Mortgage payoff in VTI

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petulant
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Re: Mortgage payoff in VTI

Post by petulant »

There is something good about any plan that keeps extra payments away from the actual mortgage when somebody like OP has significant payments and balance remaining. Extra payments on principal do not reduce the mandatory payment, meaning that in the event of job loss or other downturn, the house payments could still be problematic, even if you've paid off a huge part of the remaining balance. Refinancing in a job loss or other downturn event may be difficult. This is a point often brought up by KlangFool and one I agree with. Overall, the strategy might be called building a "sinking fund."

That said, I caution against using just VTI in a taxable account for this strategy. If a person actually wanted to use the built-up sinking fund to pay off the mortgage, an equity asset might have significant embedded capital gains that result in a high cost to pay off the mortgage. Further, while OP expressed an openness to the risk that VTI underperforms at some point, it is nevertheless not good planning since a crash in VTI's value could coincide with other financial difficulties for a person.

One way to get around the capital gains problem would be if OP or another person is relatively close to retirement. For example, if OP is retiring in 10 years, it could be that the VTI sinking fund could be redeemed over the course of 1-2 years after retiring while in the zero percent capital gains bracket (generally, up to $100,000 or so for MFJ).

An alternative that achieves the same goal identified by OP without realizing significant capital gains would be to build a sinking fund focused on bonds, whatever type are most tax-efficient. Then, based on the person's risk tolerance, the person could shift the asset allocation in other parts of the overall financial picture to take on more risk. For example, if OP has the risk tolerance to use VTI for a sinking fund but has a 70/30 allocation in a variety of retirement accounts, OP could instead make the sinking fund focus on bonds while shifting the asset allocation in other accounts appropriately, perhaps to 100/0.

This change makes sense because 1) barring asset location tax adjustments, having assets anywhere is theoretically the same for its final impact on a person, 2) the change actually facilitates using the sinking fund to pay off the mortgage with more predictability and potentially better tax treatment, and 3) the change also reflects the lower need for stability in retirement account since the absence of a large, fixed mortgage payment reduces sequence of returns risk at retirement.
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JoeRetire
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Re: Mortgage payoff in VTI

Post by JoeRetire »

dharrythomas wrote: Sat Jan 04, 2020 11:17 am Having had two kids in college, there is nothing like cash flow when unexpected expenses arise.
I guess I'd argue that a large sum in the bank (rather than in the walls of your house) is like cash flow - and could even be much better, depending on the size of the unexpected expenses.
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Horton
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Re: Mortgage payoff in VTI

Post by Horton »

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?
Do you hold any bonds or cash (beyond an emergency fund) in tax advantaged or taxable accounts? If so, why invest in bonds when you could put that money against your mortgage and earn 3.75% risk free (adjust net of taxes if you itemize)?
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Re: Mortgage payoff in VTI

Post by AlphaLess »

placeadhere2007 wrote: Sat Jan 04, 2020 10:19 am
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?
2.75% was zero cost out of pocket. That is: while I took a slightly higher rate, it did not cost any switching cost.

I would assume that in the remaining 3 years of the ARM, short-term rates can go lower, at which time I can refinance again.
In particular, if we get a recession or slow-down, short term rates will go down.

I am not stuck at the idea of refi-ing at 2.75%. I would have to look at the pros and the cons.
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placeadhere2007
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Re: Mortgage payoff in VTI

Post by placeadhere2007 »

Horton wrote: Sat Jan 04, 2020 2:55 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?
Do you hold any bonds or cash (beyond an emergency fund) in tax advantaged or taxable accounts? If so, why invest in bonds when you could put that money against your mortgage and earn 3.75% risk free (adjust net of taxes if you itemize)?
You say why invest in bonds... I never said bonds, but I would invest in VTI. Can you clarify your question?
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placeadhere2007
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Re: Mortgage payoff in VTI

Post by placeadhere2007 »

AlphaLess wrote: Sat Jan 04, 2020 5:47 pm
placeadhere2007 wrote: Sat Jan 04, 2020 10:19 am
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

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?
2.75% was zero cost out of pocket. That is: while I took a slightly higher rate, it did not cost any switching cost.

I would assume that in the remaining 3 years of the ARM, short-term rates can go lower, at which time I can refinance again.
In particular, if we get a recession or slow-down, short term rates will go down.

I am not stuck at the idea of refi-ing at 2.75%. I would have to look at the pros and the cons.
If it was 0 cost they had to add the costs to your balance. No way it was 0 true cost right :) not sure how much lower rates can go.
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Re: Mortgage payoff in VTI

Post by Triple digit golfer »

Horton wrote: Sat Jan 04, 2020 2:55 pmDo you hold any bonds or cash (beyond an emergency fund) in tax advantaged or taxable accounts? If so, why invest in bonds when you could put that money against your mortgage and earn 3.75% risk free (adjust net of taxes if you itemize)?
1. Asset allocation and mortgage are two different things. The logic to never use bonds for retirement if one has a mortgage is flawed. Bonds are there to dampen equity volatility, not generate excess returns over loan balances. Therefore, I agree with KlangFool when he says the proper comparison is the expected return of one's entire asset allocation to the mortgage rate, not just the bond portion.

2. Liquidity and cash flow are given up if the money is put toward the mortgage. Even with what one thinks is an adequate emergency fund of perhaps a year, sometimes unexpected things happen. A job loss of 18 months in the midst of a 50% equity crash is not outside the realm of possibility. It happened to people in 2008. It would certainly be nice to have bonds in that instance.

3. Look at the 2019 return of Total Bond Index.
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Horton
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Re: Mortgage payoff in VTI

Post by Horton »

placeadhere2007 wrote: Sun Jan 05, 2020 2:53 pm
Horton wrote: Sat Jan 04, 2020 2:55 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?
Do you hold any bonds or cash (beyond an emergency fund) in tax advantaged or taxable accounts? If so, why invest in bonds when you could put that money against your mortgage and earn 3.75% risk free (adjust net of taxes if you itemize)?
You say why invest in bonds... I never said bonds, but I would invest in VTI. Can you clarify your question?
You said you would invest your residual funds in VTI, but you never provided your overall asset allocation. My point is that if you have a 401k (or other retirement account) and are actively holding fixed income, then it’s likely those assets will yield less than 3.75% over the next 8 years.
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Horton
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Re: Mortgage payoff in VTI

Post by Horton »

Triple digit golfer wrote: Sun Jan 05, 2020 3:05 pm
Horton wrote: Sat Jan 04, 2020 2:55 pmDo you hold any bonds or cash (beyond an emergency fund) in tax advantaged or taxable accounts? If so, why invest in bonds when you could put that money against your mortgage and earn 3.75% risk free (adjust net of taxes if you itemize)?
1. Asset allocation and mortgage are two different things. The logic to never use bonds for retirement if one has a mortgage is flawed. Bonds are there to dampen equity volatility, not generate excess returns over loan balances. Therefore, I agree with KlangFool when he says the proper comparison is the expected return of one's entire asset allocation to the mortgage rate, not just the bond portion.

2. Liquidity and cash flow are given up if the money is put toward the mortgage. Even with what one thinks is an adequate emergency fund of perhaps a year, sometimes unexpected things happen. A job loss of 18 months in the midst of a 50% equity crash is not outside the realm of possibility. It happened to people in 2008. It would certainly be nice to have bonds in that instance.

3. Look at the 2019 return of Total Bond Index.
I’m operating under the assumption that an individual would not start paying off their mortgage until they have sufficient liquid assets to offset the risks you laid out.

Also, don’t focus on the 2019 return of Total Bond. I’ll bet you a beer that Total Bond doesn’t return more than 3.75% over the 8 year period referenced by the OP.

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AlphaLess
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Re: Mortgage payoff in VTI

Post by AlphaLess »

placeadhere2007 wrote: Sun Jan 05, 2020 2:55 pm If it was 0 cost they had to add the costs to your balance. No way it was 0 true cost right :) not sure how much lower rates can go.
Nope. Balance remained the same. As I said: I took a slightly higher rate to make it zero cost.
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Re: Mortgage payoff in VTI

Post by btownguy »

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.
This is the way
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Re: Mortgage payoff in VTI

Post by Monsterflockster »

btownguy wrote: Mon Jan 06, 2020 9:58 am
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.
This is the way
I know many who lost their homes in the last recession due to pulling out money from their house to invest. Then got laid off and lost everything.

I’m new here but pulling money out of your house feels like gambling and market timing to me. Is that the boglehead way?

If you don’t have the 50k to invest you don’t have it. I would never pull it from my house, but that’s me.
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Re: Mortgage payoff in VTI

Post by dharrythomas »

JoeRetire wrote: Sat Jan 04, 2020 2:07 pm
dharrythomas wrote: Sat Jan 04, 2020 11:17 am Having had two kids in college, there is nothing like cash flow when unexpected expenses arise.
I guess I'd argue that a large sum in the bank (rather than in the walls of your house) is like cash flow - and could even be much better, depending on the size of the unexpected expenses.
Except that home equity didn’t count in the financial aid calculations. I probably carry a little more risk on the equity side because I don’t have debt. It is hard to get in too much financial trouble without leverage. I enjoy not worrying about having enough in the bank to make a payment.
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Re: Mortgage payoff in VTI

Post by Ocean77 »

Monsterflockster wrote: Mon Jan 06, 2020 11:36 am
btownguy wrote: Mon Jan 06, 2020 9:58 am
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.
This is the way
I know many who lost their homes in the last recession due to pulling out money from their house to invest. Then got laid off and lost everything.

I’m new here but pulling money out of your house feels like gambling and market timing to me. Is that the boglehead way?

If you don’t have the 50k to invest you don’t have it. I would never pull it from my house, but that’s me.
I agree with you. I think these types of ideas and considerations pop up more frequently because the stock market has been so good for so long. Paying 3.75% on an existing or new mortgage and investing proceeds in the stock market looks like a no brainer. But who knows, that 3.75% guaranteed return may look surprisingly good when we look back a decade from now....

Ironically, those ideas would make more sense to me if we were in the middle of a terrible bear market. But then nobody would probably suggest them.
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Re: Mortgage payoff in VTI

Post by grabiner »

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
That compounding also applies to paying down a mortgage. If you buy a $10,000 CD with a 4% compounded yield, your CD balance will be $10,400 in one year, and $10,816 in two years because of compounding. If you pay down your 4% mortgage by $10,000, your mortgage balance will be $10,400 less in one year, and $10,816 less in two years.

So what matters is the higher rate, and any associated risks. I don't pay off my mortgage now because I could earn 1.80% in Vanguard Long-Term Tax-Exempt (1.96% before state tax), and 1.78% after tax if I pay down my 2.625% mortgage which is deductible at a 32.2% tax rate.
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JoeRetire
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Re: Mortgage payoff in VTI

Post by JoeRetire »

dharrythomas wrote: Mon Jan 06, 2020 8:36 pmI enjoy not worrying about having enough in the bank to make a payment.
That's a worry for you?

If you have enough in the bank to pay off the entire mortgage, it doesn't make a lot of sense to worry about having enough in the bank to make a single payment.
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Re: Mortgage payoff in VTI

Post by dharrythomas »

JoeRetire wrote: Tue Jan 07, 2020 8:10 am
dharrythomas wrote: Mon Jan 06, 2020 8:36 pmI enjoy not worrying about having enough in the bank to make a payment.
That's a worry for you?

If you have enough in the bank to pay off the entire mortgage, it doesn't make a lot of sense to worry about having enough in the bank to make a single payment.
If I’ve got it in the bank, I might as well pay it off. If I’ve got it invested what I’ve seen is that the time people need the cash flow is also the hardest time to get it. Stocks are down, credit dries up, and people lose their jobs at the same time.

I’m blessed now, I worked multiple jobs and and scrambled around before everything came together. It is hard to get in real financial trouble without leverage.
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JoeRetire
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Re: Mortgage payoff in VTI

Post by JoeRetire »

dharrythomas wrote: Tue Jan 07, 2020 6:49 pm
JoeRetire wrote: Tue Jan 07, 2020 8:10 am
dharrythomas wrote: Mon Jan 06, 2020 8:36 pmI enjoy not worrying about having enough in the bank to make a payment.
That's a worry for you?

If you have enough in the bank to pay off the entire mortgage, it doesn't make a lot of sense to worry about having enough in the bank to make a single payment.
If I’ve got it in the bank, I might as well pay it off. If I’ve got it invested what I’ve seen is that the time people need the cash flow is also the hardest time to get it. Stocks are down, credit dries up, and people lose their jobs at the same time.

I’m blessed now, I worked multiple jobs and and scrambled around before everything came together. It is hard to get in real financial trouble without leverage.
I see. Lots of worries there.

So having no mortgage reduces your worries for you. Makes sense in your case.
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placeadhere2007
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Re: Mortgage payoff in VTI

Post by placeadhere2007 »

Horton wrote: Sun Jan 05, 2020 3:44 pm
placeadhere2007 wrote: Sun Jan 05, 2020 2:53 pm
Horton wrote: Sat Jan 04, 2020 2:55 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?
Do you hold any bonds or cash (beyond an emergency fund) in tax advantaged or taxable accounts? If so, why invest in bonds when you could put that money against your mortgage and earn 3.75% risk free (adjust net of taxes if you itemize)?
You say why invest in bonds... I never said bonds, but I would invest in VTI. Can you clarify your question?
You said you would invest your residual funds in VTI, but you never provided your overall asset allocation. My point is that if you have a 401k (or other retirement account) and are actively holding fixed income, then it’s likely those assets will yield less than 3.75% over the next 8 years.
Ah got it. I'm 35 and hold none of my investments in fixed income. Everything in all my accounts is in VTI :)
BackToSchoolDad
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Re: Mortgage payoff in VTI

Post by BackToSchoolDad »

Does this approach still make sense if your mortgage rate is 4.25% and you want to invest more conservatively? 40/60 or 50/50 short term bonds and Total Stock Market.

My refinance options aren't great and I'd like to build up some taxable savings as I currently have none outside my EF and my retirement accounts are 100% equities. My goal for this would be to save up 10,000 for a recast/get rid of PMI, and also serve as a vehicle for mid term savings should the need arise for a new roof or something.

I've been paying a modest amount more on the principal each month and I'm torn between ramping that up or investing it. I'm thinking this kind of strategy would serve as a middle ground. I still have 28 years left on the mortgage.
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Re: Mortgage payoff in VTI

Post by grabiner »

BackToSchoolDad wrote: Thu May 07, 2020 10:50 am Does this approach still make sense if your mortgage rate is 4.25% and you want to invest more conservatively? 40/60 or 50/50 short term bonds and Total Stock Market.

My refinance options aren't great and I'd like to build up some taxable savings as I currently have none outside my EF and my retirement accounts are 100% equities. My goal for this would be to save up 10,000 for a recast/get rid of PMI, and also serve as a vehicle for mid term savings should the need arise for a new roof or something.

I've been paying a modest amount more on the principal each month and I'm torn between ramping that up or investing it. I'm thinking this kind of strategy would serve as a middle ground. I still have 28 years left on the mortgage.
Getting rid of PMI is a major benefit, so ramping up toward that goal is a good idea. After you have cleared the PMI (either dropped by the lender, or after a refinance), you can then decide whether paying down the mortgage is worthwhile. In your situation, it sounds like you want to keep some money liquid, and it is reasonable to pay a small dollar cost to keep liquid funds rather than paying down the mortgage.
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Re: Mortgage payoff in VTI

Post by 17outs »

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.
Never and I oppose debt. Even "good" debt as they say. I love having tons of free cashflow and I love to invest stacks every month and see the differences. Debt is a mindset that gets in the way of financial freedom. Regardless of if you read the Bible or not this is great advice.

"The borrower is slave to the lender." It's simple to me and I wasn't always of this mindset. Owing money and making money are opposites. I have not one regret. I paid off my 15 year 2 years in. 4.125%.
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Re: Mortgage payoff in VTI

Post by Shael_AT »

17outs wrote: Thu May 07, 2020 1:02 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.
Never and I oppose debt. Even "good" debt as they say. I love having tons of free cashflow and I love to invest stacks every month and see the differences. Debt is a mindset that gets in the way of financial freedom. Regardless of if you read the Bible or not this is great advice.

"The borrower is slave to the lender." It's simple to me and I wasn't always of this mindset. Owing money and making money are opposites. I have not one regret. I paid off my 15 year 2 years in. 4.125%.
I'll agree with you up until a Mortgage, and its because the debt pay off of a mortgage ranges from 7-10 years if you go full intensity baby steps listening to DR podcasts 3x a day mode.

I feel the lack of liquidity in doing this is risky. It doesn't mean stack up your pay-off money into VTSAX/VTI or other high to medium risk equities, but perhaps a mixture of HYSA, CD Ladders and Munici's like VWITX to both maintain liquidity but also nearly eliminate the risk premium on equities.

The counter argument to this is that the money 'isn't gone, its in the house', but I would argue that if you are following this forum, make a good income and are in general advanced to expert level in personal finance, retirement and fi/re concepts, that you are also in a career that has a higher chance of volatility during economic bust cycles. This is important because if you need to "capture" the money from your home, its because you need to sell it, or recast it.

Selling your home at the same rate as when you bought it, in the 1-10 year near term, implies that you are in a NEED to sell it, and if you NEED to sell it, chances are your income or prospects have modified, meaning others in the area are in a similar situation and prices deflate.

Now, that being said, if you have 1....2... maybe 3-ish years left on mortgage? If the time horizon was 1-3 years, thats where I pivot and agree with paying off the principal aggressively on a quarterly or yearly basis with cold hard cash.

Hope that makes sense! I'm a paranoid person and love my liquidity. Somehow, I don't feel that Uncle Chase or BoA are looking out for my best interest when I pay them in advanced, especially when the rates are so low right now.
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Re: Mortgage payoff in VTI

Post by BackToSchoolDad »

grabiner wrote: Thu May 07, 2020 12:05 pm Getting rid of PMI is a major benefit, so ramping up toward that goal is a good idea. After you have cleared the PMI (either dropped by the lender, or after a refinance), you can then decide whether paying down the mortgage is worthwhile. In your situation, it sounds like you want to keep some money liquid, and it is reasonable to pay a small dollar cost to keep liquid funds rather than paying down the mortgage.
So you think it would be good to split the difference: pay a bit more on the mortgage than I am now to shed the PMI while still building up a taxable account, and once the PMI is gone decide if I want to go all in on paying down the mortgage?

The PMI is only $30 a month, so it's not a huge drag on cash flow.

How much risk do I need to take on to generate a return of around 4.25%? Would 20/80 between Total World ETF and Total Bond or VG Tax Exempt Bond ETF be a reasonable allocation? I'm comfortable going up to 50/50 for this account once it's fully funded, but may keep the risk low until I have a sufficient amount of bond money available.
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Re: Mortgage payoff in VTI

Post by grabiner »

BackToSchoolDad wrote: Thu May 07, 2020 1:18 pm
grabiner wrote: Thu May 07, 2020 12:05 pm Getting rid of PMI is a major benefit, so ramping up toward that goal is a good idea. After you have cleared the PMI (either dropped by the lender, or after a refinance), you can then decide whether paying down the mortgage is worthwhile. In your situation, it sounds like you want to keep some money liquid, and it is reasonable to pay a small dollar cost to keep liquid funds rather than paying down the mortgage.
So you think it would be good to split the difference: pay a bit more on the mortgage than I am now to shed the PMI while still building up a taxable account, and once the PMI is gone decide if I want to go all in on paying down the mortgage?

The PMI is only $30 a month, so it's not a huge drag on cash flow.

How much risk do I need to take on to generate a return of around 4.25%? Would 20/80 between Total World ETF and Total Bond or VG Tax Exempt Bond ETF be a reasonable allocation? I'm comfortable going up to 50/50 for this account once it's fully funded, but may keep the risk low until I have a sufficient amount of bond money available.
This is the wrong question to ask. You can decide independently how much risk you want to take and whether to pay down your mortgage, so the right comparison should be between the return on low-risk bonds and on mortgage payments. If you hold any long-term bonds yielding 3% after tax, and your mortgage is 4.25% and is not deductible, then you are losing 1.25% a year by holding those bonds and the mortgage, rather than selling them to pay off the mortgage. This may be a price worth paying for liquidity, or for long-term tax-deferral benefits (maxing out your 401(k) and IRA, so that the money will keep growing tax-deferred even after the mortgage is gone).

If you are accumulating money to get rid of PMI, this is money you intend to spend in a few years to buy what is effectively a long-term bond, so it's probably best to leave it in a bond fund. Another reason not to put it in a stock fund is that you lose the tax-efficiency benefit of stock if you intend to hold it for a short term; the capital gains will be taxed when you sell.
Wiki David Grabiner
17outs
Posts: 105
Joined: Thu Feb 13, 2020 4:03 pm

Re: Mortgage payoff in VTI

Post by 17outs »

Shael_AT wrote: Thu May 07, 2020 1:14 pm
17outs wrote: Thu May 07, 2020 1:02 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.
Never and I oppose debt. Even "good" debt as they say. I love having tons of free cashflow and I love to invest stacks every month and see the differences. Debt is a mindset that gets in the way of financial freedom. Regardless of if you read the Bible or not this is great advice.

"The borrower is slave to the lender." It's simple to me and I wasn't always of this mindset. Owing money and making money are opposites. I have not one regret. I paid off my 15 year 2 years in. 4.125%.
I'll agree with you up until a Mortgage, and its because the debt pay off of a mortgage ranges from 7-10 years if you go full intensity baby steps listening to DR podcasts 3x a day mode.

I feel the lack of liquidity in doing this is risky. It doesn't mean stack up your pay-off money into VTSAX/VTI or other high to medium risk equities, but perhaps a mixture of HYSA, CD Ladders and Munici's like VWITX to both maintain liquidity but also nearly eliminate the risk premium on equities.

The counter argument to this is that the money 'isn't gone, its in the house', but I would argue that if you are following this forum, make a good income and are in general advanced to expert level in personal finance, retirement and fi/re concepts, that you are also in a career that has a higher chance of volatility during economic bust cycles. This is important because if you need to "capture" the money from your home, its because you need to sell it, or recast it.

Selling your home at the same rate as when you bought it, in the 1-10 year near term, implies that you are in a NEED to sell it, and if you NEED to sell it, chances are your income or prospects have modified, meaning others in the area are in a similar situation and prices deflate.

Now, that being said, if you have 1....2... maybe 3-ish years left on mortgage? If the time horizon was 1-3 years, thats where I pivot and agree with paying off the principal aggressively on a quarterly or yearly basis with cold hard cash.

Hope that makes sense! I'm a paranoid person and love my liquidity. Somehow, I don't feel that Uncle Chase or BoA are looking out for my best interest when I pay them in advanced, especially when the rates are so low right now.
I see the paid off house as security in those times. I still have liquidity elsewhere. I do look at the money like its gone. But I will have the major expense accounted for. If I was in a stage in my life where the future was slightly uncertain I might think otherwise. I plan to still be in this house in 10 years at least likely 20. If I didn't have that plan I would agree more with you.
BackToSchoolDad
Posts: 70
Joined: Wed Mar 18, 2020 6:33 pm

Re: Mortgage payoff in VTI

Post by BackToSchoolDad »

grabiner wrote: Thu May 07, 2020 1:41 pm This is the wrong question to ask. You can decide independently how much risk you want to take and whether to pay down your mortgage, so the right comparison should be between the return on low-risk bonds and on mortgage payments. If you hold any long-term bonds yielding 3% after tax, and your mortgage is 4.25% and is not deductible, then you are losing 1.25% a year by holding those bonds and the mortgage, rather than selling them to pay off the mortgage. This may be a price worth paying for liquidity, or for long-term tax-deferral benefits (maxing out your 401(k) and IRA, so that the money will keep growing tax-deferred even after the mortgage is gone).

If you are accumulating money to get rid of PMI, this is money you intend to spend in a few years to buy what is effectively a long-term bond, so it's probably best to leave it in a bond fund. Another reason not to put it in a stock fund is that you lose the tax-efficiency benefit of stock if you intend to hold it for a short term; the capital gains will be taxed when you sell.
That makes a ton of sense, thanks! I'll have to think more about it, but I'm not sure the penalty for holding that money in a bond fund is worth the liquidity.

Initially I think I'd be better off building up a taxable account for medium term needs and a second tier EF, and then once that's funded contribute more to my 457b and principal payments. If a chance to refinance favorably jumps out I'll have some funds available for that as well.
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