Pay Off Mortgage
Pay Off Mortgage
Hello All.
I am 38 years old and my wife is 36 years old. We have a 6 month emergency fund, max out our retirement accounts and invest in a taxable account. We have $82,000 left on the mortgage at 3.875% for 15 years. The value of the taxable account is $106,300. The asset allocation is a 60/40 of Vanguard Total Stock Market Index Fund Admiral and Vanguard Intermediate Term-Tax Exempt. I will only sell the amount of shares that will equal the pay off amount of the mortgage. I will have left over shares of each and will continue to invest at a 60/40 allocation in the taxable account. I met with my Tax accountant friend and he calculated that we will pay about $2,000 in capital gains tax. I am OK with paying the capital gains tax.
I am doing this for peace of mind and the feeling of being debt free. Does anyone have any thoughts or advise on this?
I am 38 years old and my wife is 36 years old. We have a 6 month emergency fund, max out our retirement accounts and invest in a taxable account. We have $82,000 left on the mortgage at 3.875% for 15 years. The value of the taxable account is $106,300. The asset allocation is a 60/40 of Vanguard Total Stock Market Index Fund Admiral and Vanguard Intermediate Term-Tax Exempt. I will only sell the amount of shares that will equal the pay off amount of the mortgage. I will have left over shares of each and will continue to invest at a 60/40 allocation in the taxable account. I met with my Tax accountant friend and he calculated that we will pay about $2,000 in capital gains tax. I am OK with paying the capital gains tax.
I am doing this for peace of mind and the feeling of being debt free. Does anyone have any thoughts or advise on this?
Re: Pay Off Mortgage
I'm a big fan of debt free living. Do it.
Re: Pay Off Mortgage
Its a personal decision, but I would pay it off. Sounds like you should, too.bulldog1 wrote:I am doing this for peace of mind and the feeling of being debt free. Does anyone have any thoughts or advise on this?
- FelixTheCat
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Re: Pay Off Mortgage
I paid off my home. It was the best financial decision I ever made. No matters what happens in life, I have a place to live.
The "mortgage payment" is now paid to my investments each month.
The "mortgage payment" is now paid to my investments each month.
Felix is a wonderful, wonderful cat.
Re: Pay Off Mortgage
Payed off mortgage much larger than yours from taxable account at dow 14000. Despite 8k+ tax, and lost gains, am still happy with decision. Priceless feeling to have no debt. Sure returns may be higher in taxable account, but maybe not. Will get rid of the negative bond in your portfolio. No interest payments to bank every month.
Re: Pay Off Mortgage
After I pay off the mortgage, I will contact my home owner's insurance provider letting them know I paid off the mortgage. Is there anything else I need to do?
Re: Pay Off Mortgage
I'd say, "Do eet! Do eet nao!" (channeling my inner Arnold S.)
As for what to do afterwards, some suggestions in this thread:
http://www.bogleheads.org/forum/viewtop ... 2&t=129773
As for what to do afterwards, some suggestions in this thread:
http://www.bogleheads.org/forum/viewtop ... 2&t=129773
"Ritter, Tod und Teufel"
Re: Pay Off Mortgage
What is your tax bracket?
Do you have any cash flow issues?
What is the current LTV on the mortgage?
Do you have any plans to move in the next few years?
Do you have any cash flow issues?
What is the current LTV on the mortgage?
Do you have any plans to move in the next few years?
Re: Pay Off Mortgage
The only reason that I would not to it would be if you would not be able to max out all your tax advantaged accounts.
If you were deducting your mortgage interest on your taxes then change your payroll withholding so that you have enough taxes withheld.
Even if you get paperwork a month or two later saying that the mortgage lien has been removed from the property, it is still a good idea to check with your counties office to confirm that it was actually taken off the title. This is easy to fix now but it can be a big problem 20 years from now.
I remember one post where someone has selling the house from their parent's estate and there was still a mortgage lien on it that had been paid off many decades before. The lender was long gone through a series of mergers with other lenders that were then merged many times. They were very lucky that they were able to find an old letter in their paperwork about the mortgage being paid off. They still had to hire a lawyer but that was enough to get the lien removed but it caused several months delay in getting the house sold. If they had not found that letter it would have been much more difficult.
If you had an escrow account be sure that you get all the bills paid that it was paying. It is not uncommon for something to slip through the cracks and for a bill to not be paid.bulldog1 wrote:Is there anything else I need to do?
If you were deducting your mortgage interest on your taxes then change your payroll withholding so that you have enough taxes withheld.
Even if you get paperwork a month or two later saying that the mortgage lien has been removed from the property, it is still a good idea to check with your counties office to confirm that it was actually taken off the title. This is easy to fix now but it can be a big problem 20 years from now.
I remember one post where someone has selling the house from their parent's estate and there was still a mortgage lien on it that had been paid off many decades before. The lender was long gone through a series of mergers with other lenders that were then merged many times. They were very lucky that they were able to find an old letter in their paperwork about the mortgage being paid off. They still had to hire a lawyer but that was enough to get the lien removed but it caused several months delay in getting the house sold. If they had not found that letter it would have been much more difficult.
Re: Pay Off Mortgage
bigred77 wrote:What is your tax bracket? 25%
Do you have any cash flow issues? No
What is the current LTV on the mortgage? 50.31%
Do you have any plans to move in the next few years? No
Re: Pay Off Mortgage
Go to the county recorder and make sure the mortgage company signed off as leinholder.bulldog1 wrote:After I pay off the mortgage, I will contact my home owner's insurance provider letting them know I paid off the mortgage. Is there anything else I need to do?
I paid my house off several years ago also. I havn't regretted it once. We all need a place to live and we don't know what the future holds. It's a comfort knowing you always have a home paid for.
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Re: Pay Off Mortgage
Debt-free living = stress-free living
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Re: Pay Off Mortgage
Not entirely. A 10 year pile of cash/investments + debt-free living is living in paradise. Welcome to Fant-a-sy Island!TravelforFun wrote:Debt-free living = stress-free living
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Re: Pay Off Mortgage
I personally probably wouldn't if I had no cash flow issues and my after tax interest rate was about 2.9% (only considering federal).
I would just keep your allocation as it is and keep paying the mortgage. I wouldn't be willing give up the liquidity that you would be giving up by selling off 80%-85% of your taxable portfolio to pay off a sub 3% loan that i could comfortably service. I might have a different opinion if the mortgage payoff was 1/3 of my taxable portfolio or even 1/2 (although I think you'll come off out comfortably ahead if you kept the mortgage around for the full term).
I would just keep your allocation as it is and keep paying the mortgage. I wouldn't be willing give up the liquidity that you would be giving up by selling off 80%-85% of your taxable portfolio to pay off a sub 3% loan that i could comfortably service. I might have a different opinion if the mortgage payoff was 1/3 of my taxable portfolio or even 1/2 (although I think you'll come off out comfortably ahead if you kept the mortgage around for the full term).
Re: Pay Off Mortgage
In addition to the points bigred77 raised, there's also a tax arbitrage to keeping the investment assets and the mortgage. The interest on the mortgage is currently deductible against your ordinary income, while the investment income is almost entirely qualified dividends, tax-exempt income, and long-term capital gain (which is deferred until you sell the shares).bigred77 wrote:I personally probably wouldn't if I had no cash flow issues and my after tax interest rate was about 2.9% (only considering federal).
I would just keep your allocation as it is and keep paying the mortgage. I wouldn't be willing give up the liquidity that you would be giving up by selling off 80%-85% of your taxable portfolio to pay off a sub 3% loan that i could comfortably service. I might have a different opinion if the mortgage payoff was 1/3 of my taxable portfolio or even 1/2 (although I think you'll come off out comfortably ahead if you kept the mortgage around for the full term).
Re: Pay Off Mortgage
Bottom line is you are throwing away money monthly, which depending on size of mortgage can be in the thousands.
Re: Pay Off Mortgage
I would have thrown away 300k by paying off my mortgage so far. Will have to see if my luck can hold out another 26 years:)
Personally I think once you pick the 15 year mortgage, you have sort of committed yourself to paying it off early course of action. Personally I can't see throwing money away by paying off a mortgage at <4%, but if it helps you sleep at night go for it.
Personally I think once you pick the 15 year mortgage, you have sort of committed yourself to paying it off early course of action. Personally I can't see throwing money away by paying off a mortgage at <4%, but if it helps you sleep at night go for it.
am wrote:Bottom line is you are throwing away money monthly, which depending on size of mortgage can be in the thousands.
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Re: Pay Off Mortgage
I agree with others I would pay it off and be done with it. Then take the mortgage payment and invest it.
To add what to do after paying it off, I sent a "Qualified RESPA" written request to my mortgage lender to return my original "wet" note stamped PAID IN FULL. This gives me the security to know they wont sell my paid off mortgage note to some other bank 20 years and six mergers later. These are called zombie notes and it has happened. It only cost me the postage so I figured why not...
I stored this along with my payoff latter forever.
And yes be sure to check with your county to make sure the lien is removed from the property.
To add what to do after paying it off, I sent a "Qualified RESPA" written request to my mortgage lender to return my original "wet" note stamped PAID IN FULL. This gives me the security to know they wont sell my paid off mortgage note to some other bank 20 years and six mergers later. These are called zombie notes and it has happened. It only cost me the postage so I figured why not...
I stored this along with my payoff latter forever.
And yes be sure to check with your county to make sure the lien is removed from the property.
"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." - Benjamin Franklin
- abuss368
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Re: Pay Off Mortgage
I have mixed feelings here.
Debt free is awesome. No doubt about it. However, the loan is 15 years, you are in your mid 30's, and the interest rate is under 4%. If you report itemized deductions on your tax return, chances are the interest rate, after tax, is even lower.
Having a taxable account over $100,000 probably provides cash flow from dividends of $2,000 - $2,500 a year with the index funds you noted. What about the possibility of having the dividends income credited to your checking account each month. The dividend income, regular mortgage payment, and any additional principal payment, could be used to pay the mortgage each month. I would expect the loan will start to amortize rather quickly. At the end of the day, you will still have your taxable account asset, just a stronger balance sheet.
Debt free is awesome. No doubt about it. However, the loan is 15 years, you are in your mid 30's, and the interest rate is under 4%. If you report itemized deductions on your tax return, chances are the interest rate, after tax, is even lower.
Having a taxable account over $100,000 probably provides cash flow from dividends of $2,000 - $2,500 a year with the index funds you noted. What about the possibility of having the dividends income credited to your checking account each month. The dividend income, regular mortgage payment, and any additional principal payment, could be used to pay the mortgage each month. I would expect the loan will start to amortize rather quickly. At the end of the day, you will still have your taxable account asset, just a stronger balance sheet.
John C. Bogle: “Simplicity is the master key to financial success."
- Crimsontide
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Re: Pay Off Mortgage
Pay it off, as I've said in other replies to this question the peace of mind is worth more than any return you MIGHT get investing. This return is guaranteed.
Re: Pay Off Mortgage
I think it's a great idea, especially if it brings you peace of mind. Think of it as a "risk free" investment of $82,000 earning a guaranteed taxable 3.875% return.bulldog1 wrote:Hello All.
I am 38 years old and my wife is 36 years old. We have a 6 month emergency fund, max out our retirement accounts and invest in a taxable account. We have $82,000 left on the mortgage at 3.875% for 15 years. The value of the taxable account is $106,300. The asset allocation is a 60/40 of Vanguard Total Stock Market Index Fund Admiral and Vanguard Intermediate Term-Tax Exempt. I will only sell the amount of shares that will equal the pay off amount of the mortgage. I will have left over shares of each and will continue to invest at a 60/40 allocation in the taxable account. I met with my Tax accountant friend and he calculated that we will pay about $2,000 in capital gains tax. I am OK with paying the capital gains tax.
I am doing this for peace of mind and the feeling of being debt free. Does anyone have any thoughts or advise on this?
Last edited by Longdog on Wed Apr 02, 2014 5:56 pm, edited 1 time in total.
Steve
Re: Pay Off Mortgage
Go out to a nice restaurant!bulldog1 wrote:After I pay off the mortgage, I will contact my home owner's insurance provider letting them know I paid off the mortgage. Is there anything else I need to do?
Steve
Re: Pay Off Mortgage
It seems the majority are for paying it off. It will be nice to see the $700 dollar mortgage payment will be redirected to the taxable account.
Re: Pay Off Mortgage
When I take money out of my left pocket and put it in my right pocket, I don't feel richer. Now for some people, this is all about emotions and they just feel better with the money in their right pocket. One thing to remember is that you can move the money from your left pocket to your right pocket at any time, but moving it from right to left is somewhat difficult. When I bought my house, I made sure I had money in both pockets.
Things to consider if you pay off the mortgage:
1) after moving your mortgage payment to your taxable account, will you take more expensive vacations, just because you can afford to?
2) after moving your mortgage payment to your taxable account, will you buy a more expensive car, just because you can afford to?
In other words, can you trust yourself not to spend any of your now-free cash flow? [I think you can trust yourself to make the mortgage payment if you don't pay off the mortgage.]
P.S. I don't quite get the "I will empty my taxable account because I feel so good putting money into my taxable account." If that is really the case, sell all your stocks, put the money into your checking account, and then buy all the same stocks again. That should make you really happy.
Things to consider if you pay off the mortgage:
1) after moving your mortgage payment to your taxable account, will you take more expensive vacations, just because you can afford to?
2) after moving your mortgage payment to your taxable account, will you buy a more expensive car, just because you can afford to?
In other words, can you trust yourself not to spend any of your now-free cash flow? [I think you can trust yourself to make the mortgage payment if you don't pay off the mortgage.]
P.S. I don't quite get the "I will empty my taxable account because I feel so good putting money into my taxable account." If that is really the case, sell all your stocks, put the money into your checking account, and then buy all the same stocks again. That should make you really happy.
Re: Pay Off Mortgage
Pay it off! I'm 43 and paid mine off 6 years ago and I've never regretted doing it. It's a fabulous feeling!
Re: Pay Off Mortgage
I would not run down my taxable portion of my portfolio to almost zero just to feel good. You can feel good just by knowing you can pay off your mortgage if you so choose. Your net worth does not change. I think with a mortgage less than 4%, and the deduction you get on your federal income tax you are better off earning money on your current taxable funds rather than having to build it back up again. So my vote falls on the don't pay off right away side.
"Earn All You Can; Give All You Can; Save All You Can." .... John Wesley
Re: Pay Off Mortgage
If my left pocket has a hole in it, so my money's continuously draining out, and if I've got my right pocket open with people willing to drop money into it (unfortunately at less of a rate than the money's draining out the left) -- you bet I'm going to feel richer if I take money out of my left pocket and put it in my right pocket.sscritic wrote:When I take money out of my left pocket and put it in my right pocket, I don't feel richer.
Heck, I'm probably going to empty out the left pocket and never use it again!
- Crimsontide
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Re: Pay Off Mortgage
+100Harold wrote:If my left pocket has a hole in it, so my money's continuously draining out, and if I've got my right pocket open with people willing to drop money into it (unfortunately at less of a rate than the money's draining out the left) -- you bet I'm going to feel richer if I take money out of my left pocket and put it in my right pocket.sscritic wrote:When I take money out of my left pocket and put it in my right pocket, I don't feel richer.
Heck, I'm probably going to empty out the left pocket and never use it again!
Re: Pay Off Mortgage
Here is how I see it. I can own my home free and clear, have zero debt and continue to invest with risk. The other option is having the risk of losing the house and the risk of investing. I like the first option.
Re: Pay Off Mortgage
I am not sure what you mean. The OP is talking about taking money out of his taxable account and putting it into home equity. How does his taxable account have a hole in it? Why would you empty your taxable account and never use it again? I don't get it.Harold wrote:If my left pocket has a hole in it, so my money's continuously draining out, and if I've got my right pocket open with people willing to drop money into it (unfortunately at less of a rate than the money's draining out the left) -- you bet I'm going to feel richer if I take money out of my left pocket and put it in my right pocket.sscritic wrote:When I take money out of my left pocket and put it in my right pocket, I don't feel richer.
Heck, I'm probably going to empty out the left pocket and never use it again!
Re: Pay Off Mortgage
Pay it Off,,been there done that
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
Re: Pay Off Mortgage
Home equity is pretty much a misnomer. He owns a home, he has a mortgage, and he has cash that could pay the mortgage.sscritic wrote:I don't get it.
The home asset is what it is; he owns the whole thing whether he's got the mortgage or not. His choice is whether to keep making payments on a mortgage (with the interest payments just being lost through the hole in the pocket) or use his cash to pay the mortgage off. Since his cash (at an equivalent risk level) earns less than his mortgage -- he's losing money (on an equivalent risk basis) as long as he maintains his mortgage.
The pocket analogy doesn't fit (and I doubt a new pair of pants will help).
Re: Pay Off Mortgage
Though I'm all for paying it off and having the peace of mind I agree that from a purely financial standpoint you'd probably be better off keeping it in taxable.
I'm also surprised most of the responses have been to payoff. Based on the many payoff or invest threads, I would have thought there'd be more invest responses than there have been.
I'm also surprised most of the responses have been to payoff. Based on the many payoff or invest threads, I would have thought there'd be more invest responses than there have been.
Re: Pay Off Mortgage
Your interest rate on the mortgage is really, really low. Your investments will likely return more than that.
Either way, you cant lose.
Either way, you cant lose.
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Re: Pay Off Mortgage
This is good advice.bulldog1 wrote:It seems the majority are for paying it off. It will be nice to see the $700 dollar mortgage payment will be redirected to the taxable account.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Pay Off Mortgage
This is where my thought process was in my first post. There is no change in net worth. If the mortgage was at a high interest rate it might make more sense. The financial confidence that at any time one can write that check is priceless. That is financial flexibility.bengal22 wrote:I would not run down my taxable portion of my portfolio to almost zero just to feel good. You can feel good just by knowing you can pay off your mortgage if you so choose. Your net worth does not change.
John C. Bogle: “Simplicity is the master key to financial success."
Re: Pay Off Mortgage
This is eerily similar to our situation in Summer of 2007. I was 37 and we had accumulated about $100k in our blue chip employer stock from ESPP and Stock option acquisitions.
We owed $80k on our mortgage ($320k house). I was in favor of paying off the mortgage. My wife thought we should ride the stock higher. I ended up convincing her that being "debt free" would bring peace of mind we could not get with the stock bouncing around in the market.
We sold enough to pay off the mortgage. I sent the last payment in early September of 2007. [OT comments removed by admin LadyGeek]
We all know how 2007 finished, 2008 unfolded and even into 2009. We were completely debt free and all our investments dropped with everyone else. The company stock dropped like a stone.
We slept ok and actually increased our 401k contributions during the spiral. It was not easy. But being debt free gave us the inertia to roll through that tough 2.5 years.
I would pay it off without a second thought. Take your former mortgage payment and start investing at a faster rate. You will make up the ground and you will sleep better.
We owed $80k on our mortgage ($320k house). I was in favor of paying off the mortgage. My wife thought we should ride the stock higher. I ended up convincing her that being "debt free" would bring peace of mind we could not get with the stock bouncing around in the market.
We sold enough to pay off the mortgage. I sent the last payment in early September of 2007. [OT comments removed by admin LadyGeek]
We all know how 2007 finished, 2008 unfolded and even into 2009. We were completely debt free and all our investments dropped with everyone else. The company stock dropped like a stone.
We slept ok and actually increased our 401k contributions during the spiral. It was not easy. But being debt free gave us the inertia to roll through that tough 2.5 years.
I would pay it off without a second thought. Take your former mortgage payment and start investing at a faster rate. You will make up the ground and you will sleep better.
Re: Pay Off Mortgage
Bloom,bloom2708 wrote:This is eerily similar to our situation in Summer of 2007. I was 37 and we had accumulated about $100k in our blue chip employer stock from ESPP and Stock option acquisitions.
We owed $80k on our mortgage ($320k house). I was in favor of paying off the mortgage. My wife thought we should ride the stock higher. I ended up convincing her that being "debt free" would bring peace of mind we could not get with the stock bouncing around in the market.
We sold enough to pay off the mortgage. I sent the last payment in early September of 2007. [OT comments removed by admin LadyGeek]
We all know how 2007 finished, 2008 unfolded and even into 2009. We were completely debt free and all our investments dropped with everyone else. The company stock dropped like a stone.
We slept ok and actually increased our 401k contributions during the spiral. It was not easy. But being debt free gave us the inertia to roll through that tough 2.5 years.
I would pay it off without a second thought. Take your former mortgage payment and start investing at a faster rate. You will make up the ground and you will sleep better.
My thoughts exactly.
Re: Pay Off Mortgage
bigred, I'm curious why, whether he might have plans to move, would be a factor. If he pays it off, and subsequently moves, he takes the proceeds of this house and puts them into the next one. Is there some other consideration?bigred77 wrote:What is your tax bracket?
Do you have any cash flow issues?
What is the current LTV on the mortgage?
Do you have any plans to move in the next few years?
Steve
Re: Pay Off Mortgage
I'm with SScritic on this. OP didn't indicate how much of his total investable assets were tied up in the taxable account. The OP will be shrinking his taxable account by 77%. IMO, it does make a difference if the taxable is 50% of investable assets vs. 10% of investable assets. Too many of the debt-free evangelists ignore just how much of their nest egg ends up being tied up in their home.sscritic wrote:When I take money out of my left pocket and put it in my right pocket, I don't feel richer. Now for some people, this is all about emotions and they just feel better with the money in their right pocket. One thing to remember is that you can move the money from your left pocket to your right pocket at any time, but moving it from right to left is somewhat difficult. When I bought my house, I made sure I had money in both pockets.
Personally, I looked at my mortgage as a liability matching situation and made sure it was paid off by my earliest retirement date. In retrospect, this was the right decision for me since it allowed me to max out retirement accounts.
A mortgage is a form of leverage. If you sell your house for a profit of $30K and had $300K of equity that is a 10% gain. But if you only have $150K in equity and still get $30K in profits that is a 20% gain.SteveM wrote:bigred, I'm curious why, whether he might have plans to move, would be a factor. If he pays it off, and subsequently moves, he takes the proceeds of this house and puts them into the next one. Is there some other consideration?bigred77 wrote:What is your tax bracket?
Do you have any cash flow issues?
What is the current LTV on the mortgage?
Do you have any plans to move in the next few years?
Re: Pay Off Mortgage
If I planned on moving relatively soon I would place an even HIGHER importence on liquidity and would definately not pay off the mortgage (although I might reconsider my 60/40 asset allocation for the taxable money if I expected to need a significant portion of the money for my new house).SteveM wrote:bigred, I'm curious why, whether he might have plans to move, would be a factor. If he pays it off, and subsequently moves, he takes the proceeds of this house and puts them into the next one. Is there some other consideration?bigred77 wrote:What is your tax bracket?
Do you have any cash flow issues?
What is the current LTV on the mortgage?
Do you have any plans to move in the next few years?
I'd just be very concerned about the amount of liquidity that I'm giving up by doing this (I think liquidity can be undervalued by alot of people until they need it, I know I've been guilty of this) and also the percentage of my net worth that I have tied up in my home.
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Re: Pay Off Mortgage
I am usually the biggest proponent of paying off one's mortgage. In this case, though, what you are saying in the words of Mr. Martini from It's a Wonderful Life "I busta da juke-a-box" to pay off the mortgage, leaving you essentially with a 6 month emergency fund, some level of retirement savings and $22K in investments. Your current mortgage payment you say up above is $700 a month. How stable is your employment? You will be giving up 9.8 years of mortgage payments or another way of thinking about this is it will take you close to 9 years to get back your 82K into a taxable account. That is a heck of a lot of liquidity to be giving up. It's the one reason, I haven't had my own mortgage burning party, just yet. If you had told me, you had 200K in a taxable account, I'd say "let's have a mortgage burning party". Liquidity is expensive when you need it most. If your jobs are very stable and you will not be moving anytime soon, then burn it. But the real key here is to redirect all of your current mortgage payment into the your Vanguard account, because if you fall into the trap of "i need a new deck, or I need a new $5,000 Wolf range or honey, I've been eyeing a sweet 100 bottle wine refrigerator we can get for 6 easy payments of $200 or it's time we upgrade our car to a new Ford - 150 pickup truck", then you will have fallen into the trap that the Joneses live in today.bulldog1 wrote:Hello All.
I am 38 years old and my wife is 36 years old. We have a 6 month emergency fund, max out our retirement accounts and invest in a taxable account. We have $82,000 left on the mortgage at 3.875% for 15 years. The value of the taxable account is $106,300. The asset allocation is a 60/40 of Vanguard Total Stock Market Index Fund Admiral and Vanguard Intermediate Term-Tax Exempt. I will only sell the amount of shares that will equal the pay off amount of the mortgage. I will have left over shares of each and will continue to invest at a 60/40 allocation in the taxable account. I met with my Tax accountant friend and he calculated that we will pay about $2,000 in capital gains tax. I am OK with paying the capital gains tax.
I am doing this for peace of mind and the feeling of being debt free. Does anyone have any thoughts or advise on this?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Re: Pay Off Mortgage
+1 My thoughts exactly, I only need to go back to 2009 when real businesses which had real customers couldn't get financing at ANY PRICE to fund working capital. To this day, there is a fair section of individuals who are still locked out of the financing marketplace - think subprime, home mortgages, personal loans, refinancings, etc.bigred77 wrote:If I planned on moving relatively soon I would place an even HIGHER importence on liquidity and would definately not pay off the mortgage (although I might reconsider my 60/40 asset allocation for the taxable money if I expected to need a significant portion of the money for my new house).SteveM wrote:bigred, I'm curious why, whether he might have plans to move, would be a factor. If he pays it off, and subsequently moves, he takes the proceeds of this house and puts them into the next one. Is there some other consideration?bigred77 wrote:What is your tax bracket?
Do you have any cash flow issues?
What is the current LTV on the mortgage?
Do you have any plans to move in the next few years?
I'd just be very concerned about the amount of liquidity that I'm giving up by doing this (I think liquidity can be undervalued by alot of people until they need it, I know I've been guilty of this) and also the percentage of my net worth that I have tied up in my home.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Re: Pay Off Mortgage
Both of our jobs are very stable. All of my paychecks go to fill the roth and taxable accounts. A portion of her paycheck goes to the mortgage payment and we live off of the rest of her paycheck. With the house paid off, the portion of her paycheck will now go to the taxable account. I am the breadwinner and we are living off of her income. It won't take long at all to catch up in the taxable account.Grt2bOutdoors wrote:I am usually the biggest proponent of paying off one's mortgage. In this case, though, what you are saying in the words of Mr. Martini from It's a Wonderful Life "I busta da juke-a-box" to pay off the mortgage, leaving you essentially with a 6 month emergency fund, some level of retirement savings and $22K in investments. Your current mortgage payment you say up above is $700 a month. How stable is your employment? You will be giving up 9.8 years of mortgage payments or another way of thinking about this is it will take you close to 9 years to get back your 82K into a taxable account. That is a heck of a lot of liquidity to be giving up. It's the one reason, I haven't had my own mortgage burning party, just yet. If you had told me, you had 200K in a taxable account, I'd say "let's have a mortgage burning party". Liquidity is expensive when you need it most. If your jobs are very stable and you will not be moving anytime soon, then burn it. But the real key here is to redirect all of your current mortgage payment into the your Vanguard account, because if you fall into the trap of "i need a new deck, or I need a new $5,000 Wolf range or honey, I've been eyeing a sweet 100 bottle wine refrigerator we can get for 6 easy payments of $200 or it's time we upgrade our car to a new Ford - 150 pickup truck", then you will have fallen into the trap that the Joneses live in today.bulldog1 wrote:Hello All.
I am 38 years old and my wife is 36 years old. We have a 6 month emergency fund, max out our retirement accounts and invest in a taxable account. We have $82,000 left on the mortgage at 3.875% for 15 years. The value of the taxable account is $106,300. The asset allocation is a 60/40 of Vanguard Total Stock Market Index Fund Admiral and Vanguard Intermediate Term-Tax Exempt. I will only sell the amount of shares that will equal the pay off amount of the mortgage. I will have left over shares of each and will continue to invest at a 60/40 allocation in the taxable account. I met with my Tax accountant friend and he calculated that we will pay about $2,000 in capital gains tax. I am OK with paying the capital gains tax.
I am doing this for peace of mind and the feeling of being debt free. Does anyone have any thoughts or advise on this?
I appreciate everyone's responses so far.
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Re: Pay Off Mortgage
My wife and I paid off our mortgage off last year. Here is how we did it:
First, we piled up cash to have a large cushion, say $25,000. Next we aggressively paid down mortgage by putting every extra penny into it. When the mortgage balance reached $25,000 we paid it off in a lump sum. This ensured we still had a cash cushion along the way in case something came up like a medical emergency, wrecked car, etc. (we had a separate, smaller emergency fund as well that we built up after).
100% debt free is the best feeling ever. Nothing hanging over my head now!
First, we piled up cash to have a large cushion, say $25,000. Next we aggressively paid down mortgage by putting every extra penny into it. When the mortgage balance reached $25,000 we paid it off in a lump sum. This ensured we still had a cash cushion along the way in case something came up like a medical emergency, wrecked car, etc. (we had a separate, smaller emergency fund as well that we built up after).
100% debt free is the best feeling ever. Nothing hanging over my head now!
Today's high is tomorrow's low.
Re: Pay Off Mortgage
Interesting, as we're kind of at that point also. Our mortgage balance is $19K and change, and we have $20K and change in a 5 year CD maturing in 2017 with a 60 day penalty. We have $17K in other emergency funds. The thought has crossed my mind, but the fact that it's a CD and not a savings has held me/us back thus far.Nummerkins wrote:My wife and I paid off our mortgage off last year. Here is how we did it:
First, we piled up cash to have a large cushion, say $25,000. Next we aggressively paid down mortgage by putting every extra penny into it. When the mortgage balance reached $25,000 we paid it off in a lump sum. This ensured we still had a cash cushion along the way in case something came up like a medical emergency, wrecked car, etc. (we had a separate, smaller emergency fund as well that we built up after).
100% debt free is the best feeling ever. Nothing hanging over my head now!
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Re: Pay Off Mortgage
$19K means you are effectively paying very little in interest, the Bank would love for you to pay it off now, so they can reinvest in a more profitable endeavor. Pay it off at your leisure, don't feel rushed.runner9 wrote:Interesting, as we're kind of at that point also. Our mortgage balance is $19K and change, and we have $20K and change in a 5 year CD maturing in 2017 with a 60 day penalty. We have $17K in other emergency funds. The thought has crossed my mind, but the fact that it's a CD and not a savings has held me/us back thus far.Nummerkins wrote:My wife and I paid off our mortgage off last year. Here is how we did it:
First, we piled up cash to have a large cushion, say $25,000. Next we aggressively paid down mortgage by putting every extra penny into it. When the mortgage balance reached $25,000 we paid it off in a lump sum. This ensured we still had a cash cushion along the way in case something came up like a medical emergency, wrecked car, etc. (we had a separate, smaller emergency fund as well that we built up after).
100% debt free is the best feeling ever. Nothing hanging over my head now!
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Re: Pay Off Mortgage
Plans to move affect the time horizon.SteveM wrote:bigred, I'm curious why, whether he might have plans to move, would be a factor. If he pays it off, and subsequently moves, he takes the proceeds of this house and puts them into the next one. Is there some other consideration?
If you have a 15-year mortgage and pay it off but continue to live in the house, you spend money today to get benefits every year for the next 15 years; this is equivalent to buying a bond portfolio with about a 7-year duration. If you have a 15-year mortgage and pay it off but sell the house in three years, you spend money today and get most of the benefit in three years (when you sell the house and would have had to pay off the mortgage anyway); this is equivalent to buying a bond portfolio with a 3-year duration and the same yield. Thus, it might be more attractive to pay off a mortgage if you will be selling the house soon, as long as you don't have liquidity needs.
In addition, by paying off the mortgage, you give up the opportunity to refinance; this is less valuable if you will move and thus would get almost no benefit from refinancing anyway.
Re: Pay Off Mortgage
I'm not sure what area you live in, but owning a house even without a mortgage can be expensive. Make sure you count for property taxes, association dues, possible maintenance issues, ect. If you have to ask if you are there yet, I would wait. 12 more months of paying down the mortgage and adding to the taxable might be good
Re: Pay Off Mortgage
I vote for keeping the mortgage for two reasons:
1. You are both young.
2. You have a 15-year loan at an incredibly low rate.
You will have the house paid off by age 53, if not sooner if you keep the mortgage. In another 5 - 10 years your salary and taxable account may grow to a size where paying off the mortgage will not affect your liquidity significantly. That may be the time to pay it off. In the meantime, why be house rich and cash poor? If you were nearing retirement age, I'd say pay it off. But you are decades away from normal retirement age.
Personal story: I bought my first home at age 33. I had a 20 year fixed-rate mortgage at 8.5% and felt fortunate to get that rate. The first couple of years, I felt the pinch of making the payments which were 50 percent more than the rent I was paying when I lived in an apartment. By age 47, fortune had smiled on me and the balance due on the mortgage was less than 5 percent of my annual income. I painlessly wrote a check for the balance and became mortgage free.
1. You are both young.
2. You have a 15-year loan at an incredibly low rate.
You will have the house paid off by age 53, if not sooner if you keep the mortgage. In another 5 - 10 years your salary and taxable account may grow to a size where paying off the mortgage will not affect your liquidity significantly. That may be the time to pay it off. In the meantime, why be house rich and cash poor? If you were nearing retirement age, I'd say pay it off. But you are decades away from normal retirement age.
Personal story: I bought my first home at age 33. I had a 20 year fixed-rate mortgage at 8.5% and felt fortunate to get that rate. The first couple of years, I felt the pinch of making the payments which were 50 percent more than the rent I was paying when I lived in an apartment. By age 47, fortune had smiled on me and the balance due on the mortgage was less than 5 percent of my annual income. I painlessly wrote a check for the balance and became mortgage free.
Best wishes, |
Michael |
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Invest your time actively and your money passively.