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

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

Post by Earl Lemongrab » Sat May 05, 2018 2:53 pm

So let's talk examples, as you want to include things in the asset allocation.

A young person is starting out, has a good job. She also bought a house that has 40k equity from the down-payment, and a loan of 160k. She can save exactly enough to invest 18.5k in 401(k) and $5500 in Roth.

She decides that a basic allocation of 50% US stocks, 30% international stocks, and 20% bonds sounds right. How does she set up her asset allocation and investments with all those factors? It's easy for me, as I wouldn't take into account the equity or loan. So I would have her put her investments into those categories as money becomes available. Rebalance as needed using whichever method she likes.
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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pezblanco
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Re: Paying down your mortgage as a way to balance your portfolio?

Post by pezblanco » Sat May 05, 2018 3:29 pm

Earl Lemongrab wrote:
Sat May 05, 2018 2:53 pm
So let's talk examples, as you want to include things in the asset allocation.

A young person is starting out, has a good job. She also bought a house that has 40k equity from the down-payment, and a loan of 160k. She can save exactly enough to invest 18.5k in 401(k) and $5500 in Roth.

She decides that a basic allocation of 50% US stocks, 30% international stocks, and 20% bonds sounds right. How does she set up her asset allocation and investments with all those factors? It's easy for me, as I wouldn't take into account the equity or loan. So I would have her put her investments into those categories as money becomes available. Rebalance as needed using whichever method she likes.
Do you view a dollar in a 401(k) as the same as in the Roth or in a Taxable account? I don't. I have money in all three types of accounts. You have to (I argue) try to account for their relative values.

And if the loan (the negative bond) is for 6% per year and the SEC yield on bonds is 2.5% do you think it is a better choice to ignore the negative bond and purchase bond funds when you could get a 6% yield by paying down the mortgage?

Yes, I agree .... your way is easier .... but your way will lead to making suboptimal decisions.

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 » Sat May 05, 2018 4:51 pm

mortfree wrote:
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
mortfree,

My portfolio is averaging 7% for the last 10 years.

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

My mortgage is 3.49%. So, why would I want to tie up my money to the house saving 3.49% interest when I can use that money to earn 7%?

There is an opportunity cost of putting extra money into the house. In my case, the PITI is 20% to 30% lowered than rent. I won't mind paying the mortgage forever. So, why would I want to put extra money into the house?

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 » Sat May 05, 2018 4:57 pm

KlangFool wrote:
Sat May 05, 2018 4:51 pm
mortfree wrote:
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
mortfree,

My portfolio is averaging 7% for the last 10 years.

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

My mortgage is 3.49%. So, why would I want to tie up my money to the house saving 3.49% interest when I can use that money to earn 7%?

KlangFool
KlangFool,
If you were going to retire/partially retire in 5 years, would that change anything? That's my situation. Of course, I'll have a 65k/yr pension and my wife will continue to work for a couple of more years. I really don't expect to need that money in 5 years but you never know. The kids will be starting college shortly after that. I struggle with going with the known (guaranteed 3% vs the possibility of doing much better OR worse).
My complete picture: viewtopic.php?f=1&t=238813

MindBogler
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Joined: Wed Apr 17, 2013 12:05 pm

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

Post by MindBogler » Sat May 05, 2018 6:10 pm

TinkerPDX wrote:
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.
I fail to understand how anyone thinks the mortgage as a negative bond makes any sense. It doesn't make sense because homes are illiquid and come with enormous transaction costs. It doesn't make sense because you can't directly rebalance between your mortgage and your portfolio. It doesn't make sense because there isn't going to be a margin call on your home. It doesn't make sense because many states are non-recourse and you can renege on the bank at any time. The decision to take a mortgage has nothing to do with a stock/bond portfolio near as I have ever been able to surmise.

The decision to take a mortgage should be based on finding somewhere to live, which is a general requirement in a civilized society. The other option is to rent. Conflating mortgage payments with negative bonds is just another case of mental gymnastics; taking something that really isn't complicated at all and turning it into a Rube Goldberg machine in order to have something to wax poetic about.

CurlyDave
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Joined: Thu Jul 28, 2016 11:37 am

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

Post by CurlyDave » Sat May 05, 2018 6:59 pm

IMHO paying down your mortgage unbalances your portfolio. It concentrates a larger percentage of your net worth in a single, illiquid real estate asset.

If you buy bonds or equities with the money, your net worth when you make the investment is the same, but it is diversified into more assets, and a different type of assets than real estate.

KlangFool
Posts: 10190
Joined: Sat Oct 11, 2008 12:35 pm

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

Post by KlangFool » Sat May 05, 2018 7:03 pm

fortfun wrote:
Sat May 05, 2018 4:57 pm
KlangFool wrote:
Sat May 05, 2018 4:51 pm
mortfree wrote:
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
mortfree,

My portfolio is averaging 7% for the last 10 years.

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

My mortgage is 3.49%. So, why would I want to tie up my money to the house saving 3.49% interest when I can use that money to earn 7%?

KlangFool
KlangFool,
If you were going to retire/partially retire in 5 years, would that change anything? That's my situation. Of course, I'll have a 65k/yr pension and my wife will continue to work for a couple of more years. I really don't expect to need that money in 5 years but you never know. The kids will be starting college shortly after that. I struggle with going with the known (guaranteed 3% vs the possibility of doing much better OR worse).
My complete picture: viewtopic.php?f=1&t=238813
fortfun,

<<KlangFool,
If you were going to retire/partially retire in 5 years, would that change anything?>>

No.

<<The kids will be starting college shortly after that. >>

So, your plan is to pay off the cheap housing loan and then take an expensive student loan for your kids?

<<I struggle with going with the known (guaranteed 3% vs the possibility of doing much better OR worse).>>

Where is the struggle? You can pay off the loan whenever you want. While your portfolio is doing better than 3% and you may need the money for the kid's college education, do not pay down or pre-pay the mortgage. There is no hurry to pay off a low-interest housing loan. The interest rate is going up.

You have a 600K house. Your portfolio is around 600K. Why would you want to put more money into your house? You are putting too much of your eggs (money) into the housing basket.

KlangFool

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

Post by CurlyDave » Sat May 05, 2018 7:09 pm

retiredjg wrote:
Sat May 05, 2018 6:21 am
...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.
It may have made emotional sense at the time, but that is just like investing with a full-service brokerage. They give you great emotional support while they fleece you on fees. I prefer the support of knowing that I am making a higher return on the money than the bank is making from me.

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pezblanco
Posts: 477
Joined: Thu Sep 12, 2013 8:02 pm

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

Post by pezblanco » Sat May 05, 2018 7:10 pm

MindBogler wrote:
Sat May 05, 2018 6:10 pm
TinkerPDX wrote:
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.
I fail to understand how anyone thinks the mortgage as a negative bond makes any sense.
A bond is just a promised series of future cash payments. A mortgage is a type of bond. The bank certainly views it as such. Being the mortgager payer makes it a negative bond to you.

It doesn't make sense because homes are illiquid and come with enormous transaction costs.
Some bonds are more liquid than others. That doesn't make them not a bond.
It doesn't make sense because you can't directly rebalance between your mortgage and your portfolio.
Why the emphasis on directly? You can obtain a Heloc and then directly rebalance should you need to do so.
It doesn't make sense because there isn't going to be a margin call on your home.
It doesn't make sense because many states are non-recourse and you can renege on the bank at any time.
Bonds have all sorts of provisions ... some are callable, some are not callable. Some are callable with penalties (early withdrawal of a CD for example.... they are still bonds.
The decision to take a mortgage has nothing to do with a stock/bond portfolio near as I have ever been able to surmise.
Perhaps my points above will completely change your mind :D ?

The decision to take a mortgage should be based on finding somewhere to live, which is a general requirement in a civilized society. The other option is to rent. Conflating mortgage payments with negative bonds is just another case of mental gymnastics; taking something that really isn't complicated at all and turning it into a Rube Goldberg machine in order to have something to wax poetic about.
I never thought of myself as a poet ... but thank you!

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fortfun
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Joined: Tue Apr 19, 2016 7:31 pm

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

Post by fortfun » Sat May 05, 2018 7:17 pm

KlangFool wrote:
Sat May 05, 2018 7:03 pm
fortfun wrote:
Sat May 05, 2018 4:57 pm
KlangFool wrote:
Sat May 05, 2018 4:51 pm
mortfree wrote:
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
mortfree,

My portfolio is averaging 7% for the last 10 years.

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

My mortgage is 3.49%. So, why would I want to tie up my money to the house saving 3.49% interest when I can use that money to earn 7%?

KlangFool
KlangFool,
If you were going to retire/partially retire in 5 years, would that change anything? That's my situation. Of course, I'll have a 65k/yr pension and my wife will continue to work for a couple of more years. I really don't expect to need that money in 5 years but you never know. The kids will be starting college shortly after that. I struggle with going with the known (guaranteed 3% vs the possibility of doing much better OR worse).
My complete picture: viewtopic.php?f=1&t=238813
fortfun,

<<KlangFool,
If you were going to retire/partially retire in 5 years, would that change anything?>>

No.

<<The kids will be starting college shortly after that. >>

So, your plan is to pay off the cheap housing loan and then take an expensive student loan for your kids?

<<I struggle with going with the known (guaranteed 3% vs the possibility of doing much better OR worse).>>

Where is the struggle? You can pay off the loan whenever you want. While your portfolio is doing better than 3% and you may need the money for the kid's college education, do not pay down or pre-pay the mortgage. There is no hurry to pay off a low-interest housing loan. The interest rate is going up.

You have a 600K house. Your portfolio is around 600K. Why would you want to put more money into your house? You are putting too much of your eggs (money) into the housing basket.

KlangFool
I have 529s that will cover the lion share of kids' instate tuition. I know you don't like 529s. I hope I don't take out any loans, or the kids either. If the mortgage is paid off by then, I'd have an extra 1,250 in cash flow to help (should it be needed).

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Earl Lemongrab
Posts: 5444
Joined: Tue Jun 10, 2014 1:14 am

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

Post by Earl Lemongrab » Sat May 05, 2018 7:18 pm

pezblanco wrote:
Sat May 05, 2018 6:44 pm
To answer your question regarding the asset allocation for your hypothetical, we would need to know the values of her 401, her Roth, and her taxable accounts .
There are no balances. It's all fresh. What is her allocation?

You keep coming with excuses to avoid the question.

Contrary to your lies and insults, I have consider this and other factors. I rationally evaluated the situation when I devised my own portfolio, after six months research and study.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

MindBogler
Posts: 644
Joined: Wed Apr 17, 2013 12:05 pm

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

Post by MindBogler » Sat May 05, 2018 7:50 pm

pezblanco wrote:
Sat May 05, 2018 7:10 pm
MindBogler wrote:
Sat May 05, 2018 6:10 pm
TinkerPDX wrote:
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.
I fail to understand how anyone thinks the mortgage as a negative bond makes any sense.
A bond is just a promised series of future cash payments. A mortgage is a type of bond. The bank certainly views it as such. Being the mortgager payer makes it a negative bond to you.

It doesn't make sense because homes are illiquid and come with enormous transaction costs.
Some bonds are more liquid than others. That doesn't make them not a bond.
It doesn't make sense because you can't directly rebalance between your mortgage and your portfolio.
Why the emphasis on directly? You can obtain a Heloc and then directly rebalance should you need to do so.
It doesn't make sense because there isn't going to be a margin call on your home.
It doesn't make sense because many states are non-recourse and you can renege on the bank at any time.
Bonds have all sorts of provisions ... some are callable, some are not callable. Some are callable with penalties (early withdrawal of a CD for example.... they are still bonds.
The decision to take a mortgage has nothing to do with a stock/bond portfolio near as I have ever been able to surmise.
Perhaps my points above will completely change your mind :D ?

The decision to take a mortgage should be based on finding somewhere to live, which is a general requirement in a civilized society. The other option is to rent. Conflating mortgage payments with negative bonds is just another case of mental gymnastics; taking something that really isn't complicated at all and turning it into a Rube Goldberg machine in order to have something to wax poetic about.
I never thought of myself as a poet ... but thank you!
You might not be able to obtain that HELOC or the bank may restrict withdrawals when its needed for your use case. The 2008 housing crisis made this fact abundantly clear. A HELOC is something I would suggest that people do not rely on. I choose to keep the calculus simple. A mortgage is a liability against an asset that hopefully acts as an inflation hedge. I don't adjust my investment strategy or policy based on the outstanding value of my mortgage. Other people are free to make different choices which is the great thing about America!

IlliniDave
Posts: 2294
Joined: Fri May 17, 2013 7:09 am

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

Post by IlliniDave » Sat May 05, 2018 7:53 pm

CurlyDave wrote:
Sat May 05, 2018 6:59 pm
IMHO paying down your mortgage unbalances your portfolio. It concentrates a larger percentage of your net worth in a single, illiquid real estate asset.

If you buy bonds or equities with the money, your net worth when you make the investment is the same, but it is diversified into more assets, and a different type of assets than real estate.
That's true it puts more money into real estate but when I finally decided to pay off my mortgage (early) I wound up with about 30% of my net worth in the house, 67% in stocks and bonds, and 3% in cash. To me that felt a lot more balanced (from a net worth perspective, I don't consider the house an investment) than 100% in financial assets. Point is, you bring up an excellent consideration, but there are times when the consideration swings in the other direction under the right circumstances.
Don't do something. Just stand there!

KlangFool
Posts: 10190
Joined: Sat Oct 11, 2008 12:35 pm

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

Post by KlangFool » Sat May 05, 2018 8:29 pm

fortfun wrote:
Sat May 05, 2018 7:17 pm

I have 529s that will cover the lion share of kids' instate tuition. I know you don't like 529s. I hope I don't take out any loans, or the kids either. If the mortgage is paid off by then, I'd have an extra 1,250 in cash flow to help (should it be needed).
fortfun,

You are assuming that everything goes well over the next 5 years.

<<I have 529s that will cover the lion share of kids' instate tuition. >>

That is not 100%. So, what are you going to do for the rest?

<<If the mortgage is paid off by then, I'd have an extra 1,250 in cash flow to help (should it be needed).>>

Still does not answer the question why do you need to pay down the mortgage now with the 70K. You do not have to. In fact, with the interest rate going up, it is easier to beat that mortgage interest as time goes by.

You can pay off the mortgage any time. Why do you have to pay it down now? Please note that it is a one-way street. It is easy to put money in. It is harder to take the money out.

70K is a lot of money in your case since your whole portfolio is only 670K. Why put so many eggs in one basket?

<<I'd have an extra 1,250 in cash flow to help>>

If you do not pay down the mortgage, you have the 70K plus whatever growth over the next 5 years to pay for it. So, what is the difference?

KlangFool
Last edited by KlangFool on Sat May 05, 2018 8:34 pm, edited 1 time in total.

KlangFool
Posts: 10190
Joined: Sat Oct 11, 2008 12:35 pm

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

Post by KlangFool » Sat May 05, 2018 8:31 pm

IlliniDave wrote:
Sat May 05, 2018 7:53 pm
CurlyDave wrote:
Sat May 05, 2018 6:59 pm
IMHO paying down your mortgage unbalances your portfolio. It concentrates a larger percentage of your net worth in a single, illiquid real estate asset.

If you buy bonds or equities with the money, your net worth when you make the investment is the same, but it is diversified into more assets, and a different type of assets than real estate.
That's true it puts more money into real estate but when I finally decided to pay off my mortgage (early) I wound up with about 30% of my net worth in the house, 67% in stocks and bonds, and 3% in cash. To me that felt a lot more balanced (from a net worth perspective, I don't consider the house an investment) than 100% in financial assets. Point is, you bring up an excellent consideration, but there are times when the consideration swings in the other direction under the right circumstances.
IlliniDave,

In OP's case, it is about 50%.

KlangFool

mortfree
Posts: 1275
Joined: Mon Sep 12, 2016 7:06 pm

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

Post by mortfree » Sat May 05, 2018 8:36 pm

KlangFool wrote:
Sat May 05, 2018 4:51 pm
mortfree wrote:
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
mortfree,

My portfolio is averaging 7% for the last 10 years.

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

My mortgage is 3.49%. So, why would I want to tie up my money to the house saving 3.49% interest when I can use that money to earn 7%?

There is an opportunity cost of putting extra money into the house. In my case, the PITI is 20% to 30% lowered than rent. I won't mind paying the mortgage forever. So, why would I want to put extra money into the house?

KlangFool
Thanks for this response and the others that are related to this subject.

So the key for me will be to invest the extra $240-300 per month instead of putting it towards the mortgage.

I do Max 401k and Roth already so it is all going to a taxable account and will go to VTI or BRKB or maybe a CD

KlangFool
Posts: 10190
Joined: Sat Oct 11, 2008 12:35 pm

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

Post by KlangFool » Sat May 05, 2018 8:39 pm

mortfree wrote:
Sat May 05, 2018 8:36 pm
KlangFool wrote:
Sat May 05, 2018 4:51 pm
mortfree wrote:
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
mortfree,

My portfolio is averaging 7% for the last 10 years.

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

My mortgage is 3.49%. So, why would I want to tie up my money to the house saving 3.49% interest when I can use that money to earn 7%?

There is an opportunity cost of putting extra money into the house. In my case, the PITI is 20% to 30% lowered than rent. I won't mind paying the mortgage forever. So, why would I want to put extra money into the house?

KlangFool
Thanks for this response and the others that are related to this subject.

So the key for me will be to invest the extra $240-300 per month instead of putting it towards the mortgage.

I do Max 401k and Roth already so it is all going to a taxable account and will go to VTI or BRKB or maybe a CD
mortfree,

If you are married, you can put that money into your spouse's Roth IRA too.

KlangFool

User avatar
pezblanco
Posts: 477
Joined: Thu Sep 12, 2013 8:02 pm

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

Post by pezblanco » Sat May 05, 2018 8:41 pm

MindBogler wrote:
Sat May 05, 2018 7:50 pm
pezblanco wrote:
Sat May 05, 2018 7:10 pm
MindBogler wrote:
Sat May 05, 2018 6:10 pm
TinkerPDX wrote:
Sat May 05, 2018 10:38 am
JoeRetire wrote:
Fri May 04, 2018 7:23 pm


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.
I fail to understand how anyone thinks the mortgage as a negative bond makes any sense.
A bond is just a promised series of future cash payments. A mortgage is a type of bond. The bank certainly views it as such. Being the mortgager payer makes it a negative bond to you.

It doesn't make sense because homes are illiquid and come with enormous transaction costs.
Some bonds are more liquid than others. That doesn't make them not a bond.
It doesn't make sense because you can't directly rebalance between your mortgage and your portfolio.
Why the emphasis on directly? You can obtain a Heloc and then directly rebalance should you need to do so.
It doesn't make sense because there isn't going to be a margin call on your home.
It doesn't make sense because many states are non-recourse and you can renege on the bank at any time.
Bonds have all sorts of provisions ... some are callable, some are not callable. Some are callable with penalties (early withdrawal of a CD for example.... they are still bonds.
The decision to take a mortgage has nothing to do with a stock/bond portfolio near as I have ever been able to surmise.
Perhaps my points above will completely change your mind :D ?

The decision to take a mortgage should be based on finding somewhere to live, which is a general requirement in a civilized society. The other option is to rent. Conflating mortgage payments with negative bonds is just another case of mental gymnastics; taking something that really isn't complicated at all and turning it into a Rube Goldberg machine in order to have something to wax poetic about.
I never thought of myself as a poet ... but thank you!
You might not be able to obtain that HELOC or the bank may restrict withdrawals when its needed for your use case. The 2008 housing crisis made this fact abundantly clear. A HELOC is something I would suggest that people do not rely on. I choose to keep the calculus simple. A mortgage is a liability against an asset that hopefully acts as an inflation hedge. I don't adjust my investment strategy or policy based on the outstanding value of my mortgage. Other people are free to make different choices which is the great thing about America!
We can all god bless America as much as we want but that still doesn't change the fact that a mortgage is a bond ....

So suppose we CAN obtain a HELOC, then do you see the argument? This is common with people that argue against prepaying mortgages on the basis of negative bond arguments ... there are all these apocalyptic arguments---- what if you can't get a Heloc? What if there is another 2008? What if there is a meteor strike? What if America isn't number one any more? OMG!!!!! Cry Havoc and Let Slip The Dogs Of War!!!

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

Post by cherijoh » Sat May 05, 2018 8:45 pm

Watty wrote:
Sat May 05, 2018 9:48 am
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.
I'm not sure where you got your 7 year number. Per this article it is almost double that.

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

Post by cherijoh » Sat May 05, 2018 9:07 pm

pezblanco wrote:
Sat May 05, 2018 1:33 pm
Earl Lemongrab wrote:
Sat May 05, 2018 1:10 pm
pezblanco wrote:
Sat May 05, 2018 1:08 pm

You may not consider it so but it is an important part of most people's wealth. Taking on ownership of a house has a huge impact on personal finances and cash flow. For example (on the asset side) you don't have to pay rent. You get to participate in it's growth in value either thru selling it and downsizing or thru a reverse mortgage ....
There's a difference between being part of your wealth and being part of your portfolio. That's what is being discussed.
Sticking your head in the sand and refusing to look at those realities may work for you but it doesn't really seem to be rational to me.
This was completely uncalled for. The fact is I didn't have my head in the sand, YOU didn't understand the point. You should apologize.
You're still doing the same thing .... "I don't consider x to be part of my portfolio ... hence I don't need to account for it in considering what I have allocated to various asset classes." x can be:
1) Cash I keep under the mattress ...
2) A large loan that functions as a negative bond ...
3) Social Security payments ....

I'm sorry that you took umbrage at my characterization of all of the above as "sticking one's head in the sand" ... by my standards, that is exactly what you are doing.
I think YOU are missing the point. Most people on Bogleheads do not consider their home to be an investment - therefore it isn't part of their investment portfolio and has no impact on their AA (i.e., split between stocks and bonds). The OP's original premise was whether he should sell the bonds in his portfolio and use to pay down mortgage. While a lot of people are in favor of paying down their mortgage as quickly as possible, I don't think most people go to 100% stocks in order to do so.

If I'm not mistaken, that was Earl Lemongrab's point, since he didn't consider his home equity as part of his investment portfolio it had no impact on how he allocated his portfolio. Nowhere in his post did he say that home equity/ mortgage debt wasn't important - just that it didn't influence his AA. So I also think your "head in the sand" comment is waaay out of left field.

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

Post by cherijoh » Sat May 05, 2018 9:13 pm

CurlyDave wrote:
Sat May 05, 2018 6:59 pm
IMHO paying down your mortgage unbalances your portfolio. It concentrates a larger percentage of your net worth in a single, illiquid real estate asset.

If you buy bonds or equities with the money, your net worth when you make the investment is the same, but it is diversified into more assets, and a different type of assets than real estate.
+1

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

Post by cherijoh » Sat May 05, 2018 9:24 pm

mortfree wrote:
Sat May 05, 2018 8:36 pm
KlangFool wrote:
Sat May 05, 2018 4:51 pm
mortfree wrote:
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
mortfree,

My portfolio is averaging 7% for the last 10 years.

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

My mortgage is 3.49%. So, why would I want to tie up my money to the house saving 3.49% interest when I can use that money to earn 7%?

There is an opportunity cost of putting extra money into the house. In my case, the PITI is 20% to 30% lowered than rent. I won't mind paying the mortgage forever. So, why would I want to put extra money into the house?

KlangFool
Thanks for this response and the others that are related to this subject.

So the key for me will be to invest the extra $240-300 per month instead of putting it towards the mortgage.

I do Max 401k and Roth already so it is all going to a taxable account and will go to VTI or BRKB or maybe a CD
IMO, aggressively paying down a mortgage at the expense of maxing out tax-advantaged savings is a BAD idea. But it gets more nuanced when you start comparing it to putting money into a taxable account. Especially as you get closer to retirement.

I never made extra payments on my mortgage, but I did refinance it twice in a falling interest rate environment - the first time from a 30 to a 15 yr mortgage and the second time to a 10-yr mortgage. So I ended up paying off my mortgage in 21 years.

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

Post by LadyGeek » Sat May 05, 2018 10:43 pm

I removed an interchange which devolved into a contentious disagreement. This thread has run its course and is locked.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

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