paydown strategy for mortgage

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chak
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paydown strategy for mortgage

Post by chak » Sat Apr 19, 2014 4:18 pm

I am looking for some advice about my situation. I am somewhat wired to dislike any debt including mortgage debt and my wife has similar mentality as well. We currently have $299K left on our mortgage for a house worth close to $1M. We are blessed with a great combined income of close to $500K. We have been actively paying down the mortgage for the past 4 years. This has helped us increase the equity in the home to $700K while keeping our investment savings lower at $500K. My current plan is to pay off the entire mortgage in the next two years while maxing out pre-tax and after tax (roth conversion) 401K investments. We plan to work for another 23 years after the mortgage is paid off. We expect saving close to $200K a year for those 23 years, ignoring any increases in compensation. Considering that it will take only two years to pay off mortgage and we still have another 23 years to invest, I am comfortable with the plan. Do you see any big risks in our plan? Thanks for your help.

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grabiner
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Re: paydown strategy for mortgage

Post by grabiner » Sat Apr 19, 2014 4:23 pm

Paying off a mortgage while maxing out your tax-deferred accounts is often a good idea, and since you can pay it off quickly, it's probably the right strategy.

Essentially, paying off the mortgage is itself an investment; if you put $10,000 towards your 4% mortgage today, you will owe $10,816 less in two years, and since the mortgage will be paid off in two years, you will have that $10,816 (minus taxes) to invest when you no longer have payments to make. Effectively, you bought a two-year CD with a 4% return, which is a great deal because of the risk-free return, even if your high tax bracket reduces the return to 2.4% after tax.
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Re: paydown strategy for mortgage

Post by Twins Fan » Sat Apr 19, 2014 4:34 pm

I don't see any risk. Looks like you guys are sitting pretty either way. You should have PLENTY saved later on! If you both are debt averse,... get rid of the debt/mortgage and smooth sailing after that. :sharebeer

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Taylor Larimore
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Re: paydown strategy for mortgage

Post by Taylor Larimore » Sat Apr 19, 2014 4:41 pm

Chak:

I agree with Grabiner. Making payments to a mortgage (except a very low-interest mortgage) is usually better than making investments into a taxable account. An exception might be if you anticipate a need for cash in the near future. Investors in high income-tax brackets should also consider the loss of any mortgage-interest tax-deduction.

Another consideration might be protection from claims of creditors in a state where the homestead is protected -- a reason for increasing home equity.

I like your idea of using the Bogleheads forum as a sounding board for an anticipated financial move.

Best wishes.
Taylor
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Re: paydown strategy for mortgage

Post by Grt2bOutdoors » Sat Apr 19, 2014 4:42 pm

Pay it off! Get rid of it!
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BerkeleyChris
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Re: paydown strategy for mortgage

Post by BerkeleyChris » Sat Apr 19, 2014 4:44 pm

Go for it. I am 35 now and paid off my mortgage several years ago, very aggressively, like you are doing. I have no regrets. Having no debt is priceless.

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Peter Foley
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Re: paydown strategy for mortgage

Post by Peter Foley » Sat Apr 19, 2014 4:56 pm

I agree with the advice given to pay off the mortgage. This is not always the correct decision, but in this current interest rate environment, it is better for most individuals to pay off a mortgage than receive little or no return on a taxable bond investment. The security of one's employment would be the only other variable.

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Re: paydown strategy for mortgage

Post by investor1 » Sat Apr 19, 2014 5:08 pm

I assume your mortgage rate is low, so the straight mathematical answer would likely be to pay the minimum and invest the rest since the returns on the investments will likely outpace the interest rate of the mortgage you started in 2010. This could mean you could pay off the house earlier given the investment returns or just peg those funds for retirement. In addition to that, you would receive more of a tax deduction due to more interest being paid. You're in a high tax bracket, so this is a larger savings for you than many others.

Paying off the house and living debt free sure helps the stress levels though, and that's what I would do given you are already saving a good amount for retirement.

chak
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Re: paydown strategy for mortgage

Post by chak » Sat Apr 19, 2014 5:13 pm

Thanks everyone. The advice seems to be overwhelmingly supportive of paying down the mortgage in two years. A couple of additional data points that may still not change your advice. First, our interest rate is quite low at 2.75% on our fixed mortgage. The amount of interest we pay a year is decreasing, reducing the difference between standard deduction and itemized deduction. Second, our jobs appear to be pretty stable in the short term, at least until the mortgage is paid off, and job stability will be less of an issue without mortgage after that. We also live in a place with good number of jobs and low unemployment rate. Thank you.

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Re: paydown strategy for mortgage

Post by freddie » Sat Apr 19, 2014 6:08 pm

Personally I would never pay off a 2.75% loan (that after tax is more like 1.75% if you in a no income tax state. I am assuming property taxes alone get you close to the standard deduction). The odds of getting that level of return out of pretty much any portfolio over 15 or so years is just too high. If you dumped it all in the s&p 500 on Jan 1 2000, you would have easily beaten 2.75% after tax. To make you really cry figure out what would have happened if you put those excess payments in the market starting 4 years ago instead of paying off the house. I am guessing you would have more than enough cash to pay off the house and still have a nice sum left. Yes that is cherry picking results. But by not investing in the market for ~6 years you have given up a lot of time diversification. Maybe it will work out in your favor. Maybe not.

At this point, though I don't know if I would switch horses. You made a choice 4 years ago to pay off the house. You might as well continue it. It isn't like the markets are in a place where the valuation say it is a screaming bargain. At the end of the day it isn't going to matter. If you can work for 15 years, you will have plenty of cash.

chak wrote:Thanks everyone. The advice seems to be overwhelmingly supportive of paying down the mortgage in two years. A couple of additional data points that may still not change your advice. First, our interest rate is quite low at 2.75% on our fixed mortgage. The amount of interest we pay a year is decreasing, reducing the difference between standard deduction and itemized deduction. Second, our jobs appear to be pretty stable in the short term, at least until the mortgage is paid off, and job stability will be less of an issue without mortgage after that. We also live in a place with good number of jobs and low unemployment rate. Thank you.

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Re: paydown strategy for mortgage

Post by ccieemeritus » Sat Apr 19, 2014 6:09 pm

I say pay it off. We paid off our mortgage six years ago. We did it with gradual extra principal payments over years and then a final balloon payment to finish it off. That decreased our stress level and allowed us to take some risks such as joining a no-pay early startup (sadly it failed, but a great life experience). It also decreased our stress when we had a medical issue which resulted in a temporary income decrease. No mortgage means being able to decrease spending dramatically even if unexpected things happen to income.

I agree with the advice to max out tax advantaged accounts first.

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Watty
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Re: paydown strategy for mortgage

Post by Watty » Sat Apr 19, 2014 6:49 pm

Do you see any big risks in our plan?
Assuming that you have enough other non-retirement funds to get by OK on just one income if you had to then I don't see how it could turn out badly.

There might be ways that you could use the mortgage to your advantage and to invest the money but no matter what you did there would be some risk you would get unlucky and hit the 5% bad outcome for some plan that should work 95% of the time. A fundamental rule in deciding to take risk or not that that you should have a need to take the additional risk and I don't see any need for you to use the mortgage to leverage your investing.

That said, saving the money for two years until you have enough to completely pay off the mortgage would cost you very little then you could decide if you should pay it off then.

freddie
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Re: paydown strategy for mortgage

Post by freddie » Sat Apr 19, 2014 7:55 pm

Having an extra couple hundred thousand in the bank account does the same thing with the advantage of it being liquid. The downside of course is if really bad stuff happens in the first 3 or so years (after that you tend to be playing with house money for most of the account in almost all cases) and you have to sell at a lower price than you paid. Seriously look how often a 5 year equal installment DCA investment plan has lost money in the past 100 years. It happens but not very often.

darrellr wrote:I say pay it off. We paid off our mortgage six years ago. We did it with gradual extra principal payments over years and then a final balloon payment to finish it off. That decreased our stress level and allowed us to take some risks such as joining a no-pay early startup (sadly it failed, but a great life experience). It also decreased our stress when we had a medical issue which resulted in a temporary income decrease. No mortgage means being able to decrease spending dramatically even if unexpected things happen to income.

I agree with the advice to max out tax advantaged accounts first.

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Zabar
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Re: paydown strategy for mortgage

Post by Zabar » Sat Apr 19, 2014 8:00 pm

Even though the mortgage interest rate is quite low, it sounds like you would derive a significant emotional benefit from getting it off your personal balance sheet. I'd go for it.

The only concern I might have is whether you might get caught in a liquidity crunch in the next two years if you're faced with an emergency. You mention maxing out your retirement accounts, but say nothing about other investments. If you have an adequate emergency fund and other investments, the liquidity issue shouldn't be a concern.

desiderium
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Re: paydown strategy for mortgage

Post by desiderium » Sat Apr 19, 2014 8:42 pm

Looks like you have a healthy stockpile of liquid assets and a high income. 1.75% on what is essentially a "short term" investment is a good return, aside from the other benefits.
One thing I did after paying off my mortgage was take out a HELOC, thinking that it was easy to qualify with my income. It didnt cost anything, and it just sits there without any balance. In the event of acute, severe hardship, I could potentially access some of the equity.

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Re: paydown strategy for mortgage

Post by hmw » Sat Apr 19, 2014 10:04 pm

At 2.75%, I would personally keep the mortgage for as long as I can and invest the excess cash in an low cost index fund. Statistically you will be likely ahead with this approach. I personally don't get stressed about 300k in mortgage at 2.75%when you have 500k savings and making 500k a year in income. I am in a somewhat similar situation. I am shopping for a house now, and plan to put down 20% to avoid PMI and borrow the rest. I plan to put the excess cash from my income into a taxable account. But that's just me.

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Re: paydown strategy for mortgage

Post by grabiner » Sat Apr 19, 2014 11:01 pm

chak wrote:Thanks everyone. The advice seems to be overwhelmingly supportive of paying down the mortgage in two years. A couple of additional data points that may still not change your advice. First, our interest rate is quite low at 2.75% on our fixed mortgage.
At that rate, it wouldn't be worth paying down, except that you can pay it down quickly. The mortgage probably would last about five years if you don't pay it down early. 2.75% is a good return on what is effectively a five-year CD, and it gives you the opportunity to get still better returns later on further paydowns.

By the same logic, I don't pay down my own mortgage. I have fifteen years left on a 2.625% mortgage, but I don't have enough spare cash to pay it off quickly (unless I sell stock for a large capital gain), so I prefer to make taxable investments with my spare cash. I retain the option of paying off the mortgage later; I may do this if rates are still low when there are only five years left, or if I have enough cash to pay off the whole thing.
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Re: paydown strategy for mortgage

Post by davidboon » Sat Apr 19, 2014 11:06 pm

I am curious to know if you have analyzed your yearly cashflow i.e. your income - expenses.

You mentioned that your annual income is $500k. How much of that is your routine day to day expenses. Even if your annual expenses are around 150k to 200k, you would still have 300k at your disposal to invest and/or pay down mortgage. You can easily pay that off in one year.

However then a significant part of your networth is tied up in real estate (which is highly illiquid). You would end up with a 1 million dollar house and 500k in savings. i.e. 66% of your networth is allocated in real estate. Are you comfortable with that?

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Re: paydown strategy for mortgage

Post by investor1 » Sat Apr 19, 2014 11:41 pm

chak wrote:First, our interest rate is quite low at 2.75% on our fixed mortgage. The amount of interest we pay a year is decreasing, reducing the difference between standard deduction and itemized deduction.
chak wrote:We currently have $299K left on our mortgage for a house worth close to $1M. We are blessed with a great combined income of close to $500K. We have been actively paying down the mortgage for the past 4 years. This has helped us increase the equity in the home to $700K while keeping our investment savings lower at $500K.
How is the standard deduction revalent?

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Re: paydown strategy for mortgage

Post by letsgobobby » Sun Apr 20, 2014 12:01 am

chak wrote:I am looking for some advice about my situation. I am somewhat wired to dislike any debt including mortgage debt and my wife has similar mentality as well. We currently have $299K left on our mortgage for a house worth close to $1M. We are blessed with a great combined income of close to $500K. We have been actively paying down the mortgage for the past 4 years. This has helped us increase the equity in the home to $700K while keeping our investment savings lower at $500K. My current plan is to pay off the entire mortgage in the next two years while maxing out pre-tax and after tax (roth conversion) 401K investments. We plan to work for another 23 years after the mortgage is paid off. We expect saving close to $200K a year for those 23 years, ignoring any increases in compensation. Considering that it will take only two years to pay off mortgage and we still have another 23 years to invest, I am comfortable with the plan. Do you see any big risks in our plan? Thanks for your help.
I would not personally feel comfortable with $1,000,000 in a single property, and only $500k in other investments. At your current interest rate I think it's foolish to keep paying off the mortgage.

chak
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Re: paydown strategy for mortgage

Post by chak » Sun Apr 20, 2014 12:09 am

investor1 wrote:How is the standard deduction revalent?
As the benefit of mortgage interest is often considered into the evaluation and as it is done through itemized deduction, I am just saying that this benefit is decreasing for us as the true benefit of interest deduction is the difference between (mortgage interest + property tax) - standard deduction. Thanks

chak
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Re: paydown strategy for mortgage

Post by chak » Sun Apr 20, 2014 12:48 am

Zabar wrote:The only concern I might have is whether you might get caught in a liquidity crunch in the next two years if you're faced with an emergency. You mention maxing out your retirement accounts, but say nothing about other investments. If you have an adequate emergency fund and other investments, the liquidity issue shouldn't be a concern.
We have close to $150K of our $500K savings out side of the retirement funds that we can potentially use for liquidity. This will give us at least two year's worth of living expenses, including the monthly mortgage payment, if I lose my job. The company I work for is also quite generous with severance package that can pay for another year's living expenses. If my wife loses her job, we can afford to manage the living expenses with my salary. Overall, if we keep at least the current liquidity level and keep adding any disposal income at mortgage, it seems like we should be ok.

chak
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Re: paydown strategy for mortgage

Post by chak » Sun Apr 20, 2014 1:17 am

letsgobobby wrote: I would not personally feel comfortable with $1,000,000 in a single property, and only $500k in other investments. At your current interest rate I think it's foolish to keep paying off the mortgage.
Since we have already bought an expensive house, whether we pay off in two years or 10 years, I feel it is really a matter of trading off liquidity and rate of return for the duration of the loan. In the grand scheme of things, $299K may not be a high number as we plan to invest $200K per year for 20+ years after mortgage is paid off in two years. Thanks for your feedback.

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Re: paydown strategy for mortgage

Post by letsgobobby » Sun Apr 20, 2014 2:51 am

It sounds good, except you have not, today, saved that $200k+ per year x 20 years. You only have the plan to save that money. Things happen. Illness/disability, layoffs, structural economic change impacting job compensation or security, ill parents... stuff. Liquidity is worth nothing until you need it. Then it's priceless.

Don't forget that after accumulating additional liquid assets, you can still pay off the mortgage early, say in 2-5 years time. By then you will have that extra $500k liquid that would go a long way toward making paying off such a low rate loan at least sensible.

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Re: paydown strategy for mortgage

Post by HIinvestor » Sun Apr 20, 2014 4:07 am

Love having the mortgage finally fully paid off. It feels wonderful! Sounds like you & your spouse can make this happen since you both value it. I do wonder about your emergency fund, in case "stuff happens." I like having 6-12 months of our expenses in cash (or similar), "just in case." I know if you fully pay off your mortgage (or even with so much equity already), you can get a HELOC, but it's nice for many of us to sleep better at night knowing we have that available.

Have you done a cash flow analysis to figure out how much of your $500K annual income you are using for annual spending? Retirement investments? Taxes? How much is left over each year? It's good to know so you can decide on a plan that makes sense going forward.

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Re: paydown strategy for mortgage

Post by basspond » Sun Apr 20, 2014 4:14 am

All I can say is to be prepared for a happy note burning party. Since our mortgage was paid off less than 10 years ago, we have been socking an extra 2 x our house payment to fund college for the kids and to pay cash for big ticket items (multiple cars and boat).

As long as you don't upsize!

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Re: paydown strategy for mortgage

Post by Blue » Sun Apr 20, 2014 5:09 am

letsgobobby wrote:It sounds good, except you have not, today, saved that $200k+ per year x 20 years. You only have the plan to save that money. Things happen. Illness/disability, layoffs, structural economic change impacting job compensation or security, ill parents... stuff. Liquidity is worth nothing until you need it. Then it's priceless.

Don't forget that after accumulating additional liquid assets, you can still pay off the mortgage early, say in 2-5 years time. By then you will have that extra $500k liquid that would go a long way toward making paying off such a low rate loan at least sensible.
I tend to agree with this. While I can understand the emotional appeal of having a paid mortgage, you will be an outlier in terms of the percent of your networth locked up in a single family home (at least a few previous threads/polls on this topic). I have the generic sense from past polls (and personal bias) that no more than 40-50% of total networth *should be* equity in personal residence. Personally, I'd focus on growing your networth first rather than paying off your mortgage.

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Taylor Larimore
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Re: paydown strategy for mortgage

Post by Taylor Larimore » Sun Apr 20, 2014 7:35 am

Chak:

When knowledgeable people disagree -- it may not make much difference.

Best wishes.
Taylor
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Re: paydown strategy for mortgage

Post by zzcooper123 » Sun Apr 20, 2014 8:02 am

Why anyone would want to pay off a low rate, long term Mortgage escapes me. Are all your other housing expenses going to evaporate, too ?

If corporations didn't maximize their debt-to-equity ratio; the CEO would be fired.

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Re: paydown strategy for mortgage

Post by OAG » Sun Apr 20, 2014 8:35 am

Got our 1st mortgage at 35 yo in 1975 @ 9.25% killed it in 1977 & got 2d mortgage (in1977) @ 8% killed it in 1986 and will NEVER get another one. Have paid cash for 6 homes since then (1 @ a time). IMO there is NO GOOD debt.
OAG=Old Army Guy. Retired CW4 USA (US Army) in 1979.

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Re: paydown strategy for mortgage

Post by grabiner » Sun Apr 20, 2014 8:48 am

zzcooper123 wrote:Why anyone would want to pay off a low rate, long term Mortgage escapes me. Are all your other housing expenses going to evaporate, too ?
The mortgage is no longer long-term, given the discussion here. If it were long-term, I would have advised against paying it down, and suggested building a mortgage pay-down fund in municipal bonds which could be used to pay off the mortgage later if appropriate. (You are just as debt-free if you have no mortgage as if you have a $200K mortgage and $200K in bonds which could be used to pay off the mortgage at any time.)
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chak
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Re: paydown strategy for mortgage

Post by chak » Sun Apr 20, 2014 10:54 am

grabiner wrote: If it were long-term, I would have advised against paying it down, and suggested building a mortgage pay-down fund in municipal bonds which could be used to pay off the mortgage later if appropriate. (You are just as debt-free if you have no mortgage as if you have a $200K mortgage and $200K in bonds which could be used to pay off the mortgage at any time.)
Thanks everyone for your advice and we have to think a bit more. I am considering the option of building up mortgage pay off fund for piece of mind and then keep investing until we have $1M in liquid funds before paying off the mortgage. If the time horizon to pay off is 5-7 years and it takes 2 years to build up mortgage payoff fund, do you still recommend municipal bonds for keeping the payoff fund? Also do I treat the mortgage payoff fund as part of my asset allocation? Thanks again.

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Re: paydown strategy for mortgage

Post by Dandy » Sun Apr 20, 2014 11:20 am

If jobs are fairly secure and you have covered the insurance bases e.g. health, life, disability, homeowner/auto/flood/hurricane and umbrella insurance you have little risk in paying off the mortgage. If the higher the mortgage rate the better the payoff decision. Hating debt is a good thing.

If the mortgage rate was low I would probably stretch out the payoff an extra year or two to increase my portfolio. Having twice as much house value as investments is a bit scary to me - as we have seen in the recent past housing prices and liquidity can turn in a heart beat. That is my risk tolerance talking.

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Re: paydown strategy for mortgage

Post by grabiner » Sun Apr 20, 2014 11:26 am

chak wrote:
grabiner wrote: If it were long-term, I would have advised against paying it down, and suggested building a mortgage pay-down fund in municipal bonds which could be used to pay off the mortgage later if appropriate. (You are just as debt-free if you have no mortgage as if you have a $200K mortgage and $200K in bonds which could be used to pay off the mortgage at any time.)
Thanks everyone for your advice and we have to think a bit more. I am considering the option of building up mortgage pay off fund for piece of mind and then keep investing until we have $1M in liquid funds before paying off the mortgage. If the time horizon to pay off is 5-7 years and it takes 2 years to build up mortgage payoff fund, do you still recommend municipal bonds for keeping the payoff fund? Also do I treat the mortgage payoff fund as part of my asset allocation? Thanks again.
If you are planning to use the fund to pay off your mortgage, it should be in municipal bonds so that you can pay off the mortgage without a capital-gains tax. If you are planning to invest and keep the mortgage, it doesn't matter as much where you hold your bonds.

If you treat the mortgage payoff fund as part of your asset allocation, you should also treat the mortgage as a negative bond in your asset allocation, because they cancel out. If you have a mortgage which requires you to pay $30,000 per year for the next ten years, and a bond portfolio which requires someone else to pay you $30,000 per year for the next ten years, you have the same risk as if you had neither one.

And once you consider that the mortgage payoff fund is a positive bond and your mortgage is a negative bond, you can see whether this is a reasonable idea based on the yields of the bond funds. If you can earn more after-tax on low-risk bonds of the same duration as your mortgage, then building a mortgage payoff fund makes more sense than paying down the mortgage directly.

This is what I do. My mortgage rate is so low that I don't expect to pay off the mortgage early unless I sell my home, so I don't have a dedicated mortgage payoff fund; instead, I make my taxable investments in stock, and hold bonds in my retirement account. My bond holding is equal to my mortgage balance, so my net bond exposure is zero, consistent with my desired 100%-stock asset allocation. If I decide to change my allocation to 80% stock as my risk tolerance decreases, this would still be 80% net, so I might have $400K in stocks, $200K in bonds, and -$100K in mortgage.
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Re: paydown strategy for mortgage

Post by OutOfCyan » Sun Apr 20, 2014 12:41 pm

chak wrote:I am considering the option of building up mortgage pay off fund for piece of mind and then keep investing until we have $1M in liquid funds before paying off the mortgage. If the time horizon to pay off is 5-7 years and it takes 2 years to build up mortgage payoff fund, do you still recommend municipal bonds for keeping the payoff fund? Also do I treat the mortgage payoff fund as part of my asset allocation? Thanks again.
At 2.75% I think you're making the correct decision by building up your investments instead. I paid my 15-year $174K mortgage @ 4.75% (2008) off in 38 months. I regret this more than almost all the other financial decisions I've ever made. I would have much rather DCA'd the extra $3K or so into a taxable account over those years, even if the market had gone down in the interim. I will have saved $52K total interest in 2023 on a $174K mortgage, but the opportunity cost of not having invested the money earlier is much greater than that; I could have doubled my money in those 15 years easily and deducted the mortgage interest on my taxes, plus the odds of me having lost money would be slim, even if I tossed it all in total stock market mutual funds.

This is really about doing what you're comfortable with. I disagree with the idea that paying off the mortgage ahead of time is in your best financial interests, even if you can't write off any of the interest. You can easily earn more than 2.75% by investing. You can also lose money, but if you're investing for a long duration, the odds are heavily tilted in your favor.

You're in the 35% tax bracket, right? Municipal bonds in a taxable account is the best place to keep the payoff fund. Here are 4 VG tax-exempt funds that may be of interest to you (duration of bond fund is in parenthesis, in years). They are all exempt from federal taxes, but the 4th one is also exempt from CA taxes (ignore this if you live elsewhere): The rule of thumb is to pick a fund with a duration that matches the length of time for your investment horizon. Based on this, you'd probably be best with the short-term fund. You'd probably be OK in the other funds, but interest rates may very well rise enough in the next 2 years to make the limited-term fund a better choice. If rates rise by 1%, you'll lose about 5% in the intermediate bond fund, 2.4% in the limited-term fund and 1% in the short-term fund. Reaching for yield may very well cost you.

You're a long way from retirement, right? If this were my money, I'd squirrel away few thousand every month in equities in a taxable account (which is what I do every month, since all my tax-deferred and tax-free space is full) and pay the minimum amount on my mortgage. For any mid-term goals (< 10 years); I'd put the money in bonds. My emergency fund is in VG's limited-term tax-exempt fund (I'm in the 28% bracket).

This is one of the cheapest loans you're ever going to have (unless you get a loan on a new or late-model car). The only reasons I can think of for paying it off is the peace of mind of being debt-free and the safety of not coming up short on cash (which doesn't sound like a huge concern in your case). Having the loan will help your credit, too, which is probably not a huge concern in your case.

Bonds are a good vehicle for money that you know you may need over some limited duration, like a vacation or a large purchase or an emergency. If you do choose to pay off the mortgage early, they're a good place to hold the money in the interim, but the interest you pay on the mortgage will almost definitely be a larger amount of money than your returns from the bonds.

letsgobobby
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Re: paydown strategy for mortgage

Post by letsgobobby » Sun Apr 20, 2014 1:17 pm

This is what I do. My mortgage rate is so low that I don't expect to pay off the mortgage early unless I sell my home, so I don't have a dedicated mortgage payoff fund; instead, I make my taxable investments in stock, and hold bonds in my retirement account.
As grabiner wrote, that is exactly what we do as well.

jji
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Re: paydown strategy for mortgage

Post by jji » Sun Apr 20, 2014 4:44 pm

We are in a similarish situation, and have the same dilemma constantly.

$280k mortgage, about $540k equity, 3.5% 30-year fixed. We have btn $1mm and $1.2mm in other assets, depending on whether you count unvested restricted stock from my company and 529s for my kids.

We've been pretty aggressive so far in paying down our mortgage, and refi-ing down from 6% fixed.

Our income is between $300k and $600k depending on bonuses, etc.

I'm inclined to continue to pay down for the peace of mind.

chak
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Re: paydown strategy for mortgage

Post by chak » Sun Apr 20, 2014 8:15 pm

Thanks everyone for your generous advice. We got some thinking to do for sure. It seems like there is no one answer to address our situation. We probably will take a middle route by taking a little longer to pay off the mortgage while keep investing any disposable income. :sharebeer

Buffetologist
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Re: paydown strategy for mortgage

Post by Buffetologist » Mon Apr 21, 2014 3:27 am

Same situation here.

We have a 2.75% mortgage with 9 years remaining.

I calculated that it costs me 1.63% after tax because our state taxes use up our entire standard deduction, and therefore the entire mortgage is deductible.

Vanguard Intermediate Term Tax Exempt Admiral is paying 2.03% after tax (based on 30 day SEC yield, Massachusetts tax)
Vanguard Long Term Tax Exempt is paying 2.93% after tax (same assumptions).

Instead of paying off the mortgage why not buy one of these. You bear a little credit risk, but it's an acceptable risk in my opinion.

I view the mortgage as a short position on bonds, and the Vanguard as a long position netting me a positive return.

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grabiner
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Re: paydown strategy for mortgage

Post by grabiner » Mon Apr 21, 2014 5:46 pm

Buffetologist wrote:Same situation here.

We have a 2.75% mortgage with 9 years remaining.

I calculated that it costs me 1.63% after tax because our state taxes use up our entire standard deduction, and therefore the entire mortgage is deductible.

Vanguard Intermediate Term Tax Exempt Admiral is paying 2.03% after tax (based on 30 day SEC yield, Massachusetts tax)
Vanguard Long Term Tax Exempt is paying 2.93% after tax (same assumptions).
Paying off a 9-year mortgage has a duration of about 4.5 years, so the intermediate-term muni fund has more interest-rate risk than a mortgage paydown, as well as the slight credit risk. If you can pay off the whole mortgage, that is probably better than investing in the munis.

If you can't pay off the whole mortgage quickly, then extra payments have a duration of 8-9 years, and then the intermediate-term muni fund comes out ahead.

That's why I recommended that the OP pay off the mortgage, as he can pay the whole thing off and get the benefit of short-term investments with intermediate-term returns. And it's why I don't pay mine down at a similar rate, as I can't pay the whole thing off without a huge tax bill (selling a lot of taxable stock), and I won't get a benefit from a partial paydown for 14 years.
Wiki David Grabiner

Buffetologist
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Re: paydown strategy for mortgage

Post by Buffetologist » Mon Apr 21, 2014 8:59 pm

So you wouldn't take 40 more after-tax basis points with only slightly more credit (AA) and duration risk (5.2 years vs 4.5 years) ? On a 200K mortgage that's $800 per year of cash money. I thought about doing the LT Tax Free for an extra 100 basis points (1%) .

Norsky19
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Re: paydown strategy for mortgage

Post by Norsky19 » Tue Oct 04, 2016 12:51 am

Not to hijack, But I have a similar question. I have a 5 year, 5.5% balloon loan from a credit union. I am hoping to pay off the entire loan before the balloon is due. I have had people question why I want to pay it off...they think I should just pay the minimum payment and in 5 years refinance the principle. I max out my 401k and contribute 2000 to taxable accounts as well. My minimum loan payment is 996 but I am going to put 3000 so the additional 2000 goes to principle. Mistake or good strategy?

Carl53
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Re: paydown strategy for mortgage

Post by Carl53 » Tue Oct 04, 2016 1:55 am

Norsky19 wrote:Not to hijack, But I have a similar question. I have a 5 year, 5.5% balloon loan from a credit union. I am hoping to pay off the entire loan before the balloon is due. I have had people question why I want to pay it off...they think I should just pay the minimum payment and in 5 years refinance the principle. I max out my 401k and contribute 2000 to taxable accounts as well. My minimum loan payment is 996 but I am going to put 3000 so the additional 2000 goes to principle. Mistake or good strategy?
good

orca91
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Re: paydown strategy for mortgage

Post by orca91 » Tue Oct 04, 2016 6:32 am

Hijack.... can one actually hijack a 2 1/2 year old thread? Resurrect is probably a better word choice. :happy

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