Another AA and payoff mortgage query

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Geekling
Posts: 13
Joined: Tue Sep 15, 2015 9:24 pm

Another AA and payoff mortgage query

Post by Geekling » Wed Aug 07, 2019 3:16 pm

I am doing mental gymnastics with my mortgage, current AA and recent volatility

Current situation
Taxable $1.2 million (57% stock/43%bond)
after tax $1.2 million (75% stock / 25% bond)
Paid up life insurance policy @ $350k (planning to convert this to a SPIA upon retirement)
Home value $1.5 million (conservative) with a 15yr mortgage of $280k remaining at 4.375 and 14 years remaining
529 @ $370k (60/40) done funding w kids at 6 and 8 years old
Early 40’s with 2 incomes at $200k each (somewhat stable jobs w 1 that has potential for significant bonus -$200-$500k but not guaranteed)

Any adjustments on allocation or advice what to do with the mortgage? I am debating paying off mortgage in 5 years at $50k a clip but could also do it this week with a few simple clicks of a button.

I am conservative by nature and hate having the mortgage over my head but I also recognize the issue of using most of my bonds in taxable to kill it with a simple push of a button.

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David Jay
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Location: Michigan

Re: Another AA and payoff mortgage query

Post by David Jay » Wed Aug 07, 2019 4:08 pm

4.375 is likely a more than your bonds are paying if you are in intermediate term bond funds. Also, bond fund NAVs are way up as rates come down (but future dividends will be lower) so this would be a good time.

I would do it. It feels great (I paid off my mortgage in February).
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

Rus In Urbe
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Re: Another AA and payoff mortgage query

Post by Rus In Urbe » Wed Aug 07, 2019 4:13 pm

At times of volatility, putting funds into a mortgage can be a great option.
I almost never advise anyone to go on "feelings"----but paying off a mortgage is a sure bet, and yeah, it FEELS really good.

Yes, you can crunch numbers and maybe get an extra % or two out of a different strategy....but nothing beats a sure thing.

We bought one Manhattan property with cash; paid off mortgage on another property...

Being mortgage-free puts the REAL back into real estate.

Cheers! :beer Rus
I'd like to live as a poor man with lots of money. ~Pablo Picasso

JoeRetire
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Re: Another AA and payoff mortgage query

Post by JoeRetire » Wed Aug 07, 2019 4:25 pm

Geekling wrote:
Wed Aug 07, 2019 3:16 pm
I am conservative by nature and hate having the mortgage over my head
If you hate it enough, then make the hate go away. You have the means to do so.

If the "recent volatility" bothers you that much, get out of the market so the bother goes away. Or at least reduce your equity allocation until you are no longer bothered.

Neither of these may be financially optimal, but it doesn't seem like you need to care about that.

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grabiner
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Re: Another AA and payoff mortgage query

Post by grabiner » Wed Aug 07, 2019 8:13 pm

You should either pay off that mortgage or refinance it. Current rates on 15-year mortgages are about 3.25%, which would save you a lot in interest.

The decision of whether to pay it off is independent of how much risk you want to take. You have enough in bonds to pay off the mortgage without changing your stock-market risk; you can then decide that you want to hold more stock, or more bonds, whether you pay off the mortgage or not. Your mortgage has a duration of about seven years, so the bonds which make the most fair comparison are Admiral shares of Vanguard Long-Term Tax-Exempt, with a 2.09% tax-free yield. Is this better or worse than paying off the mortgage? (This is the fair comparison; if you don't own that particular bond fund, you have a trade-off between return and risk with the fund you hold.)

And the main criterion for that decision is whether you itemize deductions. If you donate $14,400 to charity and pay $10,000 or more in state and local taxes, then the mortgage is fully deductible, which is 2.21% after tax in a 32% bracket, and 2.05% if the bonus puts you in the 37% bracket. That makes paying off the mortgage only break-even, so it is better to keep the bonds, with the option of paying off the mortgage if rates fall further, or keeping the bonds if they start yielding more than the mortgage rate. It is even less attractive to pay off the mortgage if you are in a high-tax state and the bonds are in a muni fund for that state.

Conversely, if you don't itemize deductions, the mortgage rate is 3.25%, so you gain 1.16% per year by selling your bonds yielding 2.09% to pay off the mortgage.
Wiki David Grabiner

z91
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Re: Another AA and payoff mortgage query

Post by z91 » Wed Aug 07, 2019 8:21 pm

grabiner wrote:
Wed Aug 07, 2019 8:13 pm
You should either pay off that mortgage or refinance it. Current rates on 15-year mortgages are about 3.25%, which would save you a lot in interest.
+1 if OP does anything, it would be to refinance.

cherijoh
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Location: Charlotte NC

Re: Another AA and payoff mortgage query

Post by cherijoh » Wed Aug 07, 2019 8:52 pm

Geekling wrote:
Wed Aug 07, 2019 3:16 pm
I am doing mental gymnastics with my mortgage, current AA and recent volatility

Current situation
Taxable $1.2 million (57% stock/43%bond)
after tax $1.2 million (75% stock / 25% bond)
Paid up life insurance policy @ $350k (planning to convert this to a SPIA upon retirement)
Home value $1.5 million (conservative) with a 15yr mortgage of $280k remaining at 4.375 and 14 years remaining
529 @ $370k (60/40) done funding w kids at 6 and 8 years old
Early 40’s with 2 incomes at $200k each (somewhat stable jobs w 1 that has potential for significant bonus -$200-$500k but not guaranteed)

Any adjustments on allocation or advice what to do with the mortgage? I am debating paying off mortgage in 5 years at $50k a clip but could also do it this week with a few simple clicks of a button.

I am conservative by nature and hate having the mortgage over my head but I also recognize the issue of using most of my bonds in taxable to kill it with a simple push of a button.
What do you mean by "after-tax"? Did you put after-tax money into a non-Roth tax-advantaged retirement plan? Or do you mean a Roth?

Topic Author
Geekling
Posts: 13
Joined: Tue Sep 15, 2015 9:24 pm

Re: Another AA and payoff mortgage query

Post by Geekling » Tue Aug 13, 2019 6:43 pm

Thank you all for your input.

Here is a few answers to your questions that might help provide additional insight;
-I live in a high tax state and my municipal bond exposure is close to my mortgage rate
-my “after tax” investments are in 401k and Roth accounts, with the Roth being valued at $260k

I like the idea of refinancing given garbingers comments and if I did refinance, Where would you place my allocation? Maybe I refinance and then ride out for another year before making a decision?

I could be more aggressive by paying with bonds or keep it relatively conservative by paying with both some stock sales and bond sales.

Thank you again

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grabiner
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Re: Another AA and payoff mortgage query

Post by grabiner » Tue Aug 13, 2019 8:10 pm

Geekling wrote:
Tue Aug 13, 2019 6:43 pm
I like the idea of refinancing given garbingers comments and if I did refinance, Where would you place my allocation? Maybe I refinance and then ride out for another year before making a decision?
This is a problem which doesn't have a clear answer. Once you refinance your mortgage, you have some risk tolerance, and you should invest consistent with your risk tolerance.

The way I do it is to count my mortgage as a negative bond. I have $X in stocks, and $Y+Z in bonds, and I owe $Z on my mortgage. I consider my allocation to be X/(X+Y) in stocks, which is currently 90%. The reason is that if I paid off my mortgage, I would keep the same $X in stocks; I would sell $Z in stocks in my taxable account, and move $Z from bonds to stocks in my employer plan, preserving my risk level. (I am seriously considering doing just this, but the capital gain on the stock sale is still large enough that I don't think it is quite worthwhile.)
Wiki David Grabiner

Topic Author
Geekling
Posts: 13
Joined: Tue Sep 15, 2015 9:24 pm

Re: Another AA and payoff mortgage query

Post by Geekling » Tue Aug 13, 2019 11:28 pm

Thank you for this additional input
Very helpful

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