pay off mortgage vs. invest in the time of covid

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tickle_monster
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pay off mortgage vs. invest in the time of covid

Post by tickle_monster »

First post after much lurking, hope you all don't scold me too harshly for this one... but I trust the Boglehead way and have been a true adherent for my 15 year investment life.

I think the market is insane right now. Normally, I wouldn't do anything about it... just stick to the plan. But my job and family situation has me thinking this is a smart play. So much downside risk, Fed interest rates already at zero, 2.5 trillion already spent to shore it up. It has to go down from here...right? Don't answer that.

So I'm considering selling long term taxable investments to pay off 273k mortgage on an 800k house, then we're completely debt free.

Have 550k in taxable, another 1.0 mil in tax advantaged. Young child who's 529 is already fully funded and another child due soon. My job is in jeopardy due to the industry it's in tanking, but my wife's job is pretty solid. With second child coming, future childcare costs are going to run 4-5k per month. HCOL obviously.

If I keep my job, we keep pouring money into the market... more than ever since mortgage payment is gone. If I lose my job and can't find another, screw it, I'm the childcare and I have no worries about paying the bills. Unless I am supremely lucky, I expect that this decision will set my retirement back by a few years, but I'm feeling pretty OK with that for security for my young family.

Good idea, bad idea? Am I letting my emotions of wanting security allow me to make a bad decision?
Last edited by tickle_monster on Thu Apr 30, 2020 10:09 am, edited 1 time in total.
mass_biker
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Re: pay off mortgage vs. invest in the time of covid

Post by mass_biker »

There are some common themes here that seem to be emerging on the forum given the combination of

1) low rates
2) concern about equity valuations -i.e. do we keep investing as markets rise in spite of all the bad news?
3) concern about changing job security/certainty - see #2 above...

Some considerations to keep in mind as you consider the payoff, with the full understanding that one size does not fit all.

1) need for geographic flexibility if your job situation changes
2) need for the additional liquidity (273k out of 550k to be used for the payoff)
3) if the paid off home will suit your family's long term needs (1 child, another on the way)

My wife has a strong aversion to any debt; I'm a bit more comfortable with it as circumstances demand (i.e. mortgage debt = ok). As she prods me into considering deleveraging (payoff mortgage etc.) it's more for piece of mind than anything else.

And I have to say, other posts that discuss the merits of living debt free (paying off your mortgage is generally considered "risk free" other than some of the more subjective considerations I tried to point out above) are quite appealing...
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tickle_monster
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Re: pay off mortgage vs. invest in the time of covid

Post by tickle_monster »

Thanks for your response.

We're located in about the best area I can imagine considering the circumstances. Some industries in trouble, but others are booming. My job is in the former, wife's in the latter. Major metro, good public transit, ok schools. Good fun stuff to do nearby. I'm sure I'll find another job in the long term at least, even if difficult in short term.

Our house fits our needs very well and I don't see any reason to consider moving until we no longer need to work. We love our house and neighbors. No more kids after this one.

We have a large emergency fund in cash already, enough for 1 year expenses, minus the mortgage payment. With what's left in taxable in top of that, we could hang on without either job for a long time.
mass_biker
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Re: pay off mortgage vs. invest in the time of covid

Post by mass_biker »

Another consideration:

- refinance your existing mortgage into a HELOC (use the new HELOC to pay off the mortgage)
- the HELOC will be drawn
- then pay off the HELOC with a draw on your investment assets

You are debt free.

But if you have a need for liquidity, tap the HELOC.

One rate I saw for a HELOC was a min. in the low 3%s. Another way to deleverage but still have the option to tap your home if you "need" the liquidity.
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grabiner
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Re: pay off mortgage vs. invest in the time of covid

Post by grabiner »

Since your taxable account is twice your mortgage balance, you don't appear to have a liquidity need, particularly since getting rid of the mortgage will reduce your cash flow needs.

You don't need to decrease your stock allocation to do this. If your taxable account is all stock, you can sell stock to pay off the mortgage, then move an equal amount from bonds to stock in your 401(k) or IRA, effectively selling bonds.

So you should look at two separate questions: Should you pay off the mortgage? How much should you have in stock? The answer to the first question appears to be yes, since your mortgage rate is probably higher than you can earn on low-risk bonds, and you don't need the liquidity. The answer to the second question is personal; I don't know your risk tolerance.

I answered both questions a month ago, paying off my own mortgage because I could sell stock for a capital loss to make the payoff, and then moving an equal amount from bonds to stock in my employer plan because I wanted to keep the same number of dollars in the stock market.
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illumination
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Re: pay off mortgage vs. invest in the time of covid

Post by illumination »

tickle_monster wrote: Wed Apr 29, 2020 11:22 pm Am I letting my emotions of wanting security allow me to make a bad decision?
I wouldn't call it a bad decision, but I tend to think most of what drives the desire to pay off a mortgage completely is for psychological reasons and not really financial ones. If I lost my job, I'd rather have nearly $300k liquid at my disposal than a paid off house. I could still comfortably make the mortgage for an incredibly long stretch of time and it's costing me very little in interest.

I definitely think you need to adjust your portfolio as you clearly feel its too risky and the bounce back has probably allowed you to do that without a massive amount of pain. I would probably lighten up the stocks for a more comfortable cushion and then see what happens with the job before you commit putting it all in your house.
jackb1117
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Re: pay off mortgage vs. invest in the time of covid

Post by jackb1117 »

I'll add some anecdotal experiences into the mix, given that our situation is nearly identical to yours (in terms of assets / family situation / HCOL). We paid off mortgage on a ~800k house in a HCOL in December and haven't regretted the decision at all. In times of uncertainty such as these, feels really good to know that if my wife & I were to both lose our jobs and the market goes to sh*t, we can hangout at home with the kids without really having to worry about any bills (other than property taxes & insurance on the house, and of course healthcare- but that's worthy of its own thread). This tradeoff is often debated around here and I think it comes down to personal risk/reward tolerance; I have always been fiscally conservative and for me, paying off the house ~25 years early was the right call.
260chrisb
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Re: pay off mortgage vs. invest in the time of covid

Post by 260chrisb »

tickle_monster wrote: Thu Apr 30, 2020 10:09 am Thanks for your response.

We're located in about the best area I can imagine considering the circumstances. Some industries in trouble, but others are booming. My job is in the former, wife's in the latter. Major metro, good public transit, ok schools. Good fun stuff to do nearby. I'm sure I'll find another job in the long term at least, even if difficult in short term.

Our house fits our needs very well and I don't see any reason to consider moving until we no longer need to work. We love our house and neighbors. No more kids after this one.

We have a large emergency fund in cash already, enough for 1 year expenses, minus the mortgage payment. With what's left in taxable in top of that, we could hang on without either job for a long time.
I'm probably not thinking about this as others are but are you asking if you should sell taxable long term investments at a loss and pay off your mortgage for emotional peace of mind or invest more in a market you are not comfortable in? Without knowing your age or income I can assume you're under 40 or close (young kid and one on the way) and assume a good income based on your current taxable, tax advantaged, and emergency fund balances. Maybe your emotions are nervous emotions. You're confident you can get a job if you lose yours, have another income anyway, and plenty of savings. Maybe stay invested, adjust your allocation in retirement accounts (maybe more cash), don't invest taxable, and throw a bunch of money at your mortgage while you see how this plays out.
mega317
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Re: pay off mortgage vs. invest in the time of covid

Post by mega317 »

tickle_monster wrote: Wed Apr 29, 2020 11:22 pm Don't answer that.
Ok I won't :D

With second child coming, future childcare costs are going to run 4-5k per month.
Not if you aren't working it's not.

But I think your plan is a good one.
https://www.bogleheads.org/forum/viewtopic.php?t=6212
Topic Author
tickle_monster
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Re: pay off mortgage vs. invest in the time of covid

Post by tickle_monster »

I'm actually pretty comfortable with my 85/15 stock/bond allocation right now. I would be selling all stock, and we'll be able to re-balance back to 85/15 using holdings in 401ks/IRAs. I took a rough look at tax bill last night and it's going to be a little under 10k I think. Some of the stock holdings are long term loss (VTIAX), most are long term gains (VTSAX).
jackb1117 wrote: Thu Apr 30, 2020 1:51 pm In times of uncertainty such as these, feels really good to know that if my wife & I were to both lose our jobs and the market goes to sh*t, we can hangout at home with the kids without really having to worry about any bills (other than property taxes & insurance on the house, and of course healthcare- but that's worthy of its own thread).
This is clearly a decision that is both emotional and financial. I read what jackb wrote and that's exactly what I'm thinking. That gives me the warm fuzzies. My emotions are somewhat nervous as I'm not sure I could find another job making what I'm making now in the short term. In that case, expenses, plus mortgage, plus childcare would be painful.

We're going to sleep on it for one more night, but we're leaning toward selling tomorrow.

Thinking about this another way... if I had 273k lump sum cash right now to invest, no mortgage, would I put it all in stocks tomorrow looking at this market? Nope.
Independent George
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Re: pay off mortgage vs. invest in the time of covid

Post by Independent George »

Based on the info you stated, I see no downside to either paying off your mortgage or continuing to invest. The important thing is you have $550k of liquid assets - that buys you a lot of freedom to move your money as you wish.

If it were me, I'd pay off the mortgage. I have 15 years left on mine, and I'm hoping to pay it off in 7. The psychological weight of debt is not something I thought about back when I first signed up for that 30-year mortgage.
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cchrissyy
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Re: pay off mortgage vs. invest in the time of covid

Post by cchrissyy »

if i wanted to sell to feel "done" but I knew in my head it wasn't mathematically optimal, I would try to focus on the fact I had X number of payments available in that account. I don't know your numbers but does it help to tell yourself something in the form of, "I am not fully paying it off right now because I know I have an account where I saved up every payment i need to make, twice, and that's plenty and I will send them on schedule."

does that help?

honestly if it were me I'd do it in chunks, maybe over 5 years, but i wouldn't last the entire term.
bampf
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Re: pay off mortgage vs. invest in the time of covid

Post by bampf »

tickle_monster wrote: Thu Apr 30, 2020 7:16 pm
We're going to sleep on it for one more night, but we're leaning toward selling tomorrow.

Thinking about this another way... if I had 273k lump sum cash right now to invest, no mortgage, would I put it all in stocks tomorrow looking at this market? Nope.
I did roughly what you are talking about in April of 2019. For me it was about what I could control vs. what I couldn't.

I knew I had no idea if the market was going up or down.
I knew I could lose my job.
I knew I couldn't count on anything except my mortgage payment coming due every 30 days.

So, we exercised control. We sold and paid off the house.

I would be disingenuous if I didn't calculate out the net worth delta a few times when the market was running hot. I would also be disingenuous if I didn't say I felt smug in May of last year and in March of this year.

Setting aside the emotion, the facts are, I don't have a house payment. I don't worry about it. My expenses are significantly less now than they were and I am still plenty liquid. I don't regret it for a second. Timing may be wrong if you sell tomorrow. It may be spectacular.

I sleep very well at night. You really can't go wrong with this choice (either way) if you believe in the long term viability of the capital markets.

There are no wrong choices. For me, I wanted control.

Regards,

Bampf
campy2010
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Re: pay off mortgage vs. invest in the time of covid

Post by campy2010 »

You're letting your distrust of the current market drive panic selling at a low point. This is buy-high, sell-low behavior that this forum encourages people to avoid. But it seems like your mind was made up before you posted the question and you have plenty of money so it doesn't matter one way or another.
bampf
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Re: pay off mortgage vs. invest in the time of covid

Post by bampf »

campy2010 wrote: Fri May 01, 2020 12:18 am You're letting your distrust of the current market drive panic selling at a low point.
Its really not all that low. Its off roughly 17% from the high but roughly the same level it was in May of 2019. I'm just talking about the broad index funds. Its also pretty close to what it was in August of 2019. Voo is up 15% or so from the low of just a month or so ago. What low point are you speaking of?

If the economy is rough for the next year (it could be) they would be a genius to sell now.

If the market doubles this time next year and they sold today and paid off their house, well, they would have a paid off house.

I really don't see the down side to using money to make your life better, regardless of how you use that money. If having it in the market makes you happier and your life better, sweet! If having no debt meets your needs, really sweet! To each their own. Wouldn't call it panic. In fact it looks to me like they are really trying to be thoughtful about how they are allocating their resources.
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Re: pay off mortgage vs. invest in the time of covid

Post by Cyclesafe »

Plenty of liquidity, ability to rebalance within tax advantaged? Easy decision, IMHO. But OP should understand that his new equity calculation should be adjusted for the increased tax liability of more equity in tax advantaged.
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Re: pay off mortgage vs. invest in the time of covid

Post by Thought Is Free »

I would pay it off. Recently paid off huge student loans ($300k+ household) and the feeling of that debt burden lifting cannot be overstated. The mortgage debt is being paid down aggressively now. Congrats on putting yourself in a great position
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tickle_monster
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Re: pay off mortgage vs. invest in the time of covid

Post by tickle_monster »

Well, we did it today! Sold the most in 5 minutes that I ever hope to have to sell. My wife and I are elated.
Can't wait to send it to the mortgage bank.
Rebalancing 401ks and IRAs next.
Thanks for the consideration and ideas everyone.

Cyclesafe, what do you mean about the increased tax liability of more equity in tax advantaged?
Cyclesafe wrote: Fri May 01, 2020 6:51 am Plenty of liquidity, ability to rebalance within tax advantaged? Easy decision, IMHO. But OP should understand that his new equity calculation should be adjusted for the increased tax liability of more equity in tax advantaged.
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Cyclesafe
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Re: pay off mortgage vs. invest in the time of covid

Post by Cyclesafe »

tickle_monster wrote: Wed May 06, 2020 12:21 am Well, we did it today! Sold the most in 5 minutes that I ever hope to have to sell. My wife and I are elated.
Can't wait to send it to the mortgage bank.
Rebalancing 401ks and IRAs next.
Thanks for the consideration and ideas everyone.

Cyclesafe, what do you mean about the increased tax liability of more equity in tax advantaged?
Cyclesafe wrote: Fri May 01, 2020 6:51 am Plenty of liquidity, ability to rebalance within tax advantaged? Easy decision, IMHO. But OP should understand that his new equity calculation should be adjusted for the increased tax liability of more equity in tax advantaged.
A portion (equivalent to your total effective tax rate) of your tax deferred account is not owned by you. It is owned by the government.

When one decreases taxable, rebalances within tax deferred, and calculates a new "asset allocation" without taking this government ownership into account, one is not actually maintaining the same asset allocation. Now this difference can be considered second order, but understanding and then ignoring this effect is better than not recognizing it in the first place.

If you slept well with your old allocation and expect to sleep well with the new allocation, that's all that matters.
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grabiner
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Re: pay off mortgage vs. invest in the time of covid

Post by grabiner »

Cyclesafe wrote: Fri May 01, 2020 6:51 am Plenty of liquidity, ability to rebalance within tax advantaged? Easy decision, IMHO. But OP should understand that his new equity calculation should be adjusted for the increased tax liability of more equity in tax advantaged.
It's actually close to break-even for taxable versus tax-deferred. In a taxable account, the IRS will tax your dividends, and that tax compounds because gains on reinvested dividends are also taxed. In addition, it will take a percentage of your capital gains. In an IRA, the IRS will take a larger percentage of your gains, but that does not compound.

For example, suppose that you retire in a 22% tax bracket, and you have a stock fund which pays a 2% qualified dividend and has 6% growth. In an IRA, the IRS will take 22%. In a taxable account held for 30 years, the IRS will take 0.3% annually, compounding to 8.62%, and the capital-gains tax will be 11.69% of the gains, so you lose 19.31% of the gains (18.15% of the total). If you pay state tax, the tax rate on a taxable account may even be higher, particularly if you retire in a state with no income tax.

For taxable versus tax-free, there is a much bigger difference; holding stock in a Roth IRA rather than a taxable account eliminates all tax on the gains, but also increases risk because the IRS will no longer give back a share of any losses.
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