2.875% mortgage pay-off financially justifiable?

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Danzangdc
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Re: 2.875% mortgage pay-off financially justifiable?

Post by Danzangdc »

Another way to think of the mortgage payoff vs. investing question is to think of it in terms of asset allocation. If the OP's chosen AA is 50/50 stocks/bonds, and if the mortgage is treated as similar to an ultra low-risk bond, then it does not make sense to dump a lot of cash on the mortgage. The cash should be allocated 50% to stocks and 50% into bonds-or-mortgage, depending on what prevailing rates are.
inbox788
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Re: 2.875% mortgage pay-off financially justifiable?

Post by inbox788 »

Earl Lemongrab wrote:
inbox788 wrote:
Earl Lemongrab wrote:Not in my book. Mortgage rates under discussion are cheap leverage and likely to reap benefits down the line.
It's a different question using the mortgage monies to buy bonds or stocks. And there's always the whatif question; what if you didn't have a mortgage. Would you take out a 2-3% long dated mortgage to invest in stocks, bonds or other?
No only would I, but I did. Well, not as long-dated as I would have liked, it would have been even better as a 15 or 30 year loan. I would certainly consider another low-rate loan for investing if the opportunity were right.

I am not afraid of debt, or loans. At all.
Are you 100% stock AA? And if not, what bonds do you own? CDs? Savings accounts? Other cash like? Emergency fund?
Nick341981
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Re: 2.875% mortgage pay-off financially justifiable?

Post by Nick341981 »

Kevin M wrote:
Nick341981 wrote: At 2.8% I would borrow as much money as the bank would loan me and hopefully at a 30 year term. It's an odds game of course but I really like my odds of coming out ahead in that situation
Does this mean your AA is 100% stocks, and that you'd like an even higher allocation to stocks?

Yield on the 20-year Treasury is just about 2.8%, so if you hold any bonds with less term risk, then selling them to buy more stocks is comparable to borrowing money at 2.8% or less (risk adjusted) to buy stocks. Either way you effectively lower your allocation to bonds and increase your allocation to stocks.

Kevin
Yes, 100% stock, all S&P 500 index, basically the Warren Buffett recommend portfolio. $200,000 mortgage financed at 2.35% for 30 years and will not pay off early even though I have way more than enough in the stock market to do so. Like I said I would have gladly borrowed at least 500k at that rate if not for high property taxes, insurance, maintence bills etc. If the bank wants to loan me a ton of money at the same rate of inflation I'll take it. I like the odds of the S&P500 beating the pants off the rate of inflation over the next 30 years.
Grogs
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Re: 2.875% mortgage pay-off financially justifiable?

Post by Grogs »

I have a 20 year mortgage at 3%. After deductions, it ends up being something like 2.4% effective. I was paying it down for the first four years, but a few months ago I decided to quit and invest the extra in my taxable account instead. My reasoning was

1) I have enough equity in the house now that barring something worse than 2008, I should be able to sell it cost-free if I absolutely had to.
2) If things do go south, I would rather have the money in liquid investments that I could use to pay for several years worth of expenses rather than locked into home equity.
3) I think it's likely market returns will exceed the 2.4% return I would get for paying down the mortgage.
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Earl Lemongrab
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Re: 2.875% mortgage pay-off financially justifiable?

Post by Earl Lemongrab »

inbox788 wrote:Are you 100% stock AA? And if not, what bonds do you own? CDs? Savings accounts? Other cash like? Emergency fund?
No, and I'm not sure what that has to do with it. I have a 60/40 allocation. I don't consider outstanding loans against the house or its equity to be part of the asset allocation.
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grabiner
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Re: 2.875% mortgage pay-off financially justifiable?

Post by grabiner »

Earl Lemongrab wrote:
inbox788 wrote:Are you 100% stock AA? And if not, what bonds do you own? CDs? Savings accounts? Other cash like? Emergency fund?
No, and I'm not sure what that has to do with it. I have a 60/40 allocation. I don't consider outstanding loans against the house or its equity to be part of the asset allocation.
If you have bonds, then you can look at the investment options discussed on the wiki:

1. Invest the money with your preferred allocation.
2. Invest the money in bonds.
3. Pay down the loan and move an equal amount of money from bonds to your preferred allocation.
4. Pay down the loan and leave the investments unchanged.

You are considering option 1. But since you have bonds, you could also choose option 3. Either one leaves you the same amount in stock, and thus the same exposure to stock-market risk. If your mortgage rate is higher than the rate on low-risk bonds of the same duration, then option 3 is better than option 1. This doesn't mean you should choose option 1; option 2 might be better than either.

In contrast, if you don't have any bonds, then you don't have option 3. You might prefer option 4 to 2 because of your mortgage rates, and prefer 3 to 1 if it were allowed, but you could still choose option 1 given that 3 is not allowed.

I do have some bonds, but my mortgage rate is so low (as is the OP's rate) that I prefer 1 to 3, and 2 to 4. Therefore, I choose only between 1 and 2 when I have new money, and I prefer 1 because I don't need any more bonds now.
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inbox788
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Re: 2.875% mortgage pay-off financially justifiable?

Post by inbox788 »

grabiner wrote:
Earl Lemongrab wrote:
inbox788 wrote:Are you 100% stock AA? And if not, what bonds do you own? CDs? Savings accounts? Other cash like? Emergency fund?
No, and I'm not sure what that has to do with it. I have a 60/40 allocation. I don't consider outstanding loans against the house or its equity to be part of the asset allocation.
If you have bonds, then you can look at the investment options discussed on the wiki:

1. Invest the money with your preferred allocation.
2. Invest the money in bonds.
3. Pay down the loan and move an equal amount of money from bonds to your preferred allocation.
4. Pay down the loan and leave the investments unchanged.

You are considering option 1. But since you have bonds, you could also choose option 3. Either one leaves you the same amount in stock, and thus the same exposure to stock-market risk. If your mortgage rate is higher than the rate on low-risk bonds of the same duration, then option 3 is better than option 1. This doesn't mean you should choose option 1; option 2 might be better than either.

In contrast, if you don't have any bonds, then you don't have option 3. You might prefer option 4 to 2 because of your mortgage rates, and prefer 3 to 1 if it were allowed, but you could still choose option 1 given that 3 is not allowed.

I do have some bonds, but my mortgage rate is so low (as is the OP's rate) that I prefer 1 to 3, and 2 to 4. Therefore, I choose only between 1 and 2 when I have new money, and I prefer 1 because I don't need any more bonds now.
That's a lot of bonds. So how much are bonds returning? How much is the mortgage? Which is lower tax adjusted (in the best case bonds adjusted for long term capital gains vs mortgage adjusted for ordinary income). At today's rates, mortgage generally is higher than bonds and bonds carry more risk, so I would look at option 3 to be the most consistent. I'm afraid another option is also on the table, "0. Invest the money in equities"! :shock:

I think for many people, paying down or paying off the mortgage with bonds is a beneficial arbitrage, and you replenish the bonds by buying them with the monies that would have gone to mortgage. And on top of that, you benefit if interest rates rise.
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grabiner
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Re: 2.875% mortgage pay-off financially justifiable?

Post by grabiner »

inbox788 wrote:
grabiner wrote:If you have bonds, then you can look at the investment options discussed on the wiki:

1. Invest the money with your preferred allocation.
2. Invest the money in bonds.
3. Pay down the loan and move an equal amount of money from bonds to your preferred allocation.
4. Pay down the loan and leave the investments unchanged.

I do have some bonds, but my mortgage rate is so low (as is the OP's rate) that I prefer 1 to 3, and 2 to 4. Therefore, I choose only between 1 and 2 when I have new money, and I prefer 1 because I don't need any more bonds now.
That's a lot of bonds. So how much are bonds returning? How much is the mortgage? Which is lower tax adjusted (in the best case bonds adjusted for long term capital gains vs mortgage adjusted for ordinary income). At today's rates, mortgage generally is higher than bonds and bonds carry more risk, so I would look at option 3 to be the most consistent.
My mortgage is 2.625% with 12 years left (I paid a lot of points to get that rate three years ago), which is 1.89% after tax in my 28% bracket. A Vanguard muni portfolio with the same duration as my whole mortgage (if I had enough cash to pay it all off) would yield 2.4%.
I'm afraid another option is also on the table, "0. Invest the money in equities"! :shock:
I consider that part of 1, as it could be your preferred allocation. My own allocation is 94% stock (counting the mortgage as a negative bond), so I put essentially all my new money in stock.
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hudson
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Re: 2.875% mortgage pay-off financially justifiable?

Post by hudson »

Shredder wrote:If it were me i'd pay it off. I am debt averse :)
I'm with Shredder.
I would pay it off as soon as possible and practical.
I would pay off any other debts and be debt free.
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Earl Lemongrab
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Re: 2.875% mortgage pay-off financially justifiable?

Post by Earl Lemongrab »

hudson wrote:I would pay it off as soon as possible and practical.
I would pay off any other debts and be debt free.
That doesn't sound financially justifiable, the topic of the thread. Sounds emotional. I try to keep emotions out finances, as it leads to bad decisions.
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BrandonBogle
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Re: 2.875% mortgage pay-off financially justifiable?

Post by BrandonBogle »

Earl Lemongrab wrote:
hudson wrote:I would pay it off as soon as possible and practical.
I would pay off any other debts and be debt free.
That doesn't sound financially justifiable, the topic of the thread. Sounds emotional. I try to keep emotions out finances, as it leads to bad decisions.
Agreed that this is an emotional decision.

I for one am not debt-adverse where it makes sense. I've actually started the ball rolling on a cash-out refi at 2.875% since I personally prefer to eat up the money at that rate versus trying to be debt-free.

That said, there are worse emotional decisions that one can make. So for an individual where the emotional value to paying off a 2.875% mortgage early is worth it, go ahead. Don't kid yourself that you are doing it for the "Best Financial Reasons"®, but you are not going to hurt your financial life in any meaningful way by paying it off. Just as with getting an AA that lets you sleep at night, if paying off the mortgage lets you sleep better at night, go for it.
hawkfan55
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Re: 2.875% mortgage pay-off financially justifiable?

Post by hawkfan55 »

the government will still come take it of you don't pay them each year a percentage of its value...ergo it is really not yours anyway
This is true! I don't know from personal experience but I doubt many on this board will have that problem :D

We have 11 years left on our mortgage at 2.75%. We paid off our last home and did not have a mortgage for 5 years. It was a goal and we reached it... nice. New house built 4 years ago and, since we put our previous home sale receipts against the new home mortgage, our mortgage cost is reasonable. I'm newly retired and we are able to afford our expenses without worry. 8-)

You should do what you are most comfortable with. Many times, I've found a middle ground works well for me.
Forum Library of Investing Advice: https://www.bogleheads.org/wiki/Main_Page
hudson
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Re: 2.875% mortgage pay-off financially justifiable?

Post by hudson »

Earl Lemongrab wrote:
hudson wrote:I would pay it off as soon as possible and practical.
I would pay off any other debts and be debt free.
That doesn't sound financially justifiable, the topic of the thread. Sounds emotional. I try to keep emotions out finances, as it leads to bad decisions.
Thanks for your response! You're making me think.

Emotional?...guilty
Bad decisions?...yes
financially justifiable? depends

I think that being debt free is a great goal for starting retirement and during retirement....or at any point in time. A friend of mine always remarked that poor folks would never have anything if they couldn't borrow.

I think being debt free and borrowing could be 2 separate philosophies or ways of living. Is either philosophy bad or wrong?

It doesn't look like the OP is a spendthrift but there are many out there. No debt is a great goal or part of the cure maybe for a spender.

I was more of a spender than a saver until I started reading bogleheads; I actually thought that someone would be crazy to buy a vehicle or residence without a loan. Before Bogleheads, I never considered maxing out a 401K, Roth,or buying 10K worth of IBonds. I always just borrowed automatically...in fact I never even knew anyone who paid cash.

The thread is two years old...but everyone already knew that.
hudson
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Post by hudson »

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Last edited by hudson on Sat Apr 22, 2017 12:12 pm, edited 2 times in total.
Dottie57
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Re: 2.875% mortgage pay-off financially justifiable?

Post by Dottie57 »

It is always fine to payoff a mortgage.
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