Need advice: Payoff mortgage or invest

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BogleFan_EarlyThirty
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Need advice: Payoff mortgage or invest

Post by BogleFan_EarlyThirty »

Me and my wife are in mid 30s. We've a 30yr fixed (4.75%) mortgage with remaining balance of $160k. We've been paying additional principal for last 6-7 years and remaining loan term now is 15 yrs. We're in 33% tax bracket, so effective interest rate is 4.75 * 0.67 = 3.12%. We've $200k in money mkt account earning 1% interest. I am considering 2 options:

1. Pay off the mortgage
Pros: No more monthly payments to worry about, increased savings although they'll earn only 1% if I put them in bank.
Cons: Loss of the mortgage interest deduction towards income taxes (we itemize deductions).

2. Refinance the mortgage into 15 yr fixed at 3.75% with approx $3k closing costs. Invest rest of the money ($197k) into diversified stock portfolio in addition to existing portfolio (401k, taxable accounts etc).

Pros: Lower interest rate, get to keep mortgage interest deduction, flexibility with what we can do with the money in hand.
Cons: Still paying 3.75 * .67 = 2.5% interest whereas money mkt only pays 1%.

Highly appreciate advice from fellow bogleheads.
Thanks
livesoft
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Post by livesoft »

#2 is where it's at.

This oft discussed, so please read away:
http://www.bogleheads.org/forum/viewtopic.php?t=73782
http://www.bogleheads.org/forum/viewtopic.php?t=66692
http://www.bogleheads.org/forum/viewtopic.php?t=66049
http://www.bogleheads.org/forum/viewtopic.php?t=66353
http://www.bogleheads.org/forum/viewtopic.php?t=55370 <-- this is the longest most emotional/argued of the threads I think

and many, many more.

Good luck with your decision!
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grabiner
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Re: Need advice: Payoff mortgage or invest

Post by grabiner »

BogleFan_EarlyThirty wrote:2. Refinance the mortgage into 15 yr fixed at 3.75% with approx $3k closing costs. Invest rest of the money ($197k) into diversified stock portfolio in addition to existing portfolio (401k, taxable accounts etc).

Pros: Lower interest rate, get to keep mortgage interest deduction, flexibility with what we can do with the money in hand.
Cons: Still paying 3.75 * .67 = 2.5% interest whereas money mkt only pays 1%.
You wouldn't use the money-market fund, though; a more natural use of the money would be to match your long-term mortgage obligation with a long-term municipal bond fund, which earns much more than 2.5% wihtout much risk (or, still better, put the taxable money in a stock index fund and hold more bonds in your 401(k) and IRA where the tax cost is less).
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redarmymembe
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Post by redarmymembe »

Would you borrow money on your paid for house to invest in the stock market?
dodonnell
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Post by dodonnell »

redarmymembe wrote:Would you borrow money on your paid for house to invest in the stock market?
All depends on the time horizon and the borrowing costs.

A 100 year time horizon and a 0% borrowing cost, yes.
That is free money for my lifetime.
Not sure our Government sponsored mortgage terms will get to this Japan like level.

At 30 years at 4.75% ... it depends.
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Watty
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Post by Watty »

Between already paying down the mortgage some and having that much money in a money market fund I would assume that you are pretty risk averse unless you just received the money.

If having a paid off house would make you feel more comfortable about taking some more risk in your investing then that would be an advantage to take into account..


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redarmymembe
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Post by redarmymembe »

dodonnell wrote:
redarmymembe wrote:Would you borrow money on your paid for house to invest in the stock market?
All depends on the time horizon and the borrowing costs.

A 100 year time horizon and a 0% borrowing cost, yes.
That is free money for my lifetime.
Not sure our Government sponsored mortgage terms will get to this Japan like level.

At 30 years at 4.75% ... it depends.

Just too simple?
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leeks
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Post by leeks »

I would pay off the mortgage. Having a paid-for house at your age sounds fantastic! You will be able to save plenty more money for investing very quickly. Should you regret your decision, you can always take out a new mortgage on the house sometime in the future.
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HardKnocker
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Post by HardKnocker »

Pay off the mortgage. Goodbye.

It's a great feeling. You'll have more cash flow to invest too.

Why waste $3k in a refinance? That's just throwing your money away.

A dollar in tax deduction is never better than a dollar in increased cash flow. Never.

Instead of paying a mortgage payment to the bank, pay it to yourself.

Get rid of the mortgage.
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biasion
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Post by biasion »

HardKnocker wrote:Pay off the mortgage. Goodbye.

It's a great feeling. You'll have more cash flow to invest too.

Why waste $3k in a refinance? That's just throwing your money away.

A dollar in tax deduction is never better than a dollar in increased cash flow. Never.

Instead of paying a mortgage payment to the bank, pay it to yourself.

Get rid of the mortgage.
Agreed.

And I will add one thing: any debt counts as negative fixed income as part of your asset allocation. For the sake of simplicity, I will use numbers that easily divide into each other to give a good example:

If you have a portfolio of 100,000 dollars that is 50/50 (50k equity, 50k fixed) and you are 50k in debt, essentially you are 100% equity.

This is because any changes in the fixed income market affect creditor and debtor equally but in the opposite direction. What's good for one is equally bad for the other and vice versa with respect to interest rates and rates of return.

Therefore, do factor this into your decisions and subsequent asset allocation.

In the end, you will likely arrive to the following order in which to use your money:

1. Have emergency fund, you always need this first if you start to have extra money beyond living paycheck to paycheck.
2. Pay off all high interest debt like credit card or car loans because the interest rates will be higher than even any equity premiums and are not deductible
3. Leave some money aside to max out your Roth IRA and maybe pay into your 401k so you don't lose the tax deferred/free space and compounding time as you only get so much every year.Prefer IRA vs 401k depending if your 401k has low fee index funds. If you have 401k w/ Vanguard, it's a moot point and IRA/401k become equivalent.
4. Pay off all other debt including mortage.
5. Finish maxing out all tax deferred accounts.
6. Taxable investing for any extra money.
Last edited by biasion on Fri May 06, 2011 7:33 am, edited 2 times in total.
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marylandcrab
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Post by marylandcrab »

I know this is an age old discussion, I just asked a similar question.

To me it depends. How long do you plan on staying in your house and is your house worth what it was when you bought it? Could you sell it for 200k? Is that your only savings? Do you have a retirement account, emergency fund, college savings for kids if you have them? Do you carry any other debt?

What makes you feel more secure, a pile of money or a paid for house?

I also think about long term wealth building and compound interest. But, no truly wealthy person has a mortgage.

My job is also different than most people, I don't rely on others for a paycheck. I also can see that I will be making more money this year. I also have every other kind of savings done - a years expenses, college funds, and 401k and it's profit sharing at the max. I have no debt but the mortgage.

Since I see I will be making more money, and I already live way below what I make, I chose to save half of my current excess into a blackrock fund and the other half is going to go to a few short term projects around the house. Once those short term projects are done, the excess income, plus any salary increases will go towards paying down the house.

To me, it's the best of all worlds, wealth accumulation, and accelerating the paying off of the mortgage so if we choose to sell in a few years and the real estate market hasn't improved, I'll still have cash and the house should be well below it's resale value.

If I really knew this was the house I'd be in there rest of my life, I think my thought process would be different.
dodonnell
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Post by dodonnell »

leeks wrote:I would pay off the mortgage. Having a paid-for house at your age sounds fantastic! You will be able to save plenty more money for investing very quickly. Should you regret your decision, you can always take out a new mortgage on the house sometime in the future.
Once your mortgage is paid off ... you forfeit the tax-deductability of any mortgage interest in the future.

In other words, a new mortgage's interest payments are not-tax deductible.

Paying off a mortgage is throwing away the interest tax deduction forever.
Last edited by dodonnell on Fri May 06, 2011 9:02 am, edited 1 time in total.
dodonnell
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Post by dodonnell »

redarmymembe wrote:
dodonnell wrote:
redarmymembe wrote:Would you borrow money on your paid for house to invest in the stock market?
All depends on the time horizon and the borrowing costs.

A 100 year time horizon and a 0% borrowing cost, yes.
That is free money for my lifetime.
Not sure our Government sponsored mortgage terms will get to this Japan like level.

At 30 years at 4.75% ... it depends.

Just too simple?
Is there a more advantageous vehicle for personal debt than a mortgage?
Strictly, from a financial perspective. If you won't ever need any kind of debt in the future ... ok.

Remember, Vanguard's short term treasury fund has a 5 year annualized return of over 4%. A life of fund return of over 5%.

Is now the right "Market Time" to pay off your mortgage? Why not wait a year or two, see where Tbills are, and then decide?

But, agreed, it is not that simple.
yobria
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Post by yobria »

Only you can decide if you want a levered position in the stock market. If not, pay it off.

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Post by scouter »

Also, once you pay off the mortgage, you may find that there's no need to itemize deductions and you can take the standard deduction. Current standard deduction for married filing jointly is $11,400.

I have friends who feel good about itemizing their mortgage interest deduction but don't realize that it's only giving them an extra deduction of what's over $11,400, as they can deduct that much without the mortgage.

Now, if you have lots of other itemized deductions, (more than $11,400), then you'd still itemize and you would be losing your mortgage deduction.

We paid off our first house in five years and paid cash for our second house. In our particular situation, they were the best financial moves we've ever made. (becoming Bogleheads a close 2nd) Every time a neighbor has had a short sale/foreclosure or we see reports about foreclosures on the news, my wife looks at me and says "I'm so glad we never have to worry about that. Thank you." My kids have seen their friends' families lose their homes or have to suddenly move and downsize, and they also know that will never happen to them. Priceless.
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ShowMeThe...
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Post by ShowMeThe... »

Just tossing in my 0.02

Whatever you decide, make sure you keep a fully funded emergency fund (between 3 and 12 months of your expenses, depending on how stable/secure your income/job is)

Good luck! :)



PS:
Once your mortgage is paid off ... you forfeit the tax-deductability of any mortgage interest in the future.

In other words, a new mortgage's interest payments are not-tax deductible.

Paying off a mortgage is throwing away the interest tax deduction forever.
Yes, but the math on that makes no sense. basically, if you send $10,000 a year to the bank in interest you get to deduct it from your taxes. At 35% tax bracket, that's about $3,500 you save on taxes. So what the tax deduction does is allow you to send $10,000 to the bank to avoid sending $3,500 to the government.

Personally, if I have to send my money to someone else (bank or govt), I'd rather spend 3,500 than 10,000....
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Post by porcupine »

scouter wrote:...We paid off our first house in five years and paid cash for our second house. In our particular situation, they were the best financial moves we've ever made. (becoming Bogleheads a close 2nd) Every time a neighbor has had a short sale/foreclosure or we see reports about foreclosures on the news, my wife looks at me and says "I'm so glad we never have to worry about that. Thank you." My kids have seen their friends' families lose their homes or have to suddenly move and downsize, and they also know that will never happen to them. Priceless.
While I agree with most of your points, I disagree that paying cash on the house is the sole thing that put you - and your family - in this situation (of not having to short sell, downsize, move, etc). Your income or frugal ways (or the combination of both) did. Why, you ask?

Well, even if you pay off a mansion, if you don't earn money, you might still have to foreclose, wouldn't you agree?

- Porcupine
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Re: Need advice: Payoff mortgage or invest

Post by porcupine »

BogleFan_EarlyThirty wrote:[...]Me and my wife are in mid 30s. We've a 30yr fixed (4.75%) mortgage with remaining balance of $160k. We've been paying additional principal for last 6-7 years and remaining loan term now is 15 yrs. We're in 33% tax bracket, so effective interest rate is 4.75 * 0.67 = 3.12%. We've $200k in money mkt account earning 1% interest. [...]
Without the mortgage, would you still be itemizing? If not, how much - ballpark figure - do the rest of your deductions come to?

Just curious - did you refinance once already? I don't recall 30-year rates being less than 5% 6-7 years ago ...

- Porcupine
Honobob
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Post by Honobob »

Time value of money.
Power of compounding.

Don't these concepts work anymore?

Why would you use 2011 dollars to pay 2041 debt?
If you were offered $160,000 in a lump sum today or in 360 equal installments over 30 years which would you take?
Remember, you can only make 1% on the lump sum.

Plus you lose the power of compounding on the investments you could make today!

Plus, you lose all flexibility. What happens if you need the money and CAN'T get a new mortgage. That's where a lot of people are stuck today.

I've had mortgages paid off and chased the rates down with 15 year refi's.
I'm not comfortable being financed 100% (gawd, that'd be sweet with today's rates and inflation potential) but there has to be a comfort level there that includes a 30 year mortgage for most, if not ALL working people.

In your situation I'd go for a 30 year mortgage with an ammount that you're comfortable with.
Last edited by Honobob on Fri May 06, 2011 10:12 am, edited 1 time in total.
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Chuck
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Post by Chuck »

ShowMeThe... wrote:Yes, but the math on that makes no sense. basically, if you send $10,000 a year to the bank in interest you get to deduct it from your taxes. At 35% tax bracket, that's about $3,500 you save on taxes. So what the tax deduction does is allow you to send $10,000 to the bank to avoid sending $3,500 to the government.
Of course it makes sense. You send $10,000 to the bank, receive $3,500 from the IRS, and $10,000 from your municipal bond fund. The muni fund would have to return less than 65% of the mortgage rate in order for this to not make sense.
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Jay69
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Post by Jay69 »

I wrote the following a week or so ago, still works here 8)

We are 42, paid off our little crapy house with low taxes 2 years ago.

I have a feeling what FI may really mean. This has helped us save even more.

From a dollar stand point it may not be the smatest thing but would do it again in a hartbeat.

No mortgage, 12 month emergency fund = can take a extra day off from work without feeling guility = priceless

One must be carefull however, its a slippery slope. I bought a new car 4 months ago with a rate at 2.8%. It was a no brainer, invest the cash and take the loan. Fast forward 4 months and the car is just about paid off. Can not stand a monthy payment.

It's more of a life choice for most of us I think.

Whats peice of mind worth to you?

Good Luck

Jay
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mak
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Post by mak »

Couple of other factors to consider:

1. If you choose to keep the mortgage and invest the money, you could lose the money and still have the mortgage. Everyone I know who didn't pay the mortgage off ended up worse off, because they traded the money away, got scared out of the market at the wrong times, bought bonds that defaulted, got swindled out of the money, etc. (This point favors paying off.)

2. A mortgage gives you a 'put' option on your house that a free & clear house doesn't have. If there is a massive disaster (uninsured, like a Katrina type act of God), a mortgage gives you the option of walking away and sticking the lender with your loss. What if the house declines 75% in value? (it can happen, houses can sell for 1/3 of only construction cost) Ask anyone in Las Vegas, Phoenix or Florida who had a paid off house in 2008 if they are happy today they don't have a mortgage to walk away from. (This one argues to not pay off.)

3. Creditor protection. Similar to #2, if you have a free & clear house over the homestead exemption in your state, and you get a massive judgment against you, the creditors can force sale of your house. If you have a mortgage and your equity is less than the homestead exemption, then no. (This point argues to not pay off.)

I paid off years ago in lump sum, and overall am pretty glad I did, because reason #1 applies most to me.
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Post by grabiner »

mak wrote:3. Creditor protection. Similar to #2, if you have a free & clear house over the homestead exemption in your state, and you get a massive judgment against you, the creditors can force sale of your house. If you have a mortgage and your equity is less than the homestead exemption, then no. (This point argues to not pay off.)
This doesn't do you much good unless the money that would otherwise be used to pay off the mortgage is invested in a 401(k) or other investment that is protected from creditors in your state. If the money is in a taxable investment, you can't be forced to sell your house, but you can lose your taxable investment, leaving you with a house with a large mortgage and no other assets. Your net worth will likely be less than the homestead exemption.
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Re: Need advice: Payoff mortgage or invest

Post by YDNAL »

BogleFan_EarlyThirty wrote:Me and my wife are in mid 30s. We've a 30yr fixed (4.75%) mortgage with remaining balance of $160k. We've been paying additional principal for last 6-7 years and remaining loan term now is 15 yrs.
Continue.

You will be done in 5+ years.

Question: why $200K in a MM account?
BogleFan_EarlyThirty wrote:We've $200k in money mkt account earning 1% interest. I am considering 2 options:....
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Tom_T
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Post by Tom_T »

dodonnell wrote:
leeks wrote:I would pay off the mortgage. Having a paid-for house at your age sounds fantastic! You will be able to save plenty more money for investing very quickly. Should you regret your decision, you can always take out a new mortgage on the house sometime in the future.
Once your mortgage is paid off ... you forfeit the tax-deductability of any mortgage interest in the future.

In other words, a new mortgage's interest payments are not-tax deductible.

Paying off a mortgage is throwing away the interest tax deduction forever.
I don't know if that's true. My understanding is that a second mortgage (or home equity loan) is still deductible if it's no more than $100,000.
BGJ
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Post by BGJ »

For your case I would not recommend refinancing because your current interest rate is too low, and It sounds like you only have 15 yrs left on it since you have already been paying it down. How about continuing to pay it down so you are done in about 8-10 yrs, this will minimize your total interest payments without tying up your 200K. Then take your 200K and put it into a conservative portfolio, you have a long time horizon working for you since you are in your 30's.
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Re: Need advice: Payoff mortgage or invest

Post by YDNAL »

BGJ wrote:For your case I would not recommend refinancing because your current interest rate is too low, and It sounds like you only have 15 yrs left on it since you have already been paying it down. How about continuing to pay it down so you are done in about 8-10 yrs, this will minimize your total interest payments without tying up your 200K. Then take your 200K and put it into a conservative portfolio, you have a long time horizon working for you since you are in your 30's.
A larger loan balance - with larger interest component - was reduced from 30-15 years with 6-7 years of additional principal.

The remaining smaller balance is reduced from 15-0 years with 5+ years of the same additional principal payments. I already said that previously (above).

Welcome to the Forum, by the way!
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dodonnell
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Post by dodonnell »

Tom_T wrote:
dodonnell wrote:
leeks wrote:I would pay off the mortgage. Having a paid-for house at your age sounds fantastic! You will be able to save plenty more money for investing very quickly. Should you regret your decision, you can always take out a new mortgage on the house sometime in the future.
Once your mortgage is paid off ... you forfeit the tax-deductability of any mortgage interest in the future.

In other words, a new mortgage's interest payments are not-tax deductible.

Paying off a mortgage is throwing away the interest tax deduction forever.
I don't know if that's true. My understanding is that a second mortgage (or home equity loan) is still deductible if it's no more than $100,000.
Good point. The first $100k of a second is deductible. So, a portion or potential all of the second mortgage's interest would be tax deductible if the loan amount no more than $100k.
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Post by larmewar »

If you do pay off the mortgage, remember to put aside funds to directly pay property taxes and home owner's insurance. You could take part of the MM funds and pay down the mortgage, which is what I would probably do.

Lar
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Post by stemikger »

Posted by BoggleFan_Early Thirty
Me and my wife are in mid 30s. We've a 30yr fixed (4.75%) mortgage with remaining balance of $160k. We've been paying additional principal for last 6-7 years and remaining loan term now is 15 yrs. We're in 33% tax bracket, so effective interest rate is 4.75 * 0.67 = 3.12%. We've $200k in money mkt account earning 1% interest. I am considering 2 options:

1. Pay off the mortgage
Pros: No more monthly payments to worry about, increased savings although they'll earn only 1% if I put them in bank.
Cons: Loss of the mortgage interest deduction towards income taxes (we itemize deductions).

2. Refinance the mortgage into 15 yr fixed at 3.75% with approx $3k closing costs. Invest rest of the money ($197k) into diversified stock portfolio in addition to existing portfolio (401k, taxable accounts etc).

Pros: Lower interest rate, get to keep mortgage interest deduction, flexibility with what we can do with the money in hand.
Cons: Still paying 3.75 * .67 = 2.5% interest whereas money mkt only pays 1%.

Highly appreciate advice from fellow bogleheads.
Thanks
I know most people here aren't Dave Ramsey fans and I also have many issues with him. Having said that I think the part of his plan where he is dead on is why we should pay off the house. In his book the Total Money Makeover he explains all the myths about mortgage tax deductions and the risk one takes when they keep a mortgage and invest the money instead. I will do it an injustice if I try to explain it myself, but if you read Baby Step 6 about why we should pay off the mortgage I think it is good advice.

One brief point he says to people who want to keep the mortgage and invest instead, he says would you borrow money to invest. Most people answer no and I think that is good advice.

Warren Buffett also says: smart people don't need leverage and dumb people have no place using it. I think when you borrow money to invest (which is what you are doing when you keep the mortgage) you are creating a risk you don't need.

P.S. You don't have to buy the book, go to his website and I think he explains his views about it there.
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SuperDaveJ
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Sep 2008 remembered --> paid off home made sleep easier

Post by SuperDaveJ »

You mention that you are in a 33% tax bracket, so it sounds like you have income of $100+k and could try to leverage your loan to get more out of your investments as you have enough income to pay off the loan quickly. But ... The fact that you have a such a large MM account indicates that you may not have the temperment to stay fully committed to the market in the event of a large correction.

Right now, the stock market is looking good. I remember September 2008 when I had my last Vanguard financial plan and was thinking about taking out a loan to invest in the market more. About a week later, the whole banking crisis hit. I'm glad that I was not leveraged with a home loan then as I survived the huge downturn better and was able to stay with my asset allocation and I did not panic and sell all my stock funds--which have since rebounded nicely.

For your case specifically, I would recommend that you pay off the home loan and you will still have a $40k emergency fund (which covers 6 months of expenses easily). Additional money from your job(s) should be invested slowly into market (dollar cost averaged). If the market goes way down, you will be getting more for your money and you will be able to sleep at night.

Best of luck on whatever path you choose. --D :)
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Post by mithrandir »

dodonnell wrote:
leeks wrote:I would pay off the mortgage. Having a paid-for house at your age sounds fantastic! You will be able to save plenty more money for investing very quickly. Should you regret your decision, you can always take out a new mortgage on the house sometime in the future.
Once your mortgage is paid off ... you forfeit the tax-deductability of any mortgage interest in the future.

In other words, a new mortgage's interest payments are not-tax deductible.

Paying off a mortgage is throwing away the interest tax deduction forever.
With the way things are going with the Federal Budget who's to say the mortgage interest tax deduction is going to live on forever?

It is so rather odd how people can "worry" about losing their tax deduction when they pay off the mortgage, as if one comes out ahead if they pay interest!
schwarm
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Re: Need advice: Payoff mortgage or invest

Post by schwarm »

YDNAL wrote:
BogleFan_EarlyThirty wrote:Me and my wife are in mid 30s. We've a 30yr fixed (4.75%) mortgage with remaining balance of $160k. We've been paying additional principal for last 6-7 years and remaining loan term now is 15 yrs.
Continue.

You will be done in 5+ years.

Question: why $200K in a MM account?
BogleFan_EarlyThirty wrote:We've $200k in money mkt account earning 1% interest. I am considering 2 options:....
Without knowing the ratio of house value to net worth, this makes the most sense to me.
scouter
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Post by scouter »

porcupine wrote:
scouter wrote:...We paid off our first house in five years and paid cash for our second house. In our particular situation, they were the best financial moves we've ever made. (becoming Bogleheads a close 2nd) Every time a neighbor has had a short sale/foreclosure or we see reports about foreclosures on the news, my wife looks at me and says "I'm so glad we never have to worry about that. Thank you." My kids have seen their friends' families lose their homes or have to suddenly move and downsize, and they also know that will never happen to them. Priceless.
While I agree with most of your points, I disagree that paying cash on the house is the sole thing that put you - and your family - in this situation (of not having to short sell, downsize, move, etc). Your income or frugal ways (or the combination of both) did. Why, you ask?

Well, even if you pay off a mansion, if you don't earn money, you might still have to foreclose, wouldn't you agree?

- Porcupine
Yes, true, it was the combination. As a matter of fact, we couldn't have paid cash if we hadn't been saving and investing for many years. In our particular case, I'm in a business in which income fluctuates wildly and sometimes we have to endure a "rainy decade." Knowing that our bare minimum housing expenses are property taxes and insurance has always enabled us to sleep soundly, even when the future has been very uncertain.
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stemikger
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Post by stemikger »

This is taken from the book The Total Money Makeover by Dave Ramsey.

This situation is one more opportunity to discover of your CPA can add.

If you do not have a $10,000 tax deduction and you are in a 30 percent bracket, you will have to pay $3,000 in taxes on that $10,000. According to the myth, we should send $10,000 in interest to the bank so we don't have to send $3,000 in taxes to the IRS. Personally, I think I will live debt-free and not make a $10,000 trade for $3,000. However, any of you who want $3,000 of your taxes paid, just e-mail me and I will personally pay $3,000 of your taxes as soon as your check for $10,000 clears into my bank account. I can add.
mikep
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Post by mikep »

I believe Dave also tells you to avoid savings bonds. If you can earn something risk-free at a rate higher than your mortgage I believe it is worth it. For example, instead of adding $200-300 per month to my 4% mortgage I'm planning to buy 4.6% I-bonds instead. Since I deduct the interest fully, and I-bonds are tax deferred (and 9.3% CA income tax exempt), I'm ahead at least in the short term. If the Feds take away the interest deduction and/or I-bond rate goes down then I will revisit this decision.
dharrythomas
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Post by dharrythomas »

I believe in living debt free.

We just moved so have a small mortgage but took a 15 year conventional and will pay off in at most 4 years 3 months depending on what DW demands for other stuff.

It will free up more for me to invest :D and more for DW to spend :wink:

Harry
Richard de Paulo
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Post by Richard de Paulo »

option #2 is most logical, however. If you pay off your current loan, you would gain the following. You have the loan off your head. It's like paying yourself 3-5%, relatively speaking. You are now very liquid to buy another house or property and you have solid equity and can quickly build capital, since you have no house payment. BTW, are you retirement accounts maximized? The freedom of owning ones home is invaluable.
livesoft
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Post by livesoft »

Richard de Paulo wrote:You are now very liquid to buy another house or property and you have solid equity and can quickly build capital, since you have no house payment. BTW, are you retirement accounts maximized? The freedom of owning ones home is invaluable.
Did I misunderstand your statements? They do not make any sense at all.

If I see $200,000 in the bank, then I think "You are now very liquid. You have already built capital and can invest as you see fit."

If I see $200,000 removed from the bank and used to pay the mortgage, then I think, "You now have no liquidity since your money is tied up in your home."

For other folks who claim you have more cash flow without a mortgage, I can flow the cash for you: Transfer every day $100,000 from one account to another account. The next day, transfer it back. That's cash-flow for you. You cannot do that if you pay off the mortgage.
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jimbone
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Post by jimbone »

Having just gone through this analysis myself, I look at it this way:

If I have the liquidity to pay off the mortgage at any time, I consider that being debt-free. Bonus that I can take that liquidity and grow it conservatively at the same time, which I can't say for the value of my house.

It may not fit a classical definition, but it beats being illiquid and potentially having very limited flexibility.

Livesoft's example of cash flow is a simple, but good one.
livesoft
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Post by livesoft »

I would like to say that there are circumstances where cash flow and a mortgage are an issue.

For example, if you are retired and collecting SS, if you need to pay a mortgage, this may cause you to withdraw more from your IRA than you otherwise would. That extra cash flow may increase your taxes not only on the IRA, but also on your SS benefits. Thus, it probably makes sense to pay off the mortgage, reduce your cash flow, and save on your taxes.
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Harold
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Post by Harold »

livesoft wrote:
Richard de Paulo wrote:You are now very liquid to buy another house or property and you have solid equity and can quickly build capital, since you have no house payment. BTW, are you retirement accounts maximized? The freedom of owning ones home is invaluable.
Did I misunderstand your statements? They do not make any sense at all.

If I see $200,000 in the bank, then I think "You are now very liquid. You have already built capital and can invest as you see fit."

If I see $200,000 removed from the bank and used to pay the mortgage, then I think, "You now have no liquidity since your money is tied up in your home."

For other folks who claim you have more cash flow without a mortgage, I can flow the cash for you: Transfer every day $100,000 from one account to another account. The next day, transfer it back. That's cash-flow for you. You cannot do that if you pay off the mortgage.
If I see $200,000 in the bank, I think man, this guy ought to have a really good well-thought out reason to borrow money just to have cash on hand.

And the cash flow observation would be a good one -- if mortgages were free. Again, paying for cash flow should be a sobering thought, done only after some serious deliberation.
livesoft
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Post by livesoft »

The $200K in the bank was for illustrative purposes. I already mentioned earlier in the thread that all this money should be invested since the return will easily exceed the interest paid on the mortgage.
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jmbkb4
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Post by jmbkb4 »

pay off that mortgage!
jimbone
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Post by jimbone »

It's a personal decision based on the individual situation.

I can say that after reading through all of these "payoff the mortgage" threads, reading the regret from livesoft is what gave me pause. I did further analysis, and it made more sense to us to invest rather than pay off.

Everyone should do the same and go through the exercise...
namaste
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Post by namaste »

I agree it's a very personal decision.

Month to month, if we did not have our mortgage payment, we would have more cash flow monthly. If for instance, I wanted to stay home full time with children and rely on my husband's lower salary, then that might be a motivation for me to accelerate my home payoff.

Turns out though that in terms of our current situation, we'd have to actually reduce our retirement funding in order to pay off the mortgage.

We could perhaps split the middle a bit, and pay it off slightly faster.

But our goals are:

1. Max out both 401k/403b
2. Max out Roth IRA x 2
3. Max SEP-IRA
3. I bond 10K x 2
4. Start taxable
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mlebuf
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Re: Need advice: Payoff mortgage or invest

Post by mlebuf »

BogleFan_EarlyThirty wrote:Me and my wife are in mid 30s. We've a 30yr fixed (4.75%) mortgage with remaining balance of $160k. We've been paying additional principal for last 6-7 years and remaining loan term now is 15 yrs. We're in 33% tax bracket, so effective interest rate is 4.75 * 0.67 = 3.12%. We've $200k in money mkt account earning 1% interest. I am considering 2 options:

1. Pay off the mortgage
Pros: No more monthly payments to worry about, increased savings although they'll earn only 1% if I put them in bank.
Cons: Loss of the mortgage interest deduction towards income taxes (we itemize deductions).

2. Refinance the mortgage into 15 yr fixed at 3.75% with approx $3k closing costs. Invest rest of the money ($197k) into diversified stock portfolio in addition to existing portfolio (401k, taxable accounts etc).

Pros: Lower interest rate, get to keep mortgage interest deduction, flexibility with what we can do with the money in hand.
Cons: Still paying 3.75 * .67 = 2.5% interest whereas money mkt only pays 1%.

Highly appreciate advice from fellow bogleheads.
Thanks
Being in your mid 30's, this seems like a no-brainer to me. I vote for Option 2. An effective borrowing rate of 2.5 percent is very likely going to be less than the rate of inflation. You'll have the house paid off around age 50, the mortgage is likely the cheapest money you'll ever get, and the size of your retirement portfolio will be considerably larger. I'm basically against debt, but this debt is just too good to pass up. This is a minimal risk where the odds of profiting handsomely are substantially in your favor.
Best wishes, | Michael | | Invest your time actively and your money passively.
jimbone
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Re: Need advice: Payoff mortgage or invest

Post by jimbone »

mlebuf wrote: Being in your mid 30's, this seems like a no-brainer to me. I vote for Option 2. An effective borrowing rate of 2.5 percent is very likely going to be less than the rate of inflation. You'll have the house paid off around age 50, the mortgage is likely the cheapest money you'll ever get, and the size of your retirement portfolio will be considerably larger. I'm basically against debt, but this debt is just too good to pass up. This is a minimal risk where the odds of profiting handsomely are substantially in your favor.
+1

Well said. This is why we decided to keep the mortgage and invest...
mithrandir
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Post by mithrandir »

If you read and re-read statements from those who argue against paying off the mortgage, one must come to this conclusion: it's somehow "prudent" to borrow against your home equity (same as not paying off mortgage debt) and use the proceeds to invest (gamble), like it's some kind of "free lunch". IOW, embrace leverage.

I suppose we can argue until the cows come home but that argument is foolhardy. It only works because people assume that mortgage debt is "cheap", that a financial institution is willing to lend you money which you can then turn around and receive a return that exceeds the costs of borrowing.

It's not that you can't use leverage to your advantage. But acknowledge leverage for what it is, a form of risk. A situation that is "illiquid" to one may be considered "un-leveraged" to another. When I look the casino that our markets seem to have become, being "un-leveraged" has greater appeal.
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Post by mithrandir »

livesoft wrote:The $200K in the bank was for illustrative purposes. I already mentioned earlier in the thread that all this money should be invested since the return will easily exceed the interest paid on the mortgage.
What is your basis for saying "will easily exceed"? It's like you are offering a guarantee. That's a sign for caution.

Look at these 30-day SEC yields:

VFISX - 0.53%
VFITX - 1.75%
VUSTX - 3.35%

When you are in this kind of interest rate environment, how can you be so sure that you will come out ahead by investing?

Oh, invest in equities? Then it's not apples-to-apples. Your portfolio is then comprised of a negative bond (mortgage) and some combination of risky assets. Should the Fed fail in their attempt to inflate, then this portfolio may get doubly whacked: increased borrowing costs (greater spread between mortgage rate and prevailing inflation rate) and lower asset prices (deflation is generally bad for risky asset prices).

But if investing with borrowed funds is what you want, I apparently won't be able to stop you. I just don't like people parading out the mantra that using leverage is "the obvious choice". Maybe it will work but don't get so blinded by it's alleged "infallibility".
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