Looking to payoff mortgage

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
noco-hawkeye
Posts: 237
Joined: Sat Aug 16, 2014 8:20 am

Looking to payoff mortgage

Post by noco-hawkeye » Thu Apr 20, 2017 4:07 pm

I am posting this partly looking for feedback, but also I am fairly sure on what steps I will take next. Maybe someone has a point of view or an idea that I have not thought of yet - but here goes....

Background info:
Married couple, two kids (14 and 10). Both parents are working, in their early 40s. We have somewhere between 15-20X our annual expenses in retirement accounts. We have about 50% of the expected cost of a basic 4yr public university saved in each of our kids 529s currently. We max out 401ks and roths each year, but 529 contributions are very infrequent.

The interesting part:
I have a windfall where I could pay off my mortgage. My mortgage is a 4yr old 15yr product at 2.75%. If I make the bare min payment, I could be done in about 7-8 yrs (I have pre-payed a bit, am ahead of schedule). The other thing I could do is take that same amount, and get both 529s to be pretty much 100% funded (if college costs don't go too crazy).

This doesn't make a lot of mathematical sense, but I think I want to pay off the mortgage and redirect the monthly payments into the 529s. I know this return of about 2% is pretty low, but I also think investing in a high schoolers 529 will have a low return as well. Also, I want to retire first and foremost. I do not have a problem if my kids take on some debt in school - within a healthy range. The other part of getting rid of the mortgage is that we could also use monthly cash flow to cover college (at least when we have 1 kid in school). My biggest fear placing this windfall in the market (be that 529 or anything else) is that I would regret having passed up this option to dump the mortgage. The 529 in my state does offer a tax break of about 4%.

I have read the threads on how happy dumping the mortgage makes everyone, but I am posting this just in case there are some other ideas / angles to consider.

Thanks in advance :sharebeer

bloom2708
Posts: 2925
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

Re: Looking to payoff mortgage

Post by bloom2708 » Thu Apr 20, 2017 4:42 pm

I'm a big fan of being debt/mortgage free. You do have a nice low rate so you will get some feedback suggesting you shouldn't pay it off.

A couple things to consider. The 14 year old and 10 year old do not have to have the same 529/college funds at this point. Will the amount just cover your mortgage or any left over to pad the oldest's 529 a bit?

Another topic to think about, we saved 50% of expected college expenses in the 529 and 50% in a Vanguard taxable account. Quite conservative 30% Total US Stock, 70% Int-Term Tax-Exempt Bond index. Moving to all bonds as college approaches. Then to more of a Limited-Term.

The thinking is that a kid might get scholarships, might only attend a 2 year school, might attend no college. If you fully load up a 529, you can move from one kid to the next. We fell in the middle and funded both ways. If there is extra taxable left over, that can be a wedding fund or car or start of an investment account. Or, we can keep it if a kid doesn't live up to our paying for college. I hope that doesn't happen, but who knows.

Paying off the mortgage, you can move the payment to the 529/taxable strategy and work toward fully funding. With 4 years left for the oldest, not sure if you have time on your side, but you could put a good dent and cashflow some during the first years. Lots of options.

My vote would be to pay off the mortgage. We paid ours off in 2007. No regrets. Oldest is 17, college is close. 14 and 9 to follow. :wink:
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

sport
Posts: 6127
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Re: Looking to payoff mortgage

Post by sport » Thu Apr 20, 2017 4:46 pm

A mortgage with a rate that low is costing you very little, especially after taxes. Almost certainly you have better places to put that money rather than paying it off any earlier than necessary.

noco-hawkeye
Posts: 237
Joined: Sat Aug 16, 2014 8:20 am

Re: Looking to payoff mortgage

Post by noco-hawkeye » Thu Apr 20, 2017 5:24 pm

bloom2708 wrote: The 14 year old and 10 year old do not have to have the same 529/college funds at this point. Will the amount just cover your mortgage or any left over to pad the oldest's 529 a bit?
We have a bit more in the 14yr old's account, but they are pretty similar. Yes, we could load up one or the others and have them weighted in a certain way. With the flexibility of the 529s, I don't worry too much who has what amounts, if they are reasonably close or we contribute the same amounts in each.
sport wrote:A mortgage with a rate that low is costing you very little, especially after taxes. Almost certainly you have better places to put that money rather than paying it off any earlier than necessary.
This is not lost on me, that it costs so little - you have a point. My feeling is that "why keep on playing the game if you have already won?" It's not that we have "won", but we are pretty far along in covering retirement costs and getting to financial independence. Would it make more sense to place this money in an investment for another 25 years? Probably - but we could also live those 25 years with a bit more flexibility in our budget too. This is the part where it doesn't make sense math-wise, but more emotionally for our well being.

mortfree
Posts: 606
Joined: Mon Sep 12, 2016 7:06 pm

Re: Looking to payoff mortgage

Post by mortfree » Thu Apr 20, 2017 5:53 pm

If it's under 100k pay it off.

Any more than that and I would probably not pay it off.

noco-hawkeye
Posts: 237
Joined: Sat Aug 16, 2014 8:20 am

Re: Looking to payoff mortgage

Post by noco-hawkeye » Sat Nov 18, 2017 9:12 am

Follow up for this thread - today the wife and I will go to the credit union and PAY OFF THE MORTGAGE! :sharebeer :beer

This year has been a bit strange in that I've had a few different jobs. One of those jobs had a significant severance package this year, and I didn't want to make the final payment on the mortgage until I was in a new job that felt more solid (which I'm now in).

After paying off the mortgage we are at about 20X retirement expenses, about 65% of the 529s funded for a 4yr public school(for both kids), and about 1.5 yrs of expenses in an emergency fund. Extra cash flow will now go into the 529s, as well as some of the emergency fund into the 529s. We are in our early 40s.

This is one of those posts that I can make on bogleheads and maybe to parents, but won't really tell friends / coworkers about. I'm pretty happy, and appreciate this forum a great deal - it really helps keep my head straight. Thanks to all!

WalterMitty
Posts: 99
Joined: Fri Sep 05, 2014 8:49 pm

Re: Looking to payoff mortgage

Post by WalterMitty » Sat Nov 18, 2017 1:49 pm

noco-hawkeye wrote:
Sat Nov 18, 2017 9:12 am
Follow up for this thread - today the wife and I will go to the credit union and PAY OFF THE MORTGAGE! :sharebeer :beer

This year has been a bit strange in that I've had a few different jobs. One of those jobs had a significant severance package this year, and I didn't want to make the final payment on the mortgage until I was in a new job that felt more solid (which I'm now in).

After paying off the mortgage we are at about 20X retirement expenses, about 65% of the 529s funded for a 4yr public school(for both kids), and about 1.5 yrs of expenses in an emergency fund. Extra cash flow will now go into the 529s, as well as some of the emergency fund into the 529s. We are in our early 40s.

This is one of those posts that I can make on bogleheads and maybe to parents, but won't really tell friends / coworkers about. I'm pretty happy, and appreciate this forum a great deal - it really helps keep my head straight. Thanks to all!

AWESOME-SAUCE!!!! Congrats!

It should feel great. At least if you are as much of an anti "debter" like me. And other than my wife, no one really knows. Please treat yourself to some reward though.

User avatar
TxAg
Posts: 1058
Joined: Sat Oct 17, 2009 11:09 am

Re: Looking to payoff mortgage

Post by TxAg » Sat Nov 18, 2017 1:56 pm

sport wrote:
Thu Apr 20, 2017 4:46 pm
A mortgage with a rate that low is costing you very little, especially after taxes. Almost certainly you have better places to put that money rather than paying it off any earlier than necessary.
+1

We have a 2.5% 15 yr. and are not paying it off early.



Edit: congrats!

User avatar
Watty
Posts: 11782
Joined: Wed Oct 10, 2007 3:55 pm

Re: Looking to payoff mortgage

Post by Watty » Sat Nov 18, 2017 2:20 pm

Congratulations :beer

Where people have done this before a few things to double check on;

1) Make sure that your property tax and home insurance gets paid even if you do not get a statement.

2) Have your home insurance company takes the lender off your home insurance policy.

3) In a few months check with your local county or whoever keeps track of home liens in your area to make sure that the mortgage lien was actually removed. In some areas you may be able to do this on line. Be sure to do this even if you get paperwork saying that the lien was removed. Mistakes sometimes happen and they will be much easier to fix now. There was a post a while back by someone that was trying to sell their parents home to settle their estate. It turned out there was still a mortgage lien for a loan that had been paid off decades before and the bank had been merged with other banks multiple times so they were long out of business.

Garthilk
Posts: 45
Joined: Wed Oct 09, 2013 10:59 pm

Re: Looking to payoff mortgage

Post by Garthilk » Sat Nov 18, 2017 2:22 pm

Congrats on the accomplishment. Check back in a few months and tell us how has the pressure of having a house payment lifted feels.

BogleBoogie
Posts: 493
Joined: Tue May 13, 2014 11:15 am
Location: AK

Re: Looking to payoff mortgage

Post by BogleBoogie » Sat Nov 18, 2017 8:00 pm

A rate of 2.75% after deducting the mortgage interest (depending on your tax bracket) is likely working out to under 2%. I'm not convinced taking a large sum of money and paying off the house is the best option. You should be able to do much better than sub-2% with the money you have. I know this is a debated topic in terms of pay off mortgage or utilize the money to be more efficient than the mortgage cost...

User avatar
Watty
Posts: 11782
Joined: Wed Oct 10, 2007 3:55 pm

Re: Looking to payoff mortgage

Post by Watty » Sat Nov 18, 2017 9:25 pm

Even though the interest rate is was low investing the money and getting a higher return is harder than it might sound because of the sequence of returns risk. Here is an example I have posted before.
 If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To break even the next year you would need to gain back the $16K and another $6,000 for the next years mortgage payments which is $22K. That would take a 25.6% return on the remaining $84K just to break even.

noco-hawkeye
Posts: 237
Joined: Sat Aug 16, 2014 8:20 am

Re: Looking to payoff mortgage

Post by noco-hawkeye » Sat Nov 18, 2017 10:25 pm

I get the concerns about paying off a low rate on a mortgage. It's not something I did without first thinking about it first.

If I had 10x expenses saved - then saving an extra 1-2x expenses is worth some marginal amount to me. If I have 20x expenses saved, then saving an extra 1-2x expenses is worth some diminished amount to me. This was my thinking, at least. I am pretty good on retirement savings, on kids college savings. I think it helps to view the marginal value on increased savings to people as well. This is something where I had the chance to pay off my mortgage, and took it.

I realize that the optimal solution probably would have been to place this money in the market for 20 years, and pay as little as possible on the mortgage. That's not what I decided, but I'm ok with the fact that there are multiple paths to financial independence. These threads on paying off low rate mortgages are not something we all agree upon, but I'm ok with my balance sheet right now. I'll sleep like a baby in my house that I own. :wink:

User avatar
willthrill81
Posts: 2362
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Looking to payoff mortgage

Post by willthrill81 » Sat Nov 18, 2017 10:38 pm

BogleBoogie wrote:
Sat Nov 18, 2017 8:00 pm
A rate of 2.75% after deducting the mortgage interest (depending on your tax bracket) is likely working out to under 2%. I'm not convinced taking a large sum of money and paying off the house is the best option. You should be able to do much better than sub-2% with the money you have. I know this is a debated topic in terms of pay off mortgage or utilize the money to be more efficient than the mortgage cost...
Remember that 70% of income tax filers take the standard deduction, so they get no 'cut' in their interest rate. Even those that do itemize are, effectively, only benefiting by the amount of deductions beyond what they would otherwise get with the standard deduction. For many that itemize, this greatly reduces the marginal benefit of the mortgage interest deduction.

I've heard many say that money that would go toward paying off the mortgage early should just invest it in stocks instead (since you aren't going to arbitrage much/any by investing in bonds instead). They say that you could just pay off the mortgage later if you wanted to. The risk here, however, is that stocks might be down 30-50% when you also find yourself to be unemployed and really wishing you didn't have a monthly mortgage payment.
Last edited by willthrill81 on Sat Nov 18, 2017 10:51 pm, edited 1 time in total.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
willthrill81
Posts: 2362
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Looking to payoff mortgage

Post by willthrill81 » Sat Nov 18, 2017 10:43 pm

noco-hawkeye wrote:
Sat Nov 18, 2017 10:25 pm
I get the concerns about paying off a low rate on a mortgage. It's not something I did without first thinking about it first.

If I had 10x expenses saved - then saving an extra 1-2x expenses is worth some marginal amount to me. If I have 20x expenses saved, then saving an extra 1-2x expenses is worth some diminished amount to me. This was my thinking, at least. I am pretty good on retirement savings, on kids college savings. I think it helps to view the marginal value on increased savings to people as well. This is something where I had the chance to pay off my mortgage, and took it.

I realize that the optimal solution probably would have been to place this money in the market for 20 years, and pay as little as possible on the mortgage. That's not what I decided, but I'm ok with the fact that there are multiple paths to financial independence. These threads on paying off low rate mortgages are not something we all agree upon, but I'm ok with my balance sheet right now. I'll sleep like a baby in my house that I own. :wink:
+1

Good for you! We're working to do the same thing and should be mortgage free in about three years.

A very real benefit of having no mortgage is the usually big boost it provides to your cash flow. If you find yourself down the road either unemployed or underemployed and earning less than you do now, I would imagine that you would rather have no required monthly payment than a corresponding amount invested in stocks (because you wouldn't be likely to get much/any benefit by investing in bonds), which could be down 50% at the same time that you became unemployed or underemployed.

I've only heard of a couple of people who paid their mortgage off early and questioned it at all afterward.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

sport
Posts: 6127
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Re: Looking to payoff mortgage

Post by sport » Sun Nov 19, 2017 1:01 am

Most of this discussion does not consider long term possibilities. A mortgage is a long term arrangement. We know what interest rates are now, but what will they be in 5 or 10 years? Here is my real life experience from a long time ago: I had a 6.75% mortgage that was a good rate at the time. At one point during the 20 year life of that loan, my money market fund was paying me 18%. My bank offered to lend me additional money at the bargain rate of only 14% if I would refinance that loan. I was very happy to have that mortgage and, of course, had no thoughts of paying it off early. Will that sort of situation occur going forward? Maybe yes, maybe no. So, if I had a mortgage with a nice low rate, I would consider it a hedge against rising interest rates. I also could probably invest the money and have gains in excess of the mortgage rate. I always felt that having the money to pay off the loan was just as good as actually paying it off, plus I had the liquidity. It worked out just fine for me.

Post Reply