Which mortgage paydown method would you recommend?

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viking112347
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Which mortgage paydown method would you recommend?

Post by viking112347 »

I have a mortgage balance of 370,000, 3.625% fixed for 30 years. I have no other debts, fully fund 401K and Roth IRA, and have 12 months worth of cash/savings bonds which act as my emergency fund. I have approx 1500-2000 extra each month that I was considering throwing at the mortgage. Not sure if I should actually send this money to the mortgage company or instead I was considering throwing it all in Vanguard Total Stock and at some point in the future the balance in this account will be enough to pay-off the mortgage. This would also give me some additional liquidity in the event of a job-loss or catastrophic emergency.

Any recommendations?
Outer Marker
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Re: Which mortgage paydown method would you recommend?

Post by Outer Marker »

Owning total stock market and paying off the mortgage are two entirely different things with vastly different risk profiles. Paying off the mortgage is 100 percent safe with a smaller but certain return. Your expected return holding TSM is higher, but not guaranteed. We might see DOW 20,000 five years from now, or it might be back down to 8,000.

If you want to pay off the mortgage, apply the extra funds as you have them available. If you want to invest in your long term portfolio, do so with respect to your long term asset allocation, diversified among stocks and bonds. If you decide you want to commit to the mortgage payoff, you would come out ahead by refinancing to a 15 year term at less than 3% -- although as you note it comes at the expense of less flexibility.
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market timer
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Re: Which mortgage paydown method would you recommend?

Post by market timer »

Might be better to use the extra $2K/month for savings bonds, if you aren't already buying the max. I'd be in no hurry to pay down a 30-year at 3.625%, unless planning to move in the next few years.
Default User BR
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Re: Which mortgage paydown method would you recommend?

Post by Default User BR »

viking112347 wrote:I have a mortgage balance of 370,000, 3.625% fixed for 30 years.
Long-term low-mortgages are a good hedge against rising interest rates and inflation. I would keep this historically low rate and not pay any off early. But that's me. I have no emotional connection with my mortgage, it is just another financial product to me.


Brian
stan1
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Re: Which mortgage paydown method would you recommend?

Post by stan1 »

viking112347 wrote:I have a mortgage balance of 370,000, 3.625% fixed for 30 years. I have no other debts, fully fund 401K and Roth IRA, and have 12 months worth of cash/savings bonds which act as my emergency fund. I have approx 1500-2000 extra each month that I was considering throwing at the mortgage. Not sure if I should actually send this money to the mortgage company or instead I was considering throwing it all in Vanguard Total Stock and at some point in the future the balance in this account will be enough to pay-off the mortgage. This would also give me some additional liquidity in the event of a job-loss or catastrophic emergency.

Any recommendations?
You don't give your age, but I'd say do some of both. Pay off your mortgage as if it were a 15 or 20 year loan, and invest the rest in a taxable account in line with your asset allocation. It's fine to carry mortgage debt in your 30's and 40's. I'm don't think someone that age needs to be debt free unless you want to be. In your 50's and 60's its time to be focused on paying off the mortgage so you can retire mortgage free (minimize expenses). This is what I'm doing; others will have alternate personal preferences. There is no formula that works for everyone, unfortunately.
Warning: I am about 80% satisficer (accepting of good enough) and 20% maximizer
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grabiner
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Re: Which mortgage paydown method would you recommend?

Post by grabiner »

Investing in stock may give higher returns, but with a lot of risk.

However, with much lower risk, you can invest in municipal bonds. Admiral shares of Long-Term Tax-Exempt have a 2.29% yield. If you can refinance to a 15-year mortgage at 3%, then your mortgage will have about the same duration as the muni fund, and in a 25% or higher tax bracket, you get a better after-tax return from buying munis than from paying down the mortgage. If you choose to keep the 30-year mortgage, then the muni fund has a slightly lower return than a mortgage paydown (unless you are in a 40% combined federal and state tax bracket and have a muni fund for your state), but less interest-rate risk, so it is still a decent deal.

I am not necessarily recommending that you do buy munis, only that the munis make a fair comparison. If you want to buy stock, or a balanced portfolio of stock and bonds, you can do that instead, increasing your risk for a higher expected return.
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jaj2276
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Re: Which mortgage paydown method would you recommend?

Post by jaj2276 »

viking112347 wrote:I have a mortgage balance of 370,000, 3.625% fixed for 30 years. I have no other debts, fully fund 401K and Roth IRA, and have 12 months worth of cash/savings bonds which act as my emergency fund. I have approx 1500-2000 extra each month that I was considering throwing at the mortgage. Not sure if I should actually send this money to the mortgage company or instead I was considering throwing it all in Vanguard Total Stock and at some point in the future the balance in this account will be enough to pay-off the mortgage. This would also give me some additional liquidity in the event of a job-loss or catastrophic emergency.

Any recommendations?
I refi'd from a 15 to a lower rate 15 and then to a 30 yr. I'm continuing to pay the same amount as when I had my first 15-yr, but the extra goes into my taxable account invested in Tax-Managed Balance Fund (extra liquidity and inflation hedge being the primary reasons why I'm not sending the money to the mortgage). If I need to TLH from my Tax-Managed Balance Fund (which is 50% munis, 50% Large and Mid-cap US stocks), I can use S&P 500 and a Muni-bond fund.

I agree with the earlier poster that investing in Total Stock is a significantly different risk profile than investing in a mortgage, so I would suggest not to do that.
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webslinger
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Re: Which mortgage paydown method would you recommend?

Post by webslinger »

I'm reminded of several seminal pieces of advice my wife and I were given when we first started out in the journey of life. The first was that even after purchasing your first home and having those huge mortgage payments, you still needed to save money. For what? Well, the next car, the kids college fund, repairs, the list goes on. The second was never to put all of our eggs in one basket. Diversify! Remember, a home is place to live.
I'd suggest looking into the costs of refinancing into a 15 year mortgage as another poster stated. This will save you money in the long term and address your desire to pay down your existing mortgage. It will also give you the flexibility to increase your savings / investments (hopefully according to the investment plan you developed).
My wife an I followed this approach even in the days of double digit interests rates and it served us well.
bpp
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Re: Which mortgage paydown method would you recommend?

Post by bpp »

If you already have a sufficient emergency fund established, how about the following approach?
I will also assume your investment asset allocation is where it should be (age in bonds, or whatever you want it to be).

Add the mortgage to your asset allocation as a negative bond. This may give you something silly-looking like 150% stocks, -50% bonds or whatever.
Now draw a glide path from your present situation to where you want to be in the future, and direct future excess contributions towards rebalancing to that path.

For example, say that in 20 years you want to be at 50/50 stocks/bonds, with the mortgage paid off.
Then you need to increase your bond allocation 5%/year.

If rebalancing to your glide path calls for putting money in to bonds one year, then either make a mortgage prepayment if the (post-tax) interest rate on your mortgage is higher than what you can get from bonds, or buy bonds if the interest rate on them has increased to beyond your mortgage rate.

If rebalancing calls for buying stocks, then do that.

At the end of the period, if you still have mortgage remaining and want it paid off, then sell some bonds to do so.

This seems like one way to optimize the question of where best to put future extra payments, either to investments or mortgage. Basically, you are letting the market tell you where to put the money, same as a regular rebalancing plan.

Just a thought.
epilnk
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Re: Which mortgage paydown method would you recommend?

Post by epilnk »

stan1 wrote:You don't give your age, but I'd say do some of both. Pay off your mortgage as if it were a 15 or 20 year loan, and invest the rest in a taxable account in line with your asset allocation. It's fine to carry mortgage debt in your 30's and 40's. I'm don't think someone that age needs to be debt free unless you want to be. In your 50's and 60's its time to be focused on paying off the mortgage so you can retire mortgage free (minimize expenses). This is what I'm doing; others will have alternate personal preferences. There is no formula that works for everyone, unfortunately.
That's what we did. When undecided, a middle path is often a good choice, and this one has the advantage of not locking you into a decision; you can shift more or less toward the mortgage as your financial situation changes. I calculated that in our case it was close to a wash; overall probably better to hold onto our mortgage, and I do like having a lot of liquidity, but I also did like seeing that principal balance go down. So I split the difference for several years until it became clear that there was no longer any reason to hold the mortgage.
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Taylor Larimore
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A difficult decision.

Post by Taylor Larimore »

Viking:

In making your decision, don't forget to also consider your mortgage deduction and income tax rate.

When decisions are difficult, it is often because it doesn't make much difference.

Best wishes.
Taylor
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NYBoglehead
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Re: Which mortgage paydown method would you recommend?

Post by NYBoglehead »

If you find that a decision is difficult to make, it can't hurt to go 50/50, half to paying down the mortgage faster and the other to TSM in a taxable account. You can always adjust the plan if you change your mind and find that one or the other best fits with your long-term plans. Your interest rate is fairly low so inflation will wipe some of that out, and the interest is deductible. That said, it's 100% safe.

If it were me, I'd go 50/50. Good luck, there really isn't a bad option for you situation.
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