Pay off mortgage vs bonds in taxable (after maxing out other retirement)

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Raspberry-503
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Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by Raspberry-503 »

I think I have drafted a post similar to this at leat 3 previous times and each time didn't post because I thought I should be able to figure it out on my owm from other posts, but I still have a mental block about why today's Yields have anything to do with long-term yields. So here it goes:

Once you have an emergency fund, are maxing out your 401(k) and Roth, and have no other debt than your mortgage, should you pay your mortgage off or invest in taxable because "it will still return more than the interest on your mortgage"?

For the reasoning about why you should invest in retirement before paying off the mortgage, especially if you're young, is well illustrated in this video (skip 10 1:30 if you want) https://www.youtube.com/watch?v=36BN42mat10

But I am already "maxing out everything else", so I'm delving into what to do with my "excess income" and why. Since as usual, the answer is probably "it depends", I'll share some basic info about my situation:
  • MFJ, early 50s, planning on retiring in 10 years but would love to have the option/security to do so earlier. planning on taking SS at 70
  • Mortgage is 15-year at 3.5%, with $88K principal & 9 years left (March 2030). We are currently paying bi-weekly instead of monthly, which is the equivalent of 2 extra payments per year, so the actual payoff date will be Jan 2029. I don't plan on retiring before the mortgage is paid off.
  • P&I is $1120/month. I am currently putting $1500/month into a taxable account (60/40 AA, with the bond portion being roughly 20% in muni bonds (MUB), 12% US total bonds (BND), 7% int'l bonds (BNDX) and 1% cash (because I was told by an advisor I needed 1-2% in "frictional cash". This is in addition to my ER)
  • I used to itemize my taxes, but the last few years TurboTax had me take the standard deduction, so I'm not even sure "mortgage interest is tax advantaged" is true anymore.

First stop, the Boglehead wiki says: https://www.bogleheads.org/wiki/Priorit ... nvestments
  • 8. Invest inside a taxable investing account. In certain circumstances, a Non-deductible traditional IRA and/or variable annuity may be better than a taxable account.
  • 9. Pay off low-interest debt (eg. most mortgages, some car loans).
So how do you transition from 8 to 9? There is no limit to taxable, you can't "max it out" and move on to #9


Looking at the advice on MrMoneyMustache's site: https://forum.mrmoneymustache.com/inves ... msg1333153
  • 7. Pay off any debts with interest rates ~3% or more above the current 10-year Treasury note yield.
  • 8. Invest in a taxable account and/or fund a 529 with any extra.
Ahah! we have a criteria. With 10-Year T-Bill around 1.5%, this says I should not pay my mortgage because is not 3% above 1.5%. Reading the fine print: take the risk-free return if high enough. Note that embedded in "high enough" is the assumption that your alternative is "all stocks" or a "fund of funds" (e.g., target retirement date) that provides a blend of stock and bond returns. If you wish to consider separate bond funds, compare the yield on a fund with a duration similar to the time remaining on the loan, and put your money toward the one with the higher after-tax interest/yield.

I wish I really understood what that means. The way I understand it, at a high level, it means if your taxable investment balance is going to grow slower than the mortgage rate, then you're better off taking the 3.5% guaranteed "return" on the mortgage cash.

A 60/40 portfolio has definitely returned more than 3.5% historically, but this is where my heap explodes: the mortgage itself has an 8-year horizon, but the money I invest instead of paying the mortgage has a 10-40 year horizon depending on how I withdraw from my different accounts during retirement, but I suspect taxable is what will be depleted first. Also does the sentence above imply I should look at the returns of the bonds section of the portfolio only?
What's the historical return of bonds (higher than the current T-Bill right?) and is today's TBill price an indication of a bond fund return over the next 10 years?


Here are some options I can think of, and in every case, I'd continue contributing $1500 to "something" every month, and once the mortgage is paid off I contribute the usual $1500 plus the $1120 I now saved in P&I :
- Do nothing, continue paying my mortgage over the next 8 years and invest $1500 at 60/40 in brokerage
- Put the bond portion of the $1500 into the mortgage, i.e. pay an extra $600 a month to the mortgage principal and invest the remaining $900 in the stock portion only of the brokerage (so it would slowly shift over time to a higher stock allocation, so would my entire portfolio, however, the imbalance would be much smaller)
- take the mortgage ($88K) balance out of the brokerage stock portion today and pay off the mortgage immediately (causing the taxable account to snaps to roughly 75/25). I think I don't want to rebalance, or now I am losing the 60/40 return. but then what, put my $1500+$1120 in the taxable account every month and invest only in bonds till I'm back to 60/40? my head hurts!
- ?
- ?
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FiveK
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by FiveK »

Given that the "correct" answer will be known only in hindsight, it appears you understand the issues well. :)

The usual trade-off is between a lower but guaranteed return (paying the mortgage) vs. a "higher expected" but not guaranteed return (stock investing). There is no way to resolve that other than making an assumption about what will actually happen in the future.

It's more straightforward when comparing mortgage vs. bonds. E.g., see Paying down loans versus investing - Bogleheads.

I believe the answer to your "does the sentence above imply I should look at the returns of the bonds section of the portfolio only?" question is "yes" because it refers to a comparison of bond funds vs. paying debt.

All three options you mention are reasonable. Find a three-sided coin and...good luck!
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by retiredjg »

I don't think it matters much. If you have no preference for one over the other, do half and half.
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by eye.surgeon »

I'd pay off the mortgage but that advice is not based on any financial analysis.
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by fatcoffeedrinker »

retiredjg wrote: Mon Jun 07, 2021 1:59 pm I don't think it matters much. If you have no preference for one over the other, do half and half.
I wouldn't do half and half, unless you are getting your mortgage reconstituted to a lower monthly payment. One of the advantages of paying off the mortgage is the immediate increased cash flow it creates to make new investments.
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by BolderBoy »

eye.surgeon wrote: Mon Jun 07, 2021 2:02 pmI'd pay off the mortgage but that advice is not based on any financial analysis.
This is what I'd do, too. You haven't got that far to go. You'll be amazed at how good it feels.
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by grabiner »

It may be easier to understand the comparison by considering pairs of options of the same risk.

A. Leave everything unchanged.
B. Sell a bond fund to pay down the mortgage.
C. Keep the mortgage unchanged, and move money from your current allocation to a bond fund.
D. Sell your current allocation to pay down the mortgage.

Rather than comparing A versus D, you can compare A versus B, and C versus D. Since your mortgage rate is much higher than your bond yield, B will come out ahead of A, with no change in risk. Likewise, D is better than C. So, regardless of how much risk you want to take, you should pay down the mortgage.

I made the same decision last year, with a much smaller spread (0.6% between after-tax mortgage rate and muni yield, but I was able to pay off the whole thing at once). I sold bonds to pay off my mortgage, keeping the same dollar amount in stock so that I got the full benefit of the market recovery.
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by grabiner »

Raspberry-503 wrote: Mon Jun 07, 2021 1:05 pm The way I understand it, at a high level, it means if your taxable investment balance is going to grow slower than the mortgage rate, then you're better off taking the 3.5% guaranteed "return" on the mortgage cash.
And even if it isn't, you have to consider the trade-off of risk versus return. You expect the stock market to grow faster than the bond market, but you are buying bonds yielding 1.32% taxable (current yield of Total Bond Market) rather than stock in order to reduce your risk. Therefore, you should also be willing to take a guaranteed return of 3.5% tax-free rather than buying stock in order to reduce your risk.
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by fortfun »

Just paid my mortgage off with my brokerage account to cash flow my 457 (39k/yr-catchup), 401k (19.5/yr), Roth IRA, DW's 457 (26k/yr), DW's 403b (26k/yr), DW's Roth IRA, DW's HSA, and DW's 401a (15k/yr).

No regrets here :)

I say pay off the mortgage!

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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by lazynovice »

How much in taxes would it cost you to sell enough in brokerage to pay it off?

I’d pay it off, but not due to math. I hardly ever see a mathematical reason to pay one off. It sounds like it is a huge emotional burden for you and you will sleep better at night with it gone. We have paid two off now and we don’t regret it. The money would be worth a lot more in the market but we still do not regret it.
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by FiveK »

grabiner wrote: Mon Jun 07, 2021 10:56 pm It may be easier to understand the comparison by considering pairs of options of the same risk.
Rather than comparing A versus D, you can compare A versus B, and C versus D.

A. Leave everything unchanged.
B. Sell a bond fund to pay down the mortgage.
Since your mortgage rate is much higher than your bond yield, B will come out ahead of A, with no change in risk.
So far so good.
C. Keep the mortgage unchanged, and move money from your current allocation to a bond fund.
D. Sell your current allocation to pay down the mortgage.
Likewise, D is better than C. So, regardless of how much risk you want to take, you should pay down the mortgage.
For someone with (and comfortable with) a high (e.g., 100%) stock allocation, why would option C be a consideration at all?
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by Raspberry-503 »

>you are buying bonds yielding 1.32% taxable (current yield of Total Bond Market)
>Since your mortgage rate is much higher than your bond yield,

I guess I am missing something fundamental about how to think of bond funds. Why is the yield important, isn't it the overall value of the bond which changes over time? Granted the 10 year return of BND is still a little under 3.5%

Ok, so I want to pay the mortgage, leave the emergency fund alone, instead sell funds from the brokerage to fund the payment.

Do I sell muni/BND/BNDX in the proportions they're held in?

To use round numbers, let's assume my taxable account is worth $500K. I sell $90k of bonds to cover the remainder of the mortgage. So the account went from $500K ($300k stocks, $200k bonds at 60/40) to $410K ($300 stock, $110k bond) or roughly 75/25 AA.

I do need to check on what the taxes would be on selling that $90K, but I think it wouldn't be bad.

How do I get back to 60/40? Invest what used to be the mortgage payment into only bonds until it's balanced again? If the market crashed next year then you'd reach 60/40 through stock attrition and start maintaining 60/40 even before you repay the $90K? What if stocks keep rising? Rebalance to 75/25, or after I've put in $45k rebalance to 70/30, on the way to 60/40 by the time I fully repaid the $90K?

Also if I did my math right I'd save $12K in interest by paying the loan now vs letting it run out.
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by harikaried »

Raspberry-503 wrote: Tue Jun 08, 2021 12:28 am To use round numbers, let's assume my taxable account is worth $500K. I sell $90k of bonds to cover the remainder of the mortgage. So the account went from $500K ($300k stocks, $200k bonds at 60/40) to $410K ($300 stock, $110k bond) or roughly 75/25 AA.

How do I get back to 60/40?
I think this part is what's confusing you as by having the debt, your net asset allocation has been at 75/25. That's why selling bonds to pay off the mortgage is similar risk as it maintains the same net aseet allocation.

If you actually wanted to be at net 60/40 (with or without the mortgage) you can rebalance immediately as usual -- preferably in a tax advantaged account.
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by retiredjg »

Raspberry-503 wrote: Tue Jun 08, 2021 12:28 am How do I get back to 60/40? Invest what used to be the mortgage payment into only bonds until it's balanced again? If the market crashed next year then you'd reach 60/40 through stock attrition and start maintaining 60/40 even before you repay the $90K? What if stocks keep rising? Rebalance to 75/25, or after I've put in $45k rebalance to 70/30, on the way to 60/40 by the time I fully repaid the $90K?
People have different ways of seeing this. Some would say that you never were at 60/40 because you had a mortgage and bonds at the same time. Other people see the mortgage and the stock to bond ratio as entirely separate issues.

It appears you are one of the second group. You would not be happy paying off the mortgage and leaving your portfolio at 75/25 because it is the same risk you had before. To you, the portfolio would be wrong.

You want to pay off the mortgage and keep your portfolio where you are comfortable. That's what you should do and it doesn't really matter which method you use to get the portfolio where you want it as long as it happens fast enough to suit you.

To me, the most obvious method would be to sell both stocks and bonds to get the money to pay off the mortgage.
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by Raspberry-503 »

Thanks to both of you, it was indeed the mental leap i was missing. I have other accounts besides taxable so the skew is not as large as 75/25, i was simplifying, but I get it now.

>To me, the most obvious method would be to sell both stocks and bonds to get the money to pay off the mortgage

In that case aren't I paying off a 3.5% debt with money that's historically earning close to twice as much (604/40 gains). That's the point of the video in the OP isn't it?
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by Wiggums »

eye.surgeon wrote: Mon Jun 07, 2021 2:02 pm I'd pay off the mortgage but that advice is not based on any financial analysis.
+1
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by grabiner »

FiveK wrote: Tue Jun 08, 2021 12:09 am
grabiner wrote: Mon Jun 07, 2021 10:56 pm It may be easier to understand the comparison by considering pairs of options of the same risk.
Rather than comparing A versus D, you can compare A versus B, and C versus D.

A. Leave everything unchanged.
B. Sell a bond fund to pay down the mortgage.
Since your mortgage rate is much higher than your bond yield, B will come out ahead of A, with no change in risk.
So far so good.
C. Keep the mortgage unchanged, and move money from your current allocation to a bond fund.
D. Sell your current allocation to pay down the mortgage.
Likewise, D is better than C. So, regardless of how much risk you want to take, you should pay down the mortgage.
For someone with (and comfortable with) a high (e.g., 100%) stock allocation, why would option C be a consideration at all?
The only reason C is included is to create a fair comparison. Most investors won't consider C. But if D is better than C, then B is better than A, and thus A cannot be right; you should choose either B or D.

Conversely, if C is better than D, then A is better than B, and thus D cannot be right.

Here is an example with numbers, starting with a bond balance equal to your loan:
A. $400K stock, $100K bonds, $100K loan.
B. $400K stock.
C. $320K stock, $180K bonds, $100K loan.
D. $320K stock, $80K bonds.
Since you have all four choices, you should choose the best of all four. If D is better than C, then B is also better than A, and thus A cannot be right. (This corresponds to my situation. In 2019, I preferred A to B and C to D because my mortgage rate was so low. In 2020, after bond yields dropped, I preferred B to A and D to C, and paid off my mortgage by selling bonds and choosing option B.)

And here is the special case of 100% stock, when you might choose to keep the loan.

A. $500K stock, $100K loan.
B. $500K stock, -$100K bonds (using margin or leveraged stock funds).
C. $400K stock, $100K bonds, $100K loan.
D. $400K stock.
Here, even if you prefer D to C, you might still prefer A to B, because you cannot borrow at the bond rate; keeping the loan could be the best way to keep the stock exposure.
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by KlangFool »

Raspberry-503 wrote: Mon Jun 07, 2021 1:05 pm
I am currently putting $1500/month into a taxable account (60/40 AA, with the bond portion being roughly 20% in muni bonds (MUB), 12% US total bonds (BND), 7% int'l bonds (BNDX) and 1% cash
Raspberry-503,

A) There is absolutely no reason why you should invest 60/40 AA in your taxable account. You would pay more taxes for this decision. So, you should fix this first. It should be CASH with 100% stock in your taxable account.

B) If your goal is to retire as early as possible, then, you should invest in the taxable account until you are financially independent. Maxing up everything is not good enough.

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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by retiredjg »

Raspberry-503 wrote: Tue Jun 08, 2021 8:33 am In that case aren't I paying off a 3.5% debt with money that's historically earning close to twice as much (604/40 gains). That's the point of the video in the OP isn't it?
Sorry, didn't watch the video, but here's an answer anyway.

It goes back to what you said in another thread...that you saw the average return of your 60/40 portfolio as greater than the interest rate of the loan. Therefore you were comfortable with keeping the mortgage.

Some people see it a different way and only compare the return of bonds to the interest rate of the loan.

I would not suggest that one of these ways is right and the other is wrong. I would suggest that people need to work within the guidelines of what makes sense to them (how they see things).
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by go2run »

Raspberry-503 wrote: Tue Jun 08, 2021 8:33 am In that case aren't I paying off a 3.5% debt with money that's historically earning close to twice as much (604/40 gains). That's the point of the video in the OP isn't it?
That is an interesting video and hits home on a number of points.

Point 1: Evaluate your personal situation and understand the liquidity and cash available to support on-going expenses.
Point 2: Creating wealth is a young person game. Focus on discipline, Money (from margin created), time for it to grow. Understand how powerful your dollars are and the impact to your "wealth multiplier".
- Wealth multiplier: early 30's (14-20x) vs early 50's (2-2.8x)
- Once you cross 45, there is nothing wrong with tackling the (mortgage/low interest) debt.

To me, the main point is when you can take advantage of available margin at an early age, you will be better off in the long run. The key to this, however, is knowing how much time one has in the market. In your case, being in the 50's, the general recommendation is to pay off the mortgage. If you were in your 20's or even 30's, it's better to invest extra cash in the market.
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by grabiner »

go2run wrote: Tue Jun 08, 2021 9:04 am To me, the main point is when you can take advantage of available margin at an early age, you will be better off in the long run. The key to this, however, is knowing how much time one has in the market. In your case, being in the 50's, the general recommendation is to pay off the mortgage. If you were in your 20's or even 30's, it's better to invest extra cash in the market.
You are only taking advantage of the margin if your investments are 100% stock. If you hold any bonds, you don't need the margin, since you could choose to hold more stock by selling your bonds.

It may still be better to keep the loan, but the margin cannot be the reason for it. You might keep the loan in order to keep more in liquid assets, or to get a long-term benefit of tax deferral by contributing more to your 401(k), or to preserve the option value of refinancing when bond and loan rates are close. I don't think any of these apply to the OP, who is maxing out a 401(k), has a large taxable account, and pays a high interest rate on the mortgage.
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by finite_difference »

You can no-cost refinance that mortgage rate from 3.5% to 2.5% or less if you do a 10-year?

It might not save you tons of money, but a few thousand dollars probably?
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by retiredflyboy »

Pay off your home.
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by FiveK »

grabiner wrote: Tue Jun 08, 2021 8:45 am
FiveK wrote: Tue Jun 08, 2021 12:09 am
grabiner wrote: Mon Jun 07, 2021 10:56 pm It may be easier to understand the comparison by considering pairs of options of the same risk.
C. Keep the mortgage unchanged, and move money from your current allocation to a bond fund.
D. Sell your current allocation to pay down the mortgage.
Likewise, D is better than C. So, regardless of how much risk you want to take, you should pay down the mortgage.
For someone with (and comfortable with) a high (e.g., 100%) stock allocation, why would option C be a consideration at all?
And here is the special case of 100% stock, when you might choose to keep the loan.

A. $500K stock, $100K loan.
B. $500K stock, -$100K bonds (using margin or leveraged stock funds).
C. $400K stock, $100K bonds, $100K loan.
D. $400K stock.
Here, even if you prefer D to C, you might still prefer A to B, because you cannot borrow at the bond rate; keeping the loan could be the best way to keep the stock exposure.
Agreed - sometimes there is no "fair" comparison because the chosen options do not have the same risk, and thus no "mathematically correct" answer without making further assumptions. And when different people have different assumptions, divergent conclusions are understandable.
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by Raspberry-503 »

I can't seem to find a decent refinance offer, with less than $90k and less than 10 years on the original mortgage, it's either high cost / low APR or no cost /not worth the spread in APR.

The internet "mortgage search" lenders seem to be the worse (LendGo, Rocket Mortgage...).

So yeah, I'm seriously thinking about paying it off. I need my wife on board though, she needs to abide by the "we're investing the money saved from the mortgage P&I"
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by WhatsIRR »

Raspberry-503 wrote: Mon Jun 07, 2021 1:05 pm

- Put the bond portion of the $1500 into the mortgage, i.e. pay an extra $600 a month to the mortgage principal and invest the remaining $900 in the stock portion only of the brokerage (so it would slowly shift over time to a higher stock allocation, so would my entire portfolio, however, the imbalance would be much smaller)
-
This is what I am doing. We are younger (38), I’d like to accelerate the mortgage but do not want to drop the lump sum to pay it off. Our allocation is 85/15 so anytime we get extra cash (tax return, bonus, RSU etc) 15% goes to the principal on the mortgage as our “bond” allocation.

Once it is in the $20k remaining range I’ll lump sum it from the emergency fund since I’ll no longer need that amount in the emergency fund for P&I payments.
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by tonyclifton »

Raspberry-503 wrote: Fri Jun 11, 2021 1:33 am I can't seem to find a decent refinance offer, with less than $90k and less than 10 years on the original mortgage, it's either high cost / low APR or no cost /not worth the spread in APR.
Did you try Third Federal Savings and Loan? We refinanced with similar figures to what you wrote. It wasn’t no-fee but the refinance had us skip a payment so the fees were pretty reasonable.
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by nps »

tonyclifton wrote: Fri Jun 11, 2021 9:13 pm
Raspberry-503 wrote: Fri Jun 11, 2021 1:33 am I can't seem to find a decent refinance offer, with less than $90k and less than 10 years on the original mortgage, it's either high cost / low APR or no cost /not worth the spread in APR.
Did you try Third Federal Savings and Loan? We refinanced with similar figures to what you wrote. It wasn’t no-fee but the refinance had us skip a payment so the fees were pretty reasonable.
I doubt they let you skip a payment. The month you didn't pay is still there at the end of the loan.
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by tonyclifton »

nps wrote: Sat Jun 12, 2021 7:06 am I doubt they let you skip a payment. The month you didn't pay is still there at the end of the loan.
You are correct...Felt like it was skipped :)
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by nolesrule »

tonyclifton wrote: Fri Jun 11, 2021 9:13 pm It wasn’t no-fee but the refinance had us skip a payment so the fees were pretty reasonable.
That's a typical "feature" of all mortgages, because the payment is in arrears. At closing you pay interest from closing to the end of the month. Then after the next month starts you get the bill for the first full payment which is due the month after that usually on the first of the month.
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by LittleMaggieMae »

Once you have an emergency fund, are maxing out your 401(k) and Roth, and have no other debt than your mortgage, should you pay your mortgage off or invest in taxable because "it will still return more than the interest on your mortgage"?
I think the answer depends on your income level, your age, and perhaps your income trajectory(will it keep going up for a decade or two - or have you reached a plateau and are happy with that).

A mortgage is typically a "wealth building tool" used to give you (and your family) a stable place to live (it can become a 'fixed expense' if property taxes and insurance don't jump up in cost every year and you don't have to keep incurring the costs of moving if you rent.)

For someone with steadily increasing income:
For someone under 40 I'd say keep the mortgage and stuff money into a taxable account.
For someone under 50 I'd say figure out how your mortgage effects your ability to retire when you want to - and then act accordingly.
For someone under 60 I'd say figure out how your mortgage effects your lifestyle in retirement and then act accordingly.

For someone with an income that has hit it's plateau and there's no action going to be taken to get off the plateau - I'd say keep stuffing money into a taxable account (and let the low interest mortgage do what it was intended to do).
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Meg77
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by Meg77 »

Raspberry-503 wrote: Mon Jun 07, 2021 1:05 pm
First stop, the Boglehead wiki says: https://www.bogleheads.org/wiki/Priorit ... nvestments
  • 8. Invest inside a taxable investing account. In certain circumstances, a Non-deductible traditional IRA and/or variable annuity may be better than a taxable account.
  • 9. Pay off low-interest debt (eg. most mortgages, some car loans).
So how do you transition from 8 to 9? There is no limit to taxable, you can't "max it out" and move on to #9
Most people should have some level of liquidity before moving to paying of super low interest rate debt. Many stop at a fully funded emergency fund. Others want to save up for a mid term home purchase or upgrade and so are investing in taxable but mentally setting aside that money for spending in 5-10 years (pre-retirement). Others may want to buy rental property or start a business or retire early or just know they have $X of funds available before starting with mortgage paydown. This especially works well in higher interest rate environments when you have a low fixed rate debt. But you're right - there is no rule to follow here.
Raspberry-503 wrote: Mon Jun 07, 2021 1:05 pm
Looking at the advice on MrMoneyMustache's site: https://forum.mrmoneymustache.com/inves ... msg1333153
  • 7. Pay off any debts with interest rates ~3% or more above the current 10-year Treasury note yield.
  • 8. Invest in a taxable account and/or fund a 529 with any extra.
Ahah! we have a criteria. With 10-Year T-Bill around 1.5%, this says I should not pay my mortgage because is not 3% above 1.5%.
This was written back when rates were higher. If it had been written in the 80's it might have told you not to pay off debt with rates below 10%. Context matters and rates change. You used to be able to get 5% on a money market fund when I got my first mortgage at 7% in 2006. Times have changed.
Raspberry-503 wrote: Mon Jun 07, 2021 1:05 pm Reading the fine print: take the risk-free return if high enough. Note that embedded in "high enough" is the assumption that your alternative is "all stocks" or a "fund of funds" (e.g., target retirement date) that provides a blend of stock and bond returns. If you wish to consider separate bond funds, compare the yield on a fund with a duration similar to the time remaining on the loan, and put your money toward the one with the higher after-tax interest/yield.
This is the key! This says you should invest in bonds in taxable instead of paying off debt only if the risk-free rate (i.e. a treasury bond yield with similar duration - 10 years in your case) is HIGHER than your debt rate.

Raspberry-503 wrote: Mon Jun 07, 2021 1:05 pm I wish I really understood what that means. The way I understand it, at a high level, it means if your taxable investment balance is going to grow slower than the mortgage rate, then you're better off taking the 3.5% guaranteed "return" on the mortgage cash.
No. It's not about how fast the balance will grow or shrink. It's simply the fact that it doesn't make mathematical sense to pay interest at 3.5% on one hand and then earn interest on bonds at 1.5% on the other. You're guaranteed to lose the spread of 2%.

Think of it this way. Mortgages ARE bonds in a literal sense. They are packaged and sold to investors. So the yield on mortgage backed bonds will NEVER be higher than the rate the borrowers on the other side are paying. Granted, rates change, and if you locked in at 2% and bond yields rise to 2.5% in the next few years, you could come out ahead. But barely - and not without risk.
Raspberry-503 wrote: Mon Jun 07, 2021 1:05 pm A 60/40 portfolio has definitely returned more than 3.5% historically, but this is where my heap explodes: the mortgage itself has an 8-year horizon, but the money I invest instead of paying the mortgage has a 10-40 year horizon depending on how I withdraw from my different accounts during retirement, but I suspect taxable is what will be depleted first. Also does the sentence above imply I should look at the returns of the bonds section of the portfolio only?
What's the historical return of bonds (higher than the current T-Bill right?) and is today's TBill price an indication of a bond fund return over the next 10 years?
You're overthinking this. A 60/40 portfolio may or may not return more than 3.5% over the next 10 years. But looking at the whole portfolio is an error. 40% of that portfolio (the bond part) is incredibly unlikely to earn more than 3.5% over the next decade. Especially after taxes. And there is risk in even bonds. You're adding lots of variables to the decision that don't apply - like your expected life and the time horizon of your whole portfolio etc.

It can make sense to have a diversified portfolio within retirement accounts that includes bonds while still having a mortgage, especially if you're older and don't have the liquidity to pay off the mortgage. But once you're wealthy enough to be maxing retirement and investing a lot in taxable and within sight of paying off the mortgage (or not needing to take one out at all when making a new purchase), it makes very little sense to take on or keep mortgage debt while buying bonds.

Dave Ramsey for example advocates never investing in bonds but rather paying off all debt including mortgages. He's been skewered for this advice over the decades, but it really makes a lot of sense (particularly when coupled with his strategy of buying paid off investment real estate in addition to stocks which can act as "fixed income" and because many Americans get a good chunk of cash flow from social security, another form of fixed income in retirement).
Raspberry-503 wrote: Mon Jun 07, 2021 1:05 pm Here are some options I can think of
- take the mortgage ($88K) balance out of the brokerage stock portion today and pay off the mortgage immediately (causing the taxable account to snaps to roughly 75/25).
BINGO!!!! I would do this in a heartbeat. It's a small balance, you have the taxable funds. Sell your crappy bonds and pay off your debt. The debt is at a higher rate. Your monthly fixed costs would plummet. You could retire earlier if you wanted to. There is literally no downside to doing this.
Raspberry-503 wrote: Mon Jun 07, 2021 1:05 pm I think I don't want to rebalance, or now I am losing the 60/40 return. but then what, put my $1500+$1120 in the taxable account every month and invest only in bonds till I'm back to 60/40? my head hurts!
Keep your AA at whatever you're most comfortable with it being at. If that is 60/40, then rebalance. You'd be selling stocks high and buying bonds. That is fine! Though personally at age 50 I'd be comfortable with a 75/25 split. Your ongoing $2700 a month investment can even you out to be sure. You can just put that wherever it's needed to keep your AA in line each month.

Just keep in mind how good you'll feel about having paid off the mortgage and even rebalanced your taxable account WHEN (not if) the next down turn hits. If you hate having no mortgage, you can always go get a new one.....
"An investment in knowledge pays the best interest." - Benjamin Franklin
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FiveK
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by FiveK »

Meg77 wrote: Wed Jun 16, 2021 11:01 am
Raspberry-503 wrote: Mon Jun 07, 2021 1:05 pm Looking at the advice on MrMoneyMustache's site: https://forum.mrmoneymustache.com/inves ... msg1333153
  • 7. Pay off any debts with interest rates ~3% or more above the current 10-year Treasury note yield.
  • 8. Invest in a taxable account and/or fund a 529 with any extra.
Ahah! we have a criteria. With 10-Year T-Bill around 1.5%, this says I should not pay my mortgage because is not 3% above 1.5%.
This was written back when rates were higher. If it had been written in the 80's it might have told you not to pay off debt with rates below 10%. Context matters and rates change. You used to be able to get 5% on a money market fund when I got my first mortgage at 7% in 2006. Times have changed.
Note that the "~3% or more above the current 10-year Treasury note yield" is not a fixed amount. One can quibble about the exact percentage, but it does seem in the ballpark of what one might reasonably expect for stock returns.
Raspberry-503 wrote: Mon Jun 07, 2021 1:05 pm Here are some options I can think of
- take the mortgage ($88K) balance out of the brokerage stock portion today and pay off the mortgage immediately (causing the taxable account to snaps to roughly 75/25).
BINGO!!!! I would do this in a heartbeat. It's a small balance, you have the taxable funds. Sell your crappy bonds and pay off your debt. The debt is at a higher rate. Your monthly fixed costs would plummet. You could retire earlier if you wanted to. There is literally no downside to doing this.
The bond vs. mortgage choice is reasonably clear. The stock vs. mortgage choice is much less clear.
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Meg77
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Re: Pay off mortgage vs bonds in taxable (after maxing out other retirement)

Post by Meg77 »

FiveK wrote: Wed Jun 16, 2021 11:53 am
Meg77 wrote: Wed Jun 16, 2021 11:01 am
Raspberry-503 wrote: Mon Jun 07, 2021 1:05 pm Looking at the advice on MrMoneyMustache's site: https://forum.mrmoneymustache.com/inves ... msg1333153
  • 7. Pay off any debts with interest rates ~3% or more above the current 10-year Treasury note yield.
  • 8. Invest in a taxable account and/or fund a 529 with any extra.
Ahah! we have a criteria. With 10-Year T-Bill around 1.5%, this says I should not pay my mortgage because is not 3% above 1.5%.
This was written back when rates were higher. If it had been written in the 80's it might have told you not to pay off debt with rates below 10%. Context matters and rates change. You used to be able to get 5% on a money market fund when I got my first mortgage at 7% in 2006. Times have changed.
Note that the "~3% or more above the current 10-year Treasury note yield" is not a fixed amount. One can quibble about the exact percentage, but it does seem in the ballpark of what one might reasonably expect for stock returns.
Raspberry-503 wrote: Mon Jun 07, 2021 1:05 pm Here are some options I can think of
- take the mortgage ($88K) balance out of the brokerage stock portion today and pay off the mortgage immediately (causing the taxable account to snaps to roughly 75/25).
BINGO!!!! I would do this in a heartbeat. It's a small balance, you have the taxable funds. Sell your crappy bonds and pay off your debt. The debt is at a higher rate. Your monthly fixed costs would plummet. You could retire earlier if you wanted to. There is literally no downside to doing this.
The bond vs. mortgage choice is reasonably clear. The stock vs. mortgage choice is much less clear.
Ah, you're right I misread the MMM sentence regarding 3%. Definitely agree with you when it comes to stocks vs mortgage - not as clear. But I do think it makes sense to pay down debt rather than invest in bonds, even if it means adjusting your AA.
"An investment in knowledge pays the best interest." - Benjamin Franklin
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