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Create a Mortgage Payoff Fund or Not?

Posted: Sun Aug 13, 2017 1:51 pm
by Agincourt
I have $200,000 left in my 13 year mortgage with a 3.0% fixed interest in California and I have $200,000 in my emergency fund at Goldman Sachs bank earning 1.2%. I am also in a high tax bracket in California. I want to keep at least $100,000 of the $200,000 as my emergency fund, so I can either (1) take $100,000 today to payoff 1/2 of the current principal or (2) keep the money in the emergency fund until I have enough money to payoff the entire mortgage. I think option (1) may be better economically, however, option (2) provides some benefits in case something bad happens and I need access to the cash, is this the best way to analyze this decision?

Re: Create a Mortgage Payoff Fund or Not?

Posted: Sun Aug 13, 2017 1:59 pm
by David Jay
I would do it now. I am paid bi-weekly and I put my entire "3rd paycheck" on the mortgage twice a year.

If you say you want $100,000 in your emergency fund, then why keep $200,000 in your emergency fund? Seems like there is a bit of angst. Do you have any specific concerns about your income?

Re: Create a Mortgage Payoff Fund or Not?

Posted: Sun Aug 13, 2017 2:01 pm
by ThrustVectoring
$200k is excessive for an emergency fund, IMO. At that point, you're probably better off paring it down to six months expenses and purchasing something like own-occupation disability insurance.

Do you have realistic scenarios for what the "something bad" would be?

Re: Create a Mortgage Payoff Fund or Not?

Posted: Sun Aug 13, 2017 2:02 pm
by Silly Wabbit
Paying down the mortgage immediately will net you more at the end of the day. Suppose you wait one year to pay down the 100k. Compared to paying down immediately, you'll have paid 3k more in interest (neglecting any tax deduction).

I'll throw out another option. Take the 100k and invest in equities. Let the mortgage run it's course. The 3% rate is cheap enough without taking into account any tax deductions. I'd take the bit of leverage as well as the easier liquidity.

Re: Create a Mortgage Payoff Fund or Not?

Posted: Sun Aug 13, 2017 2:34 pm
by Beehave
Option 2 looks better to me.

- I think you are better served with your current emergency fund given the high cost of living in your area.

- If you pay down a portion of the loan principle you will still have your monthly mortgage payments but your tax deduction for those payments will be reduced.

- If there's big inflation in the next few years your loan balance at 3% will look pretty good. If there's big deflation, you can do whatever seems right based on your then-current circumstances. If things stay pretty much the same you'll have increased your war chest and have the power to do what you want.

- If you have very secure income and are comfortable with a $100K emergency fund you can go for whatever overall cost-benefit there may be in paying down half of the mortgage now. But since you are asking, I think you are likely to be someone who will be happier with the more secure option of bucketing more money now and paying off the whole thing later (or else making moderate additional payments each month).

Re: Create a Mortgage Payoff Fund or Not?

Posted: Sun Aug 13, 2017 2:42 pm
by Goal33
I'd do option 3 which is pay off the whole thing now and open a line of credit for the emergency which will probably never happen.

Re: Create a Mortgage Payoff Fund or Not?

Posted: Sun Aug 13, 2017 2:50 pm
by neilpilot
Option 1 (or option 3) of course. I can't understand your plan for option 2. Will you wait until you have 300k in your emergency fund to payoff mortgage, so that your required 100k remains?

How about option #4: pay down mortgage by 100k from existing 200k emergency fund. Then increase your regular mortgage payments by the excess cash that your would otherwise transfer into Goldman Sachs bank.

Or option #5: option #4, except transfer funds into 4 separate $25k 11-mo no penalty CDs at Ally.

Re: Create a Mortgage Payoff Fund or Not?

Posted: Sun Aug 13, 2017 3:03 pm
by chevca
Goal33 wrote: Sun Aug 13, 2017 2:42 pm I'd do option 3 which is pay off the whole thing now and open a line of credit for the emergency which will probably never happen.
I'd do this. Just pay it off and get it done with.

In a high tax bracket, I assume high income along with that. How quickly could you build your EF back up to $100k with a high income and no mortgage payment. Outside of becoming unemployed, what emergency couldn't you handle simply from the next payday?

Re: Create a Mortgage Payoff Fund or Not?

Posted: Sun Aug 13, 2017 3:28 pm
by JBTX
It's really impossible to answer that question without a full financial picture but I tend towards option 2 and using a portion of the funds to

- Maximize any 401ks, roths, backdoor roths or any other retirement vehicles you haven't maximized
- invest in taxable account in a conservative low fee tax efficient balanced fund
- perhaps put 10k to 20k (if married) per year in ibonds which basically match inflation (currently yielding around 2.0%) and are tax deferred until liquidated. That may almost be a push with your 3.0 mortgage less your interest tax deduction.
- after you have exhausted all those then pay some additional principal monthly to lower your balance

As I have said elsewhere i think there is some value in excess liquidity funded by a low interest mortgage. If you are older you may need it for various contingencies. If you are younger you invest some of it and hopefully longer term exceed your approx 2.0% after tax cost of debt in return.

Re: Create a Mortgage Payoff Fund or Not?

Posted: Sun Aug 13, 2017 3:42 pm
by Beehave
Goal33 wrote: Sun Aug 13, 2017 2:42 pm I'd do option 3 which is pay off the whole thing now and open a line of credit for the emergency which will probably never happen.
Option 3 makes more sense to me than option1 because it removes the monthly mortgage payment. However, If the OP is more comfortable keeping cash on hand than emptying the emergency fund, here's a hybrid option for that, option 4.

Option 4: Each month you feel you have extra money on-hand (bonus, low expenses, etc.) that you can add to your monthly payment to pay-down loan principle, match that money with an equal amount from the $200K emergency fund. That way you will pay down the entire mortgage at a nicely accelerated pace using less than half of your emergency fund.

I previously recommended option 2. I personally would do option 2 or 4 but that is based on my own comfort levels and not because they are likely to max out expected or potential financial results, because they are not. I am happy to take significant risk, but only when I have a nice buffer of emergency funds, and if I were well paid and living in a high cost of living area (presumably in a high-value home) I would want a very secure base of my very own cash to give me lots of flexibility to max my options should circumstances change. That secure base would give me the comfort to take on risks with my other assets or possibly in my career that I would not be willing to take on without that base. But that's me, and the OP needs to work on the OP's own specific circumstances and comfort level.

Re: Create a Mortgage Payoff Fund or Not?

Posted: Sun Aug 13, 2017 3:58 pm
by Grt2bOutdoors
Find a municipal bond fund with a 6.5 year duration, take your $100K and invest it in said fund. Keep your liquidity while continuing to pay your mortgage. Now, at year 6.5 left on mortgage you can either pay off the entire mortgage or do nothing and continue to pay as agreed with lender, but you retain all the options when to pay it off, if ever and second, the liquidity you feel you need to have. Don't rely on a HELOC - look back in 2009, when the banks cut all the HELOCS, some of them went to zero. Imagine trying to obtain liquidity, when your credit financed liquidity is ZERO. Don't be so easy to give up your liquidity, liquidity equals options.

Re: Create a Mortgage Payoff Fund or Not?

Posted: Sun Aug 13, 2017 4:12 pm
by Watty
Another option to consider would to call your lender and ask if they will "recast your mortgage"(Google this) if you may it down by 50%. They are not required to but they likely will for a processing fee of a couple of hundred dollars. This would reduce your required monthly payment by the same percent but the length and interest rate would stay the same. This could be important in case something happens like you are laid off or interest rates go up a lot.

Re: Create a Mortgage Payoff Fund or Not?

Posted: Sun Aug 13, 2017 4:13 pm
by whodidntante
200k emergency fund, eh? Some people retire with less money.

Re: Create a Mortgage Payoff Fund or Not?

Posted: Sun Aug 13, 2017 4:52 pm
by bayview
Agincourt wrote: Sun Aug 13, 2017 1:51 pm I have $200,000 left in my 13 year mortgage with a 3.0% fixed interest in California and I have $200,000 in my emergency fund at Goldman Sachs bank earning 1.2%. I am also in a high tax bracket in California. I want to keep at least $100,000 of the $200,000 as my emergency fund, so I can either (1) take $100,000 today to payoff 1/2 of the current principal or (2) keep the money in the emergency fund until I have enough money to payoff the entire mortgage. I think option (1) may be better economically, however, option (2) provides some benefits in case something bad happens and I need access to the cash, is this the best way to analyze this decision?
How many months does this EF cover, including your current mortgage but excluding savings?

If you didn't have mortgage payments, how much would you need in an EF for six months of expenses, not including savings? For 12 months?

Re: Create a Mortgage Payoff Fund or Not?

Posted: Sun Aug 13, 2017 5:08 pm
by JBTX
whodidntante wrote: Sun Aug 13, 2017 4:13 pm 200k emergency fund, eh? Some people retire with less money.
The problem is we have zero context of his total portfolio. How much does he have in retirement or taxable equities or bonds, etc? If he is 50 and has $1 million + in stocks/bonds in various accounts, having a $200K cash balance may not seem so unreasonable. It isn't just emergency fund, it could be the cash component of his total investment portfolio, or could be useful for kids college funds or future home improvements.

I currently have around $150K between cash and ibonds, which I consider a reserve for emergencies, contingencies, help with future kids college fund, etc. etc. I have no material amounts of cash elsewhere in all other investments, mostly retirement vehicles. That cash balance is less than 10% of total portfolio.

If the OP has only $200K and he has it sitting all in cash, then yeah, that isn't terribly well allocated.

Re: Create a Mortgage Payoff Fund or Not?

Posted: Sun Aug 13, 2017 5:25 pm
by Agincourt
Thanks for all the helpful insights. I moved to California back in 2000 and I never understood why anyone would ever want to buy anything in this state and even though I have a nice house in a nice neighborhood I still don't get why anyone buys real estate here (leap of faith or there will always be people who are attracted to living here so real estate is a store of value). That said I have been a buy and hold Vanguard indexers for the last twenty five years so I have always considered my house a non-investment. The reason I have such a big emergency fund ($100,000) is because I may try to change careers or go solo someday which would cause a big decline in income (however, once the mortgage is paid I should have more options) and because California is quasi-socialist state so believe it or not a large portion of that amount will be taxed and frittered away not be me but by someone else.

Re: Create a Mortgage Payoff Fund or Not?

Posted: Sun Aug 13, 2017 6:04 pm
by Admiral
Agincourt wrote: Sun Aug 13, 2017 5:25 pm ...so believe it or not a large portion of that amount will be taxed and frittered away not be me but by someone else.
If this is a taxable emergency fund, then presumably the money's already been "taxed and frittered away" when it was earned. Unless you're speaking of capital gains, which are taxed at the federal level no matter where you live.

There's no reason to pay down such a low mortgage rate, IMO. But as others have said, w/o your full financial picture there's no way to know if this amount is adequate based on your lifestyle and expenses.

If you purchased your home in CA in 2000, unless you vastly overpaid it should have increased in value considerably, which does indeed make it a good "investment" regardless of how you wish to consider it.

Re: Create a Mortgage Payoff Fund or Not?

Posted: Sun Aug 13, 2017 7:36 pm
by Agincourt
JBTX wrote: Sun Aug 13, 2017 5:08 pm
whodidntante wrote: Sun Aug 13, 2017 4:13 pm 200k emergency fund, eh? Some people retire with less money.
The problem is we have zero context of his total portfolio. How much does he have in retirement or taxable equities or bonds, etc? If he is 50 and has $1 million + in stocks/bonds in various accounts, having a $200K cash balance may not seem so unreasonable. It isn't just emergency fund, it could be the cash component of his total investment portfolio, or could be useful for kids college funds or future home improvements.

I currently have around $150K between cash and ibonds, which I consider a reserve for emergencies, contingencies, help with future kids college fund, etc. etc. I have no material amounts of cash elsewhere in all other investments, mostly retirement vehicles. That cash balance is less than 10% of total portfolio.

If the OP has only $200K and he has it sitting all in cash, then yeah, that isn't terribly well allocated.
You are pretty spot on, 50 with well balanced equity/bond portfolio over $1 million so the main emergency fund ($100,000) is less than 10% of cash. I normally invest in equities/bonds but since the stock market appreciation in the last few years I have decided to mainly target my mortgage as ripe for payoff rather than more equities (though I add funds in my 401(k) and via my dollar cost average accounts with Vanguard every paycheck).

Re: Create a Mortgage Payoff Fund or Not?

Posted: Sun Aug 13, 2017 7:59 pm
by JBTX
Agincourt wrote: Sun Aug 13, 2017 7:36 pm
JBTX wrote: Sun Aug 13, 2017 5:08 pm
whodidntante wrote: Sun Aug 13, 2017 4:13 pm 200k emergency fund, eh? Some people retire with less money.
The problem is we have zero context of his total portfolio. How much does he have in retirement or taxable equities or bonds, etc? If he is 50 and has $1 million + in stocks/bonds in various accounts, having a $200K cash balance may not seem so unreasonable. It isn't just emergency fund, it could be the cash component of his total investment portfolio, or could be useful for kids college funds or future home improvements.

I currently have around $150K between cash and ibonds, which I consider a reserve for emergencies, contingencies, help with future kids college fund, etc. etc. I have no material amounts of cash elsewhere in all other investments, mostly retirement vehicles. That cash balance is less than 10% of total portfolio.

If the OP has only $200K and he has it sitting all in cash, then yeah, that isn't terribly well allocated.
You are pretty spot on, 50 with well balanced equity/bond portfolio over $1 million so the main emergency fund ($100,000) is less than 10% of cash. I normally invest in equities/bonds but since the stock market appreciation in the last few years I have decided to mainly target my mortgage as ripe for payoff rather than more equities (though I add funds in my 401(k) and via my dollar cost average accounts with Vanguard every paycheck).
Then I wouldn't be in a big hurry to pay off a 2.0% after tax (between mortgage interest and state income taxes I imagine you have enough to itemize ) mortgage. Park what you can in ibonds, keep some in online bank savings, maybe look into some high quality short term municipal funds or other cash substitutes. Or maybe something like this:

https://personal.vanguard.com/us/funds/ ... IntExt=INT

Re: Create a Mortgage Payoff Fund or Not?

Posted: Sun Aug 13, 2017 8:22 pm
by grabiner
I wouldn't be in a hurry to pay down that mortgage, given your high tax bracket. You could hold Admiral shares of CA Long-Term Tax-Exempt in your taxable account, with a slightly longer duration than the mortgage (7.3 years versus 6) and a 2.26% tax-free yield. Since you are paying less than 2% after tax on the mortgage, this is probably a good deal.

Re: Create a Mortgage Payoff Fund or Not?

Posted: Sun Aug 13, 2017 8:49 pm
by Taylor Larimore
Bogleheads:

Not everyone should sacrifice to pay-off a tax-deductible, low-interest rate, mortgage which usually means tying up your money in a house that is left to heirs and probate.

Several years ago I took out a low-interest rate mortgage on my home so that I could give the equity to my heirs while I am still alive. They are very grateful and I enjoy making the gift in the form of a monthly income.

Best wishes
Taylor