Paying down your mortgage as a way to balance your portfolio?

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fortfun
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Paying down your mortgage as a way to balance your portfolio?

Post by fortfun » Fri May 04, 2018 6:51 pm

Not long ago, on this forum, I read a thoughtful post about how it might not make sense to buy bonds/cds if you still owe on your mortgage. i.e. since it's about the same rate, you might as well pay down your mortgage. Do Bogleheads agree with that, and if so, could you look at putting extra cash toward your mortgage as a way to balance a stock heavy portfolio? It seems reasonable if you would use the improved cash flow, from a payed off house, just as you would withdrawing from bonds/cds, yes?

Max The Dog
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by Max The Dog » Fri May 04, 2018 7:01 pm

It seems like the tax write off from the mortgage interest would tip the scales toward buying the bonds. Also, if bond rates rise, as we hope they will, they will hopefully pay more than your mortgage interest rate. You won't be able to get the cash back if you pay off the mortgage, but you can always sell the bonds. Am I wrong? Anyway, good question.

retiredjg
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by retiredjg » Fri May 04, 2018 7:05 pm

Different things make sense to different people.

Some think you should not have a bond allocation while you have a mortgage. To a certain extent, this makes sense...financially. The numbers do argue for not having low paying bonds while you have a mortgage.

But people are not computers. People are humans. If a stock-heavy portfolio will be worrisome to you during a 2 or 3 year market downturn when half your money disappears, having a mortgage is not going to make you feel any better about it. Your gut will still be wrenched. Your sleep will still be disturbed. And you will likely be someone nobody wants to live with or be around or work with. You and your family will not gut it out and come through unscathed. There will be damage. It will not all be "made better" when things get better.

Investing does involve numbers and finance, but it also involves emotion. Ignoring your emotions or pretending that you don't have emotions about your money or that they do not matter is a fool's choice.

There are some people who can feel comfortable with no bonds while they are paying off a mortgage. But the number is probably small and the people who can do it won't know they can actually do it until they have done it.

The others who think they can do it but can't....will pay a price. And they will only know it once they have made the wrong decision and had to suffer through it.

mortfree
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by mortfree » Fri May 04, 2018 7:06 pm

RE: Max the dog

200k @ 3.875%. First year interest is around $7500.
SALT is capped at 10k

Married filing jointly (MFJ):
No tax break from the mortgage.

Need to rewire the thought process for “smaller” loans that don’t have lots of interest being charged.

Maybe that is why interest rates are going up (coincidence?)

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fortfun
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by fortfun » Fri May 04, 2018 7:16 pm

retiredjg wrote:
Fri May 04, 2018 7:05 pm
Different things make sense to different people.

Some think you should not have a bond allocation while you have a mortgage. To a certain extent, this makes sense...financially. The numbers do argue for not having low paying bonds while you have a mortgage.

But people are not computers. People are humans. If a stock-heavy portfolio will be worrisome to you during a 2 or 3 year market downturn when half your money disappears, having a mortgage is not going to make you feel any better about it. Your gut will still be wrenched. Your sleep will still be disturbed. And you will likely be someone nobody wants to live with or be around or work with. You and your family will not gut it out and come through unscathed. There will be damage. It will not all be "made better" when things get better.

Investing does involve numbers and finance, but it also involves emotion. Ignoring your emotions or pretending that you don't have emotions about your money or that they do not matter is a fool's choice.

There are some people who can feel comfortable with no bonds while they are paying off a mortgage. But the number is probably small and the people who can do it won't know they can actually do it until they have done it.

The others who think they can do it but can't....will pay a price. And they will only know it once they have made the wrong decision and had to suffer through it.
Thanks Retiredjg. Getting ready to execute my plan. Just want to make sure that I've thought of everything. There's a good reason that you have 32k+ posts. I value your input!

JoeRetire
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by JoeRetire » Fri May 04, 2018 7:23 pm

fortfun wrote:
Fri May 04, 2018 6:51 pm
could you look at putting extra cash toward your mortgage as a way to balance a stock heavy portfolio?
Perhaps I'm missing something, but I don't see how paying off a mortgage has any connection with balancing a stock-heavy portfolio.
Would you end up with no mortgage plus 100% stocks? Is that "balance"?

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fortfun
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by fortfun » Fri May 04, 2018 7:26 pm

JoeRetire wrote:
Fri May 04, 2018 7:23 pm
fortfun wrote:
Fri May 04, 2018 6:51 pm
could you look at putting extra cash toward your mortgage as a way to balance a stock heavy portfolio?
Perhaps I'm missing something, but I don't see how paying off a mortgage has any connection with balancing a stock-heavy portfolio.
Would you end up with no mortgage plus 100% stocks? Is that "balance"?
Don't know, that's why I asked? In my case, I'd have an extra 1,300/month. Might be similar to the amount I'd withdraw from bonds/cds. Not sure...

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Starchild
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by Starchild » Fri May 04, 2018 7:33 pm

Pay the mortgage off. The rate is higher than the bond yield currently. Once you pay off, you can always reinvest.

KlangFool
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by KlangFool » Fri May 04, 2018 7:35 pm

OP,

1) Liquidity.

2) Recourse loan versus non-recourse loan.

KlangFool
Last edited by KlangFool on Fri May 04, 2018 7:37 pm, edited 1 time in total.

JoeRetire
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by JoeRetire » Fri May 04, 2018 7:36 pm

fortfun wrote:
Fri May 04, 2018 7:26 pm
JoeRetire wrote:
Fri May 04, 2018 7:23 pm
fortfun wrote:
Fri May 04, 2018 6:51 pm
could you look at putting extra cash toward your mortgage as a way to balance a stock heavy portfolio?
Perhaps I'm missing something, but I don't see how paying off a mortgage has any connection with balancing a stock-heavy portfolio.
Would you end up with no mortgage plus 100% stocks? Is that "balance"?
Don't know, that's why I asked? In my case, I'd have an extra 1,300/month. Might be similar to the amount I'd withdraw from bonds/cds. Not sure...
If you would have an extra $1,300/month after paying off the mortgage, then you must have that much now. (The money to pay off the mortgage has to come from somewhere.)

There might be good reasons for you to pay off the mortgage. "Because I want to balance my portfolio" isn't one of them.

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fortfun
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by fortfun » Fri May 04, 2018 7:38 pm

KlangFool wrote:
Fri May 04, 2018 7:35 pm
OP,

1) Liquidity.

2) Recourse loan versus non-recourse loan.

KlangFool
Maybe I could try selling one room in my house :)
Thanks KlangFool!

KlangFool
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by KlangFool » Fri May 04, 2018 7:38 pm

JoeRetire wrote:
Fri May 04, 2018 7:36 pm
fortfun wrote:
Fri May 04, 2018 7:26 pm
JoeRetire wrote:
Fri May 04, 2018 7:23 pm
fortfun wrote:
Fri May 04, 2018 6:51 pm
could you look at putting extra cash toward your mortgage as a way to balance a stock heavy portfolio?
Perhaps I'm missing something, but I don't see how paying off a mortgage has any connection with balancing a stock-heavy portfolio.
Would you end up with no mortgage plus 100% stocks? Is that "balance"?
Don't know, that's why I asked? In my case, I'd have an extra 1,300/month. Might be similar to the amount I'd withdraw from bonds/cds. Not sure...
If you would have an extra $1,300/month after paying off the mortgage, then you must have that much now. (The money to pay off the mortgage has to come from somewhere.)

There might be good reasons for you to pay off the mortgage. "Because I want to balance my portfolio" isn't one of them.
JoeRetire,

OP is not paying off the mortgage. He is pre-paying the mortgage by X amount every month.

KlangFool

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badbreath
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by badbreath » Fri May 04, 2018 7:39 pm

I payed my 15 year mortgage in 15 years the started investing the payment in a taxable account. It has worked out very well.
“While money can’t buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx

KlangFool
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by KlangFool » Fri May 04, 2018 7:40 pm

fortfun wrote:
Fri May 04, 2018 7:38 pm
KlangFool wrote:
Fri May 04, 2018 7:35 pm
OP,

1) Liquidity.

2) Recourse loan versus non-recourse loan.

KlangFool
Maybe I could try selling one room in my house :)
Thanks KlangFool!
fortfun,

Is it a recourse loan or non-recourse loan? That should be part of your decision.

KlangFool

KlangFool
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by KlangFool » Fri May 04, 2018 7:41 pm

badbreath wrote:
Fri May 04, 2018 7:39 pm
I payed my 15 year mortgage in 15 years the started investing the payment in a taxable account. It has worked out very well.
badbreath,

Am I correct to assume that you were not unemployed for any significant amount of time across the multiple recessions over that 15 years?

KlangFool

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fortfun
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by fortfun » Fri May 04, 2018 7:44 pm

KlangFool wrote:
Fri May 04, 2018 7:40 pm
fortfun wrote:
Fri May 04, 2018 7:38 pm
KlangFool wrote:
Fri May 04, 2018 7:35 pm
OP,

1) Liquidity.

2) Recourse loan versus non-recourse loan.

KlangFool
Maybe I could try selling one room in my house :)
Thanks KlangFool!
fortfun,

Is it a recourse loan or non-recourse loan? That should be part of your decision.

KlangFool
I'm not sure. How do you find out? I assumed the mortgage company would just force a short sale/foreclosure if I stopped paying the mortgage. Isn't that what they normally do? I'm not too worried though. Including my emergency fund, I have almost enough to pay off the entire mortgage. Thanks!

KlangFool
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by KlangFool » Fri May 04, 2018 7:52 pm

fortfun wrote:
Fri May 04, 2018 7:44 pm
KlangFool wrote:
Fri May 04, 2018 7:40 pm
fortfun wrote:
Fri May 04, 2018 7:38 pm
KlangFool wrote:
Fri May 04, 2018 7:35 pm
OP,

1) Liquidity.

2) Recourse loan versus non-recourse loan.

KlangFool
Maybe I could try selling one room in my house :)
Thanks KlangFool!
fortfun,

Is it a recourse loan or non-recourse loan? That should be part of your decision.

KlangFool
I'm not sure. How do you find out? I assumed the mortgage company would just force a short sale/foreclosure if I stopped paying the mortgage. Isn't that what they normally do? I'm not too worried though. Including my emergency fund, I have almost enough to pay off the entire mortgage. Thanks!
fortfun,

Tell us which state you live in and we could tell you. It is controlled by the state law.

<<I assumed the mortgage company would just force a short sale/foreclosure if I stopped paying the mortgage. >>

In a recourse loan state, the mortgage company can go after your complete asset besides the house.

<< I'm not too worried though. Including my emergency fund, I have almost enough to pay off the entire mortgage. Thanks!>>

But, in a non-recourse loan state, it might make sense for you to walk away from the house if it is severely underwater. So, too much home equity is not useful in that case.

KlangFool

inbox788
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by inbox788 » Fri May 04, 2018 8:02 pm

I consider mortgage as a negative bond, so yes, if it makes sense. What is your mortgage rate? fixed? Bond returns? Tax impact?

https://www.bogleheads.org/wiki/Owning_ ... e_bonds.29

https://www.bogleheads.org/wiki/Paying_ ... the_choice

deikel
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by deikel » Fri May 04, 2018 8:17 pm

Inflation protection

Mortgage works in your favor under inflation, Bonds do the opposite
Everything you read in this post is my personal opinion. If you disagree with this disclaimer, please un-read the text immidiatly and destroy any copy or remembrance of it.

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fortfun
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by fortfun » Fri May 04, 2018 9:15 pm

KlangFool wrote:
Fri May 04, 2018 7:52 pm
fortfun wrote:
Fri May 04, 2018 7:44 pm
KlangFool wrote:
Fri May 04, 2018 7:40 pm
fortfun wrote:
Fri May 04, 2018 7:38 pm
KlangFool wrote:
Fri May 04, 2018 7:35 pm
OP,

1) Liquidity.

2) Recourse loan versus non-recourse loan.

KlangFool
Maybe I could try selling one room in my house :)
Thanks KlangFool!
fortfun,

Is it a recourse loan or non-recourse loan? That should be part of your decision.

KlangFool
I'm not sure. How do you find out? I assumed the mortgage company would just force a short sale/foreclosure if I stopped paying the mortgage. Isn't that what they normally do? I'm not too worried though. Including my emergency fund, I have almost enough to pay off the entire mortgage. Thanks!
fortfun,

Tell us which state you live in and we could tell you. It is controlled by the state law.

<<I assumed the mortgage company would just force a short sale/foreclosure if I stopped paying the mortgage. >>

In a recourse loan state, the mortgage company can go after your complete asset besides the house.

<< I'm not too worried though. Including my emergency fund, I have almost enough to pay off the entire mortgage. Thanks!>>

But, in a non-recourse loan state, it might make sense for you to walk away from the house if it is severely underwater. So, too much home equity is not useful in that case.

KlangFool
Colorado.
Owe 130k, 3%, 10yrs remaining. Worth 625k.

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fortfun
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by fortfun » Fri May 04, 2018 9:16 pm

inbox788 wrote:
Fri May 04, 2018 8:02 pm
I consider mortgage as a negative bond, so yes, if it makes sense. What is your mortgage rate? fixed? Bond returns? Tax impact?

https://www.bogleheads.org/wiki/Owning_ ... e_bonds.29

https://www.bogleheads.org/wiki/Paying_ ... the_choice
Colorado.
Owe 130k, 3%, 10yrs remaining. Worth 625k.

I think I'll take the standard deduction in the years to come.

4.6% state.
12% federal (next year, I think).

Thanks!

KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Paying down your mortgage as a way to balance your portfolio?

Post by KlangFool » Fri May 04, 2018 9:25 pm

fortfun wrote:
Fri May 04, 2018 9:15 pm
KlangFool wrote:
Fri May 04, 2018 7:52 pm
fortfun wrote:
Fri May 04, 2018 7:44 pm
KlangFool wrote:
Fri May 04, 2018 7:40 pm
fortfun wrote:
Fri May 04, 2018 7:38 pm


Maybe I could try selling one room in my house :)
Thanks KlangFool!
fortfun,

Is it a recourse loan or non-recourse loan? That should be part of your decision.

KlangFool
I'm not sure. How do you find out? I assumed the mortgage company would just force a short sale/foreclosure if I stopped paying the mortgage. Isn't that what they normally do? I'm not too worried though. Including my emergency fund, I have almost enough to pay off the entire mortgage. Thanks!
fortfun,

Tell us which state you live in and we could tell you. It is controlled by the state law.

<<I assumed the mortgage company would just force a short sale/foreclosure if I stopped paying the mortgage. >>

In a recourse loan state, the mortgage company can go after your complete asset besides the house.

<< I'm not too worried though. Including my emergency fund, I have almost enough to pay off the entire mortgage. Thanks!>>

But, in a non-recourse loan state, it might make sense for you to walk away from the house if it is severely underwater. So, too much home equity is not useful in that case.

KlangFool
Colorado.
Owe 130k, 3%, 10yrs remaining. Worth 625k.
fortfun,

https://www.creditsesame.com/blog/loans ... rse-loans/

<<Recourse and Non-Recourse Loans: State Laws
Whether you have a recourse or non-recourse loan depends largely on state law. If you’re unsure of your loan type, research your state to determine its laws regarding these loans and how impending foreclosures or asset seizures affect you. Non-recourse states include Alaska, Arizona, Washington, Utah, Idaho, Minnesota, California, North Carolina, Connecticut, North Dakota, Texas and Oregon. These states only allow non-recourse loans.

In other states, you may have either type of loan. If you have a recourse loan, the state allows your lender to pursue a deficiency judgement to recoup its money. Most states restrict a lender’s ability to pursue a deficiency judgement beyond the fair market value of the asset.>>

KlangFool

KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Paying down your mortgage as a way to balance your portfolio?

Post by KlangFool » Fri May 04, 2018 9:27 pm

fortfun wrote:
Fri May 04, 2018 9:15 pm
KlangFool wrote:
Fri May 04, 2018 7:52 pm
fortfun wrote:
Fri May 04, 2018 7:44 pm
KlangFool wrote:
Fri May 04, 2018 7:40 pm
fortfun wrote:
Fri May 04, 2018 7:38 pm


Maybe I could try selling one room in my house :)
Thanks KlangFool!
fortfun,

Is it a recourse loan or non-recourse loan? That should be part of your decision.

KlangFool
I'm not sure. How do you find out? I assumed the mortgage company would just force a short sale/foreclosure if I stopped paying the mortgage. Isn't that what they normally do? I'm not too worried though. Including my emergency fund, I have almost enough to pay off the entire mortgage. Thanks!
fortfun,

Tell us which state you live in and we could tell you. It is controlled by the state law.

<<I assumed the mortgage company would just force a short sale/foreclosure if I stopped paying the mortgage. >>

In a recourse loan state, the mortgage company can go after your complete asset besides the house.

<< I'm not too worried though. Including my emergency fund, I have almost enough to pay off the entire mortgage. Thanks!>>

But, in a non-recourse loan state, it might make sense for you to walk away from the house if it is severely underwater. So, too much home equity is not useful in that case.

KlangFool
Colorado.
Owe 130k, 3%, 10yrs remaining. Worth 625k.
fortfun,

It does not make any sense to pre-pay a 3% mortgage.

KlangFool

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fortfun
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by fortfun » Fri May 04, 2018 10:29 pm

KlangFool wrote:
Fri May 04, 2018 9:27 pm
fortfun wrote:
Fri May 04, 2018 9:15 pm
KlangFool wrote:
Fri May 04, 2018 7:52 pm
fortfun wrote:
Fri May 04, 2018 7:44 pm
KlangFool wrote:
Fri May 04, 2018 7:40 pm


fortfun,

Is it a recourse loan or non-recourse loan? That should be part of your decision.

KlangFool
I'm not sure. How do you find out? I assumed the mortgage company would just force a short sale/foreclosure if I stopped paying the mortgage. Isn't that what they normally do? I'm not too worried though. Including my emergency fund, I have almost enough to pay off the entire mortgage. Thanks!
fortfun,

Tell us which state you live in and we could tell you. It is controlled by the state law.

<<I assumed the mortgage company would just force a short sale/foreclosure if I stopped paying the mortgage. >>

In a recourse loan state, the mortgage company can go after your complete asset besides the house.

<< I'm not too worried though. Including my emergency fund, I have almost enough to pay off the entire mortgage. Thanks!>>

But, in a non-recourse loan state, it might make sense for you to walk away from the house if it is severely underwater. So, too much home equity is not useful in that case.

KlangFool
Colorado.
Owe 130k, 3%, 10yrs remaining. Worth 625k.
fortfun,

It does not make any sense to pre-pay a 3% mortgage.

KlangFool
Thanks KlangFool.

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Paying down your mortgage as a way to balance your portfolio?

Post by retiredjg » Sat May 05, 2018 6:21 am

KlangFool wrote:
Fri May 04, 2018 9:27 pm
It does not make any sense to pre-pay a 3% mortgage.
I agree it does not make any financial sense to pre-pay a 3% mortgage. But many have told us that paying off the mortgage made good emotional sense for the ones who did it.

rgs92
Posts: 1903
Joined: Mon Mar 02, 2009 8:00 pm

Re: Paying down your mortgage as a way to balance your portfolio?

Post by rgs92 » Sat May 05, 2018 6:37 am

One financial strategy is to have a permanent mortgage you intend to leave with a large balance even when you leave this world.
If this is the long-term plan, why pay it off?

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badbreath
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by badbreath » Sat May 05, 2018 7:22 am

by KlangFool

badbreath wrote: ↑Fri May 04, 2018 8:39 pm
I payed my 15 year mortgage in 15 years the started investing the payment in a taxable account. It has worked out very well.
badbreath,

Am I correct to assume that you were not unemployed for any significant amount of time across the multiple recessions over that 15 years?

KlangFool
True never unimployed
“While money can’t buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx

cherijoh
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by cherijoh » Sat May 05, 2018 7:52 am

fortfun wrote:
Fri May 04, 2018 6:51 pm
Not long ago, on this forum, I read a thoughtful post about how it might not make sense to buy bonds/cds if you still owe on your mortgage. i.e. since it's about the same rate, you might as well pay down your mortgage. Do Bogleheads agree with that, and if so, could you look at putting extra cash toward your mortgage as a way to balance a stock heavy portfolio? It seems reasonable if you would use the improved cash flow, from a payed off house, just as you would withdrawing from bonds/cds, yes?
Personally I think that is a bad idea unless the amount of mortgage owed is pretty small compared to your total investments. Your home is a large illiquid asset and therefore home equity is NOT equivalent to bonds or bond index funds that could be liquidated by EOB on any weekday. IMO, any excess cash should first go towards maxing out any tax-advantaged investments to which you have access. If you don't max out your contributions you lose that space forever!

An additional concern is that bonds play a role in reducing the volatility of your portfolio and provide you with rebalancing opportunities. You can't sell off part of your house to buy more stocks if they have tanked during a market correction.

Finally, a low-interest-rate mortgage is one of the best inflation hedges available to an ordinary investor. Don't fall victim to recency bias - the low interest rates and subdued inflation since the Great Recession is an historic anomaly and I wouldn't expect it to continue. The projected deficits pretty much guarantee upward pressure on interest rates. I am certainly not suggesting a return to the late 70's or early 80's, but you should look at happened then as a "worst case scenario".

EDITED to ADD: With a3% loan you have a very good inflation hedge!

Stormbringer
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by Stormbringer » Sat May 05, 2018 8:08 am

fortfun wrote:
Fri May 04, 2018 6:51 pm
Paying down your mortgage as a way to balance your portfolio?
I think of it in a very different way.

Often we think of our portfolios from the perspective of a balance sheet (e.g. "what's my net worth?", "how much do I have in retirement savings?", etc.). However, most people experience life from the perspective of cash flow (e.g. "what monthly payment can we afford on a house or car?").

When people get started in life, they begin to accumulate cash-flow obligations: mortgage payments, car payments, student loan payments, retirement savings, college savings, grocery bills, day care, insurance, etc. These obligations can become a trap -- there are a great many people who feel stuck in a job they don't like because of these obligations, and the loss of an income stream (job) can be financially catastrophic to them. It is even riskier when the obligations depend on two stable incomes, because if either income stream is interrupted the whole house of cards can come crashing down.

So I look at paying down a mortgage not as a "portfolio" thing so much as a step towards eliminating a sizable cash-flow obligation. Doing so opens up a world of options that you may not otherwise have.
"Compound interest is the most powerful force in the universe." - Albert Einstein

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dodecahedron
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by dodecahedron » Sat May 05, 2018 8:15 am

Max The Dog wrote:
Fri May 04, 2018 7:01 pm
It seems like the tax write off from the mortgage interest would tip the scales toward buying the bonds. .
To the extent this may have been true in the past, it is much less true now. Due to tax law effective in 2018, a growing number of taxpayers will find it in their interests to take the standard deduction, meaning they will not be getting a tax writeoff from mortgage interest.

cherijoh
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by cherijoh » Sat May 05, 2018 8:25 am

retiredjg wrote:
Sat May 05, 2018 6:21 am
KlangFool wrote:
Fri May 04, 2018 9:27 pm
It does not make any sense to pre-pay a 3% mortgage.
I agree it does not make any financial sense to pre-pay a 3% mortgage. But many have told us that paying off the mortgage made good emotional sense for the ones who did it.
I'm not disagreeing with you about how many people view the goal of paying off their mortgages. But personally I wouldn't categorize it as "good sense" - I think it is just another fallacy that falls under the category of behavioral economics. It certainly isn't the worst decision they could make (i.e., they aren't spending the money frivolously), but often times it is far from the best decision in the long run - especially for people who decide to pay off their mortgage early at the expense of saving for retirement. Big financial decisions deserve careful analysis and far too many people IMO just go with their gut.

cherijoh
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by cherijoh » Sat May 05, 2018 8:32 am

Stormbringer wrote:
Sat May 05, 2018 8:08 am
fortfun wrote:
Fri May 04, 2018 6:51 pm
Paying down your mortgage as a way to balance your portfolio?
I think of it in a very different way.

Often we think of our portfolios from the perspective of a balance sheet (e.g. "what's my net worth?", "how much do I have in retirement savings?", etc.). However, most people experience life from the perspective of cash flow (e.g. "what monthly payment can we afford on a house or car?").

When people get started in life, they begin to accumulate cash-flow obligations: mortgage payments, car payments, student loan payments, retirement savings, college savings, grocery bills, day care, insurance, etc. These obligations can become a trap -- there are a great many people who feel stuck in a job they don't like because of these obligations, and the loss of an income stream (job) can be financially catastrophic to them. It is even riskier when the obligations depend on two stable incomes, because if either income stream is interrupted the whole house of cards can come crashing down.

So I look at paying down a mortgage not as a "portfolio" thing so much as a step towards eliminating a sizable cash-flow obligation. Doing so opens up a world of options that you may not otherwise have.
In your scenario, it seems like the people simply took on too much debt. Under those circumstances it is hard to find the cash to accelerate the mortgage payments. So what happens? They reduce their contributions to retirement and college savings since those are future - not current - obligations. In the long run, paying down the mortgage when you are already stretched financially ends up risking your long term future IMO. There is no free lunch!

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pezblanco
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by pezblanco » Sat May 05, 2018 8:38 am

Pro Arguments:

1) If you aren't itemizing, paying off the mortgage is the same as a guaranteed TAX-FREE 3% bond over the span of the mortgage. In today's rate environment, that is pretty darn good. Vanguard's tax-exempt intermediate term bond fund is currently 2.42% (and you have to pay state taxes on that).

2) To counter the liquidity argument, you can always get a HELOC.

Against Arguments:

1) The liquidity argument is really the only good argument. Once the money is paid in, it is hard to get out. Even with a Heloc, you might not (probably won't) have access to money at that rate.

If liquidity is not a problem then I see absolutely no good reason to not pay off the mortgage early. Arguments based on how good it feels or not feels are just silly and have no place in a financial discussion. Most of the counter-arguments based on recourseable or not loans are waaaaay out there for most people who have quite a bit of equity in the house already and are NOT GOING TO WALK AWAY from it. Similarly for people losing their jobs and desperately needing money (this falls in the liquidity pool of arguments).

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Re: Paying down your mortgage as a way to balance your portfolio?

Post by KlangFool » Sat May 05, 2018 9:00 am

retiredjg wrote:
Sat May 05, 2018 6:21 am
KlangFool wrote:
Fri May 04, 2018 9:27 pm
It does not make any sense to pre-pay a 3% mortgage.
I agree it does not make any financial sense to pre-pay a 3% mortgage. But many have told us that paying off the mortgage made good emotional sense for the ones who did it.
retiredjg,

OP is not paying off the mortgage totally. He is prepaying a portion of the mortgage. That does not reduce his monthly mortgage payment. So, emotionally, it does not help him either.

I am not against folks paying off the mortgage totally. It is the partial payment that does not make any sense.

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KlangFool
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by KlangFool » Sat May 05, 2018 9:05 am

pezblanco wrote:
Sat May 05, 2018 8:38 am
Pro Arguments:

1) If you aren't itemizing, paying off the mortgage is the same as a guaranteed TAX-FREE 3% bond over the span of the mortgage. In today's rate environment, that is pretty darn good. Vanguard's tax-exempt intermediate term bond fund is currently 2.42% (and you have to pay state taxes on that).
pezblanco,

Please use proper terminology.

OP is not paying off the mortgage. Paying off means that he pre-paid the whole mortgage and he will have zero mortgage payment. OP is prepaying a portion of the mortgage.

KlangFool

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Watty
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by Watty » Sat May 05, 2018 9:48 am

fortfun wrote:
Fri May 04, 2018 6:51 pm
Not long ago, on this forum, I read a thoughtful post about how it might not make sense to buy bonds/cds if you still owe on your mortgage. i.e. since it's about the same rate, you might as well pay down your mortgage. Do Bogleheads agree with that, and if so, could you look at putting extra cash toward your mortgage as a way to balance a stock heavy portfolio?
A mortgage is in effect a negative bond. For example if you have a $250K mortgage and $750K in stocks You would have a net worth of $500K. Your asset allocation is in effect -50% bonds and 150% in stocks which is extremely aggressive amount of leverage. Paying down the mortgage would help but you would not be in a good situation.
fortfun wrote:
Fri May 04, 2018 6:51 pm
It seems reasonable if you would use the improved cash flow, from a payed off house, just as you would withdrawing from bonds/cds, yes?
One of the things to remember is why people should own bonds. That is mainly to reduce the volatility of their portfolio and not to provide cash flow.

For example if you have a $500K portfolio with $100K in bonds and $400k in stocks and there is a 20% stock market decline their investments would be down $80K which is a 16% drop. It will vary a lot but bonds often rise when the stock market goes now and they pay a dividend so there is a good chance that the actual loss would be lower and might more like 12%

In the first example above with leverage a 20% stock market decline would result in a $150K decline which is a 30% decline in the person's net worth.

One other thing. As mentioned a low interest rate mortgage can be an inflation hedge but on average people move about every seven years so you really can't count on that.

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Re: Paying down your mortgage as a way to balance your portfolio?

Post by Marketman » Sat May 05, 2018 9:50 am

One factor to think about is security of your home equity. I think this varies from state to state. For the most part, in Texas where I live the only people who can get your home equity if you go into bankruptcy are the IRS and the 1st lien holder on the house. To me, this is an incentive to pay off the home. But I'm not sure how this is in other states. This might be something worth looking into.

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Re: Paying down your mortgage as a way to balance your portfolio?

Post by KlangFool » Sat May 05, 2018 10:10 am

Marketman wrote:
Sat May 05, 2018 9:50 am
One factor to think about is security of your home equity. I think this varies from state to state. For the most part, in Texas where I live the only people who can get your home equity if you go into bankruptcy are the IRS and the 1st lien holder on the house. To me, this is an incentive to pay off the home. But I'm not sure how this is in other states. This might be something worth looking into.
Marketman,

Texas is a non-recourse loan state. So, why would someone want to tie up his/her money in home equity when the person can walk away from the house if it is underwater?

<<One factor to think about is security of your home equity.>>

Why worry about the security of home equity if the house owner has low home equity? There is nothing to protect in those cases.

There is more than one way to look at the situation.

KlangFool

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corn18
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by corn18 » Sat May 05, 2018 10:17 am

How do you rebalance your portfolio if most of the "bonds" are in home equity?

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fortfun
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by fortfun » Sat May 05, 2018 10:33 am

Watty wrote:
Sat May 05, 2018 9:48 am
fortfun wrote:
Fri May 04, 2018 6:51 pm
Not long ago, on this forum, I read a thoughtful post about how it might not make sense to buy bonds/cds if you still owe on your mortgage. i.e. since it's about the same rate, you might as well pay down your mortgage. Do Bogleheads agree with that, and if so, could you look at putting extra cash toward your mortgage as a way to balance a stock heavy portfolio?
A mortgage is in effect a negative bond. For example if you have a $250K mortgage and $750K in stocks You would have a net worth of $500K. Your asset allocation is in effect -50% bonds and 150% in stocks which is extremely aggressive amount of leverage. Paying down the mortgage would help but you would not be in a good situation.
fortfun wrote:
Fri May 04, 2018 6:51 pm
It seems reasonable if you would use the improved cash flow, from a payed off house, just as you would withdrawing from bonds/cds, yes?
One of the things to remember is why people should own bonds. That is mainly to reduce the volatility of their portfolio and not to provide cash flow.

For example if you have a $500K portfolio with $100K in bonds and $400k in stocks and there is a 20% stock market decline their investments would be down $80K which is a 16% drop. It will vary a lot but bonds often rise when the stock market goes now and they pay a dividend so there is a good chance that the actual loss would be lower and might more like 12%

In the first example above with leverage a 20% stock market decline would result in a $150K decline which is a 30% decline in the person's net worth.

One other thing. As mentioned a low interest rate mortgage can be an inflation hedge but on average people move about every seven years so you really can't count on that.
Thanks Watty. So you recommend paying down the mortgage and re-balancing at the same time? 3%, 10yr, 130k with a home worth 625k make any difference. You've replied to my previous posts around this topic. I appreciate that. I'm getting ready to execute our plan soon and want to make sure I have thought of everything. The bogle head 3 fund/target date philosophy is nice but it doesn't really help in a situation like ours where you are trying to figure out what to do with 70k extra cash on hand. I guess there's no right answer. Thank you!

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Re: Paying down your mortgage as a way to balance your portfolio?

Post by TinkerPDX » Sat May 05, 2018 10:38 am

JoeRetire wrote:
Fri May 04, 2018 7:23 pm
fortfun wrote:
Fri May 04, 2018 6:51 pm
could you look at putting extra cash toward your mortgage as a way to balance a stock heavy portfolio?
Perhaps I'm missing something, but I don't see how paying off a mortgage has any connection with balancing a stock-heavy portfolio.
Would you end up with no mortgage plus 100% stocks? Is that "balance"?
It is if you think of debt as a negative bond. Having stocks and a mortgage w no bonds is, financially at least, similar to having an all-stock portfolio juiced w leverage.

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Re: Paying down your mortgage as a way to balance your portfolio?

Post by Regressor » Sat May 05, 2018 11:21 am

Paying down the mortgage seems sensible to me, but only up to a point. You should still have enough bonds to rebalance your portfolio. For example, if my desired asset allocation is 80/20 and I have $100.000, then I want to have enough money to rebalance and buy stocks when they're on sale, during a recession. If stocks go down 50% my 80k would drop to 40k and assuming that my bonds do not lose value, my portfolio would be 60k. I should be able to rebalance back to 80/20, which means that I'd sell 8k of my bonds and buy stocks. In this scenario I wouldn't touch my other 12k of bonds so they'd be useless for rebalancing. Knowing this, I'd be ready to use that 12k for paying down the mortgage as that money would be earning more than the dividends that bonds pay.

Does that make sense? What's the disadvantage of this approach, apart from the fact that one would have to be ready to have zero dollars in bonds if market tanks 50% or more?

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Re: Paying down your mortgage as a way to balance your portfolio?

Post by IlliniDave » Sat May 05, 2018 11:54 am

I would think of it as de-leveraging before I would think of it as portfolio balancing. Even at 3% I'd probably pay the loan off as fast as I could prudently do so (i.e., without doing something silly like setting myself up for a liquidity crisis).
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by inbox788 » Sat May 05, 2018 12:00 pm

fortfun wrote:
Fri May 04, 2018 9:16 pm
Colorado.
Owe 130k, 3%, 10yrs remaining. Worth 625k.

I think I'll take the standard deduction in the years to come.

4.6% state.
12% federal (next year, I think).
The 10 year treasury is floating right around 3%, so it's pretty Even Steven. If you're not taking the mortgage deduction, there's no federal benefit. Don't know if you get a full 4.6% state benefit, but 4.6% on 3% interest on 130k (< $4k) balance makes the initial annual consideration less than $200 and total over 10 years less than $1000.

If you can't find better uses for your money, given current rates, I would consider paying down the mortgage over buying 2% CD and 3% treasuries. If the mortgage were closer to 2%, I wouldn't and if it were 4% I'd definitely pick the mortgage. It's right in the middle where it doesn't make a large difference what you wind up choosing without taking on substantial additional risk.

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Re: Paying down your mortgage as a way to balance your portfolio?

Post by Earl Lemongrab » Sat May 05, 2018 12:51 pm

For me, it's simple. I don't and never have included my home or anything associated with it as part of my portfolio. That means that I didn't need to account for either the loan or the equity in asset allocation. I think it makes the most sense as the loan is secured by the equity.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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Re: Paying down your mortgage as a way to balance your portfolio?

Post by vitaflo » Sat May 05, 2018 1:14 pm

Have an emergency fund large enough to handle unemployment. Max out your tax advantaged accounts. Throw any remainder on the mortgage. It should be as simple as that.

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Re: Paying down your mortgage as a way to balance your portfolio?

Post by mortfree » Sat May 05, 2018 1:44 pm

I’m going to ask this here.

How do folks get past the amount of interest on a mortgage?

I have 200k @ 3.875% for 30 years. So around $130k in interest (ballpark from my tired memory).

I’ve made 5 payments (a few with extra $$) and am down to 193k.

I feel comfortable accelerating at a 20 year pace to have interest in the 89k ballpark.

Really could use some expert information on how to not get scared by that 130k in interest.

I had paid off a previous home but moved and took the mortgage.

Thanks
Last edited by mortfree on Sat May 05, 2018 1:58 pm, edited 1 time in total.

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Re: Paying down your mortgage as a way to balance your portfolio?

Post by retiredjg » Sat May 05, 2018 1:57 pm

KlangFool wrote:
Sat May 05, 2018 9:00 am
OP is not paying off the mortgage totally. He is prepaying a portion of the mortgage. That does not reduce his monthly mortgage payment. So, emotionally, it does not help him either.
I don't think we can know that. They might find it very freeing and satisfying to be paying it off ahead of schedule.

I'm all for keeping the mortgage til the very end. I certainly intend to. But I also think there is another side of the story for some people and it should not be ignored.

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Re: Paying down your mortgage as a way to balance your portfolio?

Post by Earl Lemongrab » Sat May 05, 2018 2:23 pm

pezblanco wrote:
Sat May 05, 2018 2:18 pm

My dear Lemongrab ... your cash flows (positive and/or negative) have absolutely no impact on your asset allocation???? Really???
Why would it? Do you count your income from the job as part of your asset allocation? Do we even have the same definition of "asset allocation"? For me that's allocation of different slices of the investment pie. So for me, that's domestic stocks, international stocks, and fixed-income. Those are further divided into sub-allocations.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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Re: Paying down your mortgage as a way to balance your portfolio?

Post by pezblanco » Sat May 05, 2018 2:40 pm

Earl Lemongrab wrote:
Sat May 05, 2018 2:23 pm
pezblanco wrote:
Sat May 05, 2018 2:18 pm

My dear Lemongrab ... your cash flows (positive and/or negative) have absolutely no impact on your asset allocation???? Really???
Why would it? Do you count your income from the job as part of your asset allocation? Do we even have the same definition of "asset allocation"? For me that's allocation of different slices of the investment pie. So for me, that's domestic stocks, international stocks, and fixed-income. Those are further divided into sub-allocations.
To take an extreme example ... suppose you suddenly inherited a cash flow of 10K dollars per month for life (COLA adjusted yearly). This would have no impact on your asset allocation (here perhaps we could say percent stocks to percent bonds held in your porfolio)? I know that for me and for most non-very wealthy BHs, I would have much less need to take risk with stocks in my stock/bond allocation .... it's really that simple.

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