even if you have to take a cut in salary. I look at a paid off mortgage as a big accomplishment because I know so many people that never pay their loan off.

Good Luck.
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Re: Mortgage payoff instead of fixed income?

Postby Harold » Sun Jan 27, 2013 6:00 pm

am wrote:I have a 30 year fixed at 3.5% and about 340k left. Does it make sense to take my bond and some of my cash allocation and pay off mortgage given the poor expected returns of bonds in the future- specifically TBM? I will then be 100% stocks but maybe the volatility will be easier to stomach given that I will have no debt at all?

Well, you're already 100% stocks. You're just paying 3.5% for the privilege of feeling like you've got the additional safety and cushion of having bonds.

This question really answers itself if you apply financial discipline. You have a home worth $X, stocks worth $Y, bonds worth $Z, and a -$Z mortgage that you're apparently using to fund your bond allocation.

You're the only one who knows your financial plan. If your plan involves borrowing to invest, or borrowing to maintain liquidity -- your plan sets the amount you would like to borrow, and a maximum for what that cost of borrowing should be. Then within the constraints of those limits, you borrow as much as someone is willing to give you (doesn't have a thing to do with the mortgage, except to the extent it might be a lower cost way of borrowing). If your plan doesn't involve borrowing to invest or maintain liquidity (and you just took out the mortgage because you didn't have the cash to buy the home), then pay it off.

If the concern is about being 100% stocks, that doesn't have a thing to do with the mortgage either -- you need to sell stocks and buy bonds. (Or maybe your plan involves borrowing to buy stocks, in which case the mortgage might help fill that role.)

There's not even a question to ask here -- unless you're operating without a plan, modifying your finances based on speculative fears, etc.
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Re: Mortgage payoff instead of fixed income?

Postby retiredjg » Sun Jan 27, 2013 6:05 pm

I'm not opposed to paying off a mortgage early. I'm opposed in letting that push a person into 100% equities. Just does not make sense to me.
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Re: Mortgage payoff instead of fixed income?

Postby Harold » Sun Jan 27, 2013 6:09 pm

retiredjg wrote:I'm not opposed to paying off a mortgage early. I'm opposed in letting that push a person into 100% equities. Just does not make sense to me.

He's already 100% equities.

If that's his only concern about paying off the mortgage, he needs to sell stocks as at least part of the mortgage payoff.
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Re: Mortgage payoff instead of fixed income?

Postby retiredjg » Sun Jan 27, 2013 6:30 pm

Harold wrote:
retiredjg wrote:I'm not opposed to paying off a mortgage early. I'm opposed in letting that push a person into 100% equities. Just does not make sense to me.

He's already 100% equities.

If that's his only concern about paying off the mortgage, he needs to sell stocks as at least part of the mortgage payoff.

What did I miss? His post does not say that.
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Re: Mortgage payoff instead of fixed income?

Postby Harold » Sun Jan 27, 2013 6:34 pm

retiredjg wrote:
Harold wrote:
retiredjg wrote:I'm not opposed to paying off a mortgage early. I'm opposed in letting that push a person into 100% equities. Just does not make sense to me.

He's already 100% equities.

If that's his only concern about paying off the mortgage, he needs to sell stocks as at least part of the mortgage payoff.

What did I miss? His post does not say that.

His bond and mortgage allocations offset each other. He's got the illusion of having a solid bond allocation, but really doesn't.

As I put in my post above yours, if that's part of a well-reasoned plan, everything's good -- and it's already obvious whether he should pay off the mortgage or not.
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Re: Mortgage payoff instead of fixed income?

Postby retiredjg » Sun Jan 27, 2013 7:10 pm

Harold wrote:His bond and mortgage allocations offset each other. He's got the illusion of having a solid bond allocation, but really doesn't.

I think you see it that way because the concept of "negative bonds" makes sense to you. It does not appear to make gut sense to the original poster though.


As I put in my post above yours, if that's part of a well-reasoned plan, everything's good...

I'll disagree. It might be good for you, but I don't think it is good for someone who might see things differently.

I think the original poster might not fall into the same category as you because s/he said "maybe the volatility will be easier to stomach". That does not seem like it comes from a person who sees a mortgage as a negative bond. I think this person sees his/her investments as a compartment. Having some bonds in that compartment is probably a good idea for this poster.
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Re: Mortgage payoff instead of fixed income?

Postby Harold » Sun Jan 27, 2013 7:13 pm

retiredjg wrote:
Harold wrote:His bond and mortgage allocations offset each other. He's got the illusion of having a solid bond allocation, but really doesn't.

I think you see it that way because the concept of "negative bonds" makes sense to you. It does not appear to make gut sense to the original poster though.


As I put in my post above yours, if that's part of a well-reasoned plan, everything's good...

I'll disagree. It might be good for you, but I don't think it is good for someone who might see things differently.

I think the original poster might not fall into the same category as you because s/he said "maybe the volatility will be easier to stomach". That does not seem like it comes from a person who sees a mortgage as a negative bond. I think this person sees his/her investments as a compartment. Having some bonds in that compartment is probably a good idea for this poster.

Seeing things differently is all well and good. But if one reaches different financial conclusions depending on how he chooses to see it, at least one of the ways is wrong.

In this case, he apparently already has heavy equity risk. Just looking at things differently doesn't take that away.
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Re: Mortgage payoff instead of fixed income?

Postby Rodc » Sun Jan 27, 2013 7:27 pm

Liquidity has real value, though differs for different people. Also you have what seems to amount to anti-reinvestment risk with the anti-bond; bonds will very possibly come back to have rather more than a 3.5% interest later (as others have noted, but of course interest is front loaded in a mortgage). Shoot, the way things are going you'll be able to refi to 2.5% in a year. (well I don't think the odds are too high, but could happen as I keep getting surprised by rate going lower.)

I would not sell every bond to pay off a house, leaving only stocks and home equity. I'd rather have some bonds for rebalancing. Selling some bonds to pay down the mortgage might well make sense.
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Re: Mortgage payoff instead of fixed income?

Postby Harold » Sun Jan 27, 2013 7:33 pm

Rodc wrote:I would not sell every bond to pay off a house, leaving only stocks and home equity. I'd rather have some bonds for rebalancing. Selling some bonds to pay down the mortgage might well make sense.

There doesn't seem to be anything precluding him from selling stocks along with bonds to pay off his mortgage, thereby leaving him with both stocks and bonds afterwards.
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Re: Mortgage payoff instead of fixed income?

Postby Rodc » Sun Jan 27, 2013 8:21 pm

Harold wrote:
Rodc wrote:I would not sell every bond to pay off a house, leaving only stocks and home equity. I'd rather have some bonds for rebalancing. Selling some bonds to pay down the mortgage might well make sense.

There doesn't seem to be anything precluding him from selling stocks along with bonds to pay off his mortgage, thereby leaving him with both stocks and bonds afterwards.


Yes that is an option. Farther from a simple trade of fixed income vs fixed interest mortgage. Has somewhat different trade offs, but worth considering.
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Re: Mortgage payoff instead of fixed income?

Postby NYBoglehead » Sun Jan 27, 2013 8:29 pm

I like the idea of paying off the mortgage INSTEAD of contributing more to fixed income, but wouldn't be so quick to sell anything in order to pay off the mortgage.

Keep in mind, with the interest deduction 3.5% is effectively 2.63% in the 25% bracket. Might be even lower if you've got state income taxes and they deduct it as well. Run your own numbers.

I'm a huge advocate of no debt whatsoever but that said I don't think it makes sense to sell taxable investments that will incur taxes to do it. Throw extra money at it every month if you've got the cash flow.
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Re: Mortgage payoff instead of fixed income?

Postby Grt2bOutdoors » Sun Jan 27, 2013 8:36 pm

How much cash will the OP have left if he sells all bonds and some of the cash to make payoff?
I am an advocate of paying down the mortgage but not at the expense of giving up nearly all liquidity and coupling that with a 100% equity portfolio. Too much chance the risk shows up at the wrong time.
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Re: Mortgage payoff instead of fixed income?

Postby am » Sun Jan 27, 2013 9:09 pm

I will have roughly 1 year of emergency fund left. Maybe a bit more if the mortgage is payed for. Will have about 75k less in stocks overall, 0 in bonds, all the rest of stocks in IRAs. Will have about 43k in capital gains mostly long term. New cash flow will allow me to start building new taxable account and save some more for emergency fund. Instead of converting all my IRAs to stocks, I can convert just enough to have 80% stocks/20% bonds to allow for rebalancing.

My main concern is being relatively cash poor compared to before- roughly 2-2.5 years of money in cash before mortgage payoff. Makes us sleep better at night given all the uncertainty out there given we are a 1 income family. Also, some psychological factors like having a much smaller portfolio and not staying the course like I planned especially with the taxable portfolio which is intended for hopefully funding early retirement until pension and SS start. Also, with the market near all time highs, would love to capitalize on my gains before they evaporate (I know shame on me for trying to time).
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Re: Mortgage payoff instead of fixed income?

Postby Grt2bOutdoors » Sun Jan 27, 2013 9:39 pm

^^^^ You said it yourself - main concern is being cash poor, one income family helps you sleep at night. If you have extra cashflow, prepay some each month, but leave your lump-sum cash alone because the benefits of having it clearly outweigh the risks and any potential returns of a 100% equity portfolio.
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Re: Mortgage payoff instead of fixed income?

Postby Dario33 » Mon Jan 28, 2013 1:21 pm

NYBoglehead wrote:I like the idea of paying off the mortgage INSTEAD of contributing more to fixed income, but wouldn't be so quick to sell anything in order to pay off the mortgage.

Keep in mind, with the interest deduction 3.5% is effectively 2.63% in the 25% bracket. Might be even lower if you've got state income taxes and they deduct it as well. Run your own numbers.

I'm a huge advocate of no debt whatsoever but that said I don't think it makes sense to sell taxable investments that will incur taxes to do it. Throw extra money at it every month if you've got the cash flow.

This is probably the question I most struggle with. Whether to pay down mortgage or invest in a taxable account.

FWIW, I plan on taking an approach like you outline above. While not the exact situation as the OP, I do have a sizeable taxable account. The question at this point is whether to invest in VG mutual funds (bonds would likely be a component) or pay down the mortgage. Since the effective interest rate on the house is closer to 2.6% after interest write-off as you point out, the question becomes can I get a return of this same amount or more in a long-term taxable account w/ VG? Obviously no guarantees, but a reasonable answer would be 'yes'. Assuming tax-efficient fund placement, of course.

That said, I do accelerate my mortgage payment by contributing new money to it, just not existing money. Another thought I have is that mortgage rates could continue to fall to < 3% for 30yr. Not sure what the likeihood of this is, but if so, might make sense to refi and continue to invest in a taxable acct (for me at least).
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Re: Mortgage payoff instead of fixed income?

Postby NYBoglehead » Mon Jan 28, 2013 1:32 pm

Dario33 wrote:
NYBoglehead wrote:I like the idea of paying off the mortgage INSTEAD of contributing more to fixed income, but wouldn't be so quick to sell anything in order to pay off the mortgage.

Keep in mind, with the interest deduction 3.5% is effectively 2.63% in the 25% bracket. Might be even lower if you've got state income taxes and they deduct it as well. Run your own numbers.

I'm a huge advocate of no debt whatsoever but that said I don't think it makes sense to sell taxable investments that will incur taxes to do it. Throw extra money at it every month if you've got the cash flow.

This is probably the question I most struggle with. Whether to pay down mortgage or invest in a taxable account.

FWIW, I plan on taking an approach like you outline above. While not the exact situation as the OP, I do have a sizeable taxable account. The question at this point is whether to invest in VG mutual funds (bonds would likely be a component) or pay down the mortgage. Since the effective interest rate on the house is closer to 2.6% after interest write-off as you point out, the question becomes can I get a return of this same amount or more in a long-term taxable account w/ VG? Obviously no guarantees, but a reasonable answer would be 'yes'. Assuming tax-efficient fund placement, of course.

That said, I do accelerate my mortgage payment by contributing new money to it, just not existing money. Another thought I have is that mortgage rates could continue to fall to < 3% for 30yr. Not sure what the likeihood of this is, but if so, might make sense to refi and continue to invest in a taxable acct (for me at least).


I think that's a good plan. While obviously there are no guarantees, I think investing in the TSM in a taxable account will give you a reasonable expectation of getting a 2.6% return annually after taxes. The dividend yield alone is somewhere around 2.1%, so even with 15% taxes on dividends you're getting ~1.78% right there. Obviously it will go up and down. I recommend you offset any increase in stocks in taxable by shifting to bonds in your tax-advantaged space to maintain your AA, trying to avoid bonds in taxable due to tax purposes.
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Re: Mortgage payoff instead of fixed income?

Postby Dario33 » Mon Jan 28, 2013 1:42 pm

NYBoglehead wrote:
Dario33 wrote:
NYBoglehead wrote:I like the idea of paying off the mortgage INSTEAD of contributing more to fixed income, but wouldn't be so quick to sell anything in order to pay off the mortgage.

Keep in mind, with the interest deduction 3.5% is effectively 2.63% in the 25% bracket. Might be even lower if you've got state income taxes and they deduct it as well. Run your own numbers.

I'm a huge advocate of no debt whatsoever but that said I don't think it makes sense to sell taxable investments that will incur taxes to do it. Throw extra money at it every month if you've got the cash flow.

This is probably the question I most struggle with. Whether to pay down mortgage or invest in a taxable account.

FWIW, I plan on taking an approach like you outline above. While not the exact situation as the OP, I do have a sizeable taxable account. The question at this point is whether to invest in VG mutual funds (bonds would likely be a component) or pay down the mortgage. Since the effective interest rate on the house is closer to 2.6% after interest write-off as you point out, the question becomes can I get a return of this same amount or more in a long-term taxable account w/ VG? Obviously no guarantees, but a reasonable answer would be 'yes'. Assuming tax-efficient fund placement, of course.

That said, I do accelerate my mortgage payment by contributing new money to it, just not existing money. Another thought I have is that mortgage rates could continue to fall to < 3% for 30yr. Not sure what the likeihood of this is, but if so, might make sense to refi and continue to invest in a taxable acct (for me at least).


I think that's a good plan. While obviously there are no guarantees, I think investing in the TSM in a taxable account will give you a reasonable expectation of getting a 2.6% return annually after taxes. The dividend yield alone is somewhere around 2.1%, so even with 15% taxes on dividends you're getting ~1.78% right there. Obviously it will go up and down. I recommend you offset any increase in stocks in taxable by shifting to bonds in your tax-advantaged space to maintain your AA, trying to avoid bonds in taxable due to tax purposes.

Not to hijack this thread, but your response leads me to the second question I most struggle with. Whether it's okay for bonds to be in taxable (this probably applies to the OP's situation as well). Not only should bonds be sold to pay down the mortgage, but should they exist in taxable in the first place?

Can I stomach having taxable consist of TSM & TISM alone? Not sure. :) On the other hand, would introducing a small portion of taxable in bonds help me sleep better at night (i-bonds or intermediate term tax-exempt). It might. I can have my tax advantaged space weighted in bonds to align with my AA...just not sure if I'm comfortable having it consist of 100% of my bond allocation. Emotional reaction I know. ;)
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Re: Mortgage payoff instead of fixed income?

Postby NYBoglehead » Mon Jan 28, 2013 2:19 pm

^I don't think you're hijacking the thread. Taxation is an important consideration when making decisions about taxable investing vs. paying off debt.

Since bond interest is taxed as ordinary income, you're going to lose more of the yield to taxes if it is in a taxable account. Right now the TBM yield is something like 1.6%. If you're in the 25% bracket, you're getting an effective interest rate of 1.2%. Which is terrible.

If you are going to hold bonds in taxable, I recommend holding a muni fund. The interest might be lower but for many people the tax-equivalent yield will be higher. If you're already maxing out tax-advantaged space and are conflicted about whether or not paying down debt is the best way to go, I'd recommend a mix of TSM/TISM/Munis in a taxable account.

And...I know I said before to look at the effective interest rate after taxes in regards to keeping the mortgage. That said, if you're maxing out your tax-advantaged space there really isn't much downside IMO to paying off the mortgage faster. Might you get a better return by taxable investing. Yes, and you may not. We simply do not know. The bottom line is once the mortgage is paid off you have a paid for house and can direct what you were allotting to your monthly payment elsewhere. I do not think it can ever be looked at as a bad thing.
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Re: Mortgage payoff instead of fixed income?

Postby am » Mon Jan 28, 2013 9:00 pm

An update. Went ahead and liquidated taxable account. IRAs are now mostly TSM and TISM. Got rid of the dead weight TBM. A few days away from mortgage payoff.

Feel good about my decision. No debt. No dead asset (yes I know the purpose of bonds in a portfolio). Expenses down. Early retirement feels much closer than with my bigger portfolio. I also feel more free as far as future career options.

Yes I know having mostly stocks is not the most efficient, but now that my house is nearly paid off, I kind of look at it as a big bond that will hopefully appreciate with inflation. I feel like I can handle more volatility. Will see how it feels in a couple of months.
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Re: Mortgage payoff instead of fixed income?

Postby Toons » Mon Jan 28, 2013 9:15 pm

am wrote:An update. Went ahead and liquidated taxable account. IRAs are now mostly TSM and TISM. Got rid of the dead weight TBM. A few days away from mortgage payoff.

Feel good about my decision. No debt. No dead asset (yes I know the purpose of bonds in a portfolio). Expenses down. Early retirement feels much closer than with my bigger portfolio. I also feel more free as far as future career options.

Yes I know having mostly stocks is not the most efficient, but now that my house is nearly paid off, I kind of look at it as a big bond that will hopefully appreciate with inflation. I feel like I can handle more volatility. Will see how it feels in a couple of months.


+1 :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
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Re: Mortgage payoff instead of fixed income?

Postby Harold » Tue Jan 29, 2013 10:14 am

am wrote:An update. Went ahead and liquidated taxable account. IRAs are now mostly TSM and TISM. Got rid of the dead weight TBM. A few days away from mortgage payoff.

Feel good about my decision. No debt. No dead asset (yes I know the purpose of bonds in a portfolio). Expenses down. Early retirement feels much closer than with my bigger portfolio. I also feel more free as far as future career options.

Yes I know having mostly stocks is not the most efficient, but now that my house is nearly paid off, I kind of look at it as a big bond that will hopefully appreciate with inflation. I feel like I can handle more volatility. Will see how it feels in a couple of months.

You reduced your risk by paying off your mortgage, rather than increasing it. You already had the risk of an all stock portfolio, and now you don't have the risk of having to make mortgage payments or lose your home asset. You'd probably feel more sure about yourself if you had a comprehensive investment plan that you were simply executing -- but regardless you seem to have made the right decision. Well done!
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Re: Mortgage payoff instead of fixed income?

Postby Random Walker » Tue Jan 29, 2013 10:35 am

I went through this mortgage payoff versus holding bonds thought process a few years ago. I ended up paying off the mortgage. I've never regretted it. I learned a few things about myself in the subsequent few years as well. It did indeed strengthen my will to stick with my aggressive 80/20 AA. It made me appreciate the real cost of the house, and created a belief in me that I never want a mortgage again! Paying off the mortgage helped sort of fix me in a position of living below my means. I see lots of people upgrade houses over time and upgrade mortgages as well. Once paid, you don't want to move again unless you go cheaper! :happy
I've come to view the interest portion of a mortgage as monthly rent. Now most months there is no rent payment. Every once in a while I have bought a friend a gift about the size of the mortgage interest payment. That has been infinitely more rewarding and happy for me than an obligatory interest payment. And it's totally under my control, at my discretion. Mortgage interest doesn't feel like that.

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Re: Mortgage payoff instead of fixed income?

Postby dmcmahon » Tue Jan 29, 2013 10:46 am

I'm a fan of paying off or paying down the mortgage. Did so myself, and no regrets. But would not have done so if it meant zeroing out my bond holdings. Also don't forget to keep enough cash for emergencies. The warning about paying off an acquisition mortgage is correct - if you later decide to take out a new mortgage, only $100k is deductible (unless, under some conditions, the money's used for improvements). One idea for you to consider is paying it down but not paying it off. Take $100k or $200k and knock down the balance. Your payments will remain the same, only now you'll be further down the curve wherein much more of that monthly payment is principal, and much less is interest, and the time remaining before the loan is paid off will drop dramatically. Just an idea.
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Re: Mortgage payoff instead of fixed income?

Postby Dario33 » Tue Jan 29, 2013 1:47 pm

dmcmahon wrote:I'm a fan of paying off or paying down the mortgage. Did so myself, and no regrets. But would not have done so if it meant zeroing out my bond holdings. Also don't forget to keep enough cash for emergencies. The warning about paying off an acquisition mortgage is correct - if you later decide to take out a new mortgage, only $100k is deductible (unless, under some conditions, the money's used for improvements). One idea for you to consider is paying it down but not paying it off. Take $100k or $200k and knock down the balance. Your payments will remain the same, only now you'll be further down the curve wherein much more of that monthly payment is principal, and much less is interest, and the time remaining before the loan is paid off will drop dramatically. Just an idea.

That's good advice and essentially what I took into consideration for my approach. I'm hesitant to forego taxable investing entirely by paying off the mortgage. The way I look at is I plan on doing both...just chipping away at the mortgage more aggressively compared to investing in a taxable account if that makes sense.

Cheers to the OP at arriving at a calculated decision and acting on it. That's often the hardest part and worth congratulating. :sharebeer
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Re: Mortgage payoff instead of fixed income?

Postby am » Tue Jan 29, 2013 6:41 pm

I am 100% stocks in my IRAs and happy about this decision so far. I also have a state pension which appreciates every month which I consider bond like. Unfortunately it is through Illinois so it may be as risky as a junk bond :( . I also view my house as a big bond.

I currently view bonds as simply allowing me to rebalance when stocks are going down drastically. Maybe I can use cash for this purpose. Having a 60/40 portfolio did not really make the pain of the bear market easier to bear. I really believe being 80-90 stocks would have been just as painful for me. Now that high quality bonds have relatively little expected reward going forward, I have a hard time holding them.

I am also a relatively early accumulator so I plan to build up my taxable account with each pay check. Will have about 1.5 years of expenses by summer in emergency fund now that mortgage will be payed off. Am really happy with the decision so far. Hopefully I will not need a ton of cash anytime soon, but this is the risk I chose. Also plugging my current portfolio into compound calculators results in lower numbers, but I guess that is ok since expenses are also down. Not to mention the psychological benefits.
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Re: Mortgage payoff instead of fixed income?

Postby NYBoglehead » Tue Jan 29, 2013 6:51 pm

I wouldn't sweat the whole "what if you need to get a mortgage later" question. If you pay off your mortgage, then you free up the money that was going towards the mortgage to pay for other things. People who are disciplined and determined enough to pay off a mortgage early I'd assume are able to manage their budgets going forward and in most cases won't need to take on new debt.
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Re: Mortgage payoff instead of fixed income?

Postby dharrythomas » Tue Jan 29, 2013 7:18 pm

Congratulations. I'm always happier debt free. Moved with the job after we'd paid off the house and had to take out a new mortgage in 2010. It should be paid off this year.

1/3 of the payment is mine to increase my contribution to the retirement plan/invest. 2/3 goes to the wife for 'household expenses'. I wanted half, she only wanted to give me 1/4. The additional free cash flow will increase investments and lower stress. Since it's 30% of my take home pay, not having the payment will make little 'events' much less stressful. :happy

Good Luck

Harry
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