would you take a new mortgage to invest in stock market?

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puzzledhomeowner
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would you take a new mortgage to invest in stock market?

Post by puzzledhomeowner » Fri Jun 30, 2017 10:02 pm

'Hi,

I have read several posts about Dave Ramsey on this forum, some positive, some negative (mainly for shilling his MLP). But one thing that he repeats on his show that I have been thinking about is (summarizing) "would you take out a new loan to invest in the stock market? Having a mortgage and investing is the same..."
What do bogleheads think about this? Would you go for an interest only loan and invest the extra money towards retirement? Then does it make sense to throw it all in on the mortgage and pay it off as soon as you can?
I am not talking about gambling on individual stocks, investing the boglehead way responsibly.

Thesaints
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Re: would you take a new mortgage to invest in stock market?

Post by Thesaints » Fri Jun 30, 2017 10:09 pm

How much do you pay for your mortgage ? What's your expected return on investments ?

boglephreak
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Re: would you take a new mortgage to invest in stock market?

Post by boglephreak » Fri Jun 30, 2017 11:50 pm

for an interest only loan, sure. but i cant get an interest only loan, so this is unrealistic. my loan is 2.75%, which is very low, and for that amount, i would not take on additional debt to invest (although technically by not paying off my loan and investing in taxable instead, i am kind of doing that).

mega317
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Re: would you take a new mortgage to invest in stock market?

Post by mega317 » Sat Jul 01, 2017 12:07 am

boglephreak wrote:(although technically by not paying off my loan and investing in taxable instead, i am kind of doing that).
Exactly. And your effective rate might be less with deductions. In theory, with higher expected return, it makes sense to borrow as much money as humanly possible to invest in equities. But how much would you borrow to invest? Where to stop? Most people feel that the amount of their mortgage is a good limit and while it doesn't necessarily make perfect mathematical sense, it makes most people comfortable and so it's reasonable enough.

Vanguard Fan 1367
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Re: would you take a new mortgage to invest in stock market?

Post by Vanguard Fan 1367 » Sat Jul 01, 2017 12:18 am

I would not take out a new mortgage to invest in the stock market. I am not into market timing, but the numbers as far as P/E ratio, dividend yield, and other indicators indicate to me that valuations are a bit pricey for the market today.

I would expect Dave Ramsey to not recommend this either, am I correct?

johnra
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Re: would you take a new mortgage to invest in stock market?

Post by johnra » Sat Jul 01, 2017 12:22 am

(1) No, I would not take out a mortgage to obtain cash to put in the stock market;
(2) But the question seems backwards! taking out a mortgage is not how I obtained my cash--I obtained my cash by saving in a tax deferred retirement account slowly over time, and the mortgage allowed me to get a home while I also did this saving;
(3) now I don't want to divest my retirement savings, lose the liquidity, growth, and pay all the taxes for the sake of paying off my mortgage;
(4) I don't mind the mortgage all that much--it is 3% over 40 years, does not crowd out our cash flow, is a forced savings, gets smaller as my retirement grows 4-10% most of the last 9 years.

Fishing50
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Re: would you take a new mortgage to invest in stock market?

Post by Fishing50 » Sat Jul 01, 2017 3:43 am

Early Retirement Now says YES: Paying off a mortgage early compounds your “sequence of return risk” :D
https://earlyretirementnow.com/2016/12/ ... -leverage/

Paying minimum on a low interest rate mortgage and investing worked for us. We're 3 years from retirement at 50yrs old because we have a military pension, taxable assets, and a 3.8% mortgage. Sequence of return risk has been favorable during our saving years with 100% equities until 2015.

With a 30yr horizon to retirement, I'd choose a mortgage and investments right now.


Here's a more extreme example:

https://earlyretirementnow.com/2017/05/ ... isk-part2/
It's perfectly legal, go ask the IRS, they'll say the same thing. I actually feel stupid telling you this, I'm sure you would've investigated the matter yourself. Andy Dufresne

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unclescrooge
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Re: would you take a new mortgage to invest in stock market?

Post by unclescrooge » Sat Jul 01, 2017 5:41 am

Blanket statements/questions are pretty much useless.

Would I pull it out today? No.

But let me tell you short story.

I pulled out $70k from my home to speculate in real estate in 2003. By mid-2006 I had 18 rentals. By 2007 I had no primary house (sold to an investor, and I rented it back) and whittled down my rentals to only three properties.

Cashed in my chips, traveled for a bit, and went back to school in 2008.

I did pull out $30k at 6% in student loans in late 2009.
I didn't really need the money. It was a hedge against financial intuition collapse. I figured if everything failed, I wouldn't have to pay the money back. Plus, there wouldn't be jobs so I probably wouldn't be able to.

Well, we didn't see a great depression, I found a job, and within several months this $30k found it's way into the stock market along with the previous remaining gains from real estate.

I liquidated these stocks to purchase a home in 2014. Around the same time I paid of the original loan.

Then I took out a $110k HELOC and paid off the wife's student loans.

So if we were ever in a situation like 2010, where there was great uncertainty and valuations were low I probably would pull out money from whatever avenue I had open to me.

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Re: would you take a new mortgage to invest in stock market?

Post by Nowizard » Sat Jul 01, 2017 8:30 am

The concept, and implementing it early in our investing history, is at the center of our past investment planning. However, looking back, we were taking huge risks that worked out in the 1980's. At this point (Retirement), we would not do this unless we had sufficient assets to pay off any mortgage at any point that became desirable due to failing cognitive skills or other factors.

It is crucial to do your homework if you take out a mortgage to obtain investable funds. The decision is much more complex than simply figuring investment returns vs. loan interest since your gains are taxed, your mortgage interest is deductible, you have investments to track, etc.

Tim

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Re: would you take a new mortgage to invest in stock market?

Post by garlandwhizzer » Sat Jul 01, 2017 10:58 am

would you take a new mortgage to invest in stock market?
No.

Garland Whizzer

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Pajamas
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Re: would you take a new mortgage to invest in stock market?

Post by Pajamas » Sat Jul 01, 2017 11:09 am

It would depend on the mortgage rates as to whether I would even consider it, but generally I would prefer to use a margin loan over a mortgage for investing because I don't like the idea of using my dwelling as collateral because it is a basic necessity for living.

It also doesn't make sense to me to use something that is one single expensive thing that is difficult to buy and sell with high transaction costs to secure a loan on something very granular like stocks or mutual fund shares that can essentially be bought or sold instantly and at almost no cost.

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Re: would you take a new mortgage to invest in stock market?

Post by jimb_fromATL » Sat Jul 01, 2017 12:43 pm

VIrutally all of the advocates of keeping a big mortgage cite how much better it can do if the market is performing well, and brush off the dire consequences if the market and economy drop precipitously while you're stuck with extra debt and a mortgage payment.

IMO initially buying a home with a mortgage is considerably different -- and a much better idea -- than putting an existing home at risk in the hopes that you might be able to earn a little more interest than you’re paying on the mortgage.
  • Assuming you are going to have to pay market rate to live somewhere anyway, borrowing money to buy your own home in the first place allows you to apply all of your money toward paying off your own home and getting any appreciation in value on it too.

    Otherwise, as a renter, you are the OP (of Other Peoples' Money fame) who helps build wealth for your landlord while he/she uses your money to pay the interest and principal to reduce their debt and pay for their property, along with the landlord also getting the appreciation in value plus all the tax breaks.

    With a mortgage you're also living in and paying for the home instead of paying rent to build somebody else's wealth while a lot of your money you save toward the purchase of your own future home would be doing nothing but trying to keep up with the market price -- in normal times when home prices normally increase with inflation or more.
Not nearly as good an idea to borrow money against an existing home’s equity to invest.
  • Once the home is paid for, you're no longer getting the advantage of avoiding paying rent to somebody else.

    Instead, you're putting your house at risk as collateral to guarantee that the lender will have an investment in an annuity that has a guaranteed rate of return compounded monthly on the unpaid balance, with a minimum monthly guaranteed payout, and won't lose money. The lender has that stream of money coming in that they can invest someplace else.

    But you are gambling with the one thing you can least afford to lose -- your home -- in the hopes that you might earn more than the mortgage rate.
Just NOT owing any money on your home at all is equivalent to owning that bond or annuity that guarantees the equivalent of the monthly payout to the lender.

In fact the guaranteed rate that you're NOT paying -- which in the end is the same as earning it in an investment -- is actually better than the mortgage rate compared to investing money in a taxable account. That's because you pay tax on earnings in investments or savings accounts, but there is no tax on money that you keep for yourself instead of paying it out to a lender.

A big problem is that if you refinance for cash out, you are locked in to making the whole pre-tax payment to the lender every month for the life of the loan. To put it another way, you have no choice but to invest that amount every month in an annuity at a relatively low fixed rate – whether you can afford it or not, and whether it’s still a good idea or not.

If you have a bad year when your taxes are less, your net mortgage rate is higher. So you may lose more --if not all-- of the benefit of any tax deduction, which makes your investment cost per month higher and your net return worse -- and it's a time when you can least afford it.

If the economy crashes like it did in 2002/3 and 2008, you could owe more money on the mortgage than the home is worth. Plus your investment of the lump sum could be worth less than you owe on the mortgage.

I know people who had to postpone retirement because of that little problem; and some who lost their homes because they also lost their jobs or suffered pay cuts, and could not afford the mortgage payments. On the other hand, they probably could have paid the taxes and insurance while under-employed if the home had remained paid-off.

If you don’t borrow against the home, you can DCA with the freed-up mortgage payments. You’ll be hedging your bets against being locked in to an investment with a fixed payment (and rate) while the market is going down, and you can stop investing if you have a financial setback or if you want to wait to see what the market might do.

Or you can change your allocation to invest the payments more aggressively if your crystal ball is predicting that the market is going to increase in gains. But with the mortgage payment, you still have no choice but to continue paying the lender their guaranteed monthly income on their annuity.

I’ve never heard of Vanguard or any other broker foreclosing on your home because you decided to stop investing for a while. But mortgage lenders are known to become very grumpy and do bad things – like taking your house – if for any reason you stop making the payments.

jim

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Re: would you take a new mortgage to invest in stock market?

Post by retiredjg » Sat Jul 01, 2017 1:02 pm

I would not take out a mortgage in order to invest. However, when I bought my last house, interest rates were so low (2.75%) that I decided to leave my money invested and I did take out a mortgage for the amount I didn't have in cash.

Some people will argue it is the same thing. To me, it's not. But it's close.... :wink:

mancich
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Re: would you take a new mortgage to invest in stock market?

Post by mancich » Sat Jul 01, 2017 1:35 pm

No, I wouldn't.

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Re: would you take a new mortgage to invest in stock market?

Post by Grt2bOutdoors » Sat Jul 01, 2017 1:38 pm

No way in hell. I need a place to live, if you have no other means of paying back the loan, guess what? You have to move. They will foreclose.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

NibbanaBanana
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Re: would you take a new mortgage to invest in stock market?

Post by NibbanaBanana » Sat Jul 01, 2017 2:03 pm

Vanguard is calling for 5-6% returns for stocks and 2-3% returns for bonds over the next decade IIRC. What mortgage rate can you get? 3.5-4% at best? The question you have to ask yourself is: Am I feeling lucky? Well, are you ......?

emoore
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Re: would you take a new mortgage to invest in stock market?

Post by emoore » Sat Jul 01, 2017 2:18 pm

Yep I would and I am by holding a mortgage. So is everyone else that has a mortgage.

ljford7
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Re: would you take a new mortgage to invest in stock market?

Post by ljford7 » Sat Jul 01, 2017 3:27 pm

No way!

How soon everyone forgets what happened during the great recession.

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Re: would you take a new mortgage to invest in stock market?

Post by dharrythomas » Sat Jul 01, 2017 4:20 pm

Absolutely not.

We paid off the house early and limited debt. Paying off the house allowed us to use the cash flow to limit the amount of student loan debt for the kids.

In my mind, you can't beat free cash flow and reduced risk.

When I listen to the other arguments, I go back and think that when Warren Buffett when he moved back to Omaha, paid cash for his house, even though he was pretty sure he could make a bigger return in the market. If one of the greatest investors in history, always talks about risk, maybe the rest of us should listen.

Good luck.

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Re: would you take a new mortgage to invest in stock market?

Post by rnitz » Sat Jul 01, 2017 7:45 pm

emoore wrote:Yep I would and I am by holding a mortgage. So is everyone else that has a mortgage.
emoore has it right. Taking out a mortgage and investing in stocks IS THE EXACT SAME as having stocks and still having a mortgage. If you have stocks (outside of tax/401K/IRA considerations) and still have a mortgage, your are doing exactly what is proposed by OP. Having leverage (debt) that allows you to invest in risk investments (stocks and bonds). You can always sell the stocks and pay down the mortgage (or the converse, increasing the mortgage with a HELOC et.al. to increase your investment accounts).

Note that I don't argue this is a bad decision, only the people realize that debt (even a mortgage) is leverage. The only issue is your ability/desire to take leverage risks (and cover your interest payments).

Obligatory Note: this doesn't apply if you are going to default on your home mortgage (i.e. the debt is collateralized by your home in a non-recourse state).

bigred77
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Re: would you take a new mortgage to invest in stock market?

Post by bigred77 » Sat Jul 01, 2017 8:11 pm

Yes I would. But it depends on age and where I am positioned over my investing lifecycle.

If I have a paid off house in my early 40s, and mortgage rates are like they are today, I absolutely would.

If I have a paid off house and I'm in my early 60s and in/close to retirement. I would not. I wouldn't want to bear the additional risk and meet the debt servicing obligations from cash flow.

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Re: would you take a new mortgage to invest in stock market?

Post by nedsaid » Sat Jul 01, 2017 10:17 pm

puzzledhomeowner wrote:'Hi,

I have read several posts about Dave Ramsey on this forum, some positive, some negative (mainly for shilling his MLP). But one thing that he repeats on his show that I have been thinking about is (summarizing) "would you take out a new loan to invest in the stock market? Having a mortgage and investing is the same..."
What do bogleheads think about this? Would you go for an interest only loan and invest the extra money towards retirement? Then does it make sense to throw it all in on the mortgage and pay it off as soon as you can?
I am not talking about gambling on individual stocks, investing the boglehead way responsibly.
This is famously dumb advice. Are you certain that Dave Ramsey said this?

What I would do is ignore this piece of advice. Interest rates are very low and your mortgage should reflect that. What I am hoping is that you have a fixed low rate 30 year mortgage. If that is what you have, don't do anything but make regular payments.

If you have a higher rate mortgage and good credit, why not just refinance to get the lower rate? I would refinance for the current amount on your mortgage. If you have a variable rate mortgage, I would refinance and get a fixed 30 year mortgage.

Taking out an interest only mortgage to invest in the stock market is doubling down on stupid. Why take out an interest only loan to begin with? I think you are listening to some bad, bad advice.
A fool and his money are good for business.

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Re: would you take a new mortgage to invest in stock market?

Post by noco-hawkeye » Sat Jul 01, 2017 10:39 pm

I want to thank OP for this question. I've been hesitating on some money to pay off our mortgage, and framing the situation through this light helps. I've heard variations on this point of view, but this is a great reminder for me.

Obviously my answer is no - I would not take out any sort of loan to invest in the market. I'm sure there are various paths to reach a different point of view, but I imagine they are...

Time in the market - if you are 20-30 years away from market investments, you should probably take the loan. If you are 10 years or less away from needing the money, this seems pretty questionable to me.

The need - if you are already on track for retirement, it seems like this would not make any sense to take a loan. However, if you were on track for retirement and needed housing - you'll have to pick between renting and mortgages. Just make sure to make this choice without moving off track for retirement.

Current cash flow - Obviously you'd need the cash flow for 15-30 years to support the mortgage and be ready for this long term commitment.

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Re: would you take a new mortgage to invest in stock market?

Post by Pranav » Sat Jul 01, 2017 11:42 pm

No, I would not take out new mortgage to invest in stock market.
https://www.bogleheads.org/wiki

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Re: would you take a new mortgage to invest in stock market?

Post by whodidntante » Sun Jul 02, 2017 6:10 am

That depends on the terms.

I will take a nice fat new mortgage if you offer these terms. The mortgage has a repayment period of 20 years or more, or is interest only forever or is accumulating with no specific payment requirements like a margin loan, has a fixed interest rate, and my total cost to carry it is less than 2% fixed a year, no balloon payments, no closing costs, etc. For the interest only or accumulating option, don't expect me to ever repay the principal.

So far that offer hasn't shown up in the mail.

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Re: would you take a new mortgage to invest in stock market?

Post by ZenInvestor » Sun Jul 02, 2017 6:57 am

I would not take on debt to invest. It doesnt matter to me if its secured or unsecured debt. I paid cash for my house to be consistent with this point of view. My portfolio is more aggressive (80/20 small value tilt) because of my lower monthly expenses than I would otherwise hold (would be 70/30 or 60/40 if I had monthly debt expenses). Perhaps more importantly, my lower expenses have enabled me to take risks in my career that I would not otherwise feel comfortable taking. The whole picture matters in life, and its a very individual thing.

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puzzledhomeowner
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Re: would you take a new mortgage to invest in stock market?

Post by puzzledhomeowner » Sun Jul 02, 2017 7:05 am

@nedsaid Dave Ramsey is a big proponent of having no debt at all and this includes mortgage debt and has advocated many times about paying off the mortgage debt as soon as possible. The twist of asking whether someone would take an interest only mortgage and invest the money is mine, just being rhetorical there.
Lots of good replies, as always there is no single size fits all, but its nice to get a sample of where different people lie on their risk spectrum..

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nedsaid
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Re: would you take a new mortgage to invest in stock market?

Post by nedsaid » Sun Jul 02, 2017 9:32 am

puzzledhomeowner wrote:@nedsaid Dave Ramsey is a big proponent of having no debt at all and this includes mortgage debt and has advocated many times about paying off the mortgage debt as soon as possible. The twist of asking whether someone would take an interest only mortgage and invest the money is mine, just being rhetorical there.
Lots of good replies, as always there is no single size fits all, but its nice to get a sample of where different people lie on their risk spectrum..
There are certainly different opinions on this. For instance, I have acquaintances who have paid off their home early. My thought is that if your mortgage rate is relatively low, just pay it off on schedule. I just don't get excited about paying off a 3% mortgage, it is cheap money and tax deductible to boot. Another part of my thinking is not to get all of your cash tied up in your home. I would rather have the liquidity. On the other hand, it is nice to have your home paid off by the time you retire, and that I advocate.

I didn't realize you were asking a rhetorical question and thought you were really serious about this. I know someone who did a variation of this, took home equity out and invested in more speculative stocks and the person got burned. It does make an impression when you see things like this go wrong. People do crazy things sometimes.
A fool and his money are good for business.

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Re: would you take a new mortgage to invest in stock market?

Post by KyleAAA » Sun Jul 02, 2017 3:05 pm

Yea in that I intentionally put down far less than I could have afforded to when we bought a house last year. Valuations aren't low enough to consider getting creative with ways to borrow money right now. But putting down 10% rather than 80% on a 30 year mortgage at 3.5% seemed like a no brainer at the time, and still does.

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Re: would you take a new mortgage to invest in stock market?

Post by indexonlyplease » Sun Jul 02, 2017 3:22 pm

puzzledhomeowner wrote:'Hi,

I have read several posts about Dave Ramsey on this forum, some positive, some negative (mainly for shilling his MLP). But one thing that he repeats on his show that I have been thinking about is (summarizing) "would you take out a new loan to invest in the stock market? Having a mortgage and investing is the same..."
What do bogleheads think about this? Would you go for an interest only loan and invest the extra money towards retirement? Then does it make sense to throw it all in on the mortgage and pay it off as soon as you can?
I am not talking about gambling on individual stocks, investing the boglehead way responsibly.
I have been a Dave Ramsey fan for many years. In his 7 step plan it does not state whaat is above. He states you invest 15% of your salary along the way while you pay off your 15 year loan. So I would double check the blog. The 7 step plan is solid. He believes get debt free as fast as you can and then you can really start to invest.

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Re: would you take a new mortgage to invest in stock market?

Post by grabiner » Sun Jul 02, 2017 4:52 pm

There is an interesting difference between taking out a loan to invest, and paying down an existing loan versus investing: the duration is different.

If you take out a 15-year mortgage, the effective duration is about 7 years, because you have 180 payments in 1 month to 15 years, and the later payments have somewhat less present value. For example, if you put extra down on the mortgage to reduce all of your monthly payments, this is equivalent to buying a portfolio of bonds with an average duration of 7 years and an interest rate equal to the mortgage rate.

If you make an extra payment on a 15-year mortgage, the effective duration is the full 15 years, because you get no benefit until the last payment is eliminated. Making the extra payment is thus equivalent to buying a bond with a 15-year duration and an interest rate equal to the mortgage rate. This is less attractive.

I just checked how this applies to my own situation; it would not make sense for me to take out my current mortgage to invest, but it also does not make sense for me to make extra payments. My mortgage rate is 2.625%, which is 1.89% after 28% federal tax. I have 11 years left on my mortgage, so the mortgage as a whole has a duration of just over 5 years. Admiral shares of Vanguard Intermediate-Term Tax-Exempt yield 1.80%, with a duration of 5.2 years. Thus I would be slightly better off paying off the whole mortgage than buying a bond portfolio. (I don't actually hold this fund, but it is the most natural comparison.)

However, I can't pay off the whole mortgage now without a huge tax bill; my taxable investments are all stock with large capital gains. If I made a small extra payment on the mortgage, that would be equivalent to buying an 11-year bond for a 1.89% after-tax yield, and 11-year bonds yield much more than 1.89%.

So, I keep this mortgage, but I do treat it as a negative bond in my asset allocation. I owe $X on the mortgage, and I have $Y in stock and $Z in bonds. I compute my asset allocation as if I had $Y in stock and $Z-X in bonds. If I do decide to pay off the mortgage, I will have $Y+Z-X invested, and I will invest it as $Y in stock and $Z-X in bonds.
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