Need help deciding whether to pay off mortgage

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
flybird145
Posts: 26
Joined: Thu Dec 19, 2019 6:09 pm

Need help deciding whether to pay off mortgage

Post by flybird145 »

Hi all,

This has certainly been a really strange year, and I really could use some advice on something I've been thinking about lately. I consider myself having almost "won the game early" and have about 5M in invested assets (about 40% in equities, 60% in treasuries, short term bond funds, TIPS, and cash). I'm targeting to DCA up to 50% by the end of 2021.

I currently have about 1M in our mortgage (30 year fixed at 3.125%). State/Fed payroll taxes are 28% and 9%, so I'm calculating after-tax rate to be about 2%.

30 year treasuries are paying about 1.5 percent today, but factoring in tax-drag that's probably going to be less than 1%. So part of me is thinking to pay the mortgage off...

...but another part of me is thinking about inflation picking up. The only way our Govt will be able to pay the trillions of dollars (and more coming) in the stimulus is to let inflation reduce that burden, and/or raise taxes. So the 30 year mortgage may be good to have, and perhaps hedge against losing money in my bonds.

Is my thinking correct here? It seems that if I stop working (or slow down) and income falls down, the tax deduction makes the mortgage less worth keeping, so perhaps I could just pay it off then?

Thanks for any input!
Last edited by flybird145 on Thu Aug 27, 2020 5:02 pm, edited 1 time in total.
ScubaHogg
Posts: 762
Joined: Sun Nov 06, 2011 3:02 pm

Re: Need help deciding whether to pay off mortgage

Post by ScubaHogg »

What if you could get a 2.5% mortgage?
“Unexpected Returns dominate the Expected Returns” - Ken French
deikel
Posts: 1175
Joined: Sat Jan 25, 2014 7:13 pm

Re: Need help deciding whether to pay off mortgage

Post by deikel »

I think your reasoning is a bit off

If you assume inflation to increase, then sure, a large mortgage is a nice inflation hedge over a long time....but yield of short term bonds will also increase, maybe not in lockstep, but certainly they will/have to (so do savings rates and CDs and MM

With the same reasoning, I find TIPS rather useless in low inflation and they only pay inflation if and when it will increase - so why even bother ?

If you hold short term bonds, TIPS AND a mortgage, you have plenty in play to counteract inflation....one might argue you bank on inflation. However, the mortgage costs you to have the pleasure to have this tool at your disposal. Funny thing is that the argument of the government getting out of debt does apply since forever....and yet Inflation has been uncannily low since years now.

Your real counteract to moderate inflation is lifestyle flexibility anyway. I don't think inflation is a real argument for or against a mortgage, other then you expect a sudden spike in inflation
Everything you read in this post is my personal opinion. If you disagree with this disclaimer, please un-read the text immediately and destroy any copy or remembrance of it.
lakpr
Posts: 6716
Joined: Fri Mar 18, 2011 9:59 am

Re: Need help deciding whether to pay off mortgage

Post by lakpr »

Note that you should think about your mortgage as really a 3-layer cake.

Top layer = amount in excess of $750k, is *NOT* tax-deductible.
Bottom layer = (amount of standard deduction - SALT up to $10k limit) / your mortgage tax rate, is also *NOT* tax-deductible (the standard deduction is available to you anyway)

It's the middle layer alone that you are getting a tax benefit out of. You are only simply spreading that tax-benefit over the entire amount.

It's the same as saying you are being taxed 19.2% (for example). Not really, it's the AVERAGE tax rate spread over your entire income. If you take the last dollar you are earning, it is perhaps being taxed at 35% or worse -- which is the marginal tax rate concept. Same concept with your mortgage too.

So @flybird145, at the least you should pay off $250k on your mortgage so you fall into the sweet spot where the mortgage interest is tax-deductible (on Federal return; I am aware some states allow higher amounts).
User avatar
McGilicutty
Posts: 349
Joined: Tue Dec 13, 2016 5:24 pm

Re: Need help deciding whether to pay off mortgage

Post by McGilicutty »

You're leaving out another way to pay off debt: let interest rates go negative and then the gubmint gets paid to have debt. It's genius, really.
Topic Author
flybird145
Posts: 26
Joined: Thu Dec 19, 2019 6:09 pm

Re: Need help deciding whether to pay off mortgage

Post by flybird145 »

deikel wrote: Thu Aug 27, 2020 5:31 pm I think your reasoning is a bit off

If you assume inflation to increase, then sure, a large mortgage is a nice inflation hedge over a long time....but yield of short term bonds will also increase, maybe not in lockstep, but certainly they will/have to (so do savings rates and CDs and MM

With the same reasoning, I find TIPS rather useless in low inflation and they only pay inflation if and when it will increase - so why even bother ?

If you hold short term bonds, TIPS AND a mortgage, you have plenty in play to counteract inflation....one might argue you bank on inflation. However, the mortgage costs you to have the pleasure to have this tool at your disposal. Funny thing is that the argument of the government getting out of debt does apply since forever....and yet Inflation has been uncannily low since years now.

Your real counteract to moderate inflation is lifestyle flexibility anyway. I don't think inflation is a real argument for or against a mortgage, other then you expect a sudden spike in inflation
Thanks for the response -- my thought was that if my effective rate (after tax deduction) is somewhere around 2%, that's target inflation (what economists hope to accomplish). So not really banking on inflation, but just that it could be a good thing if it stays at or goes above 2%.

Otherwise, alternative is to pay off mortgage with short term bond holdings (or TIPS), have lower monthly expenses, etc. So you're suggesting just pay it off? :happy
ChiKid24
Posts: 341
Joined: Fri Aug 09, 2019 3:43 pm

Re: Need help deciding whether to pay off mortgage

Post by ChiKid24 »

How about doing something in the middle. 30-year mortgage rates these days are closer to 2.75% or lower on a no-cost refi, if you can get the balance below the jumbo limit (varies depending on your location) and have an LTV around 50%. So paying off a chunk to get yourself in those parameters could be a nice compromise for you.
User avatar
FelixTheCat
Posts: 1943
Joined: Sat Sep 24, 2011 12:39 am

Re: Need help deciding whether to pay off mortgage

Post by FelixTheCat »

Paying off my mortgage was a good move for me. It's great having zero debt.
Felix is a wonderful, wonderful cat.
Xrayman69
Posts: 689
Joined: Fri Jun 01, 2018 8:52 pm

Re: Need help deciding whether to pay off mortgage

Post by Xrayman69 »

ChiKid24 wrote: Thu Aug 27, 2020 6:22 pm How about doing something in the middle. 30-year mortgage rates these days are closer to 2.75% or lower on a no-cost refi, if you can get the balance below the jumbo limit (varies depending on your location) and have an LTV around 50%. So paying off a chunk to get yourself in those parameters could be a nice compromise for you.
+1. 15 year fixed conforming loans are around 2.25%. (700k in vhcol areas )
User avatar
Jerry55
Posts: 800
Joined: Tue Jan 27, 2015 1:56 am
Location: That Toddlin' Town

Re: Need help deciding whether to pay off mortgage

Post by Jerry55 »

FelixTheCat wrote: Thu Aug 27, 2020 6:34 pm Paying off my mortgage was a good move for me. It's great having zero debt.
I'm with FelixTheCat. In 1990, I bought this home, lowered the rate from 9.75% to 7.25% in 1992. Moved to a 15 year mortgage and added additional payments per year to reduce it to a 13 year mortgage and paid it off in 2005, at age 50. My birthday present to myself.

I maxed out my TSP and added "over 50" $$$, and retired at age 57.

Sometimes, it's not about $$$$$$, it's about "Feelings". YMMV and Good Luck.
Retired CSRS on 12/19/2012 @ age 57 w/39 years | Good Bye Tension, Hello Pension !!!
manatee2005
Posts: 1448
Joined: Wed Dec 18, 2019 9:17 pm

Re: Need help deciding whether to pay off mortgage

Post by manatee2005 »

FelixTheCat wrote: Thu Aug 27, 2020 6:34 pm Paying off my mortgage was a good move for me. It's great having zero debt.
It’s good to have zero debt but it’s even better to use other people’s money to get richer. I’m carrying a 400k mortgage and getting 20% YTD in the market on that money that’s in the brokerage. I could pay it off but I’d rather pay 2.5% on that money and get higher returns.
User avatar
Jerry55
Posts: 800
Joined: Tue Jan 27, 2015 1:56 am
Location: That Toddlin' Town

Re: Need help deciding whether to pay off mortgage

Post by Jerry55 »

manatee2005 wrote: Thu Aug 27, 2020 7:14 pm It’s good to have zero debt but it’s even better to use other people’s money to get richer. I’m carrying a 400k mortgage and getting 20% YTD in the market on that money that’s in the brokerage. I could pay it off but I’d rather pay 2.5% on that money and get higher returns.
Til that trains wheels fall off.......good luck.
Retired CSRS on 12/19/2012 @ age 57 w/39 years | Good Bye Tension, Hello Pension !!!
manatee2005
Posts: 1448
Joined: Wed Dec 18, 2019 9:17 pm

Re: Need help deciding whether to pay off mortgage

Post by manatee2005 »

Jerry55 wrote: Thu Aug 27, 2020 8:26 pm
manatee2005 wrote: Thu Aug 27, 2020 7:14 pm It’s good to have zero debt but it’s even better to use other people’s money to get richer. I’m carrying a 400k mortgage and getting 20% YTD in the market on that money that’s in the brokerage. I could pay it off but I’d rather pay 2.5% on that money and get higher returns.
Til that trains wheels fall off.......good luck.
Are you saying that in the long run the market won’t return more than 2.5%?
User avatar
FelixTheCat
Posts: 1943
Joined: Sat Sep 24, 2011 12:39 am

Re: Need help deciding whether to pay off mortgage

Post by FelixTheCat »

manatee2005 wrote: Thu Aug 27, 2020 7:14 pm
FelixTheCat wrote: Thu Aug 27, 2020 6:34 pm Paying off my mortgage was a good move for me. It's great having zero debt.
It’s good to have zero debt but it’s even better to use other people’s money to get richer. I’m carrying a 400k mortgage and getting 20% YTD in the market on that money that’s in the brokerage. I could pay it off but I’d rather pay 2.5% on that money and get higher returns.
How are you getting 20% YTD? Total Stock Market Index is up 2.06% as of 7/31/2020. Anything you would like to share?
Felix is a wonderful, wonderful cat.
dharrythomas
Posts: 1101
Joined: Tue Jun 19, 2007 4:46 pm

Re: Need help deciding whether to pay off mortgage

Post by dharrythomas »

I agree with Jerry and Felix. If you’ve won the game. (1) Get out of debt. (2) Build an asset allocation that provides a generous income floor. (3) You can play a little beyond that.

A wise man said something about the foolishness of risking what you have and need for something you don’t need.

Once you have won, the rules remain the same but the objective should change. Rather than to build, the objective becomes not to lose what you spent your life accumulating.

Leverage can and may juice returns, it does increase risk. You don’t need the risk.

We have never regretted being debt free.
manatee2005
Posts: 1448
Joined: Wed Dec 18, 2019 9:17 pm

Re: Need help deciding whether to pay off mortgage

Post by manatee2005 »

FelixTheCat wrote: Fri Aug 28, 2020 1:01 pm
manatee2005 wrote: Thu Aug 27, 2020 7:14 pm
FelixTheCat wrote: Thu Aug 27, 2020 6:34 pm Paying off my mortgage was a good move for me. It's great having zero debt.
It’s good to have zero debt but it’s even better to use other people’s money to get richer. I’m carrying a 400k mortgage and getting 20% YTD in the market on that money that’s in the brokerage. I could pay it off but I’d rather pay 2.5% on that money and get higher returns.
How are you getting 20% YTD? Total Stock Market Index is up 2.06% as of 7/31/2020. Anything you would like to share?
I have majority of my money in Nasdaq funds. Nasdaq is up 30% YTD. I recognized that tech will rule during corona and it worked out (so far)
Last edited by manatee2005 on Fri Aug 28, 2020 6:29 pm, edited 1 time in total.
User avatar
Watty
Posts: 21361
Joined: Wed Oct 10, 2007 3:55 pm

Re: Need help deciding whether to pay off mortgage

Post by Watty »

flybird145 wrote: Thu Aug 27, 2020 4:51 pm Is my thinking correct here?
One thing to include in your analysis is the sequence of returns risk. Here is a very simplistic example that I have posted before. You might play with your numbers looking at it this way.
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 pay off the mortgage at the end of the second year you would need about $96.5K so you would need to gain back $12.5K and another $6,000 for the next years mortgage payments which combined is $18.5K. That would take a 22% return on the remaining $84K to get back to the point where you could pay off the mortgage.

In the past portfolios have declined in roughly one of four or five years depending on the asset allocation. (20 to 25 percent of the time)

https://personal.vanguard.com/us/insigh ... llocations

The sequence of returns risk can also go the other way and you could get lucky and have the first couple of years get good returns that would put you on the path for large gains over the years. There will sometimes be very optimistic projections on just how much better not paying off the mortgage could be but one limiting factor that needs to be considered is that few people actually keep a 30 year mortgage for the full 30 years. It is difficult to put a number on it but many people who own a home will sell it in less than 10 years.
Beehave
Posts: 859
Joined: Mon Jun 19, 2017 12:46 pm

Re: Need help deciding whether to pay off mortgage

Post by Beehave »

dharrythomas wrote: Fri Aug 28, 2020 3:52 pm I agree with Jerry and Felix. If you’ve won the game. (1) Get out of debt. (2) Build an asset allocation that provides a generous income floor. (3) You can play a little beyond that.

A wise man said something about the foolishness of risking what you have and need for something you don’t need.

Once you have won, the rules remain the same but the objective should change. Rather than to build, the objective becomes not to lose what you spent your life accumulating.

Leverage can and may juice returns, it does increase risk. You don’t need the risk.

We have never regretted being debt free.
+1 Agree with all the above. As I see it, getting out of debt and building up from there = fortress financial position.
deikel
Posts: 1175
Joined: Sat Jan 25, 2014 7:13 pm

Re: Need help deciding whether to pay off mortgage

Post by deikel »

flybird145 wrote: Thu Aug 27, 2020 6:09 pm
deikel wrote: Thu Aug 27, 2020 5:31 pm I think your reasoning is a bit off

If you assume inflation to increase, then sure, a large mortgage is a nice inflation hedge over a long time....but yield of short term bonds will also increase, maybe not in lockstep, but certainly they will/have to (so do savings rates and CDs and MM

With the same reasoning, I find TIPS rather useless in low inflation and they only pay inflation if and when it will increase - so why even bother ?

If you hold short term bonds, TIPS AND a mortgage, you have plenty in play to counteract inflation....one might argue you bank on inflation. However, the mortgage costs you to have the pleasure to have this tool at your disposal. Funny thing is that the argument of the government getting out of debt does apply since forever....and yet Inflation has been uncannily low since years now.

Your real counteract to moderate inflation is lifestyle flexibility anyway. I don't think inflation is a real argument for or against a mortgage, other then you expect a sudden spike in inflation
Thanks for the response -- my thought was that if my effective rate (after tax deduction) is somewhere around 2%, that's target inflation (what economists hope to accomplish). So not really banking on inflation, but just that it could be a good thing if it stays at or goes above 2%.

Otherwise, alternative is to pay off mortgage with short term bond holdings (or TIPS), have lower monthly expenses, etc. So you're suggesting just pay it off? :happy
What I was suggesting is that inflation should not really factor into your reasoning. Inflation has been incredibly low since years and years now, despite the federal government increase its debt to astronomical levels - even under a republican president. That's not meant as a political statement so much as a reminder that in the current political climate gov spending will further increase and given lacking taxes to offset, debt will increase regardless of party in power. And yet....we are all waiting for inflation and bond yields to raise since the last recession really ....till corona virus came along and the rates even dropped and inflation stayed low....so, I am not sure how anyone can make a serious prediction on where this goes - hence it becomes in-actionable.

Given that I also think TIPS are a useless type of investment in the current situation (admitting my very private opinion), I would agree that moving your TIPS and using them to pay off your mortgage is probably a smart move you will not regret - money invested in your house will most likely also appreciate at inflation (depending in what real estate market you live, it will be more then that).
Everything you read in this post is my personal opinion. If you disagree with this disclaimer, please un-read the text immediately and destroy any copy or remembrance of it.
Lars_2013
Posts: 202
Joined: Sun Dec 15, 2013 2:00 pm

Re: Need help deciding whether to pay off mortgage

Post by Lars_2013 »

flybird145 wrote: Thu Aug 27, 2020 6:09 pm Thanks for the response -- my thought was that if my effective rate (after tax deduction) is somewhere around 2%, that's target inflation (what economists hope to accomplish). So not really banking on inflation, but just that it could be a good thing if it stays at or goes above 2%.
I paid off my 3.125% mortgage (which had 11 years remaining on the original 15-year term) last month because I'm not confident that even in a higher-inflation environment that interest rates will (1) keep up with inflation or (2) beat my risk-free rate of paying off the mortgage. My understanding is that real yields are currently negative across-the-board, and it's unclear to me if that is going to change. At the end of the day, I decided that holding the mortgage on the chance of my bonds eventually paying more than 3.125% wasn't a game I wanted to play any longer.

[Before people jump in about me refinancing, my outstanding principle was below $80,000 and both the mortgage companies I checked out and a mortgage broker I spoke to said I couldn't get a refi that was financial worthwhile on such a low outstanding principle, since the closing costs would be high compared to the total interest savings. The OP is obviously in a different situation re: refinancing.]
dharrythomas
Posts: 1101
Joined: Tue Jun 19, 2007 4:46 pm

Re: Need help deciding whether to pay off mortgage

Post by dharrythomas »

Lars_2013 wrote: Sun Aug 30, 2020 3:27 pm
flybird145 wrote: Thu Aug 27, 2020 6:09 pm Thanks for the response -- my thought was that if my effective rate (after tax deduction) is somewhere around 2%, that's target inflation (what economists hope to accomplish). So not really banking on inflation, but just that it could be a good thing if it stays at or goes above 2%.
I paid off my 3.125% mortgage (which had 11 years remaining on the original 15-year term) last month because I'm not confident that even in a higher-inflation environment that interest rates will (1) keep up with inflation or (2) beat my risk-free rate of paying off the mortgage. My understanding is that real yields are currently negative across-the-board, and it's unclear to me if that is going to change. At the end of the day, I decided that holding the mortgage on the chance of my bonds eventually paying more than 3.125% wasn't a game I wanted to play any longer.

[Before people jump in about me refinancing, my outstanding principle was below $80,000 and both the mortgage companies I checked out and a mortgage broker I spoke to said I couldn't get a refi that was financial worthwhile on such a low outstanding principle, since the closing costs would be high compared to the total interest savings. The OP is obviously in a different situation re: refinancing.]
I’ve run into the same thing, on a low mortgage balance, unless you want to cash out and extend the term, the fees overwhelm interest savings. I’ve reviewed for other people and if you refinancing around $400K, you can save money with a small interest rate cut even adding a couple of years to the mortgage, with a couple of years payback time.
User avatar
FelixTheCat
Posts: 1943
Joined: Sat Sep 24, 2011 12:39 am

Re: Need help deciding whether to pay off mortgage

Post by FelixTheCat »

manatee2005 wrote: Fri Aug 28, 2020 5:36 pm
FelixTheCat wrote: Fri Aug 28, 2020 1:01 pm
manatee2005 wrote: Thu Aug 27, 2020 7:14 pm
FelixTheCat wrote: Thu Aug 27, 2020 6:34 pm Paying off my mortgage was a good move for me. It's great having zero debt.
It’s good to have zero debt but it’s even better to use other people’s money to get richer. I’m carrying a 400k mortgage and getting 20% YTD in the market on that money that’s in the brokerage. I could pay it off but I’d rather pay 2.5% on that money and get higher returns.
How are you getting 20% YTD? Total Stock Market Index is up 2.06% as of 7/31/2020. Anything you would like to share?
I have majority of my money in Nasdaq funds. Nasdaq is up 30% YTD. I recognized that tech will rule during corona and it worked out (so far)
That is amazing. I just looked up QQQ and see it is up 39.23% as of 8/31/2020.
Felix is a wonderful, wonderful cat.
manatee2005
Posts: 1448
Joined: Wed Dec 18, 2019 9:17 pm

Re: Need help deciding whether to pay off mortgage

Post by manatee2005 »

FelixTheCat wrote: Tue Sep 01, 2020 5:11 pm
manatee2005 wrote: Fri Aug 28, 2020 5:36 pm
FelixTheCat wrote: Fri Aug 28, 2020 1:01 pm
manatee2005 wrote: Thu Aug 27, 2020 7:14 pm
FelixTheCat wrote: Thu Aug 27, 2020 6:34 pm Paying off my mortgage was a good move for me. It's great having zero debt.
It’s good to have zero debt but it’s even better to use other people’s money to get richer. I’m carrying a 400k mortgage and getting 20% YTD in the market on that money that’s in the brokerage. I could pay it off but I’d rather pay 2.5% on that money and get higher returns.
How are you getting 20% YTD? Total Stock Market Index is up 2.06% as of 7/31/2020. Anything you would like to share?
I have majority of my money in Nasdaq funds. Nasdaq is up 30% YTD. I recognized that tech will rule during corona and it worked out (so far)
That is amazing. I just looked up QQQ and see it is up 39.23% as of 8/31/2020.
Yeah. Can you imagine how much that is for somebody who’s been investing in 401k for 25 years already.

I think Nasdaq will underperform in the future like in 2001, but for now let it ride 😀
Dottie57
Posts: 9544
Joined: Thu May 19, 2016 5:43 pm
Location: Earth Northern Hemisphere

Re: Need help deciding whether to pay off mortgage

Post by Dottie57 »

Jerry55 wrote: Thu Aug 27, 2020 7:11 pm
FelixTheCat wrote: Thu Aug 27, 2020 6:34 pm Paying off my mortgage was a good move for me. It's great having zero debt.
I'm with FelixTheCat. In 1990, I bought this home, lowered the rate from 9.75% to 7.25% in 1992. Moved to a 15 year mortgage and added additional payments per year to reduce it to a 13 year mortgage and paid it off in 2005, at age 50. My birthday present to myself.

I maxed out my TSP and added "over 50" $$$, and retired at age 57.

Sometimes, it's not about $$$$$$, it's about "Feelings". YMMV and Good Luck.
This was my route too. Similar dates and rates. I refinanced to 30 year, and paid off in 13 yrs. great feeling.. less worry about layoffs.
Post Reply