Prepay mortgage?

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bungalow10
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Prepay mortgage?

Post by bungalow10 »

I have a little extra money sitting around, on top of a six month emergency fund. We already max out our Roth IRAs and I max out my 401k (DH stays home with our three kiddos). DH and I are 35. We have about $450,000 saved for retirement, no debt other than our mortgage.

We have a mortgage at 2.375% fixed rate, with a balance of $124,000. The extra money we have is about 35,000. Should we prepay the mortgage? What other options are there? I've considering putting it in a high yield savings account paying 2% and just holding it, but it seems like a lot of hassle to jump through all the hoops to get the 2%.
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sscritic
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Re: Prepay mortgage?

Post by sscritic »

I wouldn't. If you don't have a taxable account at Vanguard, open one. Deposit $35,000. Look at tax efficient fund placement. Do it (you can readjust your tax-free and tax-deferred savings without tax consequences).

P.S. When I bought my house, I took out a mortgage rather than pay cash so I could leave some money at Vanguard. So far, all is well.
Grt2bOutdoors
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Re: Prepay mortgage?

Post by Grt2bOutdoors »

I wouldn't either. I recall in a previous post you were considering having the hubby become a stay at home parent. If that remains the case, liquidity is golden, it gives you options and at the extremely low rate, no way would I be in an extreme hurry or even fast pace it to pay down. I wish I had a rate that low - is that the after-tax rate or the nominal upfront rate there? If it were me, I'd take the money and place it in the Vanguard Intermediate Tax Exempt fund, you'll get some yield, it has a 5.5 duration and you have relatively good liquidity - the fund took a hit last year, but it's come back to close where I originally bought in.
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steve_14
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Re: Prepay mortgage?

Post by steve_14 »

Paying off your mortgage is never a bad idea, so do it if it feels right. Personally, if I were getting a tax deduction on the mortgage, I wouldn't prepay since the rate is so low. Taking the standard deduction (or close to it), I'd be more inclined to prepay, though I'd probably still roll the dice with a stock-centric investment instead.
staythecourse
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Re: Prepay mortgage?

Post by staythecourse »

The answer, like everything else in life, is maybe.

From purely financial position (no emotion involved) if your fixed income portion of your asset allocation is less then the mortgage payment then yes. If not then no.

I started to prepay my mortgage as with the new Pease laws at my level of income most of my deductions are phased out. I can barely deduct out all my property taxes and none of my mortgage it seems. That made the no deduction mortgage rate HIGHER then any rate on fixed income out there that is EQUALLY risk free, no ER, tax free, and opens up much more tax deferred space for equities to shelter more away from the taxation on dividends.

Think it all out and decide what is best for you. Do keep in mind though you will LOSE A LOT of liquidity if you prepay vs. just investing it.

Good luck.
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bungalow10
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Re: Prepay mortgage?

Post by bungalow10 »

Grt2bOutdoors wrote:I wouldn't either. I recall in a previous post you were considering having the hubby become a stay at home parent. If that remains the case, liquidity is golden, it gives you options and at the extremely low rate, no way would I be in an extreme hurry or even fast pace it to pay down. I wish I had a rate that low - is that the after-tax rate or the nominal upfront rate there? If it were me, I'd take the money and place it in the Vanguard Intermediate Tax Exempt fund, you'll get some yield, it has a 5.5 duration and you have relatively good liquidity - the fund took a hit last year, but it's come back to close where I originally bought in.
That is the up-front rate. 15-year fixed, about 13.5 years left. I don't think we get a lot of tax benefits from it as we will be barely itemizing going forward. I think I'm going to switch my property tax payments to double up every other year in order to get a little tax benefit from the standard deduction.
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Grt2bOutdoors
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Re: Prepay mortgage?

Post by Grt2bOutdoors »

bungalow10 wrote:
Grt2bOutdoors wrote:I wouldn't either. I recall in a previous post you were considering having the hubby become a stay at home parent. If that remains the case, liquidity is golden, it gives you options and at the extremely low rate, no way would I be in an extreme hurry or even fast pace it to pay down. I wish I had a rate that low - is that the after-tax rate or the nominal upfront rate there? If it were me, I'd take the money and place it in the Vanguard Intermediate Tax Exempt fund, you'll get some yield, it has a 5.5 duration and you have relatively good liquidity - the fund took a hit last year, but it's come back to close where I originally bought in.
That is the up-front rate. 15-year fixed, about 13.5 years left. I don't think we get a lot of tax benefits from it as we will be barely itemizing going forward. I think I'm going to switch my property tax payments to double up every other year in order to get a little tax benefit from the standard deduction.
I am all in favor of prepaying - I hate debt. The thing I think about most is the liquidity premium. It offers intangible benefits that just can't be calculated or seen on paper and each individual or couple collectively have different beliefs on it's true value. I like to sleep at night - if I had 3 kids, one main income, a rental on the side and other things going on, I would hold onto the money. It's one thing if your mortgage was 35K and you said, you know what, let's just get rid of it - in your case, even if you paid it down by 35K you would still have a substantial balance remaining. The true worse case scenario is no income coming in or some emergency arises that requires 35K - if you sink your liquidity into the home it prevents you from being able to access and keep you going for a period of months/years and/or paying off that emergency. You are then dependent on other sources of possible financing - family could be the easiest route (or not, judging by some posters on here) and then, there is borrowing from a 401k and aghast! - a bank (where you will be put under a microscope, so to speak).
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Re: Prepay mortgage?

Post by abuss368 »

I always look at it from a "Balance Sheet" perspective. Everyone has a "Balance Sheet" which is Assets = Liabilities + Net Worth. We all try to increase assets, decrease debt, and over time our net worth increases.

Typically many questions are just like yours. I have $x amount of money and the only choice is to pay down the mortgage or nothing.

Why not a little to all areas of the Balance Sheet?

You have $35,000 at your disposal. One option (and you can change the numbers here), could be to open a taxable account at Vanguard at deposit $20,000, $10,000 to the mortgage as a one time debt payment, and perhaps $5,000 could stay in a bank savings account to increase your emergency fund. The end result to your Balance Sheet is the same but you are de-leveraging by paying down debt. $30,000 will stay on the asset side and debt will decrease $10,000.

A taxable account is an important piece of your Balance Sheet and overall financial flexibility. Vanguard did a webinar back in September on financial success and they noted the many benefits of taxable accounts and that investors should avoid putting everything in restricted retirement plans. Second, I put up a poll on this forum inquiring how many Bogleheads have taxable accounts not to long ago and the over 85% responded "yes".

If you decide to open a taxable account, I would consider a simple Three Fund Portfolio of a) Total Stock, b) Total International, and c) Intermediate Term Tax Exempt. Of course you can post a separate thread to discuss the portfolio piece of your puzzle.

I hope this helps you. At the end of the day you are to be congratulated as you are making a very good financial decision and not spending the money on cars, vacations, or some other consumable item. You will be glad you may this decision in the years ahead.

Please stop back if you have any more questions or concerns.

Best.
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bungalow10
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Re: Prepay mortgage?

Post by bungalow10 »

Grt2bOutdoors wrote: I am all in favor of prepaying - I hate debt. The thing I think about most is the liquidity premium. It offers intangible benefits that just can't be calculated or seen on paper and each individual or couple collectively have different beliefs on it's true value. I like to sleep at night - if I had 3 kids, one main income, a rental on the side and other things going on, I would hold onto the money. It's one thing if your mortgage was 35K and you said, you know what, let's just get rid of it - in your case, even if you paid it down by 35K you would still have a substantial balance remaining. The true worse case scenario is no income coming in or some emergency arises that requires 35K - if you sink your liquidity into the home it prevents you from being able to access and keep you going for a period of months/years and/or paying off that emergency. You are then dependent on other sources of possible financing - family could be the easiest route (or not, judging by some posters on here) and then, there is borrowing from a 401k and aghast! - a bank (where you will be put under a microscope, so to speak).
We no longer have the rental - we drastically simplified our lives these last few months! and so our need for a huge e-fund are reduced. We also just did (and paid cash for) the one major home improvement that has been hanging over our head for a couple years.

I'm a bit of a spender so I'm worried if I don't have a concrete plan for the money it might get spent on a home improvement or something. I'll look into the taxable account at Vanguard.
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bungalow10
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Re: Prepay mortgage?

Post by bungalow10 »

abuss368 wrote:I always look at it from a "Balance Sheet" perspective. Everyone has a "Balance Sheet" which is Assets = Liabilities + Net Worth. We all try to increase assets, decrease debt, and over time our net worth increases.

Typically many questions are just like yours. I have $x amount of money and the only choice is to pay down the mortgage or nothing.

Why not a little to all areas of the Balance Sheet?

You have $35,000 at your disposal. One option (and you can change the numbers here), could be to open a taxable account at Vanguard at deposit $20,000, $10,000 to the mortgage as a one time debt payment, and perhaps $5,000 could stay in a bank savings account to increase your emergency fund. The end result to your Balance Sheet is the same but you are de-leveraging by paying down debt. $30,000 will stay on the asset side and debt will decrease $10,000.

A taxable account is an important piece of your Balance Sheet and overall financial flexibility. Vanguard did a webinar back in September on financial success and they noted the many benefits of taxable accounts and that investors should avoid putting everything in restricted retirement plans. Second, I put up a poll on this forum inquiring how many Bogleheads have taxable accounts not to long ago and the over 85% responded "yes".

If you decide to open a taxable account, I would consider a simple Three Fund Portfolio of a) Total Stock, b) Total International, and c) Intermediate Term Tax Exempt. Of course you can post a separate thread to discuss the portfolio piece of your puzzle.

I hope this helps you. At the end of the day you are to be congratulated as you are making a very good financial decision and not spending the money on cars, vacations, or some other consumable item. You will be glad you may this decision in the years ahead.

Please stop back if you have any more questions or concerns.

Best.
thanks for the advice. I'm a big fan of the three-fund portfolio and so starting a taxable three-fund would fit in nicely with our existing plans.

If our other accounts are all at Fidelity, is there any benefit to starting an account with Vanguard? I haven't done the analysis as it pertains to taxable accounts.
An elephant for a dime is only a good deal if you need an elephant and have a dime.
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Re: Prepay mortgage?

Post by abuss368 »

bungalow10 wrote:I'll look into the taxable account at Vanguard.
This is a good plan.
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Grt2bOutdoors
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Re: Prepay mortgage?

Post by Grt2bOutdoors »

Yes - the benefit is lower costs. :D
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Re: Prepay mortgage?

Post by an_asker »

bungalow10 wrote:I have a little extra money sitting around, on top of a six month emergency fund. We already max out our Roth IRAs and I max out my 401k (DH stays home with our three kiddos). DH and I are 35. We have about $450,000 saved for retirement, no debt other than our mortgage.

We have a mortgage at 2.375% fixed rate, with a balance of $124,000. The extra money we have is about 35,000. Should we prepay the mortgage? What other options are there? I've considering putting it in a high yield savings account paying 2% and just holding it, but it seems like a lot of hassle to jump through all the hoops to get the 2%.
1. Go for a well-deserved vacation (up to $3000)
2. Put some into the mortgage (I would say anywhere from $5k to $15k, but YMMV)
3. Put the rest into Vanguard tax-advantaged fund like someone said above - and DCA into an aggressive fund (S&P500/SmallCapIndex/REITIndex/whatever you can stomach), say $100 - $500 per month - again YMMV - for a couple of years or so, in a manner that you end up with 50-50 (half in tax-advantaged bond-like fund and half in aggressive fund).

TLDR summary: I would spend $3k on a vacation; put $10k towards the mortgage; put the rest in a tax-advantaged fund but keep DCAing out of it so that I end up with $11k (or so) in an aggressive fund (or set of funds) and 11k (or so) in the tax-advantaged fund.
detroitbabu
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Re: Prepay mortgage?

Post by detroitbabu »

Maybe contribute to a 529 plan for kids if you are not doing it already.
acegolfer
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Re: Prepay mortgage?

Post by acegolfer »

Suppose you plan to move out (or pay off the loan) in 5 years. Then prepaying X dollars on 2.375% mortgage has the same effect as investing X dollars in a 5-yr 2.375% CD. You lose the liquidity and will lower interest pmt (= earn interest).

To OP,

If there's a 5-yr 2.375% CD, how much of $35k would you like to invest in such CD? That's how much you should prepay your loan.

(If you are going to payoff the loan or move out in 10 years, then consider a 10-yr 2.375% CD.)
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Re: Prepay mortgage?

Post by Twins Fan »

Normally I'm all for paying down a mortgage. :D

But, you have a pretty good situation going there, OP.... low balance and low interest. You're barely paying any interest on that dang thing. I'm jealous! :sharebeer

I messed around with the Mortgage Professor calculator and the numbers you posted. Going off what you have given, you will only pay about $21k in interest for the remainder of your mortgage! If you just stay on schedule. If you throw the $35k at it next month it would save you about $10.5k in interest and shorten the remainder of the loan by about 4 years. These aren't exact, just the nearest "k" or year.

I don't know if that's really worth it. $35k would likely do better than that in your investment portfolio.

Now, if your goal is to throw $35k a year at it and knock out the mortgage in about 4 years, that's different. But, if this is a one time deal I don't think I would put it toward the mortgage.

Here's the calculator to mess around with in case I put any numbers in wrong... http://mtgprofessor.com/calculators/Calculator2a.html
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Re: Prepay mortgage?

Post by kaudrey »

detroitbabu wrote:Maybe contribute to a 529 plan for kids if you are not doing it already.
+1

This was my first thought.

A taxable account is a good idea too - maybe split the money between both of these.
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Re: Prepay mortgage?

Post by an_asker »

Grt2bOutdoors wrote:Yes - the benefit is lower costs. :D
On the flip side, having an extra (Vanguard) account will make life a bit more complicated.
bungalow10 wrote:We no longer have the rental - we drastically simplified our lives these last few months!
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Re: Prepay mortgage?

Post by bungalow10 »

Everyone, thank you for your help and advice.

After doing some research, my plan (which I come back here to vet out with you guys/gals), is to keep 3+ months of expenses liquid, put $9k in the 529s ($3k each kid) for this year, and take the remaining $50k or so and open a Vanguard account. The fund I have settled on is VTMFX - Vanguard Tax-Managed Balanced Fund Admiral Shares.

Thoughts? Advice? Other funds I should consider. I'm pretty excited to start down the path of investing outside of retirement accounts.
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Re: Prepay mortgage?

Post by Jack FFR1846 »

In another post, someone was asking about buying a $35,000 Porsche.

Do that. What could possibly go wrong? :D


(only kidding, of course)


Another option: Do you have a home equity line of credit? If you don't, open one. Then you can put the $35k towards the mortgage and still have that money available if needed for an emergency above what your e fund has available. Especially if you have a risk of spending, seeing that mortgage balance drop below $100k is going to look great.
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bungalow10
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Re: Prepay mortgage?

Post by bungalow10 »

Jack FFR1846 wrote:In another post, someone was asking about buying a $35,000 Porsche.

Do that. What could possibly go wrong? :D

(only kidding, of course)

Another option: Do you have a home equity line of credit? If you don't, open one. Then you can put the $35k towards the mortgage and still have that money available if needed for an emergency above what your e fund has available. Especially if you have a risk of spending, seeing that mortgage balance drop below $100k is going to look great.
Hey, we can't do much with a Porche, but we could easily spend $35k on a minivan!!! I've always wanted my kids to track salt, crush food crumbs, and throw up in the back of a rapidly depreciating asset.

We have a 30k HELOC. Our mortgage is at 2.375% fixed for the next 13.5 years and, like a few others on this thread have pointed out, there's not a huge amount to be gained by paying it down. I doubt I'll be able to borrow again at that rate in my lifetime. I'm also interested in maintaining some liquidity, in the event of a true emergency.
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Re: Prepay mortgage?

Post by Grt2bOutdoors »

bungalow10 wrote:Everyone, thank you for your help and advice.

After doing some research, my plan (which I come back here to vet out with you guys/gals), is to keep 3+ months of expenses liquid, put $9k in the 529s ($3k each kid) for this year, and take the remaining $50k or so and open a Vanguard account. The fund I have settled on is VTMFX - Vanguard Tax-Managed Balanced Fund Admiral Shares.

Thoughts? Advice? Other funds I should consider. I'm pretty excited to start down the path of investing outside of retirement accounts.
Is it 3 months or 6 months or 6 months plus liquid? I would not be able to sleep at night knowing I only have 3 months in the bank, even holding other investments, but that's just me.
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bungalow10
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Re: Prepay mortgage?

Post by bungalow10 »

Grt2bOutdoors wrote:
bungalow10 wrote:Everyone, thank you for your help and advice.

After doing some research, my plan (which I come back here to vet out with you guys/gals), is to keep 3+ months of expenses liquid, put $9k in the 529s ($3k each kid) for this year, and take the remaining $50k or so and open a Vanguard account. The fund I have settled on is VTMFX - Vanguard Tax-Managed Balanced Fund Admiral Shares.

Thoughts? Advice? Other funds I should consider. I'm pretty excited to start down the path of investing outside of retirement accounts.
Is it 3 months or 6 months or 6 months plus liquid? I would not be able to sleep at night knowing I only have 3 months in the bank, even holding other investments, but that's just me.
I was thinking 3-4 mo liquid total. I've never been one to keep a lot of cash around... I like to spend money :)
An elephant for a dime is only a good deal if you need an elephant and have a dime.
detroitbabu
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Re: Prepay mortgage?

Post by detroitbabu »

If you get a break on state taxes for contributing to a 529, why not max that out instead of just putting in $9k?
e.g. Michigan has a cap of $10,000 / year for getting a break on state tax. Worth finding out for your state.
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Re: Prepay mortgage?

Post by bungalow10 »

detroitbabu wrote:If you get a break on state taxes for contributing to a 529, why not max that out instead of just putting in $9k?
e.g. Michigan has a cap of $10,000 / year for getting a break on state tax. Worth finding out for your state.
Cap for the deduction in WI is $3k/year per kid. I have three kids, hence the $9k.
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