Mortgage payoff account

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Mortgage payoff account

Postby EricHoya » Wed Jul 24, 2013 10:16 pm

Hi,
I have a mortgage payment of about 5k per month p+I with about 28.5 yrs to go. This was a refi at 4.5 after we were in the house for 1.5 years. We have no plans to move.
If I kick in an extra 400 per month, after 20 years that would be 96k off the principal, and eliminate about the last 20 payments. If I put that 400 per month into an investment account, after 20 years I should have a lot more money, getting into the ballpark of a payoff amount. My wife had some student loans that I had been paying an accelerated 400 a month on until I made a final ballon payment last month, so I can redirect this money elsewhere.
I realize that contributing directly to the mortgage is the safest way, but I like the idea of the separate account to maintain liquidity and earn interest. What would be the best way to handle this without swinging for the fences (bond fund, cds, treasuries, index fund, target date fund etc). I would really need something that i could automatically send the monthly payment to. Would you consider this account as part of your total asset allocation.
Already maxing out the 403b, did back door Roth for each of us, plus other retirement investments.
Any thoughts are appreciated
E
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Re: Mortgage payoff account

Postby momar » Wed Jul 24, 2013 10:19 pm

I don't treat this as any different from the rest of my portfolio. So basically stock heavy.

Why wouldn't you want to swing for the fences? You have a long time frame and you don't have to come up with the payoff by a particular date, so if it doesn't work out you just make a few extra years of payments.
"Index funds have a place in your portfolio, but you'll never beat the index with them." - Words of wisdom from a Fidelity rep
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Re: Mortgage payoff account

Postby Texas hold em71 » Wed Jul 24, 2013 11:59 pm

Do you trust yourself not to spend it on something else? Will you be able to stay the course if the value drops below what you have invested? The 4.5 percent return on the mortgage is risk free (although you lose liquidity) whereas the investment account is not. If you can answer yes to those questions, you should go the investment route.
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Re: Mortgage payoff account

Postby madbrain » Thu Jul 25, 2013 2:49 am

I don't have a separate investment account for mortgage payoff.

In terms of automation, Vanguard is pretty good for automatic investments into mutual funds. You can invest as little as $50 at a time.

Many have different opinions on this, but personally I am hedging my bets and doing both some partial mortgage prepayment, and contributing to after-tax investment accounts. I am doing a bit more of the later.

My recently refinanced 30yr FRM mortgage at 3.375% P&I is about $1800/month ($3100 PITI!). I am adding $900/month which should pay it off in 15 years. That's the approximate date when I hope to be retired.

I am also adding $1000/month to Vanguard. But the money in that account is not earmarked for paying off the house; it is designated for living expenses in retirement.

With your higher interest 4.5% rate, there may be an incentive to prepay a little more vs investing. But I would still do a little of both. If you can only manage $400/month, perhaps put $300 into the mortgage and $100 into automatic investments, or some other ratio. And at your next raise, add proportionally to both prepayment and automatic investment.

Keep adding this until your monthly regular prepayment is enough to get the house paid off by the date you wish to retire. Then as you get more income, all extra money should go to investing.
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Re: Mortgage payoff account

Postby EricHoya » Thu Jul 25, 2013 6:39 pm

Good comments, thanks for them. I have the self control and responsibility to not touch the money. I spoke with vanguard today and they sent me the forms to set up the account for this. I'll probably go with an index fund to start but will consider a target date fund, where the date corresponds to when I want to pay off the mortgage.
The problem I have with making extra mortgage payments is that the money is attributed to the final payments. So an extra 1000 paid now only has a future value of 1000 in 28 years. This is a lot less than the actual future value, barring any financial collapse. You would be better off just putting the extra payments into CDs even with the low low rates.
E
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Re: Mortgage payoff account

Postby DiscoBunny1979 » Thu Jul 25, 2013 8:14 pm

EricHoya wrote:The problem I have with making extra mortgage payments is that the money is attributed to the final payments. So an extra 1000 paid now only has a future value of 1000 in 28 years. This is a lot less than the actual future value, barring any financial collapse. You would be better off just putting the extra payments into CDs even with the low low rates.
E


There might be a difference between making 'extra mortgage payments' versus making extra principal payments. In order to have extra dollars work today and throughout the loan, the choice to make extra principal payments has an immediate impact when posted and cleared. Extra Principal Payments are directly taken off of the balance and therefore lowers he balance due immediately and cascades through the loan providing less interest due over the life of the loan. Since contributing extra principal payments does not result a tax, unlike CD interest, I'd prefer lowering the debt unless extra cash is needed.
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Re: Mortgage payoff account

Postby madbrain » Thu Jul 25, 2013 8:25 pm

DiscoBunny1979 wrote:
EricHoya wrote:The problem I have with making extra mortgage payments is that the money is attributed to the final payments. So an extra 1000 paid now only has a future value of 1000 in 28 years. This is a lot less than the actual future value, barring any financial collapse. You would be better off just putting the extra payments into CDs even with the low low rates.
E


There might be a difference between making 'extra mortgage payments' versus making extra principal payments. In order to have extra dollars work today and throughout the loan, the choice to make extra principal payments has an immediate impact when posted and cleared. Extra Principal Payments are directly taken off of the balance and therefore lowers he balance due immediately and cascades through the loan providing less interest due over the life of the loan. Since contributing extra principal payments does not result a tax, unlike CD interest, I'd prefer lowering the debt unless extra cash is needed.


+1, I was going to post this. An extra principal payment reduces interest for every year after the payment is made.

There is a slight tax issue though. If you are itemizing and getting a tax deduction for mortgage interest, then you will pay slightly more in taxes each year, because of that reduced interest.
The same happens with regular minimum payments, just at a much slower pace.
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Re: Mortgage payoff account

Postby EricHoya » Thu Jul 25, 2013 9:58 pm

In my old house I made extra principal payments which lowered the overall principal but did not change my monthly payments that were set by the amortization schedule.
I thought what you guys are describing is essentially a recast. I made extra principal payments on my car loan to pay it off faster which did change payment amounts.
I'll have to check with my lender, suntrust, to see how the extra payments would be handled. I just read a bankrate article that explained this better for me.
http://www.bankrate.com/finance/mortgag ... cipal.aspx
Thanks for the info
E
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Re: Mortgage payoff account

Postby Watty » Thu Jul 25, 2013 10:26 pm

Be sure to look into the tax implications of having the extra money in the taxable account and check to see if this will trigger the AMT if you are not already paying it.
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Re: Mortgage payoff account

Postby Kosmo » Thu Jul 25, 2013 10:43 pm

EricHoya wrote:In my old house I made extra principal payments which lowered the overall principal but did not change my monthly payments that were set by the amortization schedule.
I thought what you guys are describing is essentially a recast. I made extra principal payments on my car loan to pay it off faster which did change payment amounts.
I'll have to check with my lender, suntrust, to see how the extra payments would be handled. I just read a bankrate article that explained this better for me.
http://www.bankrate.com/finance/mortgag ... cipal.aspx
Thanks for the info
E

Make sure any extra payments are applied toward the principal and not applied as a future payment. Doing it this way will effectively reduce the term of the mortgage and save you interest. If your payments are applied only as future payments, you'll reduce the term of the mortgage since you're paying in advance, but won't reduce the interest paid since you're not paying down the principal any faster. And if you're paying into escrow, you'll get a refund every year when they do the escrow assessment and realize you have too much money in there.

I'd say split the difference. Pay an extra $200 per month as additional principal. Stash away $200. This gives you more liquidity should you choose to pay off the mortgage in full. But you also pay down the mortgage a little quicker. This doesn't need to be an either/or decision.
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Re: Mortgage payoff account

Postby EricHoya » Fri Jul 26, 2013 5:39 pm

Kosmo wrote:
EricHoya wrote:In my old house I made extra principal payments which lowered the overall principal but did not change my monthly payments that were set by the amortization schedule.
I thought what you guys are describing is essentially a recast. I made extra principal payments on my car loan to pay it off faster which did change payment amounts.
I'll have to check with my lender, suntrust, to see how the extra payments would be handled. I just read a bankrate article that explained this better for me.
http://www.bankrate.com/finance/mortgag ... cipal.aspx
Thanks for the info
E

Make sure any extra payments are applied toward the principal and not applied as a future payment. Doing it this way will effectively reduce the term of the mortgage and save you interest. If your payments are applied only as future payments, you'll reduce the term of the mortgage since you're paying in advance, but won't reduce the interest paid since you're not paying down the principal any faster. And if you're paying into escrow, you'll get a refund every year when they do the escrow assessment and realize you have too much money in there.

I'd say split the difference. Pay an extra $200 per month as additional principal. Stash away $200. This gives you more liquidity should you choose to pay off the mortgage in full. But you also pay down the mortgage a little quicker. This doesn't need to be an either/or decision.


Great advice. This is probably what I will do with a vanguard account.
Have a great weekend everyone.
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Re: Mortgage payoff account

Postby kwyjibo » Fri Jul 26, 2013 6:13 pm

This is my favorite take on the mortgage or invest debate, I believe the author is a member here.

http://www.mint.com/blog/investing/paying-down-your-mortgage-vs-investing-more-112011/
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Re: Mortgage payoff account

Postby Twins Fan » Fri Jul 26, 2013 7:00 pm

kwyjibo wrote:This is my favorite take on the mortgage or invest debate, I believe the author is a member here.

http://www.mint.com/blog/investing/paying-down-your-mortgage-vs-investing-more-112011/


Thank you for posting that! :beer

I recently changed my strategy to exactly what that article is saying... Knock out my mortgage, contribute to get the match in my deferred comp plan while doing that (free money), and invest later on when I feel comfortable doing so.

In looking for reading material to confirm my decision (not that I'm right or wrong, just mine), I mostly came across the "don't pay off the mortgage" articles. I found some, but they were the typical "mortgage is bad" or "snowball plan to get out of debt". None spelled it out like that article, and did so simply (a good thing for simple me). I favorited that one and will read it when/if I start to feel chicken about my decision. Thanks again.
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Re: Mortgage payoff account

Postby Default User BR » Fri Jul 26, 2013 8:23 pm

kwyjibo wrote:This is my favorite take on the mortgage or invest debate

Sorry, but that was blithering nonsense. Typical scare-mongering of the "no debt" types. He even includes the silly negative bond thing. Every bit of silliness.

Yeah, using a mortgage to invest is leveraging, but it's the best kind of leverage. There are no margin calls. If your stocks drop, SO WHAT? You're invested for the long haul, you have the time to ride out the drop. Who has failed to see the charts that show how important it is to invest early? Instead, now you pour money into a home that probably shouldn't even be considered an investment. You're starting out behind, to do what?

That doesn't even address the hedging you pick against inflation and potential future increases in interest rates.


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Re: Mortgage payoff account

Postby Twins Fan » Fri Jul 26, 2013 9:17 pm

Default User BR wrote:Sorry, but that was blithering nonsense. Typical scare-mongering


The "no debt" types might say the same about the "leverage" types. :D

Default User BR wrote:You're starting out behind, to do what?


To save tens or hundreds of thousands of dollars in interest... guaranteed.

Default User BR wrote:That doesn't even address the hedging you pick against inflation and potential future increases in interest rates.


If one doesn't have a mortgage, what does one care about interest rates increasing or decreasing?

Each situation is different, and it's called PERSONAL finance, right? To each their own.
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Re: Mortgage payoff account

Postby kwyjibo » Sat Jul 27, 2013 12:06 am

Default User BR wrote:Sorry, but that was blithering nonsense. Typical scare-mongering of the "no debt" types. He even includes the silly negative bond thing. Every bit of silliness.


You may feel it is nonsense, but I don't see anything wrong with the author's math. If you look at net worth as opposed to only looking at investment account returns, then he has a point.

I feel that the starting early vs starting later compounding comparison is a bit silly. I assume you are referring to "Jane puts $1000 away for 10 years from age 25 to 35 and gets an 8% return every year until retirement, John puts away $1000 every year from 35 to 65 with an 8% return, and in the end Jane has more money." (Or something similar). Yes it makes an important point that starting early is good and I agree with that and yes, compounding is great, but investment returns vary and that same power of compounding works in your favor for paying off your mortgage. Perhaps it is best for everyone to do the math on their personal situation and take into account their personal preference between 4.5% guaranteed and a maybe-better-maybe-worse.

There are even some Bogleheads expert panelists with similar ideas:
Look at #3 and Mr. Roth's responses in the comments here: http://www.cbsnews.com/8301-505123_162-57589485/5-warning-signs-to-watch-for-with-your-adviser/
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Re: Mortgage payoff account

Postby monocle » Sat Jul 27, 2013 12:30 am

Default User BR wrote:
kwyjibo wrote:This is my favorite take on the mortgage or invest debate

Sorry, but that was blithering nonsense. Typical scare-mongering of the "no debt" types. He even includes the silly negative bond thing. Every bit of silliness.

Yeah, using a mortgage to invest is leveraging, but it's the best kind of leverage. There are no margin calls. If your stocks drop, SO WHAT? You're invested for the long haul, you have the time to ride out the drop. Who has failed to see the charts that show how important it is to invest early? Instead, now you pour money into a home that probably shouldn't even be considered an investment. You're starting out behind, to do what?

That doesn't even address the hedging you pick against inflation and potential future increases in interest rates.


Brian


Do you currently have all the equity in your home leveraged into your brokerage account? Are you planning to do so?
-M
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Re: Mortgage payoff account

Postby Default User BR » Sat Jul 27, 2013 1:14 am

monocle wrote:Do you currently have all the equity in your home leveraged into your brokerage account? Are you planning to do so?

I took out a home-equity loan last year for an amount where I didn't have to pay any fees, including appraisal, which I invested to plan. I would have taken more if I could have done so conveniently and cheaply.


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Re: Mortgage payoff account

Postby Default User BR » Sat Jul 27, 2013 1:21 am

Twins Fan wrote:[If one doesn't have a mortgage, what does one care about interest rates increasing or decreasing?

The hedging takes place if rates go up. Then you have a loan at a rate less than safe rates (like FDIC insured). If they don't go up, little downside.

Look, if you fear debt and want to do it for emotional reasons, be my guest. But don't kid yourself that it's this great financial move. These are historic low rates, and jumping on them makes the most sense.


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Re: Mortgage payoff account

Postby Twins Fan » Sun Jul 28, 2013 5:25 pm

Default User BR wrote:
Twins Fan wrote:[If one doesn't have a mortgage, what does one care about interest rates increasing or decreasing?

The hedging takes place if rates go up. Then you have a loan at a rate less than safe rates (like FDIC insured). If they don't go up, little downside.

Look, if you fear debt and want to do it for emotional reasons, be my guest. But don't kid yourself that it's this great financial move. These are historic low rates, and jumping on them makes the most sense.


Brian


I have yet to make a "great" financial move in my lifetime. :D So, no worries I don't think that at all.

The "if" scenario you bring up is one of the reason I've changed my strategy. Anything "safe" right now isn't paying anywhere near the interest rate on my mortgage. And, I did jump on the low rates refinancing in 2012. So, why park money (or borrow to someone else) in a "safe" fixed income account, when I can get a better and guaranteed return paying off the money I borrowed. IF rates on safe assets go significantly above my mortgage rate in the future, then I may stop attacking the mortgage and stash money in the better rate safe accounts. Or, if I get my mortgage paid off before rates go up... well, yay for me. Then I'm not paying anyone any interest and only collecting interest in the safe accounts.

I believe I've read before that mortgage rates are set based on predicted future rates (about 7 years worth at least). And, with the predicted future returns on bond funds... etc. in the fixed income area, I don't find attacking a mortgage "nonsense".

But, the tax deduction... The interest I pay in a year is only a few hundred over the standard deduction... for now. In a couple/few years if I were to pay on schedule and the standard deduction bumped up a bit, the bonus there is gone for me. Actually, I consider it a non-issue for me now being only a few hundred over.

The liquidity... That's something one has to decide for themself. I'm not saving for anything right now, and don't plan on saving for anything. So, other than my emergency fund (which I have) I don't feel much need for liquidity right now.

Like I said, personal finance and to each their own. I think blanket statements about "nonsense" are a little uncalled for.
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Re: Mortgage payoff account

Postby BuckyBadger » Mon Jul 29, 2013 4:43 pm

Maybe not "nonsense," but certainly an over-simplification. I'd want to see numbers run if Jane invests. Yes, you have to make assumptions about what return she's going to get, but just because you have to make an assumption doesn't mean it's a pointless exercise.

I have a 30 year mortgage at 3.5%. After tax deductions it's well under 3%. I have a GREAT DEAL OF CONFIDENCE that my investments will make more than 2.5%. So I CHOOSE to keep my mortgage and keep investing. Is there a chance that I'll do worse in the end? I guess so, but it's a small chance. And I don't live my life worrying about the small chances, I try and focus on the big chances.
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Re: Mortgage payoff account

Postby BrandonBogle » Mon Jul 29, 2013 5:27 pm

BuckyBadger wrote:Maybe not "nonsense," but certainly an over-simplification. I'd want to see numbers run if Jane invests. Yes, you have to make assumptions about what return she's going to get, but just because you have to make an assumption doesn't mean it's a pointless exercise.

I have a 30 year mortgage at 3.5%. After tax deductions it's well under 3%. I have a GREAT DEAL OF CONFIDENCE that my investments will make more than 2.5%. So I CHOOSE to keep my mortgage and keep investing. Is there a chance that I'll do worse in the end? I guess so, but it's a small chance. And I don't live my life worrying about the small chances, I try and focus on the big chances.


I am in the same boat. I have a 2.75% mortgage for another 27.5 years before any tax deductions. I also have great confidence that my investments will grow by more than 2.75%.
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Re: Mortgage payoff account

Postby Twins Fan » Tue Jul 30, 2013 12:35 pm

And, my apologies to the OP. I feel I played a good part in side tracking your thread.

EricHoya wrote:Hi,
I have a mortgage payment of about 5k per month p+I with about 28.5 yrs to go. This was a refi at 4.5 after we were in the house for 1.5 years. We have no plans to move.
If I kick in an extra 400 per month, after 20 years that would be 96k off the principal, and eliminate about the last 20 payments. If I put that 400 per month into an investment account, after 20 years I should have a lot more money, getting into the ballpark of a payoff amount. My wife had some student loans that I had been paying an accelerated 400 a month on until I made a final ballon payment last month, so I can redirect this money elsewhere.
I realize that contributing directly to the mortgage is the safest way, but I like the idea of the separate account to maintain liquidity and earn interest. What would be the best way to handle this without swinging for the fences (bond fund, cds, treasuries, index fund, target date fund etc). I would really need something that i could automatically send the monthly payment to. Would you consider this account as part of your total asset allocation.
Already maxing out the 403b, did back door Roth for each of us, plus other retirement investments.
Any thoughts are appreciated
E


Now your situation is quite different from mine. With a $5K/month mortgage payment, that would say you're WELL over the standard deduction. So, the tax break is surely there for you. Also assuming you tax bracket is very high, so your effective interest rate is probably well below the 4.5%. Of course, you're paying a dollar in interest to save 35-40 cents, so there's that. Priorities, I guess it comes down to.

If you're going to play it safe and not swing for the fences with this extra money per month, I don't really see much of a "bonus" of having a separate low return type account. And, I wouldn't count on there being a lot more money in there 20 years from now, in a start small, slow growing, and low returning type account. I would throw the extra at the mortgage, knocking down the principal, and paying less in interest as you go.

But, I've already shown my cards, so you know which way I lean. :)

I'm assuming your income is quite high with that mortgage payment. Do you only have $400 a month extra to play with?
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Re: Mortgage payoff account

Postby T_in_ATL » Tue Jul 30, 2013 12:48 pm

OP mentioned possibly using a target date fund for the investment. One word of caution: If you are able to swing a 5k/month mortgage payment I assume you're likely in a relatively high tax bracket. The target date funds are likely to be relatively tax inefficient, and become more so as that 'date' draws nearer and the allocation shifts progressively more toward bonds. Just some food for thought...
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Re: Mortgage payoff account

Postby AUAstroMan » Tue Jul 30, 2013 1:31 pm

What about a hybrid approach? If it were me, I would consider my overall desired AA and then treat any mortgage pay down to be part of my bond allocation.

So let's say you want a 75/25 AA, then I would direct $100 per month to paying down the mortgage and then direct the other $300 into equities. The guaranteed return on the mortgage pay down would exceed what bonds are currently paying and you get some psychological benefit from knowing that you are paying down your debt slightly faster.

See the Wiki for more detail on this.
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Re: Mortgage payoff account

Postby bobbun » Tue Jul 30, 2013 1:41 pm

Feel free to tell me I'm wrong, but I have always looked at the mortgage vs. investment decision in the following way:

The real risk associated with the mortgage is that I may some day be unable to make the payment due to loss of income. This will result in substantial loss of value due to the foreclosure. While a recast is possible, pre-paying my mortgage otherwise does nothing to mitigate this risk, because the payment amount doesn't change until the mortgage is completely paid off. Given the low rates and tax deductible nature of a mortgage payment, it seems likely that I can get a better return on the money in the market. In addition, having more in savings reduces the risks associated with a mortgage to an extent that simply pre-paying the mortgage can not, short of payment in full.
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Re: Mortgage payoff account

Postby EricHoya » Tue Jul 30, 2013 9:37 pm

Hello,
Even more great points, liquidity, ROI, safe investing, etc. This all started with the 400 per month I was paying on my wife's student loan at 3.375 (before deductions). Once it got to about 2500 I just paid the loan off. So now I thought I would just redirect the 400 per month to my mortgage but was not sure this was the right move for me. Now that I understand things a little better I will probably go with some type of hybrid approach and divide the money between my mortgage and a new mortgage payoff account. I will probably follow the advice of including the new investment as part of my overall AA.
Thanks,
E
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