Thoughts on Pre-Paying my Mortgage?

[JoeRetire]

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.

You are a Boglehead. Are you capable of opening up a taxable account at a site like Vanguard, Schwab, or TD Ameritrade?

[Jags4186]

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.

You are a Boglehead. Are you capable of opening up a taxable account at a site like Vanguard, Schwab, or TD Ameritrade?

I am capable and I have a taxable account.

[MathIsMyWayr]

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

True. Rebalancing increases return. It is a simple math: (x-y)^2 is equal to or greater than zero. Isn't it in investment 101 - buy low and sell high? Ask a hot dog vendor at a ball game. However, it is irrelevant whether to pay down a mortgage or not.

[smitcat]

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.

FWIW - most folks we know do not think you need a complicated investing plan - that would include some friends, our staff this year and most all of our daughters friends where the topic has come up. The younger folks I see at a local college seem to have a decent grasp on keeping investing somewhat simple as well but we do not get into too much detail there.

[smitcat]

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

True. Rebalancing increases return. It is a simple math: (x-y)^2 is equal to or greater than zero. Isn't it in investment 101 - buy low and sell high? Ask a hot dog vendor at a ball game. However, it is irrelevant whether to pay down a mortgage or not.

"True. Rebalancing increases return."
Assuming their are no transaction or tax consequences that would be very accurate.

[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.

By making extra principle payments, the benefit would be paying less in interest? That is how I understand it at least.

double payment at 3% interest rate pays off the loan a little after 12 years. placing that double payment in a portfolio that could allow you to write a check for full payment potentially much earlier(or later obviously).

One is much safer and one requires a bit of risk. but over the course of 10 years, i think its worth the risk. interest tax deduction potentially offsets any taxes paid in a taxable account but i've not worked that out.

[lakpr]

interest tax deduction potentially offsets any taxes paid in a taxable account but i've not worked that out.

Tax Cuts and Jobs Act practically eliminated the mortgage interest tax deduction for 93%+ of mortgage holders. The standard deduction is $14,800 more than the SALT limit. So you need to have a principal balance of ( $14,800 ÷ mortgage interest rate ) before itemized deductions benefit you. If you assume a 2.5% rate, then that works out to $370k. TCJA also said the max mortgage principal balance on which you can deduct the interest is also limited to $750k (NOT adjusted for inflation).

So unless your mortgage balance is between $370k and $750k, you do not get any benefit out of interest tax deduction.

[ Married Filing Jointly status assumed in the calculations above. Singles tend to rent than buy ]

[hand]

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.

Current lender is unlikely to be motivated to offer you a lower rate - if they're holding the loan on their books, they're essentially negotiating against themselves. You should shop one of the online vendors who compete on price. Assuming you have good credit and > 20% equity, no fee 3% or better mortgages are available for many.

Additional benefit of a refinance is that if you take the opportunity to pay down principal when you refinance, your monthly payment is immediately reduced.

[hnd]

interest tax deduction potentially offsets any taxes paid in a taxable account but i've not worked that out.

Tax Cuts and Jobs Act practically eliminated the mortgage interest tax deduction for 93%+ of mortgage holders. The standard deduction is $14,800 more than the SALT limit. So you need to have a principal balance of ( $14,800 ÷ mortgage interest rate ) before itemized deductions benefit you. If you assume a 2.5% rate, then that works out to $370k. TCJA also said the max mortgage principal balance on which you can deduct the interest is also limited to $750k (NOT adjusted for inflation).

So unless your mortgage balance is between $370k and $750k, you do not get any benefit out of interest tax deduction.

[ Married Filing Jointly status assumed in the calculations above. Singles tend to rent than buy ]

yup you are right. I didn't even think about that implication as my decision was made some time ago prior to this.

[JoeRetire]

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.

You are a Boglehead. Are you capable of opening up a taxable account at a site like Vanguard, Schwab, or TD Ameritrade?

I am capable and I have a taxable account.

Okay. Then I don't understand "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."

Doesn't matter. We each do what we think is right if we have "extra" money lying around.

[exigent]

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.

You’re under no obligation to use your current lender. Shop it around. We just did a no-cost from 3.875% to 2.625% (30 yr fixed) with Better and it was super smooth. We spoke with AmeriSave first, got a loan estimate from LenderFi, and then shopped it to Better. I’m sure we could’ve squeezed out a bit more with legwork, but that’s what I had the time and patience for.

Search the forums for those lender names and you’ll see plenty of threads. There’s also a refi mega-thread.

So... Whether or not you decided to pre-pay, I would absolutely refi down from 3.75%. Rates are at *truly* historical lows thanks to the pandemic.

[grabiner]

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.

You aren't taking any more risk if you sell cash or CDs to pay down the mortgage. You still have the same dollar amount in stock, so your net worth will be affected by the same amount if the stock market crashes. (Paying down the mortgage is analogous to buying a long-term bond, because you are getting a guaranteed number of dollars on a future date, just as if you bought a bond or CD.)

However, if you refinance to a lower rate, you don't want to break any high-rate CDs to pay down the mortgage, since those CDs are themselves earning well above the market rate. When they mature, paying down a mortgage (even if you refinance to 2.5%) is likely a better deal than reinvesting in new CDs at current yields.

[grabiner]

interest tax deduction potentially offsets any taxes paid in a taxable account but i've not worked that out.

Tax Cuts and Jobs Act practically eliminated the mortgage interest tax deduction for 93%+ of mortgage holders. The standard deduction is $14,800 more than the SALT limit. So you need to have a principal balance of ( $14,800 ÷ mortgage interest rate ) before itemized deductions benefit you. If you assume a 2.5% rate, then that works out to $370k.

You got the division wrong; $14,800/2.5%=563,200.

TCJA also said the max mortgage principal balance on which you can deduct the interest is also limited to $750k (NOT adjusted for inflation).

So unless your mortgage balance is between $370k and $750k, you do not get any benefit out of interest tax deduction.

[ Married Filing Jointly status assumed in the calculations above. Singles tend to rent than buy ]

Charitable contributions also count towards the itemized deductions. If you donate $5000 to charity, then you only need $9800 in mortgage interest to itemize deductions, which would be a mortgage of $394K.

[LadyGeek]

This thread has run its course and is locked (no longer helping the OP, derailed in several directions). See: Locked Topics

Moderators or site admins may lock a topic (set it so no more replies may be added) when a violation of posting policy has occurred. Occasionally, even if there are no overt violations of posting policy, a topic (or thread) will reach a point where the information content of the discussion has been essentially exhausted and further replies are much more likely to cause distress to the community than add anything of value.