Out of Stocks to Pay Off Mortgage

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LearningToManage82
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Out of Stocks to Pay Off Mortgage

Post by LearningToManage82 » Mon Dec 03, 2018 11:58 am

We are at the point where we are seriously considering selling off stocks to pay off our mortgage.

Background:
- Husband and I are mid-30s
- About $200k left on mortgage (at 4.625%)
- Have a little over $230k in taxable account
- Have considerable invested in 401k and IRAs which won’t be touched as part of this plan (invest maximum every year and will consider to do so)
- Deductions are right below the $24k so I’m not getting that benefit

Once this is paid off we will start investing money back in monthly.

I’d like to hear some of your opinions on this.

Thanks!

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UpsetRaptor
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Re: Out of Stocks to Pay Off Mortgage

Post by UpsetRaptor » Mon Dec 03, 2018 12:02 pm

How much in capital gains are you sitting on in the taxable?

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ruralavalon
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Re: Out of Stocks to Pay Off Mortgage

Post by ruralavalon » Mon Dec 03, 2018 12:04 pm

LearningToManage82 wrote:
Mon Dec 03, 2018 11:58 am
We are at the point where we are seriously considering selling off stocks to pay off our mortgage.

Background:
- Husband and I are mid-30s
- About $200k left on mortgage (at 4.625%)
- Have a little over $230k in taxable account
- Have considerable invested in 401k and IRAs which won’t be touched as part of this plan (invest maximum every year and will consider to do so)
- Deductions are right below the $24k so I’m not getting that benefit

Once this is paid off we will start investing money back in monthly.

I’d like to hear some of your opinions on this.

Thanks!
In my opinion paying off the mortgage note with 4.65% interest is a reasonable priority ahead of taxable investing.
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JamesSFO
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Re: Out of Stocks to Pay Off Mortgage

Post by JamesSFO » Mon Dec 03, 2018 12:06 pm

I would not deplete your taxable to pay off the mortgage... Also, you likely will owe capital gains on the sale so it will not go 1-for-1.

Why not instead cut off monthly (taxable) investments and divert to pay off the mortgage implicitly it sounds like you maybe are putting $1K or something away taxably monthly or some such... Put that towards the mortgage. Make extra payments with bonuses, etc.

Admiral
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Re: Out of Stocks to Pay Off Mortgage

Post by Admiral » Mon Dec 03, 2018 12:14 pm

LearningToManage82 wrote:
Mon Dec 03, 2018 11:58 am
We are at the point where we are seriously considering selling off stocks to pay off our mortgage.

Background:
- Husband and I are mid-30s
- About $200k left on mortgage (at 4.625%)
- Have a little over $230k in taxable account
- Have considerable invested in 401k and IRAs which won’t be touched as part of this plan (invest maximum every year and will consider to do so)
- Deductions are right below the $24k so I’m not getting that benefit

Once this is paid off we will start investing money back in monthly.

I’d like to hear some of your opinions on this.

Thanks!
Please post the mortgage term and how many years remaining. Without that information we have no idea how much of what you are paying each month is interest versus principal. This is crucial info to help determine if the savings is worthwhile.

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mhadden1
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Re: Out of Stocks to Pay Off Mortgage

Post by mhadden1 » Mon Dec 03, 2018 12:21 pm

I have a mortgage that is a little lower rate than yours. I personally go for an expected return on my taxable investments that is greater than the mortgage rate, and call it good. That bet has paid off for a while - mortgage lasts a few more years - we'll see what happens.

If that's too risky for you - you could move your 200k toward safer investments, and maybe get close to 3% even after taxes, maybe more going forward. That would offset most of your interest, and you could have pretty quick access to your money any time you needed it. If you put it all the money in your house, access would likely be more difficult. And then you can dollar cost average by paying your mortgage every month. :happy
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mbasherp
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Re: Out of Stocks to Pay Off Mortgage

Post by mbasherp » Mon Dec 03, 2018 12:42 pm

If your taxable account was 2x or 3x the mortgage balance, I'd be more in agreement. I would rather keep the substantial liquid cushion the taxable account represents. If you want to pay off the mortgage from here, direct all new investments other than retirement accounts there and use all dividend distributions for the mortgage as well. I think that's a much more balanced approach.

sergio
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Re: Out of Stocks to Pay Off Mortgage

Post by sergio » Mon Dec 03, 2018 1:05 pm

What about a 50/50 split? Sell of 50% (or some other percent) of the taxable account to lock in the gains from the last 10+ year bull market, and redirect all future distributions of the remaining $130k towards the mortgage? This greatly reduces the interest you'll pay on the note, still leaves you with $130k liquid investment, protects against a market crash, still leave you some inflation hedge etc.

mw1739
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Re: Out of Stocks to Pay Off Mortgage

Post by mw1739 » Mon Dec 03, 2018 1:12 pm

Similar situation here, but our mortgage is at 3.75% and I’m keeping it, at least for the time being. Is this your forever home? If you have plans to move in the next 5-10 years, I would keep the liquidity.

pdavi21
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Re: Out of Stocks to Pay Off Mortgage

Post by pdavi21 » Mon Dec 03, 2018 1:15 pm

At the risk of being skewered alive, one benefit to paying off mortgage is to not pay for homeowner's insurance going forward.
Others are:
2. Fewer assets exposed to creditors, suers (if home is under 250-500k)
3. Simplicity
4. Higher risk adjusted return (Do you hold ANY bonds yield under 4.65%? Even in tax advantaged space (sell them for stocks))
5. Lower taxes (on future long term capital gains)

EDIT: Big con is interest tax deduction...if you do that. I take standard, so I forgot it. Other con is paying current long term capital gains (make sure they are all long term gains FIFO over 1 year)

My home is about 30% of net worth. I own it and do not have any insurance on it, but I'd consider adding liability if my exposed assets rise significantly (currently only cash reserves).

delamer
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Re: Out of Stocks to Pay Off Mortgage

Post by delamer » Mon Dec 03, 2018 1:32 pm

pdavi21 wrote:
Mon Dec 03, 2018 1:15 pm
At the risk of being skewered alive, one benefit to paying off mortgage is to not pay for homeowner's insurance going forward.
Others are:
2. Fewer assets exposed to creditors, suers (if home is under 250-500k)
3. Simplicity
4. Higher risk adjusted return (Do you hold ANY bonds yield under 4.65%? Even in tax advantaged space (sell them for stocks))
5. Lower taxes

EDIT: Big con is interest tax deduction...if you do that. I take standard, so I forgot it.

My home is about 30% of net worth. I own it and do not have any insurance on it, but I'd consider adding liability if my exposed assets rise significantly (currently only cash reserves).
It is ridiculous to drop homeowner’s insurance just because you no longer have a mortgage. Even if rebuilding “only” would cost 25% of your net worth (given that the land is worth something), why take that risk to save $1,000/year?

Consider yourself skewered.

Ben Mathew
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Re: Out of Stocks to Pay Off Mortgage

Post by Ben Mathew » Mon Dec 03, 2018 1:39 pm

Paying off the mortgage @ 4.625% without tax deductions is equivalent to investing in a bond that pays out 4.625% in a tax shielded account. They would be almost certainly be better than holding bonds in your taxable account. You have to balance this benefit against the cost of realizing capital gains in the taxable account. If that's substantial, then I would lean towards diverting future contributions from taxable to mortgage payments.

bloom2708
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Re: Out of Stocks to Pay Off Mortgage

Post by bloom2708 » Mon Dec 03, 2018 1:41 pm

We paid ours off in August 2007. Similar scenario. Note the timing compared to the late 2007 to 2010 market tumbles. We certainly had no insight into what was to come. We just decided it was time to be done with the mortgage.

After paying it off, we actually bumped up our percentage of stocks compared to bonds. We power saved through all the turmoil even though it was not fun. It worked out and would not go back to having a mortgage.

As long as you know it is a lifestyle decision and not purely financial, you can do what makes you happy and sleep well at night. Let's say you pay it off now and 1 year later you regret paying it off. I am guessing some fine financial institution will give you a new mortgage.

It is unlikely with a $200k mortgage that you get over the $24k standard deduction. If you do with large charitable contributions and high property taxes, the benefit is only ABOVE the standard deduction. Not the whole thing. Anyone/everyone gets the standard deduction.

Good luck with your decision.
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RickBoglehead
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Re: Out of Stocks to Pay Off Mortgage

Post by RickBoglehead » Mon Dec 03, 2018 1:53 pm

This seems to come up often. Some say it give peace of mind. Others say you if you wouldn't borrow to play the market, then why would you get a mortgage to do so (i.e. not pay it off)?

My perspective is simple. If the mortgage return is lower, which it is, then I will receive in the market over a long period of time, I go with the market.

pdavi21
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Re: Out of Stocks to Pay Off Mortgage

Post by pdavi21 » Mon Dec 03, 2018 1:53 pm

delamer wrote:
Mon Dec 03, 2018 1:32 pm
pdavi21 wrote:
Mon Dec 03, 2018 1:15 pm
At the risk of being skewered alive, one benefit to paying off mortgage is to not pay for homeowner's insurance going forward.
Others are:
2. Fewer assets exposed to creditors, suers (if home is under 250-500k)
3. Simplicity
4. Higher risk adjusted return (Do you hold ANY bonds yield under 4.65%? Even in tax advantaged space (sell them for stocks))
5. Lower taxes

EDIT: Big con is interest tax deduction...if you do that. I take standard, so I forgot it.

My home is about 30% of net worth. I own it and do not have any insurance on it, but I'd consider adding liability if my exposed assets rise significantly (currently only cash reserves).
It is ridiculous to drop homeowner’s insurance just because you no longer have a mortgage. Even if rebuilding “only” would cost 25% of your net worth (given that the land is worth something), why take that risk to save $1,000/year?

Consider yourself skewered.
Because, statistically, I am likely to lose more money paying for insurance than for being self insured. The insurance company profits, and I consider myself more careful with my home, and less likely to try to scam the insurance company (hail damage, etc) than the average policy holder. It's a similar gamble as a 94.7% chance to lose 1000 each year compounded at 5-7 percent and 5.3% chance to make between deductible and home value less premiums, vs 94.7% chance of nothing and 5.3% of no reimbursement for a deductible to home value loss. I chose the option with a much higher average return. Also, the insurance company can still deny a claim if you didn't change out your smoke alarm battery, install tornado shutters, tell them you had a pit bull, etc.
Last edited by pdavi21 on Mon Dec 03, 2018 1:57 pm, edited 1 time in total.

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mhadden1
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Re: Out of Stocks to Pay Off Mortgage

Post by mhadden1 » Mon Dec 03, 2018 1:56 pm

bloom2708 wrote:
Mon Dec 03, 2018 1:41 pm
We paid ours off in August 2007. Similar scenario. Note the timing compared to the late 2007 to 2010 market tumbles. We certainly had no insight into what was to come. We just decided it was time to be done with the mortgage.
An excellent example of a situation where it could have been difficult to get the money out in a timely fashion, if needed. That is, it was hard for many people to get a home equity loan, for quite a while, even when loan-to-value would support one.
Oh I can't, can I? That's what they said to Thomas Edison, mighty inventor, Thomas Lindberg, mighty flyer,and Thomas Shefsky, mighty like a rose.

bloom2708
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Re: Out of Stocks to Pay Off Mortgage

Post by bloom2708 » Mon Dec 03, 2018 2:02 pm

mhadden1 wrote:
Mon Dec 03, 2018 1:56 pm
bloom2708 wrote:
Mon Dec 03, 2018 1:41 pm
We paid ours off in August 2007. Similar scenario. Note the timing compared to the late 2007 to 2010 market tumbles. We certainly had no insight into what was to come. We just decided it was time to be done with the mortgage.
An excellent example of a situation where it could have been difficult to get the money out in a timely fashion, if needed. That is, it was hard for many people to get a home equity loan, for quite a while, even when loan-to-value would support one.
We had a 6+ month Emergency Fund. Other cash. I think you are using my example to support not paying off the mortgage. Not having it freed up ~$1,500 in cash flow that was not required to be earned. Let's say one or both lost jobs, we then had much lower monthly expenses. Every aspect has a trade-off. We discussed not having as much in taxable. I guess we could have had some medical scenario come up. The OP would still have $30k in taxable. Many sides to every decision. I actually like buying (more) during the drops. I didn't like our balances dropping like a rock, but we had a long horizon ahead.
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

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Watty
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Re: Out of Stocks to Pay Off Mortgage

Post by Watty » Mon Dec 03, 2018 2:09 pm

There is a wiki on this if you have not see it.

https://www.bogleheads.org/wiki/Paying_ ... _investing

I don't see any showstoppers like you would be taking money out of a retirement account so which option is best really depends on things like future investment returns, future interest rates, your job security, and other things that are unknowable.

It would be good to do a dummy tax return to see the tax impact. In addition to the capital gains taxes there can also be less obvious things like tax credits being phased out as your income increases. You may pay some capital gains taxes but you will likely end up paying those sooner or later anyway. Unless you can figure out a scenario where you can reduce those taxes then paying them now or ten years from now is less important and there is a chance that capital gains tax rates could be higher in the future.

Investing the money and earning a higher return sounds tempting but that is harder than it sounds since you will have a sequence of returns risk. Here is a simplistic example that I have posted before.
 If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To break even the next year you would need to gain back the $16K and another $6,000 for the next years mortgage payments which is $22K. That would take a 25.6% return on the remaining $84K just to break even.
When people ask the "Should I pay off the mortage?" question a frequent response is to ask "If you had a paid off house then would you take out a new loan just to invest the money?". Fewer people would do that but it is almost the same question except for the tax issues.

One other option is to call your lender and ask if they will "recast your mortage"(Google this) if you pay it down by 50%(or whatever makes sense). They are not required to but they usually will for a processing fee of a few hundred dollars. The way this works is that your required mortgage payment is reduced by the
same percentage but the length and interest rate stays the same.

As long as you would still have a decent emergency fund after paying it off I don't see any compelling reason not to pay it off.

Paying it off is also not a slam dunk easy choice but if you do and it turns out to have been a "mistake" in hindsight then having a paid off house by your mid 30s is a pretty good "mistake" and would be more of a missed opportunity than a real mistake.

About the only way I could see either choice turning out really badly would be if you paid the mortage off then greatly increased your spending.

(All that said I would pay it off, but that is just me.)

pennylane
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Re: Out of Stocks to Pay Off Mortgage

Post by pennylane » Mon Dec 03, 2018 2:12 pm

You say you have a large 401k and that has enough exposure to the market.

Ask yourself this: If someone could guarantee you 4.625% return on your 200k while your home value (hopefully) continues to grow, would you do it?

I'd pay off the mortgage and get that guaranteed 4.625% return.

PQ12$
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Re: Out of Stocks to Pay Off Mortgage

Post by PQ12$ » Mon Dec 03, 2018 2:19 pm

Paying it off is also not a slam dunk easy choice but if you do and it turns out to have been a "mistake" in hindsight then having a paid off house by your mid 30s is a pretty good "mistake" and would be more of a missed opportunity than a real mistake.
Amen to this. The only way this is ever a "mistake" is opportunity cost, and who the heck knows what that is really (tho you will get lots of people here telling you). I don't know anybody kicking themselves for paying their mortgage off early.

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knpstr
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Re: Out of Stocks to Pay Off Mortgage

Post by knpstr » Mon Dec 03, 2018 2:24 pm

pennylane wrote:
Mon Dec 03, 2018 2:12 pm
You say you have a large 401k and that has enough exposure to the market.

Ask yourself this: If someone could guarantee you 4.625% return on your 200k while your home value (hopefully) continues to grow, would you do it?

I'd pay off the mortgage and get that guaranteed 4.625% return.
Just to be clear, the 4.625% return is a 1-time return. Every year thereafter the money is at 0% return. You don't get a 4.625% return year after year.

Any appreciation on home value occurs irrespective of equity position. A paid off home appreciates at the same rate as a mortgaged home, for a given home.
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Sandi_k
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Re: Out of Stocks to Pay Off Mortgage

Post by Sandi_k » Mon Dec 03, 2018 2:30 pm

sergio wrote:
Mon Dec 03, 2018 1:05 pm
What about a 50/50 split? Sell of 50% (or some other percent) of the taxable account to lock in the gains from the last 10+ year bull market, and redirect all future distributions of the remaining $130k towards the mortgage? This greatly reduces the interest you'll pay on the note, still leaves you with $130k liquid investment, protects against a market crash, still leave you some inflation hedge etc.
+1.

Also note - if you have capital gains on the sold stocks, you could sell 25% of your taxable account this month, and 25% in January. Then the tax bill would be due in two different years.

I find that an "all or nothing" approach to these types of questions is not always the way to go - a middle ground can give you many of the peace of mind benefits, without clearing out all your liquidity.

pennylane
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Re: Out of Stocks to Pay Off Mortgage

Post by pennylane » Mon Dec 03, 2018 3:02 pm

knpstr wrote:
Mon Dec 03, 2018 2:24 pm
pennylane wrote:
Mon Dec 03, 2018 2:12 pm
You say you have a large 401k and that has enough exposure to the market.

Ask yourself this: If someone could guarantee you 4.625% return on your 200k while your home value (hopefully) continues to grow, would you do it?

I'd pay off the mortgage and get that guaranteed 4.625% return.
Just to be clear, the 4.625% return is a 1-time return. Every year thereafter the money is at 0% return. You don't get a 4.625% return year after year.

Any appreciation on home value occurs irrespective of equity position. A paid off home appreciates at the same rate as a mortgaged home, for a given home.
if you hold that mortgage for lets say 10 years, does your rate disappear after the first? no, therefore it is 4.625% for the remainder of the loan/balance.

Admiral
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Re: Out of Stocks to Pay Off Mortgage

Post by Admiral » Mon Dec 03, 2018 3:08 pm

PQ12$ wrote:
Mon Dec 03, 2018 2:19 pm
Paying it off is also not a slam dunk easy choice but if you do and it turns out to have been a "mistake" in hindsight then having a paid off house by your mid 30s is a pretty good "mistake" and would be more of a missed opportunity than a real mistake.
Amen to this. The only way this is ever a "mistake" is opportunity cost, and who the heck knows what that is really (tho you will get lots of people here telling you). I don't know anybody kicking themselves for paying their mortgage off early.
Paying off a mortgage early with all available non-retirement funds means you are house-rich and cash poor. I know plenty of people--and I'm sure there are some on this very message board--who are in this precise position. It's a lack of diversification. No thank you. You lose a lot of the benefits of compounding when you pay off a mortgage with a lump sum and then invest your monthly each month when it's gone. You cannot get years or compounding back. And you'd better hope your home maintains its value.
Last edited by Admiral on Mon Dec 03, 2018 3:11 pm, edited 1 time in total.

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Phineas J. Whoopee
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Re: Out of Stocks to Pay Off Mortgage

Post by Phineas J. Whoopee » Mon Dec 03, 2018 3:10 pm

I knowingly and intentionally exchanged much, by no means all, of my liquid taxable investments for a place to live. I got lucky, in part that securities prices were still steady but local real estate had already started to sink. Later on bond yields sank as well, so using new cash flow to rapidly pay off the relatively smallish loan I used was a no brainer.

I was, of course, careful to preserve adequate liquid assets. Things happen.

With preservation of plenty of liquidity OP's plan seems within the range of the sane, to me.

PJW

MotoTrojan
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Re: Out of Stocks to Pay Off Mortgage

Post by MotoTrojan » Mon Dec 03, 2018 3:13 pm

knpstr wrote:
Mon Dec 03, 2018 2:24 pm

Just to be clear, the 4.625% return is a 1-time return. Every year thereafter the money is at 0% return. You don't get a 4.625% return year after year.

Any appreciation on home value occurs irrespective of equity position. A paid off home appreciates at the same rate as a mortgaged home, for a given home.
This is simply wrong. If you assume you'll be paying the home off either way, paying it early is the same as instead putting the money into the market if the market happened to return 4.625% over the remaining duration of the loan; 4.625% annually until paid. In fact, it is actually better than my hypothetical stock market assumption since you'd have to pay gains on the 4.625% there, where-as the return on the mortgage is after-tax.

OP I'd consider this depending on what your capital gains would be. Also I am confused as to whether you are or are not maxing out a 401k/Roth but I would also prioritize that.

ThrustVectoring
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Re: Out of Stocks to Pay Off Mortgage

Post by ThrustVectoring » Mon Dec 03, 2018 3:22 pm

Admiral wrote:
Mon Dec 03, 2018 12:14 pm
Please post the mortgage term and how many years remaining. Without that information we have no idea how much of what you are paying each month is interest versus principal. This is crucial info to help determine if the savings is worthwhile.
How many years remaining is crucial for the exact opposite reason. Owing money on a mortgage has option value on uncertainty over long-term inflation and future interest rates. If interest rates shoot up, you can pocket some free money by buying higher-yielding bonds and using those to pay your later mortgage obligations. You're essentially short the ten-year treasury with a call option to close out the position at par via refinancing or prepayment. And the value of this position depends on how many years are remaining on the mortgage.

Like, I suspect you'd be more likely to tell someone to pay off a mortgage with 30 years remaining than 3, where I'd suggest the exact opposite.
Current portfolio: 60% VTI / 40% VXUS

LeftCoast
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Re: Out of Stocks to Pay Off Mortgage

Post by LeftCoast » Mon Dec 03, 2018 4:00 pm

We paid off our mortgage some years ago, and it's worked out great for us. In addition to the obvious benefit of eliminating interest payments, it also had the following benefits:

1. My wife really enjoyed the psychic benefit of knowing that if anything happened to me, she and our son would be able to live in a nice house.
2. I was able to drop a life insurance policy that I was carrying that would pay off the mortgage if I died.
3. After the mortgage payoff, I had more monthly cash flow to make other investments.

As long as you have an adequate reserve fund for emergencies, I'd say go for it.

Blueraidermike
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Re: Out of Stocks to Pay Off Mortgage

Post by Blueraidermike » Mon Dec 03, 2018 4:10 pm

In general I think you should pay off your mortgage ASAP...but you need to share more information...

- Where do you live; you only get to deduct 10K for interest, taxes, etc for your home.
- How many more years on the mortgage?
- What are you longer term plans..
- What have you been saving each year

If the money is sitting in cash (your post said out of market)...if so then you have the gains/losses and whats done is done. If that's the case, then make sure you have 6 months of expenses and put the rest down on the house...if its paid off, then save like crazy.

Another option, is accelerate your payoff.

Admiral
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Re: Out of Stocks to Pay Off Mortgage

Post by Admiral » Mon Dec 03, 2018 5:45 pm

ThrustVectoring wrote:
Mon Dec 03, 2018 3:22 pm
Admiral wrote:
Mon Dec 03, 2018 12:14 pm
Please post the mortgage term and how many years remaining. Without that information we have no idea how much of what you are paying each month is interest versus principal. This is crucial info to help determine if the savings is worthwhile.
How many years remaining is crucial for the exact opposite reason. Owing money on a mortgage has option value on uncertainty over long-term inflation and future interest rates. If interest rates shoot up, you can pocket some free money by buying higher-yielding bonds and using those to pay your later mortgage obligations. You're essentially short the ten-year treasury with a call option to close out the position at par via refinancing or prepayment. And the value of this position depends on how many years are remaining on the mortgage.

Like, I suspect you'd be more likely to tell someone to pay off a mortgage with 30 years remaining than 3, where I'd suggest the exact opposite.
What I would advise would be to make or save the most money possible while preserving liquidity. If one is at the tail end of a long mortgage, a small fraction of each month's payment goes to interest. At such a time, it may not be worth the small savings to lock up that money in the house...you're essentially just paying monthly for something instead of buying it outright. It depends on the investment rates available at the time. Clearly if I cannot reasonably expect to beat my loan rate, then paying it off is a better deal (ignoring liquidity). But that's true in year 3 or year 29.

delamer
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Re: Out of Stocks to Pay Off Mortgage

Post by delamer » Mon Dec 03, 2018 5:46 pm

pdavi21 wrote:
Mon Dec 03, 2018 1:53 pm
delamer wrote:
Mon Dec 03, 2018 1:32 pm
pdavi21 wrote:
Mon Dec 03, 2018 1:15 pm
At the risk of being skewered alive, one benefit to paying off mortgage is to not pay for homeowner's insurance going forward.
Others are:
2. Fewer assets exposed to creditors, suers (if home is under 250-500k)
3. Simplicity
4. Higher risk adjusted return (Do you hold ANY bonds yield under 4.65%? Even in tax advantaged space (sell them for stocks))
5. Lower taxes

EDIT: Big con is interest tax deduction...if you do that. I take standard, so I forgot it.

My home is about 30% of net worth. I own it and do not have any insurance on it, but I'd consider adding liability if my exposed assets rise significantly (currently only cash reserves).
It is ridiculous to drop homeowner’s insurance just because you no longer have a mortgage. Even if rebuilding “only” would cost 25% of your net worth (given that the land is worth something), why take that risk to save $1,000/year?

Consider yourself skewered.
Because, statistically, I am likely to lose more money paying for insurance than for being self insured. The insurance company profits, and I consider myself more careful with my home, and less likely to try to scam the insurance company (hail damage, etc) than the average policy holder. It's a similar gamble as a 94.7% chance to lose 1000 each year compounded at 5-7 percent and 5.3% chance to make between deductible and home value less premiums, vs 94.7% chance of nothing and 5.3% of no reimbursement for a deductible to home value loss. I chose the option with a much higher average return. Also, the insurance company can still deny a claim if you didn't change out your smoke alarm battery, install tornado shutters, tell them you had a pit bull, etc.
You are missing the point of insurance. It designed to provide coverage against catastrophic loss.

Of course most people are going to pay more in premiums than they will receive in benefits.

I, for one, will be very happy if I never make a claim.

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Re: Out of Stocks to Pay Off Mortgage

Post by pdavi21 » Mon Dec 03, 2018 5:54 pm

delamer wrote:
Mon Dec 03, 2018 5:46 pm
You are missing the point of insurance. It designed to provide coverage against catastrophic loss.
Which I don't need or want...
My insurance is the fact that I can afford to rent or buy another house plus the 1000 compounded I put away every year into my AA.
We can agree to disagree on this. We are off topic anyway.
Towards the OP's question, the option to go without property insurance (or reduce / change coverage) becomes available.
Whether it's prudent or not to do so is irrelevant.
Last edited by pdavi21 on Mon Dec 03, 2018 6:11 pm, edited 2 times in total.

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Re: Out of Stocks to Pay Off Mortgage

Post by bradpevans » Mon Dec 03, 2018 5:58 pm

LearningToManage82 wrote:
Mon Dec 03, 2018 11:58 am
We are at the point where we are seriously considering selling off stocks to pay off our mortgage.

Background:
- Husband and I are mid-30s
- About $200k left on mortgage (at 4.625%)
- Have a little over $230k in taxable account
- Have considerable invested in 401k and IRAs which won’t be touched as part of this plan (invest maximum every year and will consider to do so)
- Deductions are right below the $24k so I’m not getting that benefit

Once this is paid off we will start investing money back in monthly.

I’d like to hear some of your opinions on this.

Thanks!
My first thought is can you get a new mortgage at < 4.625% Maybe, maybe not.

I don't like the idea of paying down mortgage with potentially long term retirement funds,
then start adding to those funds again. You end up with less long term money invested less time,

Plus you pretty much guarantee 15 or 20 (23.8 even?) % tax on the stock gains due to current income levels (taking some guesses here);
you might do better than that in early retirement....

I'd rather pay it with future (paycheck) dollars, and keep my retirement invested for the long haul.

Paying extra at 4.625 I might consider; taking a LTCG hit i would not

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Re: Out of Stocks to Pay Off Mortgage

Post by cherijoh » Mon Dec 03, 2018 6:44 pm

pdavi21 wrote:
Mon Dec 03, 2018 1:15 pm
At the risk of being skewered alive, one benefit to paying off mortgage is to not pay for homeowner's insurance going forward.
Others are:
2. Fewer assets exposed to creditors, suers (if home is under 250-500k)
3. Simplicity
4. Higher risk adjusted return (Do you hold ANY bonds yield under 4.65%? Even in tax advantaged space (sell them for stocks))
5. Lower taxes (on future long term capital gains)

EDIT: Big con is interest tax deduction...if you do that. I take standard, so I forgot it. Other con is paying current long term capital gains (make sure they are all long term gains FIFO over 1 year)

My home is about 30% of net worth. I own it and do not have any insurance on it, but I'd consider adding liability if my exposed assets rise significantly (currently only cash reserves).
Consider yourself officially skewered. Not insuring your home is a bad option for most people. Do you have separate liability insurance? If not you can't claim that your exposure is only 30% of your net worth. You could be sued by a visitor to your property (including someone delivering a package to your front porch). Also, have you taken into account the cost of replacing all the contents of your home, temporary living expenses, etc? What funds would you use to replace your home and possessions? Don't forget that if you use tax-advantaged retirement funds you will get hammered on taxes.

Also, the homestead provisions (which protect your home from creditors) vary significantly by state, so your #2 advantage is also questionable for many people. I live in NC which is very stingy with its homestead exemptions:
Under the North Carolina exemption system, homeowners may exempt up to $35,000 of their home or other real or personal property covered by the homestead exemption. Homeowners age 65 or older whose spouse is deceased may exempt up to $60,000 under the homestead exemption, if the property was previously owned by the debtor as a tenant by the entirety or as a joint tenant with rights of survivorship.

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Re: Out of Stocks to Pay Off Mortgage

Post by ruralavalon » Mon Dec 03, 2018 6:51 pm

In my opinion skipping homeowner's insurance is foolish, except perhaps for the very wealthy.
Last edited by ruralavalon on Mon Dec 03, 2018 6:53 pm, edited 1 time in total.
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Re: Out of Stocks to Pay Off Mortgage

Post by Rowan Oak » Mon Dec 03, 2018 6:52 pm

A risk-free return of 4.625% is pretty good.

Ask yourself this question: if your house was paid off today would you go borrow against it to invest in the stock market?

Then there's that whole equity risk premium thing.
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Re: Out of Stocks to Pay Off Mortgage

Post by pdavi21 » Mon Dec 03, 2018 7:00 pm

cherijoh wrote:
Mon Dec 03, 2018 6:44 pm
Not insuring your home is a bad option for most people.
Considering that most people could not afford a catastrophic loss, I agree.
Considering OP has 200k in taxable accounts: I don't think that qualifies as most people either.

Do you have separate liability insurance?
I will if my at risk assets climb significantly. I also agree that this is good advice for even a larger group of people.

Also, have you taken into account the cost of replacing all the contents of your home, temporary living expenses, etc?
Yes, and I also agree that touching retirement accounts should be avoided if possible.

Also, the homestead provisions (which protect your home from creditors) vary significantly by state, so your #2 advantage is also questionable for many people:
It's still better than nothing (assuming your after-tax investments will always be easier or at least as easy for creditors to snag).

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Re: Out of Stocks to Pay Off Mortgage

Post by cherijoh » Mon Dec 03, 2018 7:01 pm

LearningToManage82 wrote:
Mon Dec 03, 2018 11:58 am
We are at the point where we are seriously considering selling off stocks to pay off our mortgage.

Background:
- Husband and I are mid-30s
- About $200k left on mortgage (at 4.625%)
- Have a little over $230k in taxable account
- Have considerable invested in 401k and IRAs which won’t be touched as part of this plan (invest maximum every year and will consider to do so)
- Deductions are right below the $24k so I’m not getting that benefit

Once this is paid off we will start investing money back in monthly.

I’d like to hear some of your opinions on this.

Thanks!
Figure out how much you would owe in capital gains tax for selling off your taxable account.

I would also figure out your net worth now and after your proposed plan then look at the breakdown between home equity, tax-advantaged retirement assets, cash and cash equivalents, and taxable investments. Are you really going to be comfortable with how large a chunk of your net worth is from illiquid home equity? Will your emergency fund be large enough once you have sold off your taxable investments?

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Re: Out of Stocks to Pay Off Mortgage

Post by z3r0c00l » Mon Dec 03, 2018 7:14 pm

I would do the very same thing in your shoes. (Depending possibly on how many capital gains you have in the stocks or some other unknown factor.)

My gut reaction is that stocks have done well, why not cap off a good run with the 4.625% final return on the money? However perhaps the most compelling point was made a few posts up. If the home was owned free and clear, would you take a mortgage out on your home today to buy stocks? I doubt many of us would say yes.

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Re: Out of Stocks to Pay Off Mortgage

Post by ThrustVectoring » Mon Dec 03, 2018 7:17 pm

Admiral wrote:
Mon Dec 03, 2018 5:45 pm
ThrustVectoring wrote:
Mon Dec 03, 2018 3:22 pm
Admiral wrote:
Mon Dec 03, 2018 12:14 pm
Please post the mortgage term and how many years remaining. Without that information we have no idea how much of what you are paying each month is interest versus principal. This is crucial info to help determine if the savings is worthwhile.
How many years remaining is crucial for the exact opposite reason. Owing money on a mortgage has option value on uncertainty over long-term inflation and future interest rates. If interest rates shoot up, you can pocket some free money by buying higher-yielding bonds and using those to pay your later mortgage obligations. You're essentially short the ten-year treasury with a call option to close out the position at par via refinancing or prepayment. And the value of this position depends on how many years are remaining on the mortgage.

Like, I suspect you'd be more likely to tell someone to pay off a mortgage with 30 years remaining than 3, where I'd suggest the exact opposite.
What I would advise would be to make or save the most money possible while preserving liquidity. If one is at the tail end of a long mortgage, a small fraction of each month's payment goes to interest. At such a time, it may not be worth the small savings to lock up that money in the house...you're essentially just paying monthly for something instead of buying it outright. It depends on the investment rates available at the time. Clearly if I cannot reasonably expect to beat my loan rate, then paying it off is a better deal (ignoring liquidity). But that's true in year 3 or year 29.
If you throw an extra $1000 at a mortgage that's at 4.5%, you get an extra $45 per year until the mortgage is paid off. $45/yr per $1000 is either a worthwhile rate of return or not, whether you're paying a lot in interest or not on your mortgage doesn't matter.

Meanwhile, you're locking in that rate of return over the remaining time of the mortgage. A given interest rate can simultaneously be fantastic for locking in your money over a short period of time, decent over like 5 years, and a terrible idea over 30 years. If you believe that the yield curve exists for good reason, then the longer duration you have left on the mortgage the less you should want to pay it down.
Current portfolio: 60% VTI / 40% VXUS

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Re: Out of Stocks to Pay Off Mortgage

Post by Admiral » Mon Dec 03, 2018 7:23 pm

z3r0c00l wrote:
Mon Dec 03, 2018 7:14 pm
I would do the very same thing in your shoes. (Depending possibly on how many capital gains you have in the stocks or some other unknown factor.)

My gut reaction is that stocks have done well, why not cap off a good run with the 4.625% final return on the money? However perhaps the most compelling point was made a few posts up. If the home was owned free and clear, would you take a mortgage out on your home today to buy stocks? I doubt many of us would say yes.
This tired chestnut needs to be retired. It's not a proper comparison.

Having $200k in cash to invest is not the same as taking out a loan against the roof over your head to invest. It's perhaps slightly closer to margin investing, but even that is not the same. A home is not a poker chip to be used for risky investments. It's a place to live. If you have enough to pay off a mortgage, then you are never at risk of losing your home: there is no default risk. This is totally different than borrowing against your home to invest, which may result in a loss of the home if you cannot repay what you owe.

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Re: Out of Stocks to Pay Off Mortgage

Post by corn18 » Mon Dec 03, 2018 7:31 pm

bradpevans wrote:
Mon Dec 03, 2018 5:58 pm
I don't like the idea of paying down mortgage with potentially long term retirement funds, then start adding to those funds again. You end up with less long term money invested less time.
This is an interesting point that I would like to explore. I agree with it, in the OP's case. Now consider a scenario where you have a windfall equal to your mortgage balance. All else being equal in the OP's situation, I think I would take that new money and pay off the mortgage. I am in this situation next year and I am considering paying off my new mortgage vs. adding to my retirement accounts.

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Re: Out of Stocks to Pay Off Mortgage

Post by dknightd » Mon Dec 03, 2018 7:38 pm

You are basically timing the "market". Should you pay off mortgage now, or later. You will not know till later what the "right" choice was. At 4.6% I'd invest some money in that.

Edit: our Mortgage is at 3.25%. I'd like to have it gone. But financially I'm guessing it makes sense for me to hold it. But I could be wrong. I'm not sure where I would draw the line (assuming enough money to pay it off if you wanted). The difference is likely only a few percent. Do what makes you happy.

There was a time you could make more than 5% in a savings account. Will those days come back? I don't know.
Last edited by dknightd on Mon Dec 03, 2018 8:01 pm, edited 1 time in total.

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Re: Out of Stocks to Pay Off Mortgage

Post by bradpevans » Mon Dec 03, 2018 8:00 pm

corn18 wrote:
Mon Dec 03, 2018 7:31 pm
bradpevans wrote:
Mon Dec 03, 2018 5:58 pm
I don't like the idea of paying down mortgage with potentially long term retirement funds, then start adding to those funds again. You end up with less long term money invested less time.
This is an interesting point that I would like to explore. I agree with it, in the OP's case. Now consider a scenario where you have a windfall equal to your mortgage balance. All else being equal in the OP's situation, I think I would take that new money and pay off the mortgage. I am in this situation next year and I am considering paying off my new mortgage vs. adding to my retirement accounts.
IMO, a "windfall" is rather different than the same money accumulated over the years in a taxable account, so i might throw more at it then.

But my invested money has a lot more time to grow than the length of my mortgage, so the sooner i can get it invested for the long term..
I'm of the opinion that, over the long haul, i can get more that 4.6% in the market

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fishandgolf
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Re: Out of Stocks to Pay Off Mortgage

Post by fishandgolf » Mon Dec 03, 2018 8:28 pm

I absolutely, positively, unequivocally HATE debt...I HATE it......... debt of any kind. Yes...I do understand that debt can be beneficial at times...but for as least amount of time a possible.

Pay it off...........at WARP SPEED. You will feel more confident, sleep better and just perform better that you no longer have this albatross........ Life is just better w/o debt!

Good luck! :sharebeer

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Re: Out of Stocks to Pay Off Mortgage

Post by z3r0c00l » Mon Dec 03, 2018 9:01 pm

Admiral wrote:
Mon Dec 03, 2018 7:23 pm
z3r0c00l wrote:
Mon Dec 03, 2018 7:14 pm
I would do the very same thing in your shoes. (Depending possibly on how many capital gains you have in the stocks or some other unknown factor.)

My gut reaction is that stocks have done well, why not cap off a good run with the 4.625% final return on the money? However perhaps the most compelling point was made a few posts up. If the home was owned free and clear, would you take a mortgage out on your home today to buy stocks? I doubt many of us would say yes.
This tired chestnut needs to be retired. It's not a proper comparison.

Having $200k in cash to invest is not the same as taking out a loan against the roof over your head to invest. It's perhaps slightly closer to margin investing, but even that is not the same. A home is not a poker chip to be used for risky investments. It's a place to live. If you have enough to pay off a mortgage, then you are never at risk of losing your home: there is no default risk. This is totally different than borrowing against your home to invest, which may result in a loss of the home if you cannot repay what you owe.
I don't understand at all. How is not paying off a mortgage on your home to keep stocks any different from adding a mortgage to your home to buy stocks? The end result is identical, you wind up with a mortgage and stocks.

I wasn't talking about some kind of investing on margin with the home as collateral.

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Re: Out of Stocks to Pay Off Mortgage

Post by Wricha » Mon Dec 03, 2018 9:29 pm

Pay off the house (given your age you could save quite a bit of money with no debt) then take a line of credit on your fully owned house to be your proxy for an emergency fund and save a bundle. Forget everything I said if capital gains are significant.

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Re: Out of Stocks to Pay Off Mortgage

Post by dknightd » Mon Dec 03, 2018 9:37 pm

fishandgolf wrote:
Mon Dec 03, 2018 8:28 pm
I absolutely, positively, unequivocally HATE debt...I HATE it......... debt of any kind. Yes...I do understand that debt can be beneficial at times...but for as least amount of time a possible.

Pay it off...........at WARP SPEED. You will feel more confident, sleep better and just perform better that you no longer have this albatross........ Life is just better w/o debt!

Good luck! :sharebeer
I'm pretty happy paying 0% on my solar panels. For 13 more years.
I'm OK paying off my house at 3.25% for nine more years.
Life would be better without debt. I'll be there one day, unless I die first. If that happens I encourage DW to slowly pay off debt.

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Re: Out of Stocks to Pay Off Mortgage

Post by dknightd » Mon Dec 03, 2018 9:57 pm

99 opinions. Most of them are right, or wrong ;)

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Re: Out of Stocks to Pay Off Mortgage

Post by grabiner » Mon Dec 03, 2018 10:07 pm

knpstr wrote:
Mon Dec 03, 2018 2:24 pm
pennylane wrote:
Mon Dec 03, 2018 2:12 pm
You say you have a large 401k and that has enough exposure to the market.

Ask yourself this: If someone could guarantee you 4.625% return on your 200k while your home value (hopefully) continues to grow, would you do it?

I'd pay off the mortgage and get that guaranteed 4.625% return.
Just to be clear, the 4.625% return is a 1-time return. Every year thereafter the money is at 0% return. You don't get a 4.625% return year after year.
The 4.625% return lasts as long as the payment you eliminated. If you pay down a 20-year mortgage to 19 years, you earn 4.625% for 20 years. If you then pay down more to reduce the term to 18 years, you earn 4.625% for 18 years, and so on down to earning 4.625% for one year on the last payment you make to pay it off.

More importantly, the money is not at 0% return after that. The money that you are not using to make mortgage payments becomes available for investing in something else. You can put that money into a bond fund to earn a low-risk return (say, 3.25% on Admiral shares of Vanguard Long-Term Tax-Exempt), or back into the stock market.

Note that you can pay down your mortgage and still keep your stock-market exposure. Sell stocks to pay down your mortgage, and move an equal amount in your 401(k) from bonds to stock. You'll still get the benefit of any stock-market growth, and you will earn less bond interest but pay less mortgage interest. Whether this is a good or bad deal depends on the rates; for you, it would be a good deal if that 4.625% is not tax-deductible. (I considered doing this in 2015, when bond rates were about equal to the after-tax rate on my mortgage, but chose not to do it because I would have had to take a large capital gain.)
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