Am I Irrational for Doing This?

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Am I Irrational for Doing This?

Postby RenoJay » Sun Feb 10, 2013 6:04 pm

I have a 15 year mortgage for around $400k at 2.75%. The interest is tax deductible and I usually hover close to or at the highest marginal federal rate.

I have CD's in a taxable account totaling $700k broken down as follows:
$250k @ 3% - 9 years left
$250k @ 2.4% - 4 years left
$200k @ 2.2% - 4 years left

With the two lower yielding CD's, the early withdrawal penalties are pretty light. With the higher yielding CD the penalty is 9 months of interest.

The "logic" behind my decision not to simply pay off the mortgage is/was:
1. If rates go up in the next few years, I'll be able to roll the CD's into high yielding vehicles while maintaining the low fixed rate mortgage.
2. The lowest yielding CD has no penalty at all for withdrawing up to $100k, so this is like an easy-access emergency fund should I need it.
3. The CDs are part of my fixed-income asset allocation. If I paid off the mortgage, I'd have much more in equity than my plan calls for, and I'd need to sell some and rebalance into more low-yielding CDs.

I went through this thought process previously and decided to pay of a mortgage on a second home that was 30 years @ 4.37% and also chose not to have any mortgage on a rental home I own.

So what do you think??? Am I irrational for holding a mortgage on the primary house that I can afford to pay off?
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Re: Am I Irrational for Doing This?

Postby livesoft » Sun Feb 10, 2013 6:07 pm

Nope, you are not irrational for holding a mortgage in this situation. Instead, you are a player. I like it.
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Re: Am I Irrational for Doing This?

Postby bottlecap » Sun Feb 10, 2013 6:35 pm

Doesn't seem to make mathematic sense, but that doesn't necessarily mean that it's irrational.

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Re: Am I Irrational for Doing This?

Postby YDNAL » Sun Feb 10, 2013 6:47 pm

RenoJay wrote:I have a 15 year mortgage for around $400k at 2.75%. The interest is tax deductible and I usually hover close to or at the highest marginal federal rate.

I have CD's in a taxable account totaling $700k broken down as follows:
$250k @ 3% - 9 years left
$250k @ 2.4% - 4 years left
$200k @ 2.2% - 4 years left

So what do you think??? Am I irrational for holding a mortgage on the primary house that I can afford to pay off?

"Irrational" is subjective thus subject to definition arguments that are TOO common in this Forum.

In your position, it makes "financial sense" to take $200K at 2.2% and $200K at 2.4% and pay debt at $2.75%. Then, take the capital + interest payment on this debt and begin gradual increase in savings. Net Worth is Net Worth (Assets less Liabilities) and reducing expenses (interest) always makes sense.
Last edited by YDNAL on Sun Feb 10, 2013 7:04 pm, edited 1 time in total.
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Re: Am I Irrational for Doing This?

Postby Call_Me_Op » Sun Feb 10, 2013 6:52 pm

In addition to what Landy says above, if you live in a homestead state, paying-off the mortgage will yield asset protection benefit - in that you may be able to shield money that would otherwise be in unprotected investments.
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Re: Am I Irrational for Doing This?

Postby livesoft » Sun Feb 10, 2013 6:57 pm

But everybody knows that interest rates on CDs will be above 4% in a couple of years, so that 2.75% fixed-rate mortgage is going to be looking pretty sweet then. Folks who pay off such mortgages will be left with a sour taste in their mouths.
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Re: Am I Irrational for Doing This?

Postby YDNAL » Sun Feb 10, 2013 7:07 pm

livesoft wrote:But everybody knows that interest rates on CDs will be above 4% in a couple of years, so that 2.75% fixed-rate mortgage is going to be looking pretty sweet then. Folks who pay off such mortgages will be left with a sour taste in their mouths.

Do you really "know," livesoft? That is as speculative as purposedly loading up on debt to invest.

To each his/her own.
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Re: Am I Irrational for Doing This?

Postby nisiprius » Sun Feb 10, 2013 7:20 pm

1) In my opinion rationality is overrated and should only be part of the investment decision-making process. "Trust thyself."

2) What you're proposing certainly seems to be within what I call the "range of the sane." The difference in interest rate between even your lowest-yielding CD and the mortgage isn't huge. Historically, paying down a mortgage is a high-yielding "safe" investment but not in this case. Even if you and livesoft turn out to be wrong, it's not as if you were foregoing any huge benefit.

What I mean to say is that I don't think you're kidding yourself about your situation, and as long as you have $700K in CDs and $400K owing on the house it's not as if you are in any danger of losing the house. It's not any kind of plumb foolishness.

All that said, I personally am skeptical of all the smarty-smarty reasoning people sometimes give for not paying down mortgages. I think it's mostly just rationalization. Paying down debt is so basically boring and unpleasant--you have all those Scrooge McDuck gold pieces visible in your money bin and it's awful to let go of them and have nothing to show for it but a lower number on a statement.
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Re: Am I Irrational for Doing This?

Postby Toons » Sun Feb 10, 2013 7:52 pm

YDNAL wrote:
RenoJay wrote:I have a 15 year mortgage for around $400k at 2.75%. The interest is tax deductible and I usually hover close to or at the highest marginal federal rate.

I have CD's in a taxable account totaling $700k broken down as follows:
$250k @ 3% - 9 years left
$250k @ 2.4% - 4 years left
$200k @ 2.2% - 4 years left

So what do you think??? Am I irrational for holding a mortgage on the primary house that I can afford to pay off?

"Irrational" is subjective thus subject to definition arguments that are TOO common in this Forum.

In your position, it makes "financial sense" to take $200K at 2.2% and $200K at 2.4% and pay debt at $2.75%. Then, take the capital + interest payment on this debt and begin gradual increase in savings. Net Worth is Net Worth (Assets less Liabilities) and reducing expenses (interest) always makes sense.


+1 Excellent ,Pay off the debt
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Re: Am I Irrational for Doing This?

Postby Watty » Sun Feb 10, 2013 8:48 pm

So what do you think??? Am I irrational for holding a mortgage on the primary house that I can afford to pay off?



When you slice and dice the numbers you are basically paying a modest amout each year to have an option to keep the mortage in case interest rates go much higher sometime in the next 15 years. There is nothing irrational about that and in fact it is a pretty good inflation hedge that would be difficult to get any other way.

It may or may not turn out well as investment but it is a reasonable choice.

Paying off the mortage would also be a reasonable choice.
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Re: Am I Irrational for Doing This?

Postby ourbrooks » Sun Feb 10, 2013 8:58 pm

YDNAL wrote:
livesoft wrote:But everybody knows that interest rates on CDs will be above 4% in a couple of years, so that 2.75% fixed-rate mortgage is going to be looking pretty sweet then. Folks who pay off such mortgages will be left with a sour taste in their mouths.

Do you really "know," livesoft? That is as speculative as purposedly loading up on debt to invest.

To each his/her own.


Try reading the Credit Suisse report that's linked to in another thread. They predict that interest rates will stay below the rate of inflation for the next 6-9 years and they will never reach their historical levels. I have no apriori reason for believing that the people at Credit Suisse have any more of a crystal ball than posters on this forum but its a possibility to consider.
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Re: Am I Irrational for Doing This?

Postby Random Musings » Sun Feb 10, 2013 9:00 pm

IMHO, a whole lotta nothing in your situation. You can pay off the loan, but I don't see a big reason why. You have liquidity, and if the market would take a big dive, it might be a good time in terms of higher ER's in equities at that point to utilize thar liquidity, especially if you have a long term horizon with those monies.

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Re: Am I Irrational for Doing This?

Postby am » Sun Feb 10, 2013 9:12 pm

Have you looked at your mortgage statement recently? Now take a look at how much interest you are paying monthly? Bet it is more than 1k. Are you ok with that? I was not and paid my mortgage off. Could not find a way to make 1k month guaranteed any other way. Debt is debt and it stinks.
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Re: Am I Irrational for Doing This?

Postby Amishman » Sun Feb 10, 2013 9:20 pm

I would pay off the mortgage.
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Re: Am I Irrational for Doing This?

Postby Grt2bOutdoors » Sun Feb 10, 2013 10:17 pm

livesoft wrote:But everybody knows that interest rates on CDs will be above 4% in a couple of years, so that 2.75% fixed-rate mortgage is going to be looking pretty sweet then. Folks who pay off such mortgages will be left with a sour taste in their mouths.


Are you willing to put :dollar on this? We also know the world is going to end because Nostradamus, the Incas and who knows else has predicted that as well. The Japanese have been saying that rates will rise for 20 years, as of Friday they are still near zero. The only ones who have a sour taste there are those who have held on to debt paying high nominal rates in a deflationary enviornment. Must be bad sake. :twisted:
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Re: Am I Irrational for Doing This?

Postby livesoft » Sun Feb 10, 2013 10:28 pm

Of course I am willing to put money on this ... in the same way that I put money into the stock market via ETFs and mutual funds. I have written many times about the inherent option that one has with a mortgage. It is valuable. Use it.
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Re: Am I Irrational for Doing This?

Postby Rob5TCP » Sun Feb 10, 2013 10:33 pm

I like your odds. Basically you are betting that the after tax difference between your mortgage and your savings --- that rates will increase in the next 4 years.
The downside is minimal, you paid about .4% more interest per year than your savings generated.
If you right, the upside can go all the way up to 5 or even 10 times that amount.

Next year my building is going condo. When that happens, I will take a mortgage for the greatest amount I can (if I get a rate
of 2.75% or anything close). I will make sure I have the option to prepay.
If interest rates do rise, it will be nice to hold a large mortgage at an incredible rate.
While i have several CD's at 2.4% at Ally, the current rate at Ally for 5 years (small penalty for
early withdrawal) is about 1.6%. Not quite as attractive as your rates.
But, I would still take it.
Last edited by Rob5TCP on Mon Feb 11, 2013 1:54 pm, edited 1 time in total.
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Re: Am I Irrational for Doing This?

Postby Default User BR » Mon Feb 11, 2013 1:44 pm

I think that is a very inexpensive hedge against future increases in the interest rates and inflation. If nothing much happens in that area, it costs you nearly nothing. If there are increases, then you will be rewarded.


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Re: Am I Irrational for Doing This?

Postby Doc » Mon Feb 11, 2013 4:22 pm

livesoft wrote:Of course I am willing to put money on this ... in the same way that I put money into the stock market via ETFs and mutual funds. I have written many times about the inherent option that one has with a mortgage. It is valuable. Use it.


Look at the flip side. Larry Swedroe is negative on mortgage backed securities because of the prepayment/extension options held by the homeowner. That says the option inherent in the mortgage does have value.

In the current economic/political climate you also have to place some value on the liquidity of short term obligations above and beyond the "coupon".
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Re: Am I Irrational for Doing This?

Postby grabiner » Mon Feb 11, 2013 7:50 pm

RenoJay wrote:I have a 15 year mortgage for around $400k at 2.75%. The interest is tax deductible and I usually hover close to or at the highest marginal federal rate.


In the 35% tax bracket, you are paying 1.79% to borrow that money. I would be in no hurry to pay it off, since you can lend money at a higher rate than 1.79% with the same duration and very little risk. (The current yield on Admiral shares of Long-Term Tax-Exempt is 2.11%; that's what you pay to lend money to states and cities, tax-free.)

I have CD's in a taxable account totaling $700k broken down as follows:
$250k @ 3% - 9 years left
$250k @ 2.4% - 4 years left
$200k @ 2.2% - 4 years left


Keeping all three of these makes sense. The mortgage has an effective duration of about 9 years, so the 3% CD is a better deal than a mortgage payoff. And the short-term CDs give you four years of returns almost as good as the mortgage, and the option to reinvest at 2.75% taxable when they mature (paying off the mortgage) or at a higher rate if bond yields go up later.
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