Paying off mortgage with 87K left on it

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rakish_weasel
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Paying off mortgage with 87K left on it

Post by rakish_weasel » Sun Sep 09, 2018 1:26 pm

Hi all -- first post here in a few years, the previous one being a request for a portfolio review which Lafder and ruralavalon in particular were really extremely helpful. Since that post and their advice, I have simplified my 401K towards a Boglehead 3-fund approach, eliminated higher ER funds, and moved my taxable account and rollover IRA directly to Vanguard. At that time (mid-2015), Lafder noted that across EF and savings, 22% of my NW was in cash -- that has since been halved, such that now it is just 11%. NW has grown from 830K to 1.3M in that time -- which says more about the good fortune of markets health the past three years than it does about anything else.

Brief bit about me: 47 years old, male, single, never married, no kids. Have generally sought to live below my means, but did not get truly serious about saving/investing until my early 30's, unfortunately. Have always put enough into 401K to get company match, and frequently more than that -- but only started maxing out 401/Roth by late 30s. Have never paid more than $12k for a car, and have not held a car loan or held credit card debt since 2003.

Overall NW: $1.3M
Income: ~125K/year salary + 10% annual bonus
Tax Brackets: 24% federal, 0% state (using new 2018 tax law. Prev bracket was 28%)
Emergency fund: $100k (conservative, yes: ~2 yrs' of expenses, high-yield savings acct)
Savings/checkings: $40k (for general billpay, house projects, etc.)
House: $335k paid in 2001 on a 30-yr note at 6.5%. Refi'd ~2009 to 15-yr fixed, 3.75%. $87k remaining on mortgage. $7700 of interest left to pay via remaining ~4 years of regular payments. Prop taxes are $7k/yr. HOI is 1400/yr. Current house value ~$520k.
Debt: None, other than mortgage.
Cars: One 16-year old Japanese truck.
N.B: I do include home equity in the NW, but calculated from the $335k purchase price, *not* the $520k assessed value. So home equity is calculated as 335-87 = $248K, which is about 19% of NW.

Investments summary:
Co. 401K: $600K (Fidelity)
Roth IRA: $115k (T. Rowe Price)
Rollover IRA: $35k (Vanguard)
Taxable acct: $140k (Vanguard)
Overall asset allocation: 90/10

Current passive/automated investment contributions:
$18,500/yr to max out 401K
$5,500/yr to max out Roth IRA -- this needs to change, as this past year saw that IRS says I can no longer contribute that much
$6,000/yr to taxable account for commission-free Vanguard ETFs

Typical monthly expenses: $4k. Roughly half of this, $1900, is towards mortgage (princ+int only). I've reviewed the other $2100 in monthly expenses and found that the main area of 'waste' is groceries/food/household items, which somehow manage to be 750-800/mo. Planning on cutting that to 500/mo.

---------------------

Now to the question. With just 87K left on the mortgage, I've hit the paradox point where despite the fact that the majority of mortgage interest is already in the rearview mirror, I feel a strong pull to pay off that mortgage regardless. I took the time yesterday to search Bogleheads forum and read a good number of threads about the general pros/cons of paying off a mortgage early, and it does seem that BHs as a whole are rather divided on the subject. Best as I can tell, the *general* advice is that from a strict number standpoint, one is likely better off investing the lump sum in the markets as *the odds* are greater that one will get a better ROI than the low 3.75% mortgage rate -- particularly since the effective mortgage rate post-deduction is only around 2.9%.

The flip side, of course, is that that 2.9% is a fully-guaranteed return. While I share BHs' belief that one shouldn't try to time the market, I also think it's legitimate to acknowledge that we are Year 10 of a bull market (by most measures).

So... what I'm looking at doing is using much of the 'excess' EF (along with bit of excess from the regular savings acct) to pay off the mortgage. The EF earns 1.85%, compared to the 2.9% effective return on paying down mortgage. But more to the point: the EF sits at $100K right now precisely because I have $4k/mo expenses thanks to that $1900 mortgage payment. With the mortgage paid off, I won't need anywhere near $100k in the EF to handle 2 years' worth of living expenses in the scenario of a job loss.

The end result of paying off the mortgage would be $34k remaining in the EF and about $20k in the regular savings acct -- leaving me at just above 4% in cash with respect to NW. Given the elimination of the mortgage payment and $400 reduced from monthly expenditure waste, I'd be looking at $1700/mo of expenses -- which means that $34k EF would cover about 20 months' living expenses. Not quite 2 years, but still pretty healthy.

I do recognise that paying off that $87k mortgage will quite possibly result in reduced gains as compared to investing in, say, VTI. But I also view it as trading the 1.85% the money currently earns in highyieldsavings for the 2.9% guaranteed return on mortgage, because so long as I have this mortgage I would not plan on using any of that EF to invest in the markets in the first place. I also see the 90/10 asset allocation in my 401/RIRA/TIA as being admittedly aggressive for a 47/yo, and putting $87K towards a mortgage as countering that by increasing a "bond-like" position.

How does this logic sound to you? More than anything, I'd like to ensure I'm not missing something blatantly obvious that would result in the $87k mortgage payoff being a significant mistake, as opposed to a "well you could've likely made a bit more in the markets, but it wasn't guaranteed, so it's not a bad call if it helps you sleep better at night." I do find it fascinating how the tug/allure of paying off mortgage increases, the closer you get to it -- despite the fact that at the end of the mortgage, your principal-to-interest ratio is higher than ever. Is that reason right there a big enough reason to say no to the payoff?

Your thoughts/advice are greatly welcomed, and I'll be happy to edit/update this original post with more info if it is requested. I'd like to know if you agree with the above payoff plan, but would also want to hear alternative suggestions that you might view as measurably preferable.

Regards,
-RW
Last edited by rakish_weasel on Sun Sep 09, 2018 1:47 pm, edited 2 times in total.

mortfree
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Re: Paying off mortgage with 87K left on it

Post by mortfree » Sun Sep 09, 2018 1:43 pm

How much are taxes and insurance on your home per month?

rakish_weasel
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Re: Paying off mortgage with 87K left on it

Post by rakish_weasel » Sun Sep 09, 2018 1:46 pm

Good question - I should have included that info as well. Property taxes are about $7k/yr, and insurance is about $1400/yr. Roughly $700/mo between the two, and that is included/considered in the current $4k/mo expenses (and the ~1700/mo expected expenses if the mortgage were paid off).

I'll update the original post to include this info as well.

-RW

EnjoyIt
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Re: Paying off mortgage with 87K left on it

Post by EnjoyIt » Sun Sep 09, 2018 1:58 pm

Because you keep such a "healthy" EF I think using it up to pay off your mortgage is a great idea. I would do that immediately and then build up the EF back to your desired level of 24 months expenses over the next few months. If your emergency fund wasn't so high I would recommend keeping the mortgage instead.

Also, I personally do not like adding the home value to my NW. Although you are right that it is there and adds to your wealth, that number does very little in telling you where you are financially. That is unless you are planning on selling and moving to a lower cost home in retirement. Much more useful is seeing what your investment assets are because the return from those investments will dictate you potential spending in retirement. Either way I like you plan and would jump on it ASAP.

One more thing I toned is that your invested NW is $890k which means at a 4% withdrawal rate you can spend $2966/month and based on historic returns likely never run out of money (Not 100% success but pretty close.) Without a mortgage this is already more than you spend which would make you financially independent and able to retire right now at your current spending rate. Even at a 3% return you can spend $2225/month which is still more than you spend and very likely never run out of money.

Congratulations on being financially independant.

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CardinalRule
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Re: Paying off mortgage with 87K left on it

Post by CardinalRule » Sun Sep 09, 2018 2:09 pm

I don't think it would change your analysis that much, but are you sure that you will be itemizing this year, given the changes in tax law?
rakish_weasel wrote:
Sun Sep 09, 2018 1:26 pm

Now to the question. With just 87K left on the mortgage, I've hit the paradox point where despite the fact that the majority of mortgage interest is already in the rearview mirror, I feel a strong pull to pay off that mortgage regardless. I took the time yesterday to search Bogleheads forum and read a good number of threads about the general pros/cons of paying off a mortgage early, and it does seem that BHs as a whole are rather divided on the subject. Best as I can tell, the *general* advice is that from a strict number standpoint, one is likely better off investing the lump sum in the markets as *the odds* are greater that one will get a better ROI than the low 3.75% mortgage rate -- particularly since the effective mortgage rate post-deduction is only around 2.9%.

The flip side, of course, is that that 2.9% is a fully-guaranteed return. While I share BHs' belief that one shouldn't try to time the market, I also think it's legitimate to acknowledge that we are Year 10 of a bull market (by most measures).


mortfree
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Re: Paying off mortgage with 87K left on it

Post by mortfree » Sun Sep 09, 2018 2:27 pm

Is the house in decent shape?

HVAC?
Roof?
Carpets?
Kitchen?
Bath?

If any of these need to be done will you sell your investments or pay cash or would you need to borrow?

If borrowing, do you think you’ll get a rate as low as your current mortgage?

I paid my house off (at age 39) when I had a similar loan amount and some of the above were checked off.

Of course I moved and have a mortgage again.

rakish_weasel
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Re: Paying off mortgage with 87K left on it

Post by rakish_weasel » Sun Sep 09, 2018 2:51 pm

EnjoyIt -- that is exactly what the plan would be, and 2 yrs' expenses would be about 41k, which isn't far from the EF's new $34k starting point. Given the near-$2k reduction in monthly expenses from the mortgage payoff, that could easily be built back up in 4 mos or so.

I hear you on the home equity inclusion in NW, and have debated the same -- prefer to err on the side of caution rather than overestimate with rose-tinted glasses and then get burned. My compromise on this was to stick to the 2001 purchase price so long as market value is clearly above that (as it is now) -- and if somehow market value dropped below that purchase price then I'd scrap the house entirely from NW. The house is definitively not one I plan to stay in for the long haul -- my general plan is to downsize/simplify in (early) retirement, smaller/cheaper house in lower COL area either in U.S. or overseas, and travel (cheaply) a few times a year. Because of this intention to eventually leave both this house and this state, I wanted to see the established home equity as part of the NW/available funds for purchasing or renting a smaller place elsewhere.

Thank you for your advice on the mortgage payoff and on viewing only invested assets as source of potential spending on retirement, as that is very true given that I would absolutely not draw a HELOC or etc. to fund anything in retirement. Social security is estimated to be about $2800/mo but I simply won't include that in my calculations because A) it assumes one continues at same income until age 62, and I plan to retire before that, and B) I feel zero confidence that SS will truly be there for me, at least 100%. I'm hopeful to receive 75% of the adjusted estimated benefit, but for the purposes of planning FIRE I calculate $0 coming from SS -- anything that comes from the gov't is icing/gravy/whatnot.

I certainly don't *feel* financially independent, but it is good to hear your assessment that I'm largely there at this point. My two main financial concerns in retirement are A) health insurance/healh costs, and B) travel costs. Although typical scenarios suggest one plan on 70-80% of income in retirement, I lean more to 100-120% just because of the above two items. It's probably just a "better to have and not need, than need and not have" mindset at work. Right now the plan is to work another six years and retire at age 53 -- which is probably another reason I should revisit that 90/10 allocation in the invested assets.

-RW

rakish_weasel
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Re: Paying off mortgage with 87K left on it

Post by rakish_weasel » Sun Sep 09, 2018 3:10 pm

CardinalRule - I am not positive that I'll be itemising this year, even though I have for the past 15+. The lower 24% tax rate combined with less- or even zero-mortgage interest deduction may well dictate no itemising this year or next. That is a good point, and I'll need to check into that.

I'm hard-pressed to see a scenario where not paying off the mortgage in order to keep itemising would wind up saving me enough on taxes to justify 1.85% return from the highyield savings account instead of the 2.9% effective mortgage rate from payoff.... but I am all ears if you or others feel otherwise.


MortFree - the house is an historic house that does have some needs. I've done a lot in the 17 years I've lived here, but current outstanding key needs are: roof, exterior paint, and possibly upstairs bath. The house is in a mixed-use zoned downtown neighbourhood, and there is a high chance of a business (law firm, etc.) eventually buying it rather than single family. Because of this, the advice I've been given from a few r.e. agents is to definitely take care of the roof and exterior paint, but leave the upstairs bath alone as the incoming business would likely re-do it entirely anyways. As such, I'm estimating on another $20k or so over the next few years on those two main items. Because neither of them needs to be completed in the next year, and because I would still have about $20k in the regular (non-EF) savings account along with significantly increased savings each month post-mortgage-payoff, I didn't feel that the roof and exterior paint job warranted scrapping the mort payoff plan.

But to answer your question, there are zero (zero!) plans to borrow or sell investments to fund house projects. $10k of the ~$20k needed is already available in the regular savings account. The other half would come from the $1900/mo no longer being put towards the mortgage, once the EF was built back up to $40k (ie, 2 yrs of expenses), a few months from now. Does that seem a reasonable approach, or would you definitively do all house repairs prior to paying off mortgage?

-RW

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randomizer
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Re: Paying off mortgage with 87K left on it

Post by randomizer » Sun Sep 09, 2018 3:22 pm

I think it's clear that you want to do it, and given your circumstances, I think that's reason enough to do it; you won't do much harm by doing so, that's for sure.
87.5:12.5, EM tilt — HODL the course!

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Watty
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Re: Paying off mortgage with 87K left on it

Post by Watty » Sun Sep 09, 2018 3:52 pm

rakish_weasel wrote:
Sun Sep 09, 2018 1:26 pm
Refi'd ~2009 to 15-yr fixed, 3.75%. $87k remaining on mortgage.
You only have about 6 years left on the mortgage.

Paying it off would be like getting a risk free 3.75% 6 year CD.

You are over analyzing this, pay it off. If you had 30 years left the decision might be harder.

If you have an unexpected dire emergency that your reduced emergency fund will not cover then you could dip into the $140K that you have in your taxable account.
rakish_weasel wrote:
Sun Sep 09, 2018 1:26 pm
Cars: One 16-year old Japanese truck.
Take a look at the safety features it has. Especially with a truck ESC is good to have and they have improved the rollover crash protections a lot too. There is a whole laundry list of other advances in safety features. It would be good to consider buying a newer vehicle just for the safety features.

GAAP
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Re: Paying off mortgage with 87K left on it

Post by GAAP » Sun Sep 09, 2018 3:57 pm

I have trouble believing that you will be able to deduct the mortgage interest, which means that pre-paying actually returns the full rate.

That return is also tax-free, so you should also consider the tax savings on the ~$7700 in remaining interest vs. the taxes due on the savings account.

All-in-all, I think you've understated the benefits.

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CardinalRule
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Re: Paying off mortgage with 87K left on it

Post by CardinalRule » Sun Sep 09, 2018 4:43 pm

The real issue is the higher standard deduction. With $7,000 in property taxes and a smallish mortgage balance, no interest deduction seems likely.

That said, I tend to agree with the posters who think you might be overanalyzing this a bit. I am not seeing a lot of downside to paying it off. You could also pay down $60 thousand or so and get a more modern truck to last another ten years or so. :happy

One other thought - an equity line of credit can be a helpful and flexible tool if unexpected repair or other bills arise on the house.
rakish_weasel wrote:
Sun Sep 09, 2018 3:10 pm
CardinalRule - I am not positive that I'll be itemising this year, even though I have for the past 15+. The lower 24% tax rate combined with less- or even zero-mortgage interest deduction may well dictate no itemising this year or next. That is a good point, and I'll need to check into that.

I'm hard-pressed to see a scenario where not paying off the mortgage in order to keep itemising would wind up saving me enough on taxes to justify 1.85% return from the highyield savings account instead of the 2.9% effective mortgage rate from payoff.... but I am all ears if you or others feel otherwise.

rakish_weasel
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Re: Paying off mortgage with 87K left on it

Post by rakish_weasel » Sun Sep 09, 2018 4:54 pm

Watty -- indeed there's about 4-1/2 years left on the mortgage (due to some previous lump sum principal paydowns). Main thing I've wondered is whether it's really a 3.75% return at this point. Mortgages are front-loaded with interest --- even though the rate across the entire 15-year note is 3.75%, isn't it the case that principal paydowns in the first few years are effectively > 3.75%, while paydowns in the final few years are effectively < 3.75%? That's where I'm wondering if my math might be off. If it's truly the case that it remains an effective 3.75%, and particularly if I wouldn't be able to itemise this upcoming year, then the mort payoff makes even more sense than I initially suspected.

I agree on the truck-- this one has neither ESC, 4x4, or even ABS. :annoyed That's a point of consideration, and I would certainly be buying a replacement/newer used truck in cash, rather than a loan.


GAAP -- had not accounted for the taxes paid on the EF savings account. That takes the effective APY of the EF down to just 1.4%. So instead of comparing 1.85 (EF) vs. 2.9 (effective mort rate), it may well be more accurately put as 1.4 (EF) vs. 3.75 (full mort rate due to no itemising). Mortgage payoff looks even more compelling from that angle than initially - thanks for that.

I'll need to dig a bit further to see if I'd really be able to itemise this year vs. standard deduction -- it's been 17 years since that possibility even existed.

Hazel-Rah
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Re: Paying off mortgage with 87K left on it

Post by Hazel-Rah » Sun Sep 09, 2018 5:22 pm

rakish_weasel wrote:
Sun Sep 09, 2018 1:26 pm

The flip side, of course, is that that 2.9% is a fully-guaranteed return. While I share BHs' belief that one shouldn't try to time the market, I also think it's legitimate to acknowledge that we are Year 10 of a bull market (by most measures).
I'd just like to point out that if you truly believed the bull market is about to wind down then your strong cash position would much better be suited for investing on the dip. Putting that cash to work to eliminate the mortgage means it would not be available to buy on the cheap.

Personally, I will also be paying off my mortgage by end of this year and I don't worry about trying to time the market. My EF will drop down to more risky levels than yours (temporarily) but it is a tradeoff I am willing to make because I hate having the debt. I'll take the guaranteed return of mortgage rate over the risk-laden potential market return over X years every time.

rakish_weasel
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Re: Paying off mortgage with 87K left on it

Post by rakish_weasel » Sun Sep 09, 2018 5:24 pm

CardinalRule -- Agreed. The std deduction going from $6350 in 2017, up to $12000 in 2018, would have made it fairly close a couple of years ago, but with reduced mortgage interest, and a drop in property taxes (due to a new historic tax exemption), I'm quite confident any itemisation is going to fall beneath $12k, and thus the mort payoff resulting in returning the full rate.

At this point I'm leaning towards just getting it paid off this week. I like your idea of $60k now and getting a newer truck with better safety features, but I'd then be continuing to carry the $4k monthly expenses (with $1900 mort payment) and a much smaller EF that would only cover about 8 mos' expenses. The key motivating factor towards the paydown is the elimination of that $1900/mo which thus allows for a much smaller EF. Whether that justifies driving an older and potentially less-safe truck is, of course, a matter of debate and no real right or wrong answers. Those old trucks are sure built like tanks, though :-D

It may well just be that I've been overthinking this -- certainly, in the helpful replies that have come in so far, there seems to be a shared belief that there's no big missing 'gotcha' to be found, and that paying it off is a defensible course of action. Tapping into the BH 'hive mind', as I've seen it referred to here, is very helpful from a crossing-T's and dotting-I's standpoint, not to mention comfort level in moving/utilising that quantity of funds. This insight is very much appreciated!

-RW

rakish_weasel
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Re: Paying off mortgage with 87K left on it

Post by rakish_weasel » Sun Sep 09, 2018 5:32 pm

Hazel-Rah -- I'm with you on your second para there. I really just don't see trying to time the market. Before I posted this original post on this thread, I went back to my previous 2015 post on this forum and re-read that entire thread -- somewhere in there, I noted that "we are now in Year 6 of a bull market..." .... .... and yet look where we are now.

It really is possible that "this time it's different" and things continue upward for several more years. Indeed, that's why I continue to max out the 401K, RIRA (at least as much as I'm allowed to, seems that has changed), and contribute regularly to the Vanguard taxable account. I'm mostly viewing the mortgage paydown as a diversification tool, a hedge against a market downturn, rather than going all-in on equities in a mature bullmarket.

The other simple fact of the matter is that if I don't pay off the mortgage... then the continued $4k/mo expenses means I wouldn't have any comfort level using that EF to buy on the dip -- so it'd be staying earning that lousy 1.4% effective yield regardless of what the market does or doesn't do. I think that right there is probably the key reason I'm leaning towards paying it all off this week -- I won't be missing out on any potential market returns because it wouldn't even be in there in the first place.

Like you, I really dislike debt -- and while I recognise that that may mean slightly lower returns than those that perhaps wisely opt to leverage low-int-rate debt to their advantage by investing, I prefer to offset that difference by simply jacking up my overall savings rate. It's not perfect, but I figure one could do a lot worse.

-RW

vested1
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Re: Paying off mortgage with 87K left on it

Post by vested1 » Sun Sep 09, 2018 6:20 pm

I disagree somewhat that counting home equity as part of NW is a bad idea. Home equity is quantifiable as a estimated dollar amount, unlike the annuities some include in their NW, such as a pension or SS. I don't count home equity in NW only because I don't assign much value in NW calculations.

I am currently making large lump sum payments on our mortgage in retirement to either have it paid off in less than 4 years (18 years early) or sell it and buy another, much nicer home in a LCOL area of a more tax friendly State, using the cash from the sale. We owe almost twice as much on our mortgage than you do, and pay taxes on IRA withdrawals, yet still think it's a good plan. In my mind I am moving money from one pocket to the other, rather than consuming it, although many here would disagree. The main justification is more buying power if we sell and buy for cash, and 15k less expense per year if we stay put, with nearly zero chance of running out of money in retirement.

Tax estimates with and without the mortgage from now until the end of the term of your loan, if you did nothing, are an additional consideration. I computed our taxes for the next 5 years before implementing our mortgage payoff plan. Our plan smooths out our tax rate and coincidentally lowers it right when RMD's kick in due to less money housed in pre-tax accounts, which coincides with the timing of our paid off mortgage. This accomplishes the same thing as Roth conversion, minus the gain in investments. Far less money would be needed for withdrawals once the mortgage is gone, and delayed SS which avoids State taxation makes up for this immediately prior to the onset of RMD's.

The advantage of paying off your mortgage is not merely a psychological one. By paying it off you are not only reducing monthly expenses but giving yourself more options as well. You are relatively young and your future looks great, but negative occurrences, such as a job loss or a health problem that restricts your employ-ability, have a way of sneaking up on you. Having fewer obligations if something like that would occur will ensure your continued success. Who knows where health care costs are going, and having less expense for housing will help in that regard.

You are in a position where paying off your mortgage would have zero tax consequences because the payoff would come from post-tax cash. I say go for it.

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Re: Paying off mortgage with 87K left on it

Post by rakish_weasel » Sun Sep 09, 2018 8:27 pm

Vested1 -- Appreciate that considered and detailed reply, particularly seeing as how you are in a not dissimilar situation. One thing that's becoming clear through these conversations and research is that people seem to define things like 'flexibility', 'having options', and 'buying power' differently, depending on their point of view. I see this much as you do, with a key attraction of a paid-off mortgage being the flexibility and options that come with increased cash flow each month due to elimination of the monthly mort payment. The less we owe and the less we spend, the less we *need* to have on hand.

There are others who seem to view it the opposite: that dumping liquid assets into an illiquid item like a house limits one's options because those assets are no longer easily accessible in the event of a major health cost, or a decision to purchase a second property, buy into the markets on dips, or what have you. I see the points being made -- having a lot of cash/taxable investments on hand means a bit more mobility/agility to put towards anything at all. And perhaps you and I are sacrificing some of that flexibility in order to really take a hatchet to our monthly expenses.

In the end, I think the biggest argument for keeping the cash is if one were dead-set on purchasing a 2nd property whilst still owning/living in the first one and needing a down payment -- either by buying a rental property, or by buying a new main residence and renting out the current house. That requires having two mortgages, and isn't really something I envision doing. Am I correct in saying that you're thinking similarly -- that you would only be looking at buying that nicer house in the LCOL area after your current house is sold?

-RW

mortfree
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Re: Paying off mortgage with 87K left on it

Post by mortfree » Sun Sep 09, 2018 8:47 pm

Less than 6 years to go

Less than 8k in interest.

More than enough cash now to pay it off without tax consequences.

What if you do this instead:
Deem your mortgage paid off “on paper”

With the monthly paycheck take $1900 and invest it.

Make your mortgage payment from the cash pile.

Do this for the next few months and see how it feels.

Re-evaluate.

You said you wanted alternatives and this is something I thought of AFTER I paid off a mortgage before.

It’s so easy to say I’ll take that 1900/month and invest. But the reality is that might not happen each month.

Just sharing my thoughts and experience.

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Re: Paying off mortgage with 87K left on it

Post by Lafder » Sun Sep 09, 2018 9:24 pm

You have gone this long without paying it off. Go ahead and pay it off and see what that feels like.

Build your reserves to your desired amount again in the next few months. Then trickle the equivalent of the monthly payments into investments each month.

Then report back on how it feels.

If you regret the choice, re mortgage!

Oh, with such an old vehicle, insure your own life by taking some of the mortgage payment money and invest in car payments for yourself. Once you see the safety features on the new vehicle you will see if was worth it!

lafder

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Re: Paying off mortgage with 87K left on it

Post by tfb » Sun Sep 09, 2018 9:50 pm

rakish_weasel wrote:
Sun Sep 09, 2018 1:26 pm
because so long as I have this mortgage I would not plan on using any of that EF to invest in the markets in the first place.
This constraint is set by yourself. Maybe it should be questioned if you are looking for alternatives. "[T]he markets" don't have to be 100% stocks. Either way would not be a significant mistake. The tug you feel is basically the behavior bias loss aversion. You feel twice as much pain in paying interest as the joy in earning a return. That said, your 3.75% rate, likely not deductible, is relatively high for a 15-year. You must have missed an opportunity to refinance it to 2.5% - 2.75% at some point. So I would say pay it off based on this relatively high rate.
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Re: Paying off mortgage with 87K left on it

Post by IowaFarmBoy » Mon Sep 10, 2018 6:18 am

rakish_weasel wrote:
Sun Sep 09, 2018 4:54 pm
Watty -- indeed there's about 4-1/2 years left on the mortgage (due to some previous lump sum principal paydowns). Main thing I've wondered is whether it's really a 3.75% return at this point. Mortgages are front-loaded with interest --- even though the rate across the entire 15-year note is 3.75%, isn't it the case that principal paydowns in the first few years are effectively > 3.75%, while paydowns in the final few years are effectively < 3.75%? That's where I'm wondering if my math might be off. If it's truly the case that it remains an effective 3.75%, and particularly if I wouldn't be able to itemise this upcoming year, then the mort payoff makes even more sense than I initially suspected.
The mortgage is 3.75% on whatever money you owe at a given point in time. In the early years, you owe more so more of your payment goes to interest and less to principal. In later years, you owe less, so more of your payment is principal but you are still paying 3.75% interest. If you want to see this illustrated, look for an amortization calculator online.

If you won't be itemizing, I think paying off is pretty close to a no-brainer given how little time you have left and that it doesn't appear you will have liquidity issues. If you do itemize, it makes it a little less clear cut but still is a good choice because the mortgage is so much higher than the interest on your emergency fun.

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Re: Paying off mortgage with 87K left on it

Post by Nissanzx1 » Mon Sep 10, 2018 7:24 am

Pay it off today. Commit to funding another large EF immediately as the priority.

Job well done!

Jack FFR1846
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Re: Paying off mortgage with 87K left on it

Post by Jack FFR1846 » Mon Sep 10, 2018 8:01 am

What I would do (and actually have done).

Take out a no cost HELOC. (for those asking where.....I did with my credit union).

Now, with equity available to you, pay off the mortgage.

There is certainly a split among people whether to use the mortgage as a way to invest more in the market or not. That's your decision. With the new tax law, it's no longer as much of an advantage to keep the mortgage.

I say that if your 15 year old truck without all those things to break is serving you well, keep it. It's not all that long ago that I drove a car with no ABS, no top, no heater, no power steering or brakes and no air bags. Somehow, I survived. :D Replace it when YOU feel like replacing it.
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Re: Paying off mortgage with 87K left on it

Post by ryman554 » Mon Sep 10, 2018 8:09 am

rakish_weasel wrote:
Sun Sep 09, 2018 4:54 pm
Watty -- indeed there's about 4-1/2 years left on the mortgage (due to some previous lump sum principal paydowns). Main thing I've wondered is whether it's really a 3.75% return at this point. Mortgages are front-loaded with interest --- even though the rate across the entire 15-year note is 3.75%, isn't it the case that principal paydowns in the first few years are effectively > 3.75%, while paydowns in the final few years are effectively < 3.75%? That's where I'm wondering if my math might be off. If it's truly the case that it remains an effective 3.75%, and particularly if I wouldn't be able to itemise this upcoming year, then the mort payoff makes even more sense than I initially suspected.
Bolded is absolutely incorrect. There is nothing "front loaded" onto a mortgage. It only looks that way on a amortization table.

paying additional principle earlier in the mortgage has a bigger effect because you have more years to compound the 3.75% savings. But you are always getting 3.75% (compounded!) return by pre-paying your mortgage.

Different absolute value (hard cash) of interest savings, same relative percentage (mortgage rate) value. Think of it as putting money in a CD for 30 years or 2 years at the same rate. One gives you more money at the end. But they are both the same interest rate.

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Re: Paying off mortgage with 87K left on it

Post by Admiral » Mon Sep 10, 2018 9:02 am

I'll play. Your rate is low by historical terms, absolutely, but not so low that investing in bonds instead of paying it off is a no brainer (based on current rates), which makes the choice more difficult.

The interest savings is $7700, and that's real money. On the other hand, that's a tiny fraction of your assets, and paying over 80k to save it only makes sense if you are comfortable reducing your liquidity significantly.

If it were me, I would (probably) not pay it off. I might, on the other hand, consider paying it off in two years, and take the two years to add more to my taxable pile. This also has another advantage: if (and that's a big IF) rates go up, at that point you might decide that bonds financially make more sense because you can make a guaranteed higher return by investing in them (versus paying off the loan.)

I think keeping that much cash out of the markets is a mistake, but that's based on your comfort level with risk. You are at or very near FI, so a job loss (which, really, is what an EF is for) seems like less of a real concern. I vote for maintaining a lot of liquidity, but not keeping it all in a MM/savings account.

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Re: Paying off mortgage with 87K left on it

Post by aristotelian » Mon Sep 10, 2018 9:23 am

Your 90/10 would normally be considered quite aggressive at your age. Arguably, the mortgage is a negative bond. In effect, you are closer to 100% stock. Your large EF offsets that somewhat, but if you pay off the mortgage with the EF that would still put you at roughly "true" 90/10 allocation.

We paid ours off last year and realized some gains from the market to do so. The bottom line is that if you asked me whether I would borrow money to invest in stocks right now, the answer is no. You are at the age where you need to start thinking about risk, and carrying a mortgage to invest increases your risk. I would be inclined to pay it off, but I would do so at least partially from stocks as a way of deleveraging your portfolio and shifting to a more conservative allocation long term.

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Re: Paying off mortgage with 87K left on it

Post by welderwannabe » Mon Sep 10, 2018 9:29 am

rakish_weasel wrote:
Sun Sep 09, 2018 8:27 pm
I see this much as you do, with a key attraction of a paid-off mortgage being the flexibility and options that come with increased cash flow each month due to elimination of the monthly mort payment. The less we owe and the less we spend, the less we *need* to have on hand.
The increased monthly cash flow is a great bonus. It also will reduce the necessary size of your emergency fund. Keeping 2 years of expenses in cash earning a couple points less than your mortgage is costing you doesnt make a lot of sense.

Pay it off and don't look back. :sharebeer
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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Re: Paying off mortgage with 87K left on it

Post by Admiral » Mon Sep 10, 2018 9:37 am

welderwannabe wrote:
Mon Sep 10, 2018 9:29 am
rakish_weasel wrote:
Sun Sep 09, 2018 8:27 pm
I see this much as you do, with a key attraction of a paid-off mortgage being the flexibility and options that come with increased cash flow each month due to elimination of the monthly mort payment. The less we owe and the less we spend, the less we *need* to have on hand.
The increased monthly cash flow is a great bonus. It also will reduce the necessary size of your emergency fund. Keeping 2 years of expenses in cash earning a couple points less than your mortgage is costing you doesnt make a lot of sense.

Pay it off and don't look back. :sharebeer
The "increased monthly cash flow" is basically a mirage when the OP has $100k in a taxable account. If the OP took 2k each month from that taxable account and used it to pay the mortgage, would you say that this has freed up cash flow? It hasn't done that. All that the OP is doing is choosing to pay the mortgage from cash flow and not from savings. OP could just replace the savings with the saved cash, same difference (not accounting for cap gains etc.)

Money is fungible, there's no increase in cash flow if one already has the money to pay a mortgage and chooses not to do so.

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Re: Paying off mortgage with 87K left on it

Post by Watty » Mon Sep 10, 2018 9:52 am

Jack FFR1846 wrote:
Mon Sep 10, 2018 8:01 am
I say that if your 15 year old truck without all those things to break is serving you well, keep it. It's not all that long ago that I drove a car with no ABS, no top, no heater, no power steering or brakes and no air bags. Somehow, I survived. Replace it when YOU feel like replacing it.
I know at least two people that didn't and a number of people that had injuries that they will never fully recover from.

That is one of the reasons that I am fairly conscious about car safety.

You can see some of the driver death rate statistics here;

https://www.iihs.org/iihs/topics/driver-death-rates

I don't know what type of truck the OP has but I looked and a 2002 2wd Tacoma has a driver death rate of 108, 81 for the extended cab. The 2014 was 30 for the access cab version, 13 for the double cab.

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Re: Paying off mortgage with 87K left on it

Post by vested1 » Mon Sep 10, 2018 10:11 am

rakish_weasel wrote:
Sun Sep 09, 2018 8:27 pm
Vested1 -- Appreciate that considered and detailed reply, particularly seeing as how you are in a not dissimilar situation. One thing that's becoming clear through these conversations and research is that people seem to define things like 'flexibility', 'having options', and 'buying power' differently, depending on their point of view. I see this much as you do, with a key attraction of a paid-off mortgage being the flexibility and options that come with increased cash flow each month due to elimination of the monthly mort payment. The less we owe and the less we spend, the less we *need* to have on hand.

There are others who seem to view it the opposite: that dumping liquid assets into an illiquid item like a house limits one's options because those assets are no longer easily accessible in the event of a major health cost, or a decision to purchase a second property, buy into the markets on dips, or what have you. I see the points being made -- having a lot of cash/taxable investments on hand means a bit more mobility/agility to put towards anything at all. And perhaps you and I are sacrificing some of that flexibility in order to really take a hatchet to our monthly expenses.

In the end, I think the biggest argument for keeping the cash is if one were dead-set on purchasing a 2nd property whilst still owning/living in the first one and needing a down payment -- either by buying a rental property, or by buying a new main residence and renting out the current house. That requires having two mortgages, and isn't really something I envision doing. Am I correct in saying that you're thinking similarly -- that you would only be looking at buying that nicer house in the LCOL area after your current house is sold?

-RW
Correct. We won't consider having two mortgages. One has been a sufficient shackle, and a burden that will be a pleasure to eliminate.

After working out the details of our plan, using amortization schedules and determining a relatively short term and somewhat generous budget, I ran it by my daughter, who is a CPA. She checked my math, which was accurate as it turns out. She commented upon my strategic nature, which is a tragically recent development which only took effect during the last 10 years. Blissful ignorance is still ignorance after all. Thank you Bogleheads!

Do yourself a favor and follow your instincts. Pay off the mortgage and give yourself a different, more executable set of options.

BTW, I drive an 18 year old truck, so we have even more in common.

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Re: Paying off mortgage with 87K left on it

Post by Nate79 » Mon Sep 10, 2018 10:17 am

3.75% after tax risk free return is not bad. I would pay off the mortgage today and use the extra money to build back up your extra emergency fund.

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Re: Paying off mortgage with 87K left on it

Post by wabbajack » Mon Sep 10, 2018 10:23 am

Watty wrote:
Mon Sep 10, 2018 9:52 am
Jack FFR1846 wrote:
Mon Sep 10, 2018 8:01 am
I say that if your 15 year old truck without all those things to break is serving you well, keep it. It's not all that long ago that I drove a car with no ABS, no top, no heater, no power steering or brakes and no air bags. Somehow, I survived. Replace it when YOU feel like replacing it.
I know at least two people that didn't and a number of people that had injuries that they will never fully recover from.

That is one of the reasons that I am fairly conscious about car safety.

You can see some of the driver death rate statistics here;

https://www.iihs.org/iihs/topics/driver-death-rates

I don't know what type of truck the OP has but I looked and a 2002 2wd Tacoma has a driver death rate of 108, 81 for the extended cab. The 2014 was 30 for the access cab version, 13 for the double cab.
+1
Congrats OP on being in great financial shape! Buy a new car. With your net worth it is a no-brainer. Driving is the riskiest thing most people do, and you don't get to decide when an accident happens to you. Insure yourself.

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Re: Paying off mortgage with 87K left on it

Post by bloom2708 » Mon Sep 10, 2018 10:24 am

I would pay it off with your Emergency Fund. Easy choice.

At 47, I would look hard at being 90/10. Just no reason to be 90/10 (In my opinion) at 47. I happen to be 47 and we paid off our mortgage in the summer of 2007. It just worked out that we had a bunch of stock options to sell and it more than covered the mortgage balance. You know what happened fall of 2007 and forward.

Pay it off. There is always another mortgage out there if you miss it.
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

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Re: Paying off mortgage with 87K left on it

Post by rojas65 » Mon Sep 10, 2018 11:30 am

<r><QUOTE author="rakish_weasel" post_id="4110539" time="1536517576" user_id="98269"><s>
rakish_weasel wrote:
Sun Sep 09, 2018 1:26 pm
</s>
--------------------
Brief bit about me: 47 years old, male, single, never married, no kids. Have generally sought to live below my means, but did not get truly serious about saving/investing until my early 30's, unfortunately. Have always put enough into 401K to get company match, and frequently more than that -- but only started maxing out 401/Roth by late 30s. Have never paid more than $12k for a car, and have not held a car loan or held credit card debt since 2003.

Typical monthly expenses: $4k. Roughly half of this, $1900, is towards mortgage (princ+int only). I've reviewed the other $2100 in monthly expenses and found that the main area of 'waste' is groceries/food/household items, which somehow manage to be 750-800/mo. Planning on cutting that to 500/mo.
---------------------
<e>
</e></QUOTE>

OP, I just wanted to chime in on your post with a different take on things. Why does it have to be all or nothing? Either pay off the mortgage entirely now or just pay the monthly amount until paid in full? Why not add $1K or $2K or $1,653.38 more each month to your payment? This allows you to pay it down more quickly than the normal amort schedule yet allows you flexibility if something better comes up.

You state that you refuse to invest any of your EF while you have a mortgage. You also say you "did not get truly serious about saving/investing until my early 30's, unfortunately," and of your typical monthly expense you "found that the main area of 'waste' is groceries/food/household items, which somehow manage to be 750-800/mo. Planning on cutting that to 500/mo."

That lifestyle goal sounds a little meager and downright spartan, however, if that is your goal than I certainly encourage you to pursue it. And curiosity gets the better of me to ask, "To what end?" You are single with no children and are very secure financially. So what is the goal of turbocharging your net worth? Philanthropy? Expensive hobbies? Extensive travel? FIRE?
It seems to me that you are focusing way too closely on the individual trees and not so much on the forest itself.
As I reread my post, I'm not sure too much is actionable but I am very curious on your motivations which of course are none of my business, anyway.
Cheers -
J.

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Re: Paying off mortgage with 87K left on it

Post by Darth Xanadu » Mon Sep 10, 2018 12:00 pm

rakish_weasel wrote:
Sun Sep 09, 2018 1:26 pm
$5,500/yr to max out Roth IRA -- this needs to change, as this past year saw that IRS says I can no longer contribute that much
Though not related specifically to your question, search the forums for backdoor Roth contributions. This will allow you to effectively "contribute" to the Roth IRA despite income limitations. This option would require additional analysis given your rollover IRA but it could be worth it if you wanted 6+ more years of funding Roth accounts which can be invaluable in early retirement situations and tax optimization strategies.
"A courageous teacher, failure is."

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Re: Paying off mortgage with 87K left on it

Post by welderwannabe » Mon Sep 10, 2018 12:10 pm

Admiral wrote:
Mon Sep 10, 2018 9:37 am
The "increased monthly cash flow" is basically a mirage when the OP has $100k in a taxable account. If the OP took 2k each month from that taxable account and used it to pay the mortgage, would you say that this has freed up cash flow? It hasn't done that. All that the OP is doing is choosing to pay the mortgage from cash flow and not from savings. OP could just replace the savings with the saved cash, same difference (not accounting for cap gains etc.)
Someone may not feel the need to have $100K cash in a taxable account if they have fewer mandatory payments. I squeezed down my EF when I paid off my mortgage.

Free cash flow is definitely increased by the gap between earned interest and paid interest, but I see your point and you are correct.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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Re: Paying off mortgage with 87K left on it

Post by tesuzuki2002 » Mon Sep 10, 2018 12:43 pm

rakish_weasel wrote:
Sun Sep 09, 2018 1:26 pm
Hi all -- first post here in a few years, the previous one being a request for a portfolio review which Lafder and ruralavalon in particular were really extremely helpful. Since that post and their advice, I have simplified my 401K towards a Boglehead 3-fund approach, eliminated higher ER funds, and moved my taxable account and rollover IRA directly to Vanguard. At that time (mid-2015), Lafder noted that across EF and savings, 22% of my NW was in cash -- that has since been halved, such that now it is just 11%. NW has grown from 830K to 1.3M in that time -- which says more about the good fortune of markets health the past three years than it does about anything else.

Brief bit about me: 47 years old, male, single, never married, no kids. Have generally sought to live below my means, but did not get truly serious about saving/investing until my early 30's, unfortunately. Have always put enough into 401K to get company match, and frequently more than that -- but only started maxing out 401/Roth by late 30s. Have never paid more than $12k for a car, and have not held a car loan or held credit card debt since 2003.

Overall NW: $1.3M
Income: ~125K/year salary + 10% annual bonus
Tax Brackets: 24% federal, 0% state (using new 2018 tax law. Prev bracket was 28%)
Emergency fund: $100k (conservative, yes: ~2 yrs' of expenses, high-yield savings acct)
Savings/checkings: $40k (for general billpay, house projects, etc.)
House: $335k paid in 2001 on a 30-yr note at 6.5%. Refi'd ~2009 to 15-yr fixed, 3.75%. $87k remaining on mortgage. $7700 of interest left to pay via remaining ~4 years of regular payments. Prop taxes are $7k/yr. HOI is 1400/yr. Current house value ~$520k.
Debt: None, other than mortgage.
Cars: One 16-year old Japanese truck.
N.B: I do include home equity in the NW, but calculated from the $335k purchase price, *not* the $520k assessed value. So home equity is calculated as 335-87 = $248K, which is about 19% of NW.

Investments summary:
Co. 401K: $600K (Fidelity)
Roth IRA: $115k (T. Rowe Price)
Rollover IRA: $35k (Vanguard)
Taxable acct: $140k (Vanguard)
Overall asset allocation: 90/10

Current passive/automated investment contributions:
$18,500/yr to max out 401K
$5,500/yr to max out Roth IRA -- this needs to change, as this past year saw that IRS says I can no longer contribute that much
$6,000/yr to taxable account for commission-free Vanguard ETFs

Typical monthly expenses: $4k. Roughly half of this, $1900, is towards mortgage (princ+int only). I've reviewed the other $2100 in monthly expenses and found that the main area of 'waste' is groceries/food/household items, which somehow manage to be 750-800/mo. Planning on cutting that to 500/mo.

---------------------

Now to the question. With just 87K left on the mortgage, I've hit the paradox point where despite the fact that the majority of mortgage interest is already in the rearview mirror, I feel a strong pull to pay off that mortgage regardless. I took the time yesterday to search Bogleheads forum and read a good number of threads about the general pros/cons of paying off a mortgage early, and it does seem that BHs as a whole are rather divided on the subject. Best as I can tell, the *general* advice is that from a strict number standpoint, one is likely better off investing the lump sum in the markets as *the odds* are greater that one will get a better ROI than the low 3.75% mortgage rate -- particularly since the effective mortgage rate post-deduction is only around 2.9%.

The flip side, of course, is that that 2.9% is a fully-guaranteed return. While I share BHs' belief that one shouldn't try to time the market, I also think it's legitimate to acknowledge that we are Year 10 of a bull market (by most measures).

So... what I'm looking at doing is using much of the 'excess' EF (along with bit of excess from the regular savings acct) to pay off the mortgage. The EF earns 1.85%, compared to the 2.9% effective return on paying down mortgage. But more to the point: the EF sits at $100K right now precisely because I have $4k/mo expenses thanks to that $1900 mortgage payment. With the mortgage paid off, I won't need anywhere near $100k in the EF to handle 2 years' worth of living expenses in the scenario of a job loss.

The end result of paying off the mortgage would be $34k remaining in the EF and about $20k in the regular savings acct -- leaving me at just above 4% in cash with respect to NW. Given the elimination of the mortgage payment and $400 reduced from monthly expenditure waste, I'd be looking at $1700/mo of expenses -- which means that $34k EF would cover about 20 months' living expenses. Not quite 2 years, but still pretty healthy.

I do recognise that paying off that $87k mortgage will quite possibly result in reduced gains as compared to investing in, say, VTI. But I also view it as trading the 1.85% the money currently earns in highyieldsavings for the 2.9% guaranteed return on mortgage, because so long as I have this mortgage I would not plan on using any of that EF to invest in the markets in the first place. I also see the 90/10 asset allocation in my 401/RIRA/TIA as being admittedly aggressive for a 47/yo, and putting $87K towards a mortgage as countering that by increasing a "bond-like" position.

How does this logic sound to you? More than anything, I'd like to ensure I'm not missing something blatantly obvious that would result in the $87k mortgage payoff being a significant mistake, as opposed to a "well you could've likely made a bit more in the markets, but it wasn't guaranteed, so it's not a bad call if it helps you sleep better at night." I do find it fascinating how the tug/allure of paying off mortgage increases, the closer you get to it -- despite the fact that at the end of the mortgage, your principal-to-interest ratio is higher than ever. Is that reason right there a big enough reason to say no to the payoff?

Your thoughts/advice are greatly welcomed, and I'll be happy to edit/update this original post with more info if it is requested. I'd like to know if you agree with the above payoff plan, but would also want to hear alternative suggestions that you might view as measurably preferable.

Regards,
-RW

If you want to hold on to money in case you need it... Update your budget and shift it more towards investing.. You have the EF that will cover the mortgage. Starting paying $5K a month on the mortgage instead of $1900. Draw It from your EF. It will be paid off in about 16 months... In the event something happens 6 or 12 months from now you will still have a sizable EF and can stop paying extra on the mortgage and ride out the storm that way.

I have been doing very similar the past 6 months.. I'm happy with the way things are going. Paying my mortgage down significantly and I still have cash reserves if needed. My Mortgage just went below $45K. I'll have it paid off May 2018 if things keep on schedule..

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Re: Paying off mortgage with 87K left on it

Post by sergeant » Mon Sep 10, 2018 2:09 pm

I would pay off the mortgage, get a new Toyota truck, change AA to 70/30, and roll your rollover IRA to your 401k (if they allow it) so you can do backdoor Roth.
Lincoln 3 EOW!

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Re: Paying off mortgage with 87K left on it

Post by Meg77 » Mon Sep 10, 2018 2:18 pm

rakish_weasel wrote:
Sun Sep 09, 2018 4:54 pm
Watty -- indeed there's about 4-1/2 years left on the mortgage (due to some previous lump sum principal paydowns). Main thing I've wondered is whether it's really a 3.75% return at this point. Mortgages are front-loaded with interest --- even though the rate across the entire 15-year note is 3.75%, isn't it the case that principal paydowns in the first few years are effectively > 3.75%, while paydowns in the final few years are effectively < 3.75%? That's where I'm wondering if my math might be off. If it's truly the case that it remains an effective 3.75%, and particularly if I wouldn't be able to itemise this upcoming year, then the mort payoff makes even more sense than I initially suspected.
This is a common misunderstanding (mortgage banker speaking), but mortgage interest is NOT front loaded. You pay more interest at first because the balance is higher. But the interest you pay on your mortgage each month is EXACTLY the mortgage rate multiplied by last month's balance (divided by 12). The remainder of the payment goes to principal.

Also - pay off your mortgage. You're in great shape, you want to do it, and it's unlikely ANY asset class - bonds, stocks, or cash - will return more than 3.75% each year over the next 4.5 years (it could happen, but I wouldn't borrow money on my house to bet on it).

Besides, we aren't talking about a ton of money here. Let's say you COULD earn 1% more on your money by investing it. We're talking about $73 bucks a month difference this month - which would decrease every month as the balance decreases. As a percentage of your net worth it's literally a rounding error whether or not you do this. So just do it.

And congrats on being debt free. :beer
"An investment in knowledge pays the best interest." - Benjamin Franklin

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Re: Paying off mortgage with 87K left on it

Post by InvestoGuy » Mon Sep 10, 2018 2:29 pm

I had about $100K left on my mortgage several months ago and after reviewing a lot of mortgage threads here, I decided to pay it off. My reasons (and all might not be purely mathematical, some are emotional):

1. Desire to be completely debt free. Oh, what a great feeling
2. Wanted to do some 'profit taking' from the higher than expected stock market returns of the last few years . Rather than re balancing, I decided to pay off.

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Re: Paying off mortgage with 87K left on it

Post by focusedonwhatmatters » Mon Sep 10, 2018 4:18 pm

Another vote for pay it off. You've got the money sitting in cash. Paying off your mortgage with it essentially guarantees the emergency portion of your housing needs is met, and you are no longer paying interest.

I dissent from the majority, and feel a 90/10 allocation in your case is fine. Between paying off the mortgage, your emergency fund, not having children, and easily identifiable areas you could cut if you needed to, I feel you have enough room to weather a big drop.

And I also think you deserve a new vehicle. :D

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Re: Paying off mortgage with 87K left on it

Post by rakish_weasel » Mon Sep 10, 2018 4:25 pm

Really can't express how helpful all of these responses have been -- never ceases to amaze me how thoughtful and knowledgeable people here are, and the time spent providing insight and advice. Very very much appreciated.


Lafder -- that makes a lot of sense to me, and would absolutely be the plan moving forward, re: building up the EF again and then switching the $1900/mo previously put to mortgage into regular, ie DCA, ETF purchases at VG. The vehicle is a tough one -- part of the draw of the old truck is that it's cheap to insure (liability-only), I don't care if it gets dings, and it's incredibly reliable. It is spartan, admittedly, but I really do like the peace of mind that goes along with owning/driving it. The lack of safety features is a real issue -- as noted earlier, it lacks even basic things like antilock brakes or even 4x4. A newer truck would likely cost more both upfront and in insurance.... but as you note, those costs would be insuring my own life, to point. Watty pointed out some death rate statistics from the IIHS, and for what I had perceived as a "built like a tank" truck, my truck had a very poor score in the 80's. I can see building the EF back up to a 2-yr level, and then divvying up the freed-up 1900/mo between taxable account and car fund.


Vested1 -- you know all about the pros/cons of the old truck, then :) I am quite partial to some of the more recent Audis from 2010-on, but I'm so accustomed to driving the cheap/reliable truck that it's almost second nature at this point. Sort of a "you don't miss what you never had", kind of thing.
Concurred in full on the idea of a second mortgage -- it just has no appeal. The goal here is to simply buy any future house in cash with the proceeds from the sale of this current one I have now --- or at worst, a 15-yr note with 50% down, etc. Like you said, this current mortgage is a burden that will be a pleasure to eliminate, and I have a hunch that once life is experienced without it, there will be motivation for avoiding a subsequent one later on. Of course life has a way of twisting/turning and taking us to places we didn't envision, so I'd never write off the possibility of one later on... but certainly will not purchase a second home before this current one sells.


Tfb -- you are right, the constraint on not spending the EF is set by myself. It has been the case that, for whatever reason, with 4K/mo expenses my "sleep well at night" EF level is 2 years -- and so biting into that EF to fund stock purchases or a new car goes against the whole purpose of the EF, in my view. The "number" for the EF is definitely not $100k -- the number is 2 years (for me, for whatever reason!)... and so with the mortgage gone, the EF can come down by nearly half.


IowaFarmBoy/Ryman554/Meg77 -- appreciate the explanations on the mortgage interest not genuinely being "front-loaded" re: a different rate, but just re: the amount owed. The Amortisation Table gives the initial illusion that early on, paying ~$200 in principle saves ~$1700 in interest -- but the idea of compounded savings makes it clearer how each payment still results in a 3.75% rate. Ryman's visual of the money towards a 30-yr CD vs 2-yr reinforces the reality of it -- *time* is the factor that results in so much interest gone in the first few years, as opposed to the final years... not the rate.

rakish_weasel
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Re: Paying off mortgage with 87K left on it

Post by rakish_weasel » Mon Sep 10, 2018 4:40 pm

Admiral -- yours is one of the few dissenting takes that suggests pausing and keeping some/all of it. As you said, it really boils down to comfort level of decreased liquidity. While the reduced EF will still be able to handle 18 months of *regular* expenses.... it will not give me the same leeway/latitude for anything that required a large lump sum of money. I do see your vote for maintaining liquidity -- and the current EF qualifies as such, even as the effective yield is a paltry 1.4%. And it is indeed specifically to address potential for job loss -- if I were, say, 60, then I might feel closer to FI and thus not as adamant about keeping 2 yrs' expenses handy like that. But at 47, with plans to retire at 53... I'm more or less planning on about 45 years of retirement, and that's a long block of time. Because of that, the idea of job loss now, even given 'only' 6 years to (planned) retirement, remains a real concern.

From your second post, there is no doubt that in some ways, the increased cash flow is a mirage. Is it better to have $100 in one hand whilst at same time having a debt/invoice for $100 in the other hand? Or is it better to have neither? It seems to me to be more of a rearranging than a true *increase* in cash flow --- it's true that more $ from each paycheque is now freed up to rebuild the EF, but it came at the expense of gutting the original $100k EF in the first place. This may be what several posters in this thread are driving at when they've noted that i'm likely overthinking over analysing this decision.

-RW

rakish_weasel
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Re: Paying off mortgage with 87K left on it

Post by rakish_weasel » Mon Sep 10, 2018 5:03 pm

Rojas65 -- you said:
"That lifestyle goal sounds a little meager and downright spartan, however, if that is your goal than I certainly encourage you to pursue it. And curiosity gets the better of me to ask, "To what end?" You are single with no children and are very secure financially. So what is the goal of turbocharging your net worth? Philanthropy? Expensive hobbies? Extensive travel? FIRE?
It seems to me that you are focusing way too closely on the individual trees and not so much on the forest itself.
As I reread my post, I'm not sure too much is actionable but I am very curious on your motivations which of course are none of my business, anyway. "
It's a good point, and questions I've asked myself along the way (as I'm sure most of us have). The historic house I own has given me a very real appreciation of the simple life (because it is anything but!) -- and that appreciation has gone beyond just the house but to life in general. Peace of mind is just worth so much, and it naturally follows that financial independence -- not needing to keep/hold a job in order to ever make ends meet again -- goes a long way towards providing that. Further, I think even those who are acutely aware of rising health costs in retirement may still well underestimate what those costs may wind up being -- and because of that, I don't feel particularly FI at age 47, in my situation. As such, it's important to me to be self-sufficient in this regard during retirement, to avoid being a burden on family, friends, or society as a whole. FI also allows one to be able to 'be there' to assist loved ones in their times of need in the future, focusing on what you can do to help, instead of having to do a cost-benefit analysis of whether assisting would wind up hurting yourself.

I guess in the end it really boils down to freedom, peace of mind, a certain tranquillity to life -- being able to travel and experience things that being tied down to an office job doesn't let one do. I've always said that money doesn't itself make you happy --- but it can give you the time/means to spend life doing the things that do make you happy. What those things are.... is up to each of us to decide! :)

-RW

rakish_weasel
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Re: Paying off mortgage with 87K left on it

Post by rakish_weasel » Mon Sep 10, 2018 5:09 pm

DarthXanadu -- I do need to search on the Backdoor Roth option. I've done a little of this, and have a decent feel for how it is accomplished when contributing directly to a regular IRA (and then converting). The main thing I need to figure out is what to do when one has already contributed the $5500 to the RIRA, and then found out after-the-fact that only $2k of it or so was allowed, due to the salary constraints.

This is the sole reason I filed for an extension for the first time, on the 2017 taxes -- realised I'd contributed the full $5500 when I wasn't eligible. Going forward I would contribute the proper amount to the RIRA, the rest to a TIRA and then convert.... but for 2017 need to identify the proper course of action, especially since the extension deadline is next month, ha.

Given that I've already contributed the full to the RIRA, is it best to bring in a tax advisor to handle this, or is this something I can straightforwardly address myself using guidance from BH?

-RW

rojas65
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Re: Paying off mortgage with 87K left on it

Post by rojas65 » Mon Sep 10, 2018 8:08 pm

OP - articulate and thoughtful replies from you. We all have thoughts, ideals and doubts about our personal situations and life paths. Good luck to you!
J.

Snowjob
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Re: Paying off mortgage with 87K left on it

Post by Snowjob » Mon Sep 10, 2018 11:06 pm

rakish_weasel wrote:
Sun Sep 09, 2018 1:26 pm
....

Overall NW: $1.3M
Income: ~125K/year salary + 10% annual bonus
Tax Brackets: 24% federal, 0% state (using new 2018 tax law. Prev bracket was 28%)
Emergency fund: $100k (conservative, yes: ~2 yrs' of expenses, high-yield savings acct)
Savings/checkings: $40k (for general billpay, house projects, etc.)
House: $335k paid in 2001 on a 30-yr note at 6.5%. Refi'd ~2009 to 15-yr fixed, 3.75%. $87k remaining on mortgage. $7700 of interest left to pay via remaining ~4 years of regular payments. Prop taxes are $7k/yr. HOI is 1400/yr. Current house value ~$520k.
Debt: None, other than mortgage.
Cars: One 16-year old Japanese truck.
N.B: I do include home equity in the NW, but calculated from the $335k purchase price, *not* the $520k assessed value. So home equity is calculated as 335-87 = $248K, which is about 19% of NW.

Investments summary:
Co. 401K: $600K (Fidelity)
Roth IRA: $115k (T. Rowe Price)
Rollover IRA: $35k (Vanguard)
Taxable acct: $140k (Vanguard)
Overall asset allocation: 90/10

Current passive/automated investment contributions:
$18,500/yr to max out 401K
$5,500/yr to max out Roth IRA -- this needs to change, as this past year saw that IRS says I can no longer contribute that much
$6,000/yr to taxable account for commission-free Vanguard ETFs

Typical monthly expenses: $4k. Roughly half of this, $1900, is towards mortgage (princ+int only). I've reviewed the other $2100 in monthly expenses and found that the main area of 'waste' is groceries/food/household items, which somehow manage to be 750-800/mo. Planning on cutting that to 500/mo.
...

Regards,
-RW
I read this thread with great interest as I am also contemplating making a large mortgage payment. My gut reaction from viewing the title of the post actual was a strong NO, do not make the payment! But after reviewing the selected information from the above, its clear that the pay off makes sense. All of the other information is really secondary to this barebones review of your cashflow and assets.

Your basically a millionaire (liquid) who lives on 24k a year, if I read the above properly -- frankly at 2.5% withdrawl rate you could retire if you had to, your spending is low enough that your obamacare subsidies would be massive, and you still have social security coming down the road. Given that you have no better use for the money -- you already save in excess of what you spend each year -- just pay it off and move on. Save the interest. When ever you do retire (5-10 years from now?) you'll be in a very nice situation with plenty saved to cover your basics.

My own situation, I am looking at making an additional large payment up front to reduce the interest costs on the my loan. While they may not be "front loaded" as some have suggested, your payments are fixed through the course of the mortgage. Thus each subsequent payment is more vaulable to the mortgage holder. If I were to follow the schedule of my 15 year mortgage, the first 5 years of payments would be knocking out 60% of the interest, the principle to interest split on the amortization tables is something like 60/40. If I had to pack up and move for some reason in the next three years this would be very expensive rental as I'm paying mostly interest. For me I'm contemplating paying that first 1/3rd up front then using the normal schedule for the balance. the interst costs are much more lower given the fixed payment schedule so i've taken out risk on the front and back end of the term. (front end risk in that my current payments are more valuable, back end in that well its gone-- the term drops to a shade over 9 years from 15).

Additionally, and this is the key difference between us, I DO have a better use for my money. I make much less than you but I do have more options for saving via my work plan. I can take advantage of afterax contributions and roll them to a roth. Additionally I use an HSA which you don't. Given I have nearly double the savings vehicles available at about 2/3rds your income, my goal right now is to efficiently recycle all the capital I've generated via trading gains (I have a large taxable account that I built entirely through debt, leverage and trading -- yes all sins here) and flush it through these tax shelters. I want to keep exposure to the market, sure, but as you say after the run up why not take some off the table. considering the tax costs and interest I'd need to earn a substantial (excess of 10.5% ROR, assuming a straight line market return) from here in order to not make the 1/3rd payment ecnomically viable.

So in summary for me, better irr, better risk profile on the mortgage, better opportunities to use the cash are the difference. For you, pay it off, and continue on your merry way, you're already looking great for retirement -- just adjust that asset allocation and start reducing your risk, a bit. You've won the game for your level of spending. Your biggest risk is that you end up spending more afterwards and liking it, though I might say bravo good for you, you've earned it, enjoy it =)

- Steve

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Watty
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Re: Paying off mortgage with 87K left on it

Post by Watty » Mon Sep 10, 2018 11:46 pm

Snowjob wrote:
Mon Sep 10, 2018 11:06 pm
My own situation, I am looking at making an additional large payment up front to reduce the interest costs on the my loan. While they may not be "front loaded" as some have suggested, your payments are fixed through the course of the mortgage.
If you are thinking of making a large prepayment then you can call your lender and ask if they will "recast your mortgage"(Google this). They are not required to do this but they often will for a processing fee of a couple of hundred dollars. They way this works is that if you pay the loan down by 33%(or whatever makes sense) then your required monthly payment will be reduced by the same percentage. The length of the loan and the interest rate stay the same. This can be important if something happens like you are laid off or interest rates go up a lot.

Snowjob
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Re: Paying off mortgage with 87K left on it

Post by Snowjob » Tue Sep 11, 2018 8:07 am

Watty wrote:
Mon Sep 10, 2018 11:46 pm
Snowjob wrote:
Mon Sep 10, 2018 11:06 pm
My own situation, I am looking at making an additional large payment up front to reduce the interest costs on the my loan. While they may not be "front loaded" as some have suggested, your payments are fixed through the course of the mortgage.
If you are thinking of making a large prepayment then you can call your lender and ask if they will "recast your mortgage"(Google this). They are not required to do this but they often will for a processing fee of a couple of hundred dollars. They way this works is that if you pay the loan down by 33%(or whatever makes sense) then your required monthly payment will be reduced by the same percentage. The length of the loan and the interest rate stay the same. This can be important if something happens like you are laid off or interest rates go up a lot.
Thanks for the advice, for a few hundred bucks I'll take flexibility all day long -- though Id like to stay on schedule if possible!

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