Mortgage payoff in VTI

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placeadhere2007
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Mortgage payoff in VTI

Post by placeadhere2007 »

With about 230k remaining on our 30 yr mortgage at 3.75%, I've struggled with the paying it off vs using the excess to invest. So, I've decided that a different approach may work best. Please note... at the current pace, the house could be paid off in 8 years. Starting today, all excess funds that I would have used to pay off the house are going into VTI. The thought being that in 8 years... or less, the value will end up being higher than the payoff (would need to be roughly 4.25-4.5% returns pre-tax to equal thr 3.75% on mortgage).

If things don't go well, I'm happy to let the money sit until the annualized return exceeds the break even.

The temptation would be to conveniently use the investment funds for other purposes but I'm not worried about that. I like having the liquidity on top of the current 6 month emergency fund we have.

Thoughts?
HEDGEFUNDIE
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Re: Mortgage payoff in VTI

Post by HEDGEFUNDIE »

I approve.
bikesandbeers
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Re: Mortgage payoff in VTI

Post by bikesandbeers »

That sounds reasonable to me. There are a lot of different threads about paying down mortgage you can review, but I think it always comes down to whatever lets you sleep at night. Are you up worried about what VTI is doing with all your money there or worrying that you are missing out on a booming market with a paid off house?

One qquestion on the 8 year timeline would be if you would do anything to lock in any gains prior to 8 years, either by buying into a bond fund, or maybe paying some lump sum on your mortgage at 4 and 6 years.
Financologist
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Re: Mortgage payoff in VTI

Post by Financologist »

As a finance professional and serial value maximizer I confess to paying off a 2.625% mortgage. I laid out a series of financial rationalizations at the time (e.g., tax adjusted, like-term government bond returns would not have exceeded the "guaranteed" return of making the payoff). Several years later and in the face of overwhelming market returns foregone I can report 0 regret. Why? Because my responsibilities to my family include providing shelter, food, love, comfort and opportunity. Mega-wealth isn't on the list. Now, don't get me wrong, I'm aiming for that also, but first things first..

In short, if you have a significant safety net and there isn't a measurably better use of the cash, I vote for paying off the mortgage.
manatee2005
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Re: Mortgage payoff in VTI

Post by manatee2005 »

"Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it.” - Albert Einstein

This thought alone prevents me from paying off the house. :moneybag
livesoft
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Re: Mortgage payoff in VTI

Post by livesoft »

HEDGEFUNDIE wrote: Thu Jan 02, 2020 12:24 am I approve.
Me, too.

If one is investing, then one expects to gain money investing or one wouldn't do it. The only questions are how much, how fast, and what could go wrong. If things go wrong, then one can simply wait until things improve and go much better than right. That's the beauty of a mortgage: One has the option to wait until things go really well and only then pay off the mortgage. In the meantime, just make the monthly payments.

If one cannot wait for the option to pay off, then think about why that might be the case and act accordingly.
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grettman
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Re: Mortgage payoff in VTI

Post by grettman »

But if VTI continues to take off will you actually pull the trigger and pay off the mortgage in 8 years? Speaking for myself, I think there is a good chance I will break any promises I made to myself and continue to ride VTI as long as I can.
Triple digit golfer
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Re: Mortgage payoff in VTI

Post by Triple digit golfer »

As long as you're willing to have 8 years of returns that underperform and therefore not accelerate any payments. Best case, market soars and you pay it off. Worst case, market tanks and you have a lot of VTI shares sitting alongside a paid off home in 8 years.
rascott
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Re: Mortgage payoff in VTI

Post by rascott »

I fully intend to keep my 3% mortgage as long as possible. Would even look at extending it out again for another 30 years in a handful of years down the road, if market conditions allow for it. There is nothing special about a paid for house. But others feel differently, and that's fine too.
acegolfer
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Re: Mortgage payoff in VTI

Post by acegolfer »

If anyone has a paid off house, do you consider getting a new mortgage to invest in market? Posts here imply it may be a good move.
richard37
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Re: Mortgage payoff in VTI

Post by richard37 »

We are in a similar boat right now. 200K remaining on a 15 yr mortgage at 3.25%. 9 years or so remaining. I have been aggressively paying it down with anything leftover after maxing out all retirement accounts and funding 529s and after receiving a (hopefully good) bonus in March, I will have enough to pay it off and keep 6 figures in savings.

Had the same pay it off or invest debate but my thinking is to get it paid and then put all these extra dollars into taxable going forward. Who knows what the next few years will bring and my industry has some uncertainty so this gives me the comfort of knowing house is paid off should anything happen to my job / the market etc.
mervinj7
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Re: Mortgage payoff in VTI

Post by mervinj7 »

placeadhere2007 wrote: Thu Jan 02, 2020 12:08 am With about 230k remaining on our 30 yr mortgage at 3.75%, I've struggled with the paying it off vs using the excess to invest. So, I've decided that a different approach may work best. Please note... at the current pace, the house could be paid off in 8 years. Starting today, all excess funds that I would have used to pay off the house are going into VTI. The thought being that in 8 years... or less, the value will end up being higher than the payoff (would need to be roughly 4.25-4.5% returns pre-tax to equal thr 3.75% on mortgage).

If things don't go well, I'm happy to let the money sit until the annualized return exceeds the break even.

The temptation would be to conveniently use the investment funds for other purposes but I'm not worried about that. I like having the liquidity on top of the current 6 month emergency fund we have.

Thoughts?
I may be misunderstanding but if your plan is pay off the mortgage in 8 years anyway, then you may consider refinancing to a 10/1 ARM (or 7/1 ARM) to lower the mortgage interest rate for the next 8 years. That will help to lower the break-even pre-tax returns needed on VTI.
Topic Author
placeadhere2007
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Re: Mortgage payoff in VTI

Post by placeadhere2007 »

mervinj7 wrote: Thu Jan 02, 2020 12:24 pm
placeadhere2007 wrote: Thu Jan 02, 2020 12:08 am With about 230k remaining on our 30 yr mortgage at 3.75%, I've struggled with the paying it off vs using the excess to invest. So, I've decided that a different approach may work best. Please note... at the current pace, the house could be paid off in 8 years. Starting today, all excess funds that I would have used to pay off the house are going into VTI. The thought being that in 8 years... or less, the value will end up being higher than the payoff (would need to be roughly 4.25-4.5% returns pre-tax to equal thr 3.75% on mortgage).

If things don't go well, I'm happy to let the money sit until the annualized return exceeds the break even.

The temptation would be to conveniently use the investment funds for other purposes but I'm not worried about that. I like having the liquidity on top of the current 6 month emergency fund we have.

Thoughts?
I may be misunderstanding but if your plan is pay off the mortgage in 8 years anyway, then you may consider refinancing to a 10/1 ARM (or 7/1 ARM) to lower the mortgage interest rate for the next 8 years. That will help to lower the break-even pre-tax returns needed on VTI.
Sorry if I'm not doing the replies right! ARM rates are not appreciably better and I would be adding interest rate risk on top of market risk. If VTI earns 0% for the next 8 years I wouldn't have enough to pay off mortgage and my rate could be pretty high on the reset.
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placeadhere2007
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Re: Mortgage payoff in VTI

Post by placeadhere2007 »

grettman wrote: Thu Jan 02, 2020 6:28 am But if VTI continues to take off will you actually pull the trigger and pay off the mortgage in 8 years? Speaking for myself, I think there is a good chance I will break any promises I made to myself and continue to ride VTI as long as I can.
If VTI earned 8% annualized for 8 years the delta is somewhere around 30k pretax that I would have over the mortgage payoff amount. The gain on VTI at 8% would be about 50k which generates a tax bill of roughly 7500. So, I'd have the mortgage paid off and about 22,500 remaining which I would probably keep invested. What I'm not factoring in are yearly capital gains or dividends but with the low turnover in VTI I'm guessing they aren't huge.
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placeadhere2007
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Re: Mortgage payoff in VTI

Post by placeadhere2007 »

rascott wrote: Thu Jan 02, 2020 7:32 am I fully intend to keep my 3% mortgage as long as possible. Would even look at extending it out again for another 30 years in a handful of years down the road, if market conditions allow for it. There is nothing special about a paid for house. But others feel differently, and that's fine too.
I would argue the increased cash flow for no more PI (obviously still have the TI) is a nice benefit.
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8foot7
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Re: Mortgage payoff in VTI

Post by 8foot7 »

placeadhere2007 wrote: Thu Jan 02, 2020 1:52 pm
mervinj7 wrote: Thu Jan 02, 2020 12:24 pm
placeadhere2007 wrote: Thu Jan 02, 2020 12:08 am With about 230k remaining on our 30 yr mortgage at 3.75%, I've struggled with the paying it off vs using the excess to invest. So, I've decided that a different approach may work best. Please note... at the current pace, the house could be paid off in 8 years. Starting today, all excess funds that I would have used to pay off the house are going into VTI. The thought being that in 8 years... or less, the value will end up being higher than the payoff (would need to be roughly 4.25-4.5% returns pre-tax to equal thr 3.75% on mortgage).

If things don't go well, I'm happy to let the money sit until the annualized return exceeds the break even.

The temptation would be to conveniently use the investment funds for other purposes but I'm not worried about that. I like having the liquidity on top of the current 6 month emergency fund we have.

Thoughts?
I may be misunderstanding but if your plan is pay off the mortgage in 8 years anyway, then you may consider refinancing to a 10/1 ARM (or 7/1 ARM) to lower the mortgage interest rate for the next 8 years. That will help to lower the break-even pre-tax returns needed on VTI.
Sorry if I'm not doing the replies right! ARM rates are not appreciably better and I would be adding interest rate risk on top of market risk. If VTI earns 0% for the next 8 years I wouldn't have enough to pay off mortgage and my rate could be pretty high on the reset.
There is no interest rate risk on a 10/1 ARM (and minimal on a 7/1 ARM) if you continue making your current payment, as you have indicated your current balance will be paid off in 8 years. Even at a 5/1 ARM, you're only exposing three years' worth of interest, which at that point would be minimal, to whatever the difference in rates would be and typically those are capped at 2%.
ohai
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Re: Mortgage payoff in VTI

Post by ohai »

Just make sure your financial plan is not derailed in a downturn, where VTI and home value will decrease, but your debt will stay the same.
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Re: Mortgage payoff in VTI

Post by geerhardusvos »

placeadhere2007 wrote: Thu Jan 02, 2020 12:08 am With about 230k remaining on our 30 yr mortgage at 3.75%, I've struggled with the paying it off vs using the excess to invest. So, I've decided that a different approach may work best. Please note... at the current pace, the house could be paid off in 8 years. Starting today, all excess funds that I would have used to pay off the house are going into VTI. The thought being that in 8 years... or less, the value will end up being higher than the payoff (would need to be roughly 4.25-4.5% returns pre-tax to equal thr 3.75% on mortgage).

If things don't go well, I'm happy to let the money sit until the annualized return exceeds the break even.

The temptation would be to conveniently use the investment funds for other purposes but I'm not worried about that. I like having the liquidity on top of the current 6 month emergency fund we have.

Thoughts?
Approve. Something similar done by MadFientist with VWIAX, but VTSAX/VTI is great

https://www.madfientist.com/mortgage-payoff-experiment/
VTSAX and chill
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anon_investor
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Re: Mortgage payoff in VTI

Post by anon_investor »

I approve!

I am basically doing the same thing. I plan to TLH between VTSAX and VFIAX when the opportunity arises.
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LilyFleur
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Re: Mortgage payoff in VTI

Post by LilyFleur »

Financologist wrote: Thu Jan 02, 2020 12:56 am As a finance professional and serial value maximizer I confess to paying off a 2.625% mortgage. I laid out a series of financial rationalizations at the time (e.g., tax adjusted, like-term government bond returns would not have exceeded the "guaranteed" return of making the payoff). Several years later and in the face of overwhelming market returns foregone I can report 0 regret. Why? Because my responsibilities to my family include providing shelter, food, love, comfort and opportunity. Mega-wealth isn't on the list. Now, don't get me wrong, I'm aiming for that also, but first things first..

In short, if you have a significant safety net and there isn't a measurably better use of the cash, I vote for paying off the mortgage.
My mother was a CFP and she had worked with many divorcees and widows. When I got divorced, she said that some people would argue for using equity from my new condo, which I paid for in cash, for investments. But she also said that some of her clients really valued owning their home outright, that she supported that decision. I ended up using a HELOC for college expenses for my children. It was at 4.25%. I just paid it off and that felt great! It's interesting, we all have different things that keep us from sleeping at night. Divorced folks sometimes have housing anxiety, and a paid-for house can help them sleep at night. It's also important, if you have a lot of equity tied up in your home, to have a good umbrella policy.
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Re: Mortgage payoff in VTI

Post by whodidntante »

acegolfer wrote: Thu Jan 02, 2020 7:57 am If anyone has a paid off house, do you consider getting a new mortgage to invest in market? Posts here imply it may be a good move.
It's the same thing, except that taking a mortgage does have a transaction cost. But I would do it for the right spread. Interest rates are low but expected returns are also low due to valuations. So I've actually gone the other way, prepaying my mortgage instead of buying more bonds. I wanted to reduce instead of increasing the risk of my portfolio, and this is the method with the highest expected returns that is available to me.
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placeadhere2007
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Re: Mortgage payoff in VTI

Post by placeadhere2007 »

8foot7 wrote: Thu Jan 02, 2020 2:57 pm
placeadhere2007 wrote: Thu Jan 02, 2020 1:52 pm
mervinj7 wrote: Thu Jan 02, 2020 12:24 pm
placeadhere2007 wrote: Thu Jan 02, 2020 12:08 am With about 230k remaining on our 30 yr mortgage at 3.75%, I've struggled with the paying it off vs using the excess to invest. So, I've decided that a different approach may work best. Please note... at the current pace, the house could be paid off in 8 years. Starting today, all excess funds that I would have used to pay off the house are going into VTI. The thought being that in 8 years... or less, the value will end up being higher than the payoff (would need to be roughly 4.25-4.5% returns pre-tax to equal thr 3.75% on mortgage).

If things don't go well, I'm happy to let the money sit until the annualized return exceeds the break even.

The temptation would be to conveniently use the investment funds for other purposes but I'm not worried about that. I like having the liquidity on top of the current 6 month emergency fund we have.

Thoughts?
I may be misunderstanding but if your plan is pay off the mortgage in 8 years anyway, then you may consider refinancing to a 10/1 ARM (or 7/1 ARM) to lower the mortgage interest rate for the next 8 years. That will help to lower the break-even pre-tax returns needed on VTI.
Sorry if I'm not doing the replies right! ARM rates are not appreciably better and I would be adding interest rate risk on top of market risk. If VTI earns 0% for the next 8 years I wouldn't have enough to pay off mortgage and my rate could be pretty high on the reset.
There is no interest rate risk on a 10/1 ARM (and minimal on a 7/1 ARM) if you continue making your current payment, as you have indicated your current balance will be paid off in 8 years. Even at a 5/1 ARM, you're only exposing three years' worth of interest, which at that point would be minimal, to whatever the difference in rates would be and typically those are capped at 2%.
Sure. If I did pay it off in 8 years you are right but with what I proposed I'm arguing I have liquidity in case there's a short term need above my emergency fund.

And the best laid plans don't always work so I may not be able to pay it off in 8 years.

If ARM rates were appreciably lower... maybe 100bp or so... maybe. But doing an ARM refinance with a small reduction in rate would take a number of years to break even for the closing costs.
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8foot7
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Re: Mortgage payoff in VTI

Post by 8foot7 »

I guess I'm confused. You have eight years left on your original note (at its original amortization), or you have been making extra payments for a while and the extra payments if continued would result in your note being paid off in eight years?
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placeadhere2007
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Re: Mortgage payoff in VTI

Post by placeadhere2007 »

8foot7 wrote: Thu Jan 02, 2020 7:30 pm I guess I'm confused. You have eight years left on your original note (at its original amortization), or you have been making extra payments for a while and the extra payments if continued would result in your note being paid off in eight years?
Fair question and I wasn't clear. The note has 27 years left and based on my best guess of extra payments, I would be done in about 8 years.
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JoeRetire
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Re: Mortgage payoff in VTI

Post by JoeRetire »

placeadhere2007 wrote: Thu Jan 02, 2020 12:08 am With about 230k remaining on our 30 yr mortgage at 3.75%

all excess funds that I would have used to pay off the house are going into VTI.

Thoughts?
Makes complete sense to me not to pay off a mortgage with a 3.75% rate when you feel that your investments will return more as long as the investments fit within your preferred asset allocation plan.

I'm guessing you aren't one of those who lies awake at night worried about having a mortgage.
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placeadhere2007
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Re: Mortgage payoff in VTI

Post by placeadhere2007 »

JoeRetire wrote: Thu Jan 02, 2020 8:07 pm
placeadhere2007 wrote: Thu Jan 02, 2020 12:08 am With about 230k remaining on our 30 yr mortgage at 3.75%

all excess funds that I would have used to pay off the house are going into VTI.

Thoughts?
Makes complete sense to me not to pay off a mortgage with a 3.75% rate when you feel that your investments will return more as long as the investments fit within your preferred asset allocation plan.

I'm guessing you aren't one of those who lies awake at night worried about having a mortgage.
Ha... definitely not awake at night. Would love to have it paid off before my oldest of 4 kids starts college in Aug 2028.
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Re: Mortgage payoff in VTI

Post by dru808 »

geerhardusvos wrote: Thu Jan 02, 2020 3:28 pm
placeadhere2007 wrote: Thu Jan 02, 2020 12:08 am With about 230k remaining on our 30 yr mortgage at 3.75%, I've struggled with the paying it off vs using the excess to invest. So, I've decided that a different approach may work best. Please note... at the current pace, the house could be paid off in 8 years. Starting today, all excess funds that I would have used to pay off the house are going into VTI. The thought being that in 8 years... or less, the value will end up being higher than the payoff (would need to be roughly 4.25-4.5% returns pre-tax to equal thr 3.75% on mortgage).

If things don't go well, I'm happy to let the money sit until the annualized return exceeds the break even.

The temptation would be to conveniently use the investment funds for other purposes but I'm not worried about that. I like having the liquidity on top of the current 6 month emergency fund we have.

Thoughts?
Approve. Something similar done by MadFientist with VWIAX, but VTSAX/VTI is great

https://www.madfientist.com/mortgage-payoff-experiment/

With Wellesley, interesting.
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Re: Mortgage payoff in VTI

Post by AlphaLess »

acegolfer wrote: Thu Jan 02, 2020 7:57 am If anyone has a paid off house, do you consider getting a new mortgage to invest in market? Posts here imply it may be a good move.
I would.

In fact, I would even take a perpetual mortgage, interest-only, if the deal is good.

Currently have a 2.75%.
If someone would extend that type of a rate forever, sure.
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Re: Mortgage payoff in VTI

Post by danielc »

placeadhere2007 wrote: Thu Jan 02, 2020 12:08 am With about 230k remaining on our 30 yr mortgage at 3.75%, I've struggled with the paying it off vs using the excess to invest. So, I've decided that a different approach may work best. Please note... at the current pace, the house could be paid off in 8 years. Starting today, all excess funds that I would have used to pay off the house are going into VTI. The thought being that in 8 years... or less, the value will end up being higher than the payoff (would need to be roughly 4.25-4.5% returns pre-tax to equal thr 3.75% on mortgage).

If things don't go well, I'm happy to let the money sit until the annualized return exceeds the break even.

The temptation would be to conveniently use the investment funds for other purposes but I'm not worried about that. I like having the liquidity on top of the current 6 month emergency fund we have.

Thoughts?
Both options are defensible. The expected return of the stock market is higher than the mortgage, but it is uncertain since stocks are a risky asset. The return from paying off your mortgage is guaranteed and tax-free because you don't pay taxes for "not spending" money. Altogether, I suspect that the two options will have similar risk-adjusted return and the decision should come down to your preference for risk.
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JoeRetire
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Re: Mortgage payoff in VTI

Post by JoeRetire »

placeadhere2007 wrote: Thu Jan 02, 2020 10:14 pmWould love to have it paid off before my oldest of 4 kids starts college in Aug 2028.
Why?
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placeadhere2007
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Re: Mortgage payoff in VTI

Post by placeadhere2007 »

JoeRetire wrote: Fri Jan 03, 2020 8:14 am
placeadhere2007 wrote: Thu Jan 02, 2020 10:14 pmWould love to have it paid off before my oldest of 4 kids starts college in Aug 2028.
Why?
We have 529s set up for the kids and when each one gets to day 1 of college... each should have 60k in it. However, at some point, I'd love the additional free cash flow available. Not necessarily for tuition costs... but it feels like a nice checkpoint. Keeping the mortgage perpetually isn't my style.
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placeadhere2007
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Re: Mortgage payoff in VTI

Post by placeadhere2007 »

AlphaLess wrote: Thu Jan 02, 2020 10:34 pm
acegolfer wrote: Thu Jan 02, 2020 7:57 am If anyone has a paid off house, do you consider getting a new mortgage to invest in market? Posts here imply it may be a good move.
I would.

In fact, I would even take a perpetual mortgage, interest-only, if the deal is good.

Currently have a 2.75%.
If someone would extend that type of a rate forever, sure.
If you are at 2.75% I assume you are at a 15 year? I don't want a mortgage in perpetuity but wouldn't you want to extend out as long as you can on the mortgage (say 30 year at 4%) so you would have additional money to invest/compound?
lkar
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Re: Mortgage payoff in VTI

Post by lkar »

It’s probably too negligible at today’s interest rates to really even mention but for those who itemize there is an additional cost of prepayment in the form of lost deduction.

Prepaying a 4 percent loan by $10,000 will cost a taxpayer in the 24 percent bracket about $96 a year. This deduction slightly reduces the effective rate of borrowing.

Again, not huge, but for those who are watching their taxable income — maybe those in the QBID phase out — deductions can have considerable value.

Again, close to negligible on low interest rate loans, but not nothing.
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JoeRetire
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Re: Mortgage payoff in VTI

Post by JoeRetire »

placeadhere2007 wrote: Fri Jan 03, 2020 9:31 am
JoeRetire wrote: Fri Jan 03, 2020 8:14 am
placeadhere2007 wrote: Thu Jan 02, 2020 10:14 pmWould love to have it paid off before my oldest of 4 kids starts college in Aug 2028.
Why?
We have 529s set up for the kids and when each one gets to day 1 of college... each should have 60k in it. However, at some point, I'd love the additional free cash flow available. Not necessarily for tuition costs... but it feels like a nice checkpoint. Keeping the mortgage perpetually isn't my style.
Okay, thanks for answering. Feeling like a nice checkpoint is understandable. And not being your style is understandable.
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Re: Mortgage payoff in VTI

Post by AlphaLess »

placeadhere2007 wrote: Fri Jan 03, 2020 9:32 am
AlphaLess wrote: Thu Jan 02, 2020 10:34 pm
acegolfer wrote: Thu Jan 02, 2020 7:57 am If anyone has a paid off house, do you consider getting a new mortgage to invest in market? Posts here imply it may be a good move.
I would.

In fact, I would even take a perpetual mortgage, interest-only, if the deal is good.

Currently have a 2.75%.
If someone would extend that type of a rate forever, sure.
If you are at 2.75% I assume you are at a 15 year? I don't want a mortgage in perpetuity but wouldn't you want to extend out as long as you can on the mortgage (say 30 year at 4%) so you would have additional money to invest/compound?
5x1 ARM amortized at 30 years.

This is my second ARM.

Got around 3 years left.

I am sure I can refi at similar terms.
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9-5 Suited
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Re: Mortgage payoff in VTI

Post by 9-5 Suited »

manatee2005 wrote: Thu Jan 02, 2020 4:07 am "Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it.” - Albert Einstein

This thought alone prevents me from paying off the house. :moneybag
There are very good reasons for opting to lever up via a mortgage, but this isn't one of them. It's a non-sequitur. The choice between investing in bonds, investing in equities, or investing in debt reduction has zero to do with an understanding of compound interest - it's just an issue of preference for certain types of risk. All three take advantage of the "miracle of compounding" and are productive investments. Of course equities have a higher *expected* return, but also significantly higher risk.

As obvious proof, if equities return 1% over the next 20 years someone who chose to pay off a 3% mortgage won't be the idiot who didn't understand how compound interest works. They'll be the guy with a higher net worth than the person who chose the riskier asset to invest in.
manatee2005
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Re: Mortgage payoff in VTI

Post by manatee2005 »

9-5 Suited wrote: Fri Jan 03, 2020 11:51 pm
manatee2005 wrote: Thu Jan 02, 2020 4:07 am "Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it.” - Albert Einstein

This thought alone prevents me from paying off the house. :moneybag
There are very good reasons for opting to lever up via a mortgage, but this isn't one of them. It's a non-sequitur. The choice between investing in bonds, investing in equities, or investing in debt reduction has zero to do with an understanding of compound interest - it's just an issue of preference for certain types of risk. All three take advantage of the "miracle of compounding" and are productive investments. Of course equities have a higher *expected* return, but also significantly higher risk.

As obvious proof, if equities return 1% over the next 20 years someone who chose to pay off a 3% mortgage won't be the idiot who didn't understand how compound interest works. They'll be the guy with a higher net worth than the person who chose the riskier asset to invest in.
I don't think you understand how compound interest works. You know it, but you don't understand it. :moneybag
MotoTrojan
Posts: 10709
Joined: Wed Feb 01, 2017 8:39 pm

Re: Mortgage payoff in VTI

Post by MotoTrojan »

manatee2005 wrote: Sat Jan 04, 2020 12:17 am
9-5 Suited wrote: Fri Jan 03, 2020 11:51 pm
manatee2005 wrote: Thu Jan 02, 2020 4:07 am "Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it.” - Albert Einstein

This thought alone prevents me from paying off the house. :moneybag
There are very good reasons for opting to lever up via a mortgage, but this isn't one of them. It's a non-sequitur. The choice between investing in bonds, investing in equities, or investing in debt reduction has zero to do with an understanding of compound interest - it's just an issue of preference for certain types of risk. All three take advantage of the "miracle of compounding" and are productive investments. Of course equities have a higher *expected* return, but also significantly higher risk.

As obvious proof, if equities return 1% over the next 20 years someone who chose to pay off a 3% mortgage won't be the idiot who didn't understand how compound interest works. They'll be the guy with a higher net worth than the person who chose the riskier asset to invest in.
I don't think you understand how compound interest works. You know it, but you don't understand it. :moneybag
Loans aren't compounding just the way equity investments do? What?!
manatee2005
Posts: 1080
Joined: Wed Dec 18, 2019 9:17 pm

Re: Mortgage payoff in VTI

Post by manatee2005 »

MotoTrojan wrote: Sat Jan 04, 2020 1:56 am
manatee2005 wrote: Sat Jan 04, 2020 12:17 am
9-5 Suited wrote: Fri Jan 03, 2020 11:51 pm
manatee2005 wrote: Thu Jan 02, 2020 4:07 am "Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it.” - Albert Einstein

This thought alone prevents me from paying off the house. :moneybag
There are very good reasons for opting to lever up via a mortgage, but this isn't one of them. It's a non-sequitur. The choice between investing in bonds, investing in equities, or investing in debt reduction has zero to do with an understanding of compound interest - it's just an issue of preference for certain types of risk. All three take advantage of the "miracle of compounding" and are productive investments. Of course equities have a higher *expected* return, but also significantly higher risk.

As obvious proof, if equities return 1% over the next 20 years someone who chose to pay off a 3% mortgage won't be the idiot who didn't understand how compound interest works. They'll be the guy with a higher net worth than the person who chose the riskier asset to invest in.
I don't think you understand how compound interest works. You know it, but you don't understand it. :moneybag
Loans aren't compounding just the way equity investments do? What?!
I can't help you. It will come to you eventually.
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Forester
Posts: 1622
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Location: UK

Re: Mortgage payoff in VTI

Post by Forester »

placeadhere2007 wrote: Thu Jan 02, 2020 12:08 am Thoughts?
If my horizon was equities for a decade I would give US megacap a wide berth and go one third each US small cap value, EAFE & Emerging

https://interactive.researchaffiliates. ... ocation#!/

Expected 10yr real returns

Emerging markets 7.1%
EAFE 5.1%
US small 1.9%
US large 0.4%
Topic Author
placeadhere2007
Posts: 17
Joined: Thu Dec 19, 2019 7:41 pm

Re: Mortgage payoff in VTI

Post by placeadhere2007 »

AlphaLess wrote: Fri Jan 03, 2020 11:22 pm
placeadhere2007 wrote: Fri Jan 03, 2020 9:32 am
AlphaLess wrote: Thu Jan 02, 2020 10:34 pm
acegolfer wrote: Thu Jan 02, 2020 7:57 am If anyone has a paid off house, do you consider getting a new mortgage to invest in market? Posts here imply it may be a good move.
I would.

In fact, I would even take a perpetual mortgage, interest-only, if the deal is good.

Currently have a 2.75%.
If someone would extend that type of a rate forever, sure.
If you are at 2.75% I assume you are at a 15 year? I don't want a mortgage in perpetuity but wouldn't you want to extend out as long as you can on the mortgage (say 30 year at 4%) so you would have additional money to invest/compound?
5x1 ARM amortized at 30 years.

This is my second ARM.

Got around 3 years left.

I am sure I can refi at similar terms.
5/1 ARM rates are much higher than 2.75% right? If by similar terms you mean you can get another 5/1 then yes. But refinancing every 5 years would add a lot of cost right?
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9-5 Suited
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Re: Mortgage payoff in VTI

Post by 9-5 Suited »

manatee2005 wrote: Sat Jan 04, 2020 12:17 am
9-5 Suited wrote: Fri Jan 03, 2020 11:51 pm
manatee2005 wrote: Thu Jan 02, 2020 4:07 am "Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it.” - Albert Einstein

This thought alone prevents me from paying off the house. :moneybag
There are very good reasons for opting to lever up via a mortgage, but this isn't one of them. It's a non-sequitur. The choice between investing in bonds, investing in equities, or investing in debt reduction has zero to do with an understanding of compound interest - it's just an issue of preference for certain types of risk. All three take advantage of the "miracle of compounding" and are productive investments. Of course equities have a higher *expected* return, but also significantly higher risk.

As obvious proof, if equities return 1% over the next 20 years someone who chose to pay off a 3% mortgage won't be the idiot who didn't understand how compound interest works. They'll be the guy with a higher net worth than the person who chose the riskier asset to invest in.
I don't think you understand how compound interest works. You know it, but you don't understand it. :moneybag
It is you who doesn't quite understand in this case. The interest on a mortgage loan is "simple interest" and does NOT compound. What you're not seeing is that principal payments DO compound as you don't pay the simple interest on the reduced principal in every subsequent period. And principal payments are what is being discussed when loan paydown/payoff is the topic.

If you don't believe me, here's another source: https://thefinancebuff.com/is-home-mort ... erest.html

Read the subheader of "Principal Payments".
dharrythomas
Posts: 1080
Joined: Tue Jun 19, 2007 4:46 pm

Re: Mortgage payoff in VTI

Post by dharrythomas »

manatee2005 wrote: Thu Jan 02, 2020 4:07 am "Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it.” - Albert Einstein

This thought alone prevents me from paying off the house. :moneybag
While there is much truth in this statement often attributed to Einstein, there is no evidence that he ever actually said it.
dharrythomas
Posts: 1080
Joined: Tue Jun 19, 2007 4:46 pm

Re: Mortgage payoff in VTI

Post by dharrythomas »

acegolfer wrote: Thu Jan 02, 2020 7:57 am If anyone has a paid off house, do you consider getting a new mortgage to invest in market? Posts here imply it may be a good move.
We’ve bought 3 houses. Bought the second in 1999 and paid it off in 2006. When we moved for the job, we upgraded a bit but put everything out of the old house into the new house, bought September 2010, paid off in November 2014.

We have never considered borrowing against the house in order to invest more more. Used the free cash flow for some extra savings and some spending. Markets have gone up a great deal and so have our investments, could be richer, but we have enough. No regrets.
dharrythomas
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Re: Mortgage payoff in VTI

Post by dharrythomas »

lkar wrote: Fri Jan 03, 2020 9:42 am It’s probably too negligible at today’s interest rates to really even mention but for those who itemize there is an additional cost of prepayment in the form of lost deduction.

Prepaying a 4 percent loan by $10,000 will cost a taxpayer in the 24 percent bracket about $96 a year. This deduction slightly reduces the effective rate of borrowing.

Again, not huge, but for those who are watching their taxable income — maybe those in the QBID phase out — deductions can have considerable value.

Again, close to negligible on low interest rate loans, but not nothing.
And it only works that way if you have over $24,000 in itemized deductions. Most take the standard deduction so no tax benefit for us.
yogesh
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Re: Mortgage payoff in VTI

Post by yogesh »

When I posted this question I got answer to do both.
So every year I put half in VTMFX and half in mortgage.
Due to strong bull of this decade I didn’t feel like I missed market returns while also reducing principal on mortgage.
Emergency: FDIC | Taxable: VTMFX | Retirement: TR2040
dharrythomas
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Re: Mortgage payoff in VTI

Post by dharrythomas »

mervinj7 wrote: Thu Jan 02, 2020 12:24 pm
placeadhere2007 wrote: Thu Jan 02, 2020 12:08 am With about 230k remaining on our 30 yr mortgage at 3.75%, I've struggled with the paying it off vs using the excess to invest. So, I've decided that a different approach may work best. Please note... at the current pace, the house could be paid off in 8 years. Starting today, all excess funds that I would have used to pay off the house are going into VTI. The thought being that in 8 years... or less, the value will end up being higher than the payoff (would need to be roughly 4.25-4.5% returns pre-tax to equal thr 3.75% on mortgage).

If things don't go well, I'm happy to let the money sit until the annualized return exceeds the break even.

The temptation would be to conveniently use the investment funds for other purposes but I'm not worried about that. I like having the liquidity on top of the current 6 month emergency fund we have.

Thoughts?
I may be misunderstanding but if your plan is pay off the mortgage in 8 years anyway, then you may consider refinancing to a 10/1 ARM (or 7/1 ARM) to lower the mortgage interest rate for the next 8 years. That will help to lower the break-even pre-tax returns needed on VTI.
I looked at something like that in the early 2000s, refi for a lower interest rate so I could speed up the payoff. In my case, with the fees, the refi didn’t help with the payoff. The fees absorbed the benefit of the lower rate. If I wanted to extend the term, take out cash, and lower the payment, it would have been great. I was trying to lower what it would cost to pay off the loan, so I stayed put.
dharrythomas
Posts: 1080
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Re: Mortgage payoff in VTI

Post by dharrythomas »

JoeRetire wrote: Fri Jan 03, 2020 8:14 am
placeadhere2007 wrote: Thu Jan 02, 2020 10:14 pmWould love to have it paid off before my oldest of 4 kids starts college in Aug 2028.
Why?
Having had two kids in college, there is nothing like cash flow when unexpected expenses arise. We paid off the house and started stacking up cash. We sent our oldest to a state school, partial scholarship, part-time job, federal government level of student loans at the time, we still spent our former mortgage payment on top of that.

Free cash flow is great.
babystep
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Re: Mortgage payoff in VTI

Post by babystep »

What is your AA ? Do you have any bonds ? How about reducing some bonds and using the same amount to reduce the mortgage ?
MotoTrojan
Posts: 10709
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Re: Mortgage payoff in VTI

Post by MotoTrojan »

manatee2005 wrote: Sat Jan 04, 2020 3:55 am
MotoTrojan wrote: Sat Jan 04, 2020 1:56 am
manatee2005 wrote: Sat Jan 04, 2020 12:17 am
9-5 Suited wrote: Fri Jan 03, 2020 11:51 pm
manatee2005 wrote: Thu Jan 02, 2020 4:07 am "Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it.” - Albert Einstein

This thought alone prevents me from paying off the house. :moneybag
There are very good reasons for opting to lever up via a mortgage, but this isn't one of them. It's a non-sequitur. The choice between investing in bonds, investing in equities, or investing in debt reduction has zero to do with an understanding of compound interest - it's just an issue of preference for certain types of risk. All three take advantage of the "miracle of compounding" and are productive investments. Of course equities have a higher *expected* return, but also significantly higher risk.

As obvious proof, if equities return 1% over the next 20 years someone who chose to pay off a 3% mortgage won't be the idiot who didn't understand how compound interest works. They'll be the guy with a higher net worth than the person who chose the riskier asset to invest in.
I don't think you understand how compound interest works. You know it, but you don't understand it. :moneybag
Loans aren't compounding just the way equity investments do? What?!
I can't help you. It will come to you eventually.
Interesting way to say you’re right.
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