Thoughts on Pre-Paying my Mortgage?

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Topic Author
CaptainTyson
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Thoughts on Pre-Paying my Mortgage?

Post by CaptainTyson »

I have a mortgage at 3.75% and I'm thinking about making a partial pre-payment so I can directly pay down some principal. Basically it's like getting a guaranteed 3.75% return on my "investment." Certainly this is better than a CD or bonds at their current rates, correct? Of course, stocks would be better but I already have significant funds devoted to stocks so I'm not looking to do more stock investment. Thank you!
Doctor Rhythm
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Re: Thoughts on Pre-Paying my Mortgage?

Post by Doctor Rhythm »

We actually did this several years ago. At that time, we had a 5/1 30-year ARM and were in the variable rate period. We ended up paying off the mortgage in 15 years, and saving a lot of money on interest, both by getting the lower starting rate of an ARM and by saving 15 years of interest payments. In retrospect we may have come out better on balance by investing the extra payments, but we were already saving a lot and the psychological benefit of being debt free was a plus.

I’d say it’s worth doing if you have extra money after maxing out all of your tax advantaged space and kind of feel you’re reaching your peak risk tolerance as far as buying more stocks.

Oh, and welcome to the forum.
stoptothink
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Re: Thoughts on Pre-Paying my Mortgage?

Post by stoptothink »

Doctor Rhythm wrote: Sun Nov 29, 2020 7:57 pm I’d say it’s worth doing if you have extra money after maxing out all of your tax advantaged space and kind of feel your reaching your peak risk tolerance as far as buying more stocks.
This is exactly what we did, for 4.5yrs until it was totally paid off. In hindsight, paying off our 3.125% mortgage early was a net loss compared to starting a taxable account, but I don't feel bad about not having a mortgage .
Monsterflockster
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Re: Thoughts on Pre-Paying my Mortgage?

Post by Monsterflockster »

stoptothink wrote: Sun Nov 29, 2020 8:04 pm
Doctor Rhythm wrote: Sun Nov 29, 2020 7:57 pm I’d say it’s worth doing if you have extra money after maxing out all of your tax advantaged space and kind of feel your reaching your peak risk tolerance as far as buying more stocks.
This is exactly what we did, for 4.5yrs until it was totally paid off. In hindsight, paying off our 3.125% mortgage early was a net loss compared to starting a taxable account, but I don't feel bad about not having a mortgage .
The future increases in the market are not guaranteed. It could’ve easily stayed down low after the March decline.

How did you come out comparing the amount you saved in interest (over the life of the loan) to what you would’ve made by putting it in the market those 4.5 years?
KlangFool
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Re: Thoughts on Pre-Paying my Mortgage?

Post by KlangFool »

OP,

What is your asset allocation? What would you only invest on stock only or the bond only? Why won't you invest as per your asset allocation?

Why do you think that your portfolio cannot beat 3.75%?

KlangFool
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anon_investor
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Re: Thoughts on Pre-Paying my Mortgage?

Post by anon_investor »

CaptainTyson wrote: Sun Nov 29, 2020 5:47 pm I have a mortgage at 3.75% and I'm thinking about making a partial pre-payment so I can directly pay down some principal. Basically it's like getting a guaranteed 3.75% return on my "investment." Certainly this is better than a CD or bonds at their current rates, correct? Of course, stocks would be better but I already have significant funds devoted to stocks so I'm not looking to do more stock investment. Thank you!
Have you considered a no cost refi?
lakpr
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Re: Thoughts on Pre-Paying my Mortgage?

Post by lakpr »

Captain Tyson,

You are exactly right. Prepaying a big chunk of the mortgage is indeed buying a CD yielding 3.75% for the remainder if your mortgage term.

The benchmark figure you should keep in mind in deciding to whether to prepay the mortgage or invest, is the SEC yield of the Total Bond Market index fund. The SEC yield is a measure of the yield you can expect to achieve, if you hold all the bonds in the fund for the next 12 months. It is a forward looking yield measure.

Right now that figure is 1.1%.

There are suggestions above my post to consider no-cost refi. Well, even if you do consider such refi, you are not going to get anything less than 2.25%, on any term (15 year or 30 year) or even ARMs. That is still twice the SEC yield of total bond market index fund, so prepayment is still the right move.

Klangfool's post suggests investing in the market instead of prepaying the mortgage. That completely ignores the fact that investing in the market is taking the risk, but prepaying the mortgage is a GUARANTEED return. Some of us would just like to avoid taking market risk and accept guaranteed returns, we are just risk averse.

FYI, I did practice what I am saying. In 2015, I had a HELOC for 2.5% rate fixed for 5 years, for $120k loan balance. I still went ahead and paid that off within 3 years, throwing more than $40k per year, more than $3k per month, towards that debt and paid it off by late 2018.

Edit: to preempt responses that point out the lack of liquidity inherent in prepaying the mortgage (you can't resell a brick or two of your home to raise money, unlike a bond fund; you will have to sell the entire home and incur significant transaction costs such as real estate sales taxes and commissions) -- the twice-the-yield is worth taking liquidity risk. If the lender allows recasting, even the liquidity risk can be minimized.
Rudedog
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Re: Thoughts on Pre-Paying my Mortgage?

Post by Rudedog »

We made double mortgage payments for years and when I had an "extra" 5K or 10K, I'd pay it on our mortgage principal. It feels great to be debt free.
JBEB
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Re: Thoughts on Pre-Paying my Mortgage?

Post by JBEB »

While I am not giving advice on paying off early or extending the low interest loan as long as possible-

I never understood the concept of partial prepayments. You lose liquidity, all while not getting any of the benefits of actually paying off the loan.

Even if you dont want to invest-put it in a high interest savings, wait til you have enough to pay it off then decide.
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Re: Thoughts on Pre-Paying my Mortgage?

Post by Jack FFR1846 »

DW and I did this on 2 of the houses we owned. We started just out of college with virtually nothing. We both had good jobs and saved like crazy. We were able to destroy all of our other debt, starting with the highest interest loan one at a time. Once all the other loans were gone, we treated the mortgage as just another loan. Along the way, we did refinance several times at no cost, at one point going from 30 to 15. A good stock option sale in 2002 finished it for us where I was able to pay off the rest of the mortgage. Once that was complete, guess what? The money we would have paid for the mortgage can be used for other things like savings bonds, upping our 401k's and being ready for large purchases like cars that we bought with cash.
Bogle: Smart Beta is stupid
Topic Author
CaptainTyson
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Re: Thoughts on Pre-Paying my Mortgage?

Post by CaptainTyson »

Doctor Rhythm wrote: Sun Nov 29, 2020 7:57 pm We actually did this several years ago. At that time, we had a 5/1 30-year ARM and were in the variable rate period. We ended up paying off the mortgage in 15 years, and saving a lot of money on interest, both by getting the lower starting rate of an ARM and by saving 15 years of interest payments. In retrospect we may have come out better on balance by investing the extra payments, but we were already saving a lot and the psychological benefit of being debt free was a plus.

I’d say it’s worth doing if you have extra money after maxing out all of your tax advantaged space and kind of feel you’re reaching your peak risk tolerance as far as buying more stocks.

Oh, and welcome to the forum.
Thank you, and thanks for the welcome to the forum. I've been studying the wiki and lurking for a while and finally made an account.

The bolded part above is exactly my thought.
Topic Author
CaptainTyson
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Re: Thoughts on Pre-Paying my Mortgage?

Post by CaptainTyson »

KlangFool wrote: Sun Nov 29, 2020 8:20 pm OP,

What is your asset allocation? What would you only invest on stock only or the bond only? Why won't you invest as per your asset allocation?

Why do you think that your portfolio cannot beat 3.75%?

KlangFool
Thank you for the questions, i'll try to answer.

Asset allocation:
- 33% in IRA (TSP/Roth IRA) which is all invested in C Fund (S&P 500) / VTSAX
- 33% in a 0.6% savings acct
- 33% in CDs earning on average about 3%

I think my stock portfolio can definitely beat 3.75%. I do not think bonds or CDs/savings/etc could beat 3.75%. But since roughly 33% of my assets are already in stocks I don't want to put more into stocks or other "riskier" investments. Thank you.
Topic Author
CaptainTyson
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Re: Thoughts on Pre-Paying my Mortgage?

Post by CaptainTyson »

anon_investor wrote: Sun Nov 29, 2020 8:35 pm
CaptainTyson wrote: Sun Nov 29, 2020 5:47 pm I have a mortgage at 3.75% and I'm thinking about making a partial pre-payment so I can directly pay down some principal. Basically it's like getting a guaranteed 3.75% return on my "investment." Certainly this is better than a CD or bonds at their current rates, correct? Of course, stocks would be better but I already have significant funds devoted to stocks so I'm not looking to do more stock investment. Thank you!
Have you considered a no cost refi?
Yes and no. I spoke with my lender (Bank of Am) and was advised that while I could get a refi, the closing costs would pretty much negate the lower interest rates I'd get. It didn't sound like they offered a no cost option. Any suggestions? Thanks.
Topic Author
CaptainTyson
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Re: Thoughts on Pre-Paying my Mortgage?

Post by CaptainTyson »

lakpr wrote: Mon Nov 30, 2020 12:57 am Captain Tyson,

You are exactly right. Prepaying a big chunk of the mortgage is indeed buying a CD yielding 3.75% for the remainder if your mortgage term.

The benchmark figure you should keep in mind in deciding to whether to prepay the mortgage or invest, is the SEC yield of the Total Bond Market index fund. The SEC yield is a measure of the yield you can expect to achieve, if you hold all the bonds in the fund for the next 12 months. It is a forward looking yield measure.
Thanks so much for the detailed reply, lakpr. Yes I am risk averse because I am fortunate to have enough that I don't really need to grow that much. I have zero desire to be wealthy or retire early. Just want to be a normal, conservative, and thoughtful person.
Topic Author
CaptainTyson
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Re: Thoughts on Pre-Paying my Mortgage?

Post by CaptainTyson »

JBEB wrote: Mon Nov 30, 2020 8:12 am While I am not giving advice on paying off early or extending the low interest loan as long as possible-

I never understood the concept of partial prepayments. You lose liquidity, all while not getting any of the benefits of actually paying off the loan.

Even if you dont want to invest-put it in a high interest savings, wait til you have enough to pay it off then decide.
Thanks, good points. For me I will still have liquidity even if I make a dent in the mortgage. Sure, I won't pay off the whole thing but the "high interest" savings right now is at best 0.6%.
Topic Author
CaptainTyson
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Re: Thoughts on Pre-Paying my Mortgage?

Post by CaptainTyson »

Jack FFR1846 wrote: Mon Nov 30, 2020 8:27 am DW and I did this on 2 of the houses we owned. We started just out of college with virtually nothing. We both had good jobs and saved like crazy. We were able to destroy all of our other debt, starting with the highest interest loan one at a time. Once all the other loans were gone, we treated the mortgage as just another loan. Along the way, we did refinance several times at no cost, at one point going from 30 to 15. A good stock option sale in 2002 finished it for us where I was able to pay off the rest of the mortgage. Once that was complete, guess what? The money we would have paid for the mortgage can be used for other things like savings bonds, upping our 401k's and being ready for large purchases like cars that we bought with cash.
Thanks, yes I have no other loans or debt and no desire to buy any big purchases like cars. I have one car i got used which i like. I'm pretty boring.
KlangFool
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Re: Thoughts on Pre-Paying my Mortgage?

Post by KlangFool »

CaptainTyson wrote: Mon Nov 30, 2020 10:31 am
KlangFool wrote: Sun Nov 29, 2020 8:20 pm OP,

What is your asset allocation? What would you only invest on stock only or the bond only? Why won't you invest as per your asset allocation?

Why do you think that your portfolio cannot beat 3.75%?

KlangFool
Thank you for the questions, i'll try to answer.

Asset allocation:
- 33% in IRA (TSP/Roth IRA) which is all invested in C Fund (S&P 500) / VTSAX
- 33% in a 0.6% savings acct
- 33% in CDs earning on average about 3%

I think my stock portfolio can definitely beat 3.75%. I do not think bonds or CDs/savings/etc could beat 3.75%. But since roughly 33% of my assets are already in stocks I don't want to put more into stocks or other "riskier" investments. Thank you.
CaptainTyson,


Your asset allocation (AA) is 33/67.


A) Why can't you invest the extra money on the whole 33/67: 33% stock and 67% CASH?


B) Why do you think that it cannot beat 3.75%?

You do not have to change your asset allocation.

KlangFool
Living Free
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Re: Thoughts on Pre-Paying my Mortgage?

Post by Living Free »

CaptainTyson wrote: Mon Nov 30, 2020 10:31 am
KlangFool wrote: Sun Nov 29, 2020 8:20 pm OP,

What is your asset allocation? What would you only invest on stock only or the bond only? Why won't you invest as per your asset allocation?

Why do you think that your portfolio cannot beat 3.75%?

KlangFool
Thank you for the questions, i'll try to answer.

Asset allocation:
- 33% in IRA (TSP/Roth IRA) which is all invested in C Fund (S&P 500) / VTSAX
- 33% in a 0.6% savings acct
- 33% in CDs earning on average about 3%

I think my stock portfolio can definitely beat 3.75%. I do not think bonds or CDs/savings/etc could beat 3.75%. But since roughly 33% of my assets are already in stocks I don't want to put more into stocks or other "riskier" investments. Thank you.
That's a fairly conservative asset allocation. How old/far away from retirement are you? Or are you already retired?
lakpr
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Re: Thoughts on Pre-Paying my Mortgage?

Post by lakpr »

KlangFool wrote: Mon Nov 30, 2020 10:51 am CaptainTyson,


Your asset allocation (AA) is 33/67.


A) Why can't you invest the extra money on the whole 33/67: 33% stock and 67% CASH?


B) Why do you think that it cannot beat 3.75%?

You do not have to change your asset allocation.

KlangFool
*IF* the 33:67 portfolio is beating the 3.75% return, that return is almost exclusively coming from the stocks allocation of 33%. The 67% allocated to bonds and cash will yield only 0.6% (CDs) or 1.1% (SEC yield of bonds). That money, rather being deployed in the "bonds and cash" (fixed income instruments), is much much better deployed to prepay or pay off the mortgage, and the OP would be in *exactly* the same position risk wise as he is before. The amount of market risk the OP would be taking remains the same, with or without the pay-down/pay-off of the mortgage.

I have said this in my previous post in this thread, and also multiple times in other posts. It really is a money-losing action to have the mortgage AND invest in bonds that yield much less than the mortgage interest rate. If the differences is a few basis points, it may not matter much. But now the difference is hundreds of basis points.

The only conceivable risk with pay-down/pay-off of the mortgage is liquidity risk. Then again, the liquidity risk can be minimized if the lender allows for a re-cast of the mortgage (same end date for mortgage loan payoff, but lesser REQUIRED monthly payment); as also with having about 1 year of expenses in an emergency fund.
lakpr
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Re: Thoughts on Pre-Paying my Mortgage?

Post by lakpr »

CaptainTyson wrote: Mon Nov 30, 2020 10:34 am Yes and no. I spoke with my lender (Bank of Am) and was advised that while I could get a refi, the closing costs would pretty much negate the lower interest rates I'd get. It didn't sound like they offered a no cost option. Any suggestions? Thanks.
LenderFi and AmeriSave are the two most popular names around here, for truly no-cost refi.
lakpr
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Re: Thoughts on Pre-Paying my Mortgage?

Post by lakpr »

JBEB wrote: Mon Nov 30, 2020 8:12 am While I am not giving advice on paying off early or extending the low interest loan as long as possible-

I never understood the concept of partial prepayments. You lose liquidity, all while not getting any of the benefits of actually paying off the loan.

Even if you dont want to invest-put it in a high interest savings, wait til you have enough to pay it off then decide.
Yes and no; with some lenders, it is possible to recast the remainder of the mortgage so that the end-date of the mortgage remains the same, but the monthly payments will be recalculated to a lower amount. So in such case, you can reap the benefit of prepayment as well as reduce the liquidity risk (reduce, but not eliminate -- but then that's the same position risk-wise the person would be in even if not pre-paying).

Another alternative is to take out a HELOC, but it has its own downsides. HELOC rates are higher than the mortgage rates, and they also tend to disappear precisely at the time you truly need them.
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CaptainTyson
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Re: Thoughts on Pre-Paying my Mortgage?

Post by CaptainTyson »

KlangFool wrote: Mon Nov 30, 2020 10:51 am
A) Why can't you invest the extra money on the whole 33/67: 33% stock and 67% CASH?

KlangFool
Good point, perhaps I will consider deploying the extra money in a 33/67 fashion. So 33% of my extra money will go to stocks and 67% to pre-paying the mortgage. Ok thanks I'm now deciding between this 33/67 option or fully dumping the extra money into the mortgage pre-payment. Very glad I posted you all are giving me good ideas to ponder. Also going to look further into the no cost re-fi.
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CaptainTyson
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Re: Thoughts on Pre-Paying my Mortgage?

Post by CaptainTyson »

Living Free wrote: Mon Nov 30, 2020 11:13 am
That's a fairly conservative asset allocation. How old/far away from retirement are you? Or are you already retired?
I'm decades away from retirement. I agree it is too conservative. I'm trying to open my mind to being more aggressive but it's a process for me :happy
6bquick
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Re: Thoughts on Pre-Paying my Mortgage?

Post by 6bquick »

JBEB wrote: Mon Nov 30, 2020 8:12 am While I am not giving advice on paying off early or extending the low interest loan as long as possible-

I never understood the concept of partial prepayments. You lose liquidity, all while not getting any of the benefits of actually paying off the loan.

Even if you dont want to invest-put it in a high interest savings, wait til you have enough to pay it off then decide.
+1
KlangFool
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Re: Thoughts on Pre-Paying my Mortgage?

Post by KlangFool »

lakpr wrote: Mon Nov 30, 2020 11:21 am
KlangFool wrote: Mon Nov 30, 2020 10:51 am CaptainTyson,


Your asset allocation (AA) is 33/67.


A) Why can't you invest the extra money on the whole 33/67: 33% stock and 67% CASH?


B) Why do you think that it cannot beat 3.75%?

You do not have to change your asset allocation.

KlangFool
*IF* the 33:67 portfolio is beating the 3.75% return, that return is almost exclusively coming from the stocks allocation of 33%. The 67% allocated to bonds and cash will yield only 0.6% (CDs) or 1.1% (SEC yield of bonds). That money, rather being deployed in the "bonds and cash" (fixed income instruments), is much much better deployed to prepay or pay off the mortgage, and the OP would be in *exactly* the same position risk wise as he is before. The amount of market risk the OP would be taking remains the same, with or without the pay-down/pay-off of the mortgage.

I have said this in my previous post in this thread, and also multiple times in other posts. It really is a money-losing action to have the mortgage AND invest in bonds that yield much less than the mortgage interest rate. If the differences is a few basis points, it may not matter much. But now the difference is hundreds of basis points.

The only conceivable risk with pay-down/pay-off of the mortgage is liquidity risk. Then again, the liquidity risk can be minimized if the lender allows for a re-cast of the mortgage (same end date for mortgage loan payoff, but lesser REQUIRED monthly payment); as also with having about 1 year of expenses in an emergency fund.
I disagreed. The portfolio return is not just the sum of its part.

KlangFool
Hyperchicken
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Re: Thoughts on Pre-Paying my Mortgage?

Post by Hyperchicken »

The rational thing to do would IMO be this:
  • Move to a more aggressive asset allocation (e.g. 80/20 stocks/bonds).
  • Refinance the mortgage.
Less drastic but also less rational change:
  • Liquidate CDs, pay all cash towards the mortgage, leaving only the operational cash reserve and whatever is deemed necessary to maintain adequate liquidity.
  • Still look into refinancing the mortgage. Possibly before paying it down, if that helps you get a better deal.
Either way I would not sell stocks to pay down the mortgage.

Note: BofA is not really competitive as far as mortgage refinancing goes.
Last edited by Hyperchicken on Mon Nov 30, 2020 11:48 am, edited 1 time in total.
smitcat
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Re: Thoughts on Pre-Paying my Mortgage?

Post by smitcat »

KlangFool wrote: Mon Nov 30, 2020 11:36 am
lakpr wrote: Mon Nov 30, 2020 11:21 am
KlangFool wrote: Mon Nov 30, 2020 10:51 am CaptainTyson,


Your asset allocation (AA) is 33/67.


A) Why can't you invest the extra money on the whole 33/67: 33% stock and 67% CASH?


B) Why do you think that it cannot beat 3.75%?

You do not have to change your asset allocation.

KlangFool
*IF* the 33:67 portfolio is beating the 3.75% return, that return is almost exclusively coming from the stocks allocation of 33%. The 67% allocated to bonds and cash will yield only 0.6% (CDs) or 1.1% (SEC yield of bonds). That money, rather being deployed in the "bonds and cash" (fixed income instruments), is much much better deployed to prepay or pay off the mortgage, and the OP would be in *exactly* the same position risk wise as he is before. The amount of market risk the OP would be taking remains the same, with or without the pay-down/pay-off of the mortgage.

I have said this in my previous post in this thread, and also multiple times in other posts. It really is a money-losing action to have the mortgage AND invest in bonds that yield much less than the mortgage interest rate. If the differences is a few basis points, it may not matter much. But now the difference is hundreds of basis points.

The only conceivable risk with pay-down/pay-off of the mortgage is liquidity risk. Then again, the liquidity risk can be minimized if the lender allows for a re-cast of the mortgage (same end date for mortgage loan payoff, but lesser REQUIRED monthly payment); as also with having about 1 year of expenses in an emergency fund.
I disagreed. The portfolio return is not just the sum of its part.

KlangFool
Other then the sum of its parts what else is missing?
lakpr
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Re: Thoughts on Pre-Paying my Mortgage?

Post by lakpr »

Hyperchicken wrote: Mon Nov 30, 2020 11:46 am Either way I would not sell stocks to pay down the mortgage.
I am really curious: for what purpose are you investing in stocks in a taxable account? Presumably for SOME purpose? The OP has already stated that he is conservative at heart, and do not like to take undue risks. Implicitly also said that paying off the mortgage is one of the purposes of his investments. Selling stocks *IS* taking risk off the table and preserving the gains.
lakpr
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Re: Thoughts on Pre-Paying my Mortgage?

Post by lakpr »

smitcat wrote: Mon Nov 30, 2020 11:47 am
KlangFool wrote: Mon Nov 30, 2020 11:36 am
I disagreed. The portfolio return is not just the sum of its part.

KlangFool
Other then the sum of its parts what else is missing?
Yes, I am really puzzled as to what else is the portfolio return, if not sum of returns of its parts.

KF,
Please explain!
hnd
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Re: Thoughts on Pre-Paying my Mortgage?

Post by hnd »

i'm not a fan of partial prepayments, like paying down on the principle each month. There isn't a benefit really, just limbo, your payment amount stays the same, and you really are just letting the bank make money off your $ instead of you. I like to have the money available if for some reason its necessary. pulling money out of home equity requires costs and potential hassle....especially if said reason i need it is because of unemployement.

we put what would be a double payment into a taxable account, in a fairly aggressive fund. FFNOX. And any time we get an extra chunk of money, it will go there too. We hold it there and expect to be able to pay off the whole thing in one lump sum in 7-8 years. of course who knows where the economy is or what the balance is at that time, but we can evaluate at that time whether paying off the mortgage is the right thing for us.
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JoeRetire
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Re: Thoughts on Pre-Paying my Mortgage?

Post by JoeRetire »

CaptainTyson wrote: Sun Nov 29, 2020 5:47 pm I have a mortgage at 3.75% and I'm thinking about making a partial pre-payment so I can directly pay down some principal. Basically it's like getting a guaranteed 3.75% return on my "investment." Certainly this is better than a CD or bonds at their current rates, correct? Of course, stocks would be better but I already have significant funds devoted to stocks so I'm not looking to do more stock investment. Thank you!
I wouldn't.

But often, it depends on your whole financial situation - your age, what you hold in other assets, if you are fully funding all retirement investments, if you have a sufficient emergency fund, your future financial goals, etc.

If you are at the point in your life where you never want to invest any additional funds according to your asset allocation plan, then perhaps it makes sense.

Where will the funds you will use to prepay come from?
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.
Jags4186
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Re: Thoughts on Pre-Paying my Mortgage?

Post by Jags4186 »

hnd wrote: Mon Nov 30, 2020 12:21 pm i'm not a fan of partial prepayments, like paying down on the principle each month. There isn't a benefit really, just limbo, your payment amount stays the same, and you really are just letting the bank make money off your $ instead of you. I like to have the money available if for some reason its necessary. pulling money out of home equity requires costs and potential hassle....especially if said reason i need it is because of unemployement.

we put what would be a double payment into a taxable account, in a fairly aggressive fund. FFNOX. And any time we get an extra chunk of money, it will go there too. We hold it there and expect to be able to pay off the whole thing in one lump sum in 7-8 years. of course who knows where the economy is or what the balance is at that time, but we can evaluate at that time whether paying off the mortgage is the right thing for us.
The benefit is beyond what a spreadsheet says for many people — perhaps not many Bogleheads. Money paid towards your mortgage adds to your balance sheet and becomes illiquid. That means it’s not getting spent on a new handbag, a new pool, a new watch, a tony vacation. The real alternative for many people is “pay down mortgage or buy more stuff” not “pay down mortgage or invest in my well-tuned portfolio.”

Even though it doesn’t matter, sometimes when I think about buying something I’ll just head over to my mortgage servicer’s website and pay down the cost of the object on my mortgage. $100 here, $75 there may not be a lot, but all of a sudden I’m short on cash and not ready, able, and willing to go buy my new whatever. Remember, when you have a mortgage you are choosing to borrow at your mortgage’s prevailing interest rate to buy anything and everything. You get groceries? It’s a loan. You get gas? It’s on a loan. You buy Christmas gifts? Those are paid for by your personal house bank.
KlangFool
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Re: Thoughts on Pre-Paying my Mortgage?

Post by KlangFool »

smitcat wrote: Mon Nov 30, 2020 11:47 am
KlangFool wrote: Mon Nov 30, 2020 11:36 am
lakpr wrote: Mon Nov 30, 2020 11:21 am
KlangFool wrote: Mon Nov 30, 2020 10:51 am CaptainTyson,


Your asset allocation (AA) is 33/67.


A) Why can't you invest the extra money on the whole 33/67: 33% stock and 67% CASH?


B) Why do you think that it cannot beat 3.75%?

You do not have to change your asset allocation.

KlangFool
*IF* the 33:67 portfolio is beating the 3.75% return, that return is almost exclusively coming from the stocks allocation of 33%. The 67% allocated to bonds and cash will yield only 0.6% (CDs) or 1.1% (SEC yield of bonds). That money, rather being deployed in the "bonds and cash" (fixed income instruments), is much much better deployed to prepay or pay off the mortgage, and the OP would be in *exactly* the same position risk wise as he is before. The amount of market risk the OP would be taking remains the same, with or without the pay-down/pay-off of the mortgage.

I have said this in my previous post in this thread, and also multiple times in other posts. It really is a money-losing action to have the mortgage AND invest in bonds that yield much less than the mortgage interest rate. If the differences is a few basis points, it may not matter much. But now the difference is hundreds of basis points.

The only conceivable risk with pay-down/pay-off of the mortgage is liquidity risk. Then again, the liquidity risk can be minimized if the lender allows for a re-cast of the mortgage (same end date for mortgage loan payoff, but lesser REQUIRED monthly payment); as also with having about 1 year of expenses in an emergency fund.
I disagreed. The portfolio return is not just the sum of its part.

KlangFool
Other then the sum of its parts what else is missing?
smitcat,

It had been proven this year.


The portfolio return of a 60/40 portfolio is not the same as the return of 60% stock and 40% bond. In the real sequence of return, volatility helps the 60/40 portfolio to "Buy Low and Sell High".

KlangFool
KlangFool
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Re: Thoughts on Pre-Paying my Mortgage?

Post by KlangFool »

Jags4186 wrote: Mon Nov 30, 2020 12:30 pm
hnd wrote: Mon Nov 30, 2020 12:21 pm i'm not a fan of partial prepayments, like paying down on the principle each month. There isn't a benefit really, just limbo, your payment amount stays the same, and you really are just letting the bank make money off your $ instead of you. I like to have the money available if for some reason its necessary. pulling money out of home equity requires costs and potential hassle....especially if said reason i need it is because of unemployement.

we put what would be a double payment into a taxable account, in a fairly aggressive fund. FFNOX. And any time we get an extra chunk of money, it will go there too. We hold it there and expect to be able to pay off the whole thing in one lump sum in 7-8 years. of course who knows where the economy is or what the balance is at that time, but we can evaluate at that time whether paying off the mortgage is the right thing for us.
The benefit is beyond what a spreadsheet says for many people — perhaps not many Bogleheads. Money paid towards your mortgage adds to your balance sheet and becomes illiquid.
Jags4186,

If we want to go down that path, most people do not max up their 401K either. Maxing up the 401K can lock down the saving and reduce taxes at the same time.


KlangFool
smitcat
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Re: Thoughts on Pre-Paying my Mortgage?

Post by smitcat »

KlangFool wrote: Mon Nov 30, 2020 12:35 pm
smitcat wrote: Mon Nov 30, 2020 11:47 am
KlangFool wrote: Mon Nov 30, 2020 11:36 am
lakpr wrote: Mon Nov 30, 2020 11:21 am
KlangFool wrote: Mon Nov 30, 2020 10:51 am CaptainTyson,


Your asset allocation (AA) is 33/67.


A) Why can't you invest the extra money on the whole 33/67: 33% stock and 67% CASH?


B) Why do you think that it cannot beat 3.75%?

You do not have to change your asset allocation.

KlangFool
*IF* the 33:67 portfolio is beating the 3.75% return, that return is almost exclusively coming from the stocks allocation of 33%. The 67% allocated to bonds and cash will yield only 0.6% (CDs) or 1.1% (SEC yield of bonds). That money, rather being deployed in the "bonds and cash" (fixed income instruments), is much much better deployed to prepay or pay off the mortgage, and the OP would be in *exactly* the same position risk wise as he is before. The amount of market risk the OP would be taking remains the same, with or without the pay-down/pay-off of the mortgage.

I have said this in my previous post in this thread, and also multiple times in other posts. It really is a money-losing action to have the mortgage AND invest in bonds that yield much less than the mortgage interest rate. If the differences is a few basis points, it may not matter much. But now the difference is hundreds of basis points.

The only conceivable risk with pay-down/pay-off of the mortgage is liquidity risk. Then again, the liquidity risk can be minimized if the lender allows for a re-cast of the mortgage (same end date for mortgage loan payoff, but lesser REQUIRED monthly payment); as also with having about 1 year of expenses in an emergency fund.
I disagreed. The portfolio return is not just the sum of its part.

KlangFool
Other then the sum of its parts what else is missing?
smitcat,

It had been proven this year.


The portfolio return of a 60/40 portfolio is not the same as the return of 60% stock and 40% bond. In the real sequence of return, volatility helps the 60/40 portfolio to "Buy Low and Sell High".

KlangFool
"In the real sequence of return, volatility helps the 60/40 portfolio to "Buy Low and Sell High"."
So wt what was the real return of a 60/40 and with which balancing scheme was it achieved?
Did you consider taxes when this happens?
Do you think the OP should consider taxes when doing this?
What is the 30/70 portfolio anticipated return for you in 2021?
Hyperchicken
Posts: 507
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Re: Thoughts on Pre-Paying my Mortgage?

Post by Hyperchicken »

lakpr wrote: Mon Nov 30, 2020 12:07 pm I am really curious: for what purpose are you investing in stocks in a taxable account? Presumably for SOME purpose?
I am investing in stocks in a taxable account because this is my asset allocation, and I'm running out of tax advantaged space.
lakpr wrote: Mon Nov 30, 2020 12:07 pm The OP has already stated that he is conservative at heart, and do not like to take undue risks. Implicitly also said that paying off the mortgage is one of the purposes of his investments. Selling stocks *IS* taking risk off the table and preserving the gains.
Heart is not necessarily the body part I would be making financial decisions with.

Point was that the market risk may not be undue. OP stated that he is decades away from the retirement, so it may be too early to take the risk off the table.

OP believes he has saved enough and that he does not need to take the risk in the market. That could be the case, I'm not going to argue. However, given that OP is considering paying the mortgage down, not paying it off, I am inclined to think that he does not in fact have that much savings so as to sit back, relax, and take the money off the market.
Admiral
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Re: Thoughts on Pre-Paying my Mortgage?

Post by Admiral »

What is the duration of your mortgage, how many years are left, and what is the balance?

You should be aware that if you're young and/or far from retirement, AND not high net worth, your current, highly conservative asset allocation may not provide the growth you need (depending on your expected future expenses, of course). Even many current retirees on the forum are not that conservative.

Pre-paying is the conservative choice, but probably not the best choice financially. Much depends on the answers to the question posed above. Certainly if you hold a 30 year mortgage and are not that far along, a refi to 15 is much wiser, esp since the rate will be a LOT lower that 3.75%.
Charon
Posts: 180
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Re: Thoughts on Pre-Paying my Mortgage?

Post by Charon »

lakpr wrote: Mon Nov 30, 2020 12:57 am Prepaying a big chunk of the mortgage is indeed buying a CD yielding 3.75% for the remainder if your mortgage term.
It's higher than that. For a 22% tax bracket, it's the equivalent of a 4.8% CD, since you have to pay income tax on the CD but not on the "earnings" from paying off your mortgage.

So I would pay down a mortgage if that money would otherwise be going to a CD that is only for savings purposes (and not, for example, for an emergency fund).

Please ignore KlangFool. He doesn't understand risk/reward calculations.

However, I would certainly join with others in saying that the OP's asset allocation is too conservative, unless they have massively more money than they will ever need (which, as has been pointed out, seems unlike if they still have a mortgage).
KlangFool
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Re: Thoughts on Pre-Paying my Mortgage?

Post by KlangFool »

smitcat wrote: Mon Nov 30, 2020 12:42 pm
KlangFool wrote: Mon Nov 30, 2020 12:35 pm
smitcat wrote: Mon Nov 30, 2020 11:47 am
KlangFool wrote: Mon Nov 30, 2020 11:36 am
lakpr wrote: Mon Nov 30, 2020 11:21 am

*IF* the 33:67 portfolio is beating the 3.75% return, that return is almost exclusively coming from the stocks allocation of 33%. The 67% allocated to bonds and cash will yield only 0.6% (CDs) or 1.1% (SEC yield of bonds). That money, rather being deployed in the "bonds and cash" (fixed income instruments), is much much better deployed to prepay or pay off the mortgage, and the OP would be in *exactly* the same position risk wise as he is before. The amount of market risk the OP would be taking remains the same, with or without the pay-down/pay-off of the mortgage.

I have said this in my previous post in this thread, and also multiple times in other posts. It really is a money-losing action to have the mortgage AND invest in bonds that yield much less than the mortgage interest rate. If the differences is a few basis points, it may not matter much. But now the difference is hundreds of basis points.

The only conceivable risk with pay-down/pay-off of the mortgage is liquidity risk. Then again, the liquidity risk can be minimized if the lender allows for a re-cast of the mortgage (same end date for mortgage loan payoff, but lesser REQUIRED monthly payment); as also with having about 1 year of expenses in an emergency fund.
I disagreed. The portfolio return is not just the sum of its part.

KlangFool
Other then the sum of its parts what else is missing?
smitcat,

It had been proven this year.


The portfolio return of a 60/40 portfolio is not the same as the return of 60% stock and 40% bond. In the real sequence of return, volatility helps the 60/40 portfolio to "Buy Low and Sell High".

KlangFool
"In the real sequence of return, volatility helps the 60/40 portfolio to "Buy Low and Sell High"."
So wt what was the real return of a 60/40 and with which balancing scheme was it achieved?
Did you consider taxes when this happens?
Do you think the OP should consider taxes when doing this?
What is the 30/70 portfolio anticipated return for you in 2021?
smitcat,

Folks with an AA of 70/30 to 30/70 would have rebalanced twice this year if they use a 5/25 band-based rebalancing scheme.

<<Did you consider taxes when this happens?
Do you think the OP should consider taxes when doing this?>>

No.


<<What is the 30/70 portfolio anticipated return for you in 2021?>>

I do not know. But, if the market stays volatile, the rebalancing will increase the return.

KlangFool
smitcat
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Re: Thoughts on Pre-Paying my Mortgage?

Post by smitcat »

KlangFool wrote: Mon Nov 30, 2020 1:01 pm
smitcat wrote: Mon Nov 30, 2020 12:42 pm
KlangFool wrote: Mon Nov 30, 2020 12:35 pm
smitcat wrote: Mon Nov 30, 2020 11:47 am
KlangFool wrote: Mon Nov 30, 2020 11:36 am

I disagreed. The portfolio return is not just the sum of its part.

KlangFool
Other then the sum of its parts what else is missing?
smitcat,

It had been proven this year.


The portfolio return of a 60/40 portfolio is not the same as the return of 60% stock and 40% bond. In the real sequence of return, volatility helps the 60/40 portfolio to "Buy Low and Sell High".

KlangFool
"In the real sequence of return, volatility helps the 60/40 portfolio to "Buy Low and Sell High"."
So wt what was the real return of a 60/40 and with which balancing scheme was it achieved?
Did you consider taxes when this happens?
Do you think the OP should consider taxes when doing this?
What is the 30/70 portfolio anticipated return for you in 2021?
smitcat,

Folks with an AA of 70/30 to 30/70 would have rebalanced twice this year if they use a 5/25 band-based rebalancing scheme.

<<Did you consider taxes when this happens?
Do you think the OP should consider taxes when doing this?>>

No.


<<What is the 30/70 portfolio anticipated return for you in 2021?>>

I do not know. But, if the market stays volatile, the rebalancing will increase the return.

KlangFool
Tax considerations:
Could be a huge mistake since we do not know his tax situation.

"Folks with an AA of 70/30 to 30/70 would have rebalanced twice this year if they use a 5/25 band-based rebalancing scheme."
Even without tax considerations what was the return for that AA with a 5/25 rebalance scheme vs without this year?
hnd
Posts: 289
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Re: Thoughts on Pre-Paying my Mortgage?

Post by hnd »

Jags4186 wrote: Mon Nov 30, 2020 12:30 pm
hnd wrote: Mon Nov 30, 2020 12:21 pm i'm not a fan of partial prepayments, like paying down on the principle each month. There isn't a benefit really, just limbo, your payment amount stays the same, and you really are just letting the bank make money off your $ instead of you. I like to have the money available if for some reason its necessary. pulling money out of home equity requires costs and potential hassle....especially if said reason i need it is because of unemployement.

we put what would be a double payment into a taxable account, in a fairly aggressive fund. FFNOX. And any time we get an extra chunk of money, it will go there too. We hold it there and expect to be able to pay off the whole thing in one lump sum in 7-8 years. of course who knows where the economy is or what the balance is at that time, but we can evaluate at that time whether paying off the mortgage is the right thing for us.
The benefit is beyond what a spreadsheet says for many people — perhaps not many Bogleheads. Money paid towards your mortgage adds to your balance sheet and becomes illiquid. That means it’s not getting spent on a new handbag, a new pool, a new watch, a tony vacation. The real alternative for many people is “pay down mortgage or buy more stuff” not “pay down mortgage or invest in my well-tuned portfolio.”

Even though it doesn’t matter, sometimes when I think about buying something I’ll just head over to my mortgage servicer’s website and pay down the cost of the object on my mortgage. $100 here, $75 there may not be a lot, but all of a sudden I’m short on cash and not ready, able, and willing to go buy my new whatever. Remember, when you have a mortgage you are choosing to borrow at your mortgage’s prevailing interest rate to buy anything and everything. You get groceries? It’s a loan. You get gas? It’s on a loan. You buy Christmas gifts? Those are paid for by your personal house bank.
there are many who can't do what i do. I've worked with them. yeah, locking your money away from yourself is def prudent. and the sense of accomplishment is completely real as well.
KlangFool
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Re: Thoughts on Pre-Paying my Mortgage?

Post by KlangFool »

smitcat wrote: Mon Nov 30, 2020 1:24 pm
KlangFool wrote: Mon Nov 30, 2020 1:01 pm
smitcat wrote: Mon Nov 30, 2020 12:42 pm
KlangFool wrote: Mon Nov 30, 2020 12:35 pm
smitcat wrote: Mon Nov 30, 2020 11:47 am

Other then the sum of its parts what else is missing?
smitcat,

It had been proven this year.


The portfolio return of a 60/40 portfolio is not the same as the return of 60% stock and 40% bond. In the real sequence of return, volatility helps the 60/40 portfolio to "Buy Low and Sell High".

KlangFool
"In the real sequence of return, volatility helps the 60/40 portfolio to "Buy Low and Sell High"."
So wt what was the real return of a 60/40 and with which balancing scheme was it achieved?
Did you consider taxes when this happens?
Do you think the OP should consider taxes when doing this?
What is the 30/70 portfolio anticipated return for you in 2021?
smitcat,

Folks with an AA of 70/30 to 30/70 would have rebalanced twice this year if they use a 5/25 band-based rebalancing scheme.

<<Did you consider taxes when this happens?
Do you think the OP should consider taxes when doing this?>>

No.


<<What is the 30/70 portfolio anticipated return for you in 2021?>>

I do not know. But, if the market stays volatile, the rebalancing will increase the return.

KlangFool
Tax considerations:
Could be a huge mistake since we do not know his tax situation.

"Folks with an AA of 70/30 to 30/70 would have rebalanced twice this year if they use a 5/25 band-based rebalancing scheme."
Even without tax considerations what was the return for that AA with a 5/25 rebalance scheme vs without this year?
I do not know.

My 60/40 portfolio return about 7.5% YTD. I use both 5/25 and annual rebalancing.

VTSAX returns 3.23% YTD

VBTLX returns 6.36% YTD


KlangFool
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Re: Thoughts on Pre-Paying my Mortgage?

Post by 1789 »

CaptainTyson wrote: Sun Nov 29, 2020 5:47 pm I have a mortgage at 3.75% and I'm thinking about making a partial pre-payment so I can directly pay down some principal. Basically it's like getting a guaranteed 3.75% return on my "investment." Certainly this is better than a CD or bonds at their current rates, correct? Of course, stocks would be better but I already have significant funds devoted to stocks so I'm not looking to do more stock investment. Thank you!
Can you refinance to a lower rate? I would invest the money and not pay off the mortgage if i were you.
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Re: Thoughts on Pre-Paying my Mortgage?

Post by anon_investor »

CaptainTyson wrote: Mon Nov 30, 2020 10:34 am
anon_investor wrote: Sun Nov 29, 2020 8:35 pm
CaptainTyson wrote: Sun Nov 29, 2020 5:47 pm I have a mortgage at 3.75% and I'm thinking about making a partial pre-payment so I can directly pay down some principal. Basically it's like getting a guaranteed 3.75% return on my "investment." Certainly this is better than a CD or bonds at their current rates, correct? Of course, stocks would be better but I already have significant funds devoted to stocks so I'm not looking to do more stock investment. Thank you!
Have you considered a no cost refi?
Yes and no. I spoke with my lender (Bank of Am) and was advised that while I could get a refi, the closing costs would pretty much negate the lower interest rates I'd get. It didn't sound like they offered a no cost option. Any suggestions? Thanks.
Forget a big bank, you need to look at some online mortgage places, like LenderFi. I did a no cost refi with LenderFi in July (2.75% on 30 yr fixed). Here is a good thread where people are posting their recent experiences doing refis:
Refinance Mega Thread
viewtopic.php?f=2&t=289559&start=8050
Drovor
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Re: Thoughts on Pre-Paying my Mortgage?

Post by Drovor »

hnd wrote: Mon Nov 30, 2020 12:21 pm i'm not a fan of partial prepayments, like paying down on the principle each month. There isn't a benefit really, just limbo, your payment amount stays the same, and you really are just letting the bank make money off your $ instead of you. I like to have the money available if for some reason its necessary. pulling money out of home equity requires costs and potential hassle....especially if said reason i need it is because of unemployement.
By making extra principle payments, the benefit would be paying less in interest? That is how I understand it at least.
Topic Author
CaptainTyson
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Re: Thoughts on Pre-Paying my Mortgage?

Post by CaptainTyson »

Thank you again everyone for all the replies and advice. I think you all have given me great things to think about and I have no further questions. This thread can probably be closed but of course I defer to the mods.
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JoeRetire
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Re: Thoughts on Pre-Paying my Mortgage?

Post by JoeRetire »

Jags4186 wrote: Mon Nov 30, 2020 12:30 pmMoney paid towards your mortgage adds to your balance sheet and becomes illiquid. That means it’s not getting spent on a new handbag, a new pool, a new watch, a tony vacation. The real alternative for many people is “pay down mortgage or buy more stuff” not “pay down mortgage or invest in my well-tuned portfolio.”
Yup.

If you simply cannot control your spending when you have "available money", then I guess it might make sense to put it towards your mortgage.

Although for the life of me, I can't understand why anyone would be incapable of investing that money if they are capable of pre-paying some mortgage.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.
Jags4186
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Re: Thoughts on Pre-Paying my Mortgage?

Post by Jags4186 »

JoeRetire wrote: Mon Nov 30, 2020 2:52 pm
Jags4186 wrote: Mon Nov 30, 2020 12:30 pmMoney paid towards your mortgage adds to your balance sheet and becomes illiquid. That means it’s not getting spent on a new handbag, a new pool, a new watch, a tony vacation. The real alternative for many people is “pay down mortgage or buy more stuff” not “pay down mortgage or invest in my well-tuned portfolio.”
Yup.

If you simply cannot control your spending when you have "available money", then I guess it might make sense to put it towards your mortgage.

Although for the life of me, I can't understand why anyone would be incapable of investing that money if they are capable of pre-paying some mortgage.
The mortgage is a bill. Everyone understands bills. Lots of people have no clue about investing.
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JoeRetire
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Re: Thoughts on Pre-Paying my Mortgage?

Post by JoeRetire »

Jags4186 wrote: Mon Nov 30, 2020 2:54 pm
JoeRetire wrote: Mon Nov 30, 2020 2:52 pm
Jags4186 wrote: Mon Nov 30, 2020 12:30 pmMoney paid towards your mortgage adds to your balance sheet and becomes illiquid. That means it’s not getting spent on a new handbag, a new pool, a new watch, a tony vacation. The real alternative for many people is “pay down mortgage or buy more stuff” not “pay down mortgage or invest in my well-tuned portfolio.”
Yup.

If you simply cannot control your spending when you have "available money", then I guess it might make sense to put it towards your mortgage.

Although for the life of me, I can't understand why anyone would be incapable of investing that money if they are capable of pre-paying some mortgage.
The mortgage is a bill. Everyone understands bills. Lots of people have no clue about investing.
You wouldn't need much of a clue to set up a taxable account invested in an index fund. Then, when you are too weak to resist spending, you could put the money to work for you rather than into the walls of your home.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.
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Re: Thoughts on Pre-Paying my Mortgage?

Post by Jags4186 »

JoeRetire wrote: Mon Nov 30, 2020 2:59 pm You wouldn't need much of a clue to set up a taxable account invested in an index fund. Then, when you are too weak to resist spending, you could put the money to work for you rather than into the walls of your home.
As I said, this isn't a huge deal for people on Bogleheads. Most people don't think that way or "get" investing. Source: the entire personal advisory services industry.

Perhaps you run in a different circle than me. Most people I know think you need "a guy" in order to invest. Most people I know are "investing" in complicated insurance or annuity products. Most people I know are highly educated. Many people believe the best investing is complicated investing.
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