Not Another Payoff The Mortgage Thread....

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SJR
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Not Another Payoff The Mortgage Thread....

Post by SJR » Sun May 28, 2017 3:32 pm

I know that the question has been asked many times and the answer is that it's usually a matter of preference. Personally, I have made such a decision already, but I am starting to question it now. Perhaps some of you can provide some feedback and unbiased thought to help me sort through my confusion.

I bought a house almost 2 years ago with a 30 year 4.25% mortgage. Last summer I refinanced to a 15 year 2.875% (and reduced the loan amount).

My plan was then save as much as possible and to pay it all off once I had enough. I'm not quite there yet but am getting pretty close. Here are the list of Pros and Cons that I've made note of for paying it off as soon as I can. (The 3 pros are basically matched against 3 cons)

Pros:
-Emotional feeling of freedom from debt (have no other debt besides for a cheap car lease).
-Free up future cash flow to be used as I see fit (invest in the market most likely on a monthly basis without second thought).
-Clear the road -so to say- for my long-term financial plan (right now things are hazy and I'm not taking action as I otherwise should/would)

Cons:
-Interest rates are rising and this money is likely the cheapest money I'll ever lay my hands on. (Am anyways making monthly principal payments so the loan duration will be substantially less than 15 years).
-Money is tied up until I sell the house and basically 0 chance of getting money so cheaply in the future if needed (ie for expensive home improvement projects which will eventually be a consideration, or to bankroll a new business opportunity [business I own is disruptive and not a stable profession].
-Perhaps it is too soon to put the pedal to the metal with my longer term goals.

DW and I currently max out all retirement options. We have 1 year (perhaps more) of EF as well.

Assuming I decide to keep the mortgage I then have 2 options for how to use the money- invest in a 40/60-60/40 portfolio (haven't decided yet) or try to cover the interest expense from the mortgage (ie 2.5% 5 year CD or 1.75% 18 month CD [in the hopes that rates increase further to the point that I'm at break even or making money after the 18 month term]). I also have access to some bank accounts that I can earn between 2%-2.27% on a limited amount of money (25-35k), x2 (for DW and me), but would have to jump through some hoops monthly. (PM me if you are interested in opening one for yourself; I'd be happy to share the info)

I really would like to pay it off and be done with it, but my concern of 1. getting a mediocre return on that money and 2. tying it up without being more settled across all fronts is causing me to think twice.

What would you do?

livesoft
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Re: Not Another Payoff The Mortgage Thread....

Post by livesoft » Sun May 28, 2017 3:56 pm

I would not pay it off. I started a thread on that today:
viewtopic.php?f=10&t=219886
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mortfree
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Re: Not Another Payoff The Mortgage Thread....

Post by mortfree » Sun May 28, 2017 4:04 pm

If you don't pay off the mortgage it appears you will be investing conservatively - makes sense. But at the end of the day you still have a mortgage and will have made some money relative to the mortgage interest.

If you do pay it off then you will feel free to invest without limitations.

Depending on your age, income, mortgage balance and cash savings I think if you are under 45 and the mortgage is less than 100k then I would pay it off (I did just that). If it is more than 100k then you may want to invest it.

There are other calculations for determining this. in the end the math only goes so far.

The freedom to invest how you want is priceless. However dumping a large amount of money to an illiquid asset really puts an end to the compounding of money over time.

Good luck

retire57
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Re: Not Another Payoff The Mortgage Thread....

Post by retire57 » Sun May 28, 2017 4:11 pm

Agree that this is less about math and more about how badly you want to be free of debt.

cherijoh
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Re: Not Another Payoff The Mortgage Thread....

Post by cherijoh » Sun May 28, 2017 4:48 pm

smokey joe robinson wrote:I know that the question has been asked many times and the answer is that it's usually a matter of preference. Personally, I have made such a decision already, but I am starting to question it now. Perhaps some of you can provide some feedback and unbiased thought to help me sort through my confusion.

I bought a house almost 2 years ago with a 30 year 4.25% mortgage. Last summer I refinanced to a 15 year 2.875% (and reduced the loan amount).

My plan was then save as much as possible and to pay it all off once I had enough. I'm not quite there yet but am getting pretty close. Here are the list of Pros and Cons that I've made note of for paying it off as soon as I can. (The 3 pros are basically matched against 3 cons)

Pros:
-Emotional feeling of freedom from debt (have no other debt besides for a cheap car lease).
-Free up future cash flow to be used as I see fit (invest in the market most likely on a monthly basis without second thought).
-Clear the road -so to say- for my long-term financial plan (right now things are hazy and I'm not taking action as I otherwise should/would)

Cons:
-Interest rates are rising and this money is likely the cheapest money I'll ever lay my hands on. (Am anyways making monthly principal payments so the loan duration will be substantially less than 15 years).
-Money is tied up until I sell the house and basically 0 chance of getting money so cheaply in the future if needed (ie for expensive home improvement projects which will eventually be a consideration, or to bankroll a new business opportunity [business I own is disruptive and not a stable profession].
-Perhaps it is too soon to put the pedal to the metal with my longer term goals.
Ok here's my 2 cents worth:
Pro #1 - IMO it is all in your mind and how you frame it. Let's look at the alternatives to paying down your mortgage. At one extreme, you spent all the money that could have been used to pay off the mortgage and when you finally pay it off you are still far away from meeting your retirement goals. In this case I would agree that you would have been better off paying off your mortgage early.

But at the other extreme, you invest ever cent that would have gone into paying down the mortgage in a diversified portfolio of index funds with a suitable AA. You end up with better diversification between tax-advantaged and taxable investments and home equity. So please think about whether you would really feel more secure having paid off your mortgage vs. knowing that you could pay off your mortgage without breaking a sweat? If you still think that option would give you more satisfaction, I will be scratching my head but I will concede you pro #1

Pro #2 - Another fallacy in my opinion. You seem to be ignoring that saving up the money to pay down your mortgage is impacting CURRENT cash flow. You would still be making your current mortgage payments, right? If you aren't saving extra to pay off the mortgage you would have more current cash flow. So why is future cash flow better than current cash flow?

Pro #3 - I'm not sure what you are trying to get at here, but it sounds like you want to use "saving up to pay off the mortgage" as an excuse to kick the "retirement planning" can down the road. :confused

Con #1 - You hit the nail on the head with this one. People focus on the interest they are saving by paying off their mortgage but totally ignore the fact that the P&I payment stays the same for the life of the loan and they are paying it off in cheaper dollars! My parents bought their house in the early '60s with a 4.75% VA loan. Then the '70s and double digit inflation hit. My parents paid off their loan on schedule much to the dismay of their mortgage lender. The consumer price index (CPI)had increased over 4.5X in the interim.

Con #2 - Also a very valid point. If you have job or income instability, I would not want to be limited to just home equity or retirement savings in a tax advantaged plan with withdrawal restrictions. You need to look at your finances holistically IMO.

Con #3 - Just like pro # 3, I have no idea what you are trying to get at here.

All in all I would say it makes more sense to stick with your mortgage schedule and start investing NOW in an after-tax investment account.

ff4930
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Re: Not Another Payoff The Mortgage Thread....

Post by ff4930 » Sun May 28, 2017 5:29 pm

Hey there,

I am pretty much on the same boat as you. I have a 15 year loan on a 3% rate. I read through all of these threads and I still come back to this one pro which you have listed:
-Emotional feeling of freedom from debt
This achievement/goal is hard to beat. Many will say, invest your extra principal and you will get more than a 3% return. That seems logical and reasonable, however that still can't beat the emotional feeling of mortgage pay off.



I have made up my mind and will keep putting extra money to principal instead of the market.

Take a look at this thread - viewtopic.php?t=97467

avalpert
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Re: Not Another Payoff The Mortgage Thread....

Post by avalpert » Sun May 28, 2017 5:49 pm

I wouldn't pay it off early - but I don't get emotionally attached when it comes to money. Personally, I'm fine letting the bank subsidize my investments at ~2% post-tax rates - heck I increased my mortgage at that rate last year and would do it again.

If you can't subdue the emotional bias that gives you irrational attachment to being 'debt free' then you have to decide for yourself what that is worth to you.

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Re: Not Another Payoff The Mortgage Thread....

Post by noco-hawkeye » Sun May 28, 2017 6:01 pm

mortfree wrote:...
Depending on your age, income, mortgage balance and cash savings I think if you are under 45 and the mortgage is less than 100k then I would pay it off (I did just that). If it is more than 100k then you may want to invest it.
...

Why does 100k make a difference? The amount should not really be a factor, I imagine. If we are talking about 150k to payoff for someone making 400k / year.... that is different than 95k and the homeowner only making 80k. I'm just curious why 100k is a magic number.

noco-hawkeye
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Re: Not Another Payoff The Mortgage Thread....

Post by noco-hawkeye » Sun May 28, 2017 6:11 pm

I'm in a similar situation. I have the money to pay off the mortgage, but I am unsure if I really want to pull the trigger. Here is one thing that I cannot let go of - What if I take this money, place it in the market - and it drops by 40%! I would not be happy with myself, even though my entire portfolio would also be down 40% and see a bigger drop. This option to have my mortgage gone is just too much to ignore. I think I will pay it off, I'm just waiting a bit before making this decision, in case I can come up with a good argument that changes my mind.

Good luck, there is not really clear cut right / wrong paths here (from what I can tell).

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Re: Not Another Payoff The Mortgage Thread....

Post by Ron Ronnerson » Sun May 28, 2017 6:27 pm

I've been tempted to begin to pay off my loan faster than scheduled since I'll have my mortgage until I'm 68 if I keep to the schedule. It's a 30 year fixed rate loan at 3.25%, but the effective rate is currently close to 2%. On the one hand, it would feel great to not have a mortgage. On the other hand, that feeling will likely come at a price since the rate is low. I've decided to let my brain make the decision instead of my heart - I'm keeping the loan till the end. I expect that inflation will help me out with the payments over the long term. We shall see.

mortfree
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Re: Not Another Payoff The Mortgage Thread....

Post by mortfree » Sun May 28, 2017 6:28 pm

noco-hawkeye wrote:
mortfree wrote:...
Depending on your age, income, mortgage balance and cash savings I think if you are under 45 and the mortgage is less than 100k then I would pay it off (I did just that). If it is more than 100k then you may want to invest it.
...

Why does 100k make a difference? The amount should not really be a factor, I imagine. If we are talking about 150k to payoff for someone making 400k / year.... that is different than 95k and the homeowner only making 80k. I'm just curious why 100k is a magic number.
that was my situation. To me, once I got below 100k I figured I might as well pay it off - I did that over 3 years.

If the OP gave actual numbers my answer could have been different and more specific.

Instead I gave my experience and perspective as an example; it wasn't intended to be a golden rule.

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Re: Not Another Payoff The Mortgage Thread....

Post by grabiner » Sun May 28, 2017 6:42 pm

What is your tax bracket, and can you deduct the interest?

If you are in a 28% tax bracket, the after-tax rate on your mortgage is 2.07%. Paying off your mortgage has a duration of 7 years (weighted average time of all future payments). Vanguard Long-Term Tax-Exempt has a duration of 7 years, and 2.59% yield on Admiral shares. Therefore, even if you could pay off the whole mortgage all at once, you would get a slightly higher return from investing in municipal bonds (with a bit of risk). And you would keep the liquidity.

I just rechecked the same situation for my own mortgage. I am in a 28% bracket, and my 2.625% rate (I paid a lot of points for that) has an after-tax rate of 1.89%. My mortgage has 11 years left, which gives it a duration of 5 years. Admiral shares of Vanguard Intermediate-Term Tax-Exempt yield 1.93%, also with a duration of 5 years. Therefore, if I could pay off the whole mortgage all at once, it would be close to break-even. But I can't pay off the whole mortgage all at once without other costs; I would have to sell stock for a huge capital gain. And paying down only part of the mortgage, shortening it from 11 years to 9, would have a duration of 10 years, which is clearly not worthwhile.
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HomerJ
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Re: Not Another Payoff The Mortgage Thread....

Post by HomerJ » Sun May 28, 2017 7:00 pm

I absolutely HATE debt... And I LOVED the day we paid off the mortgage... But we didn't pay it off the instant we had enough cash to do so.

15-year mortgage is awesome... Just pay extra on it, but also save in taxable account... Half and half with all your extra money.

In 5-8 years, see where you're at...

I don't like the idea of paying off a $200,000 mortgage when you have $210,000 in taxable savings....

But if you have $300,000 or $400,000 in taxable savings? Knock that sucker out!

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Re: Not Another Payoff The Mortgage Thread....

Post by JonnyDVM » Sun May 28, 2017 9:29 pm

I'm pretty debt adverse but debt at <3% with deductible interest ? I'm not jonesing to pay that off. You already are paying it off accelerated with a 15 year payoff vs a 30. I wouldn't be stressing out about paying it down any faster. You can re-evaluate in a decade.
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SJR
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Re: Not Another Payoff The Mortgage Thread....

Post by SJR » Sun May 28, 2017 9:39 pm

mortfree wrote: Depending on your age, income, mortgage balance and cash savings I think if you are under 45 and the mortgage is less than 100k then I would pay it off (I did just that). If it is more than 100k then you may want to invest it.
I am under 45 and the mortgage is more than 100k.
retire57 wrote:Agree that this is less about math and more about how badly you want to be free of debt.
The "want" is pretty strong, but the logical side of me won't allow the emotion to have its way if it's completely illogical (which is the conclusion I am coming to the more I think about it).
cherijoh wrote:
But at the other extreme, you invest ever cent that would have gone into paying down the mortgage in a diversified portfolio of index funds with a suitable AA. You end up with better diversification between tax-advantaged and taxable investments and home equity. So please think about whether you would really feel more secure having paid off your mortgage vs. knowing that you could pay off your mortgage without breaking a sweat? If you still think that option would give you more satisfaction, I will be scratching my head but I will concede you pro #1
I agree that the latter would feel more secure, but to safely reach that point will take many more years of saving and investing (to the point that I have enough equity to be able to lose 40% and still be ahead).
cherijoh wrote: Pro #2 - Another fallacy in my opinion. You seem to be ignoring that saving up the money to pay down your mortgage is impacting CURRENT cash flow. You would still be making your current mortgage payments, right? If you aren't saving extra to pay off the mortgage you would have more current cash flow. So why is future cash flow better than current cash flow?
I am not ignoring this. Right now I don't require the additional cash flow. My expenses are limited and I only have one very young child. I hope to have more and those children will be going to private school. It's going to be a lot of money to say the least.
cherijoh wrote: Pro #3 - I'm not sure what you are trying to get at here, but it sounds like you want to use "saving up to pay off the mortgage" as an excuse to kick the "retirement planning" can down the road. :confused
We have and continue to max out our tax deferred contributions. I also have a retirement portfolio in taxable. The point was that currently the monthly payment is always there in the back of my mind, and if my business takes a turn for the worse, I wouldn't feel secure having invested all the remaining savings into the market. It's unlikely, but in a perfect storm I would end up with a loss in the market, a reduction in income, and substantially increasing expenses, while having to make monthly mortgage payments to boot.
cherijoh wrote: Con #2 - Also a very valid point. If you have job or income instability, I would not want to be limited to just home equity or retirement savings in a tax advantaged plan with withdrawal restrictions. You need to look at your finances holistically IMO.
If I were to pay it off, then all new money would go directly into an after-tax account. Both the mortgage money and leftover savings. There would be a period that my liquid assets above and beyond my EF would be limited, but as long as my income stayed the same I would build a decent position within a year. I'm confident in the short term, but a bit concerned for the mid-long term. (increased expenses, and unknown future of the business)
mortfree wrote:
that was my situation. To me, once I got below 100k I figured I might as well pay it off - I did that over 3 years.

If the OP gave actual numbers my answer could have been different and more specific.

Instead I gave my experience and perspective as an example; it wasn't intended to be a golden rule.
If the amount was below 100k I would probably just pay it off. It's close to double.
grabiner wrote:What is your tax bracket, and can you deduct the interest?

If you are in a 28% tax bracket, the after-tax rate on your mortgage is 2.07%. Paying off your mortgage has a duration of 7 years (weighted average time of all future payments). Vanguard Long-Term Tax-Exempt has a duration of 7 years, and 2.59% yield on Admiral shares. Therefore, even if you could pay off the whole mortgage all at once, you would get a slightly higher return from investing in municipal bonds (with a bit of risk). And you would keep the liquidity.

I just rechecked the same situation for my own mortgage. I am in a 28% bracket, and my 2.625% rate (I paid a lot of points for that) has an after-tax rate of 1.89%. My mortgage has 11 years left, which gives it a duration of 5 years. Admiral shares of Vanguard Intermediate-Term Tax-Exempt yield 1.93%, also with a duration of 5 years. Therefore, if I could pay off the whole mortgage all at once, it would be close to break-even. But I can't pay off the whole mortgage all at once without other costs; I would have to sell stock for a huge capital gain. And paying down only part of the mortgage, shortening it from 11 years to 9, would have a duration of 10 years, which is clearly not worthwhile.
For 2015 I was in the 28% bracket due to having a lot of deductions. I also paid AMT. Not sure what 2016 worked out to be, but can ask my accountant. I did pay AMT again for 2016. In my original post, I mentioned placing the equivalent of the loan in CD's/high yield savings accounts which would be similar to your suggestion of investing into a long-term bond fund with less risk of principal. I could technically use your idea or mine and then funnel all new monies into a 3 fund portfolio. I can also split the money and place part in a 3 fund, and the rest in CD's/high yield checking.

If a basic checking account offered 3% now there's a good chance I'd just park the equivalent of the mortgage there and invest all new money. Once the continuous investments grew to a sizable amount where the mortgage was no longer a concern, I'd probably invest the "contra-mortgage" account as well.

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Re: Not Another Payoff The Mortgage Thread....

Post by Cycle » Sun May 28, 2017 10:02 pm

I struggled with this topic the last two years, so thanks for posting. After maxing out 401ks in my twenties there wasn't much left to pay down my 15 year mortgage, but now that I'm married and we rented out our other duplex unit we've been in a position to put more money to work. I just mailed in my cashiers check to pay off the last $.01 of the mortgage on Saturday and as a point of reference I'm 33.

A statement from my bogelhead investing strategy document: "To reduce obligations during times of financial turmoil, consumer and mortgage debt are forbidden."

You have another option, since its a sellers market it may be a good time to sell your house and buy something smaller with the cash you have from the sale, perhaps within walking distance of work if you aren't already.

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Re: Not Another Payoff The Mortgage Thread....

Post by JDCarpenter » Sun May 28, 2017 10:15 pm

SJR wrote:...
I really would like to pay it off and be done with it, ....

What would you do?
What I would do is not relevant. You should pay it off, methinks. (Me, we just refi'd into 15 yr 2.75% mortgage of 220K--and we retire in July. But, I think I'm more risk tolerant than you are, and 220K is a rounding error for us.)
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Re: Not Another Payoff The Mortgage Thread....

Post by Zedon » Sun May 28, 2017 11:08 pm

I think a large part of it is personal preference.
Can you handle debt? How secure is your job, retirement?
Personally I do not have enough to pay mine off but I don't think I would if I could, it's at a very low interest rate and as others have pointed out you will be paying the same in 15 or 30 years even though inflation has made that amount much less valuable. I think the fact that I have a job where I have a lot of stability and a pension coming makes me more secure with long term debt. I do plan to pay it off 5 years early to coincide with my retirement at age 63.

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Re: Not Another Payoff The Mortgage Thread....

Post by cherijoh » Mon May 29, 2017 8:17 am

gloss151 wrote:You have another option, since its a sellers market it may be a good time to sell your house and buy something smaller with the cash you have from the sale, perhaps within walking distance of work if you aren't already.
Why would you suggest the OP - who posted that he hopes to grow his family in the future - downsize his house? :confused

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Re: Not Another Payoff The Mortgage Thread....

Post by Traveller » Mon May 29, 2017 9:04 am

Based on the number of supporters with rational arguments on both sides of this topic, I don't think it matters a lot either way. I feel the same about the lump sum vs. dollar cost averaging debate. In the end, I just split the difference and go for the "AND" instead of choosing one or the other.

I chose to pay mine off 1 year ago at 46 years old. I did that by splitting the difference with extra cash flow for several years - half went to taxable savings and half to principal. I'm not very emotionally driven in my decisions, but I will say that I enjoy the feeling of no mortgage or any other debt. Our living expenses are pretty small and that gives us a lot of freedom.

What did surprise me was how much my wife appreciated paying it off - she took GREAT comfort in knowing that was gone.

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Re: Not Another Payoff The Mortgage Thread....

Post by Cycle » Mon May 29, 2017 9:36 am

I floated the idea of downsizing because that would be one mechanism (albeit 6% fee way) to pay off the debt. That's assuming the current residence is a 2000+ sqft american dream home. Seems like many families on this planet get by with less than 300sq/ft per person. Currently our tenants have two kids in the 1100 sqft 2br/1ba apartment. Houses and commutes have expanded over time, which has reduced americans savings rates. "Things do not change, we change" Thoreau.

In managing your monthly budget, its much easier to understand ones spending habits when there isn't a big ol house payment in there, because part of that house payment is technically savings since its pricipal. The spending visuals in mint or personal capital get confounded by that house payment.

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Re: Not Another Payoff The Mortgage Thread....

Post by meebers » Mon May 29, 2017 9:54 am

PITI (Taxes/Insurance is a given) is just plain EVIL! Spending $1.00 on a mortgage to save $0.25 cents on taxes makes no sense to me. Not having a mortgage in the past has allowed me to pay cash for my present house. PI payments (estimate $2000/month) "savings" for the last 13 years allows plenty of cash for investments etc. I am up ~ $100K at the present if I were to sell. This is just IMHO, YMMV :)

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Re: Not Another Payoff The Mortgage Thread....

Post by cockersx3 » Mon May 29, 2017 10:41 am

One thing to remember is that it's not just a matter of comparing the after-tax rate of your mortgage vs expected market returns - if it was, keeping the mortgage and investing would always win. The real question is whether the amount of extra money you'd make in the market is worth the risk of short-term (or even medium-term) loss in the market. Michael Kitces has a great article that explains this - here's the link:

https://www.kitces.com/blog/why-keeping ... -the-risk/

I found this article to be helpful to me as I went through a similar dilemma last year. My mortgage was 4.125%, so after-tax that was equivalent to around 3% after taxes as my interest would have been deductible. With expected market returns of around 5-7% over the next 10 years, without factoring in risk the math suggested keeping the mortgage. However, once you factor in a risk premium (believe Kitces used 5% in his article) the math isn't as strong. For me, the absence of strong risk-adjusted math and the feeling of not having that mortgage hanging over my head was enough for us to pay it off.

Alternatively, I decided that I wouldn't be able to handle a market crash while knowing that I had passed up an opportunity to become debt free. When I held the mortgage, I used to track the markets constantly for fear of decline. Now post-mortgage, I don't pay attention to the market nearly as often, and I sleep better at night - totally worth it to me as a lower-risk-tolerance person.

That said - I do think the OP's situation is a bit different, with an after-tax interest rate of less than 2% (assuming he can claim it all as itemized deductions). Swings the math more towards keeping the mortgage I think, depending on the OP's risk tolerance. Hope this helps!

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Re: Not Another Payoff The Mortgage Thread....

Post by bertilak » Mon May 29, 2017 11:01 am

Thanks for the link. A good summary paragraph:
  • Which means in practical terms, the mortgage borrower shouldn’t avoid pre-paying the mortgage and investing in stocks simply because equities are expected to earn a higher return. If the borrower is going to be compensated for the risk of the investment, the borrower shouldn’t direct money towards stocks unless expected to earn the mortgage interest rate plus a 5% risk premium.
That's something I have tried to express in several of the "Should I Pay Off My Mortgage?" threads. I generally put it something like this:
  • Simply comparing expected return in the market with the mortgage interest rate ignores the value of the risk-free return you get by paying off the mortgage. That's a guarantee that has some significant value. Don't leave it out of your calculations.

    For those who like liability matching portfolios, paying off a mortgage significantly reduces the liabilities that need to be matched.
I really should not have said "Market" but "Portfolio." The expected return of any rational portfolio is going to be less than that of 100% equities. So maybe a 5% safety factor is not enough!
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Re: Not Another Payoff The Mortgage Thread....

Post by JGoneRiding » Mon May 29, 2017 11:34 am

At 2.875% and already on a 10 yr ish repayment plan, I would invest. Moderately. That is me.

I think I am close to your age?? We are planning on a 20 yr repayment plan once we are back on track with retirement after the baby comes (and probably a sibling too)

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Re: Not Another Payoff The Mortgage Thread....

Post by J295 » Mon May 29, 2017 11:53 am

We don't care for debt so we paid down our mortgage> For us in our situation and with our lifestyle eliminating this obligation was the right choice. Could we have made a few percentage points more by investing the $$ rather than paying down debt? Maybe ... but maybe not ....

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Re: Not Another Payoff The Mortgage Thread....

Post by J295 » Mon May 29, 2017 12:06 pm

According to Reuters 2012 John Bogle interview ....

Q: How about investments in other areas of your life, like real estate?

A: My wife and I downsized our home in Bryn Mawr, Pennsylvania, as we got older. About five years ago we moved into a place that's about a third smaller and with much less property. I didn't take out a mortgage for it because at this point I don't have to borrow money, and I don't like to

SJR
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Re: Not Another Payoff The Mortgage Thread....

Post by SJR » Mon May 29, 2017 9:18 pm

livesoft wrote:I would not pay it off. I started a thread on that today:
viewtopic.php?f=10&t=219886
Following this thread closely. Lots of good perspectives there.
gloss151 wrote:I struggled with this topic the last two years, so thanks for posting. After maxing out 401ks in my twenties there wasn't much left to pay down my 15 year mortgage, but now that I'm married and we rented out our other duplex unit we've been in a position to put more money to work. I just mailed in my cashiers check to pay off the last $.01 of the mortgage on Saturday and as a point of reference I'm 33.

A statement from my bogelhead investing strategy document: "To reduce obligations during times of financial turmoil, consumer and mortgage debt are forbidden."

You have another option, since its a sellers market it may be a good time to sell your house and buy something smaller with the cash you have from the sale, perhaps within walking distance of work if you aren't already.
I only bought the home in 2015 and it's a starter home so not looking to sell and move. Homes are only more expensive around here + high property taxes. Mine is a deal in comparison. I'm also 5 minutes away from work by car... :)

I'd like to pay it off one way or another, the question for me right now is when.
Zedon wrote:I think a large part of it is personal preference.
Can you handle debt? How secure is your job, retirement?
Personally I do not have enough to pay mine off but I don't think I would if I could, it's at a very low interest rate and as others have pointed out you will be paying the same in 15 or 30 years even though inflation has made that amount much less valuable. I think the fact that I have a job where I have a lot of stability and a pension coming makes me more secure with long term debt. I do plan to pay it off 5 years early to coincide with my retirement at age 63.
I am self-employed in a volatile industry. Not much stability. No pension. With that being said business income has improved year over year since inception. I prefer not to be beholden to anyone or anything, especially a bank. That's the gist of it.
Traveller wrote:Based on the number of supporters with rational arguments on both sides of this topic, I don't think it matters a lot either way. I feel the same about the lump sum vs. dollar cost averaging debate. In the end, I just split the difference and go for the "AND" instead of choosing one or the other.

I chose to pay mine off 1 year ago at 46 years old. I did that by splitting the difference with extra cash flow for several years - half went to taxable savings and half to principal. I'm not very emotionally driven in my decisions, but I will say that I enjoy the feeling of no mortgage or any other debt. Our living expenses are pretty small and that gives us a lot of freedom.

What did surprise me was how much my wife appreciated paying it off - she took GREAT comfort in knowing that was gone.
I think the 50/50 idea is decent except that the 50% used to pay down the mortgage has no immediate benefit from a cash flow perspective. One of the pros of no mortgage is freed up cash flow which gives me extreme flexibility. For that reason I am hesitant to "compromise" with myself in this case.
gloss151 wrote:I floated the idea of downsizing because that would be one mechanism (albeit 6% fee way) to pay off the debt. That's assuming the current residence is a 2000+ sqft american dream home. Seems like many families on this planet get by with less than 300sq/ft per person. Currently our tenants have two kids in the 1100 sqft 2br/1ba apartment. Houses and commutes have expanded over time, which has reduced americans savings rates. "Things do not change, we change" Thoreau.

In managing your monthly budget, its much easier to understand ones spending habits when there isn't a big ol house payment in there, because part of that house payment is technically savings since its pricipal. The spending visuals in mint or personal capital get confounded by that house payment.
.

My home is about 2,000 SQ feet with 3 bedrooms. Hardly the dream home. (I'm very satisfied with it, don't get me wrong)
I strongly agree with your final sentiment. The house payment messes with the mental accounting.
cockersx3 wrote:One thing to remember is that it's not just a matter of comparing the after-tax rate of your mortgage vs expected market returns - if it was, keeping the mortgage and investing would always win. The real question is whether the amount of extra money you'd make in the market is worth the risk of short-term (or even medium-term) loss in the market. Michael Kitces has a great article that explains this - here's the link:

https://www.kitces.com/blog/why-keeping ... -the-risk/

I found this article to be helpful to me as I went through a similar dilemma last year. My mortgage was 4.125%, so after-tax that was equivalent to around 3% after taxes as my interest would have been deductible. With expected market returns of around 5-7% over the next 10 years, without factoring in risk the math suggested keeping the mortgage. However, once you factor in a risk premium (believe Kitces used 5% in his article) the math isn't as strong. For me, the absence of strong risk-adjusted math and the feeling of not having that mortgage hanging over my head was enough for us to pay it off.

Alternatively, I decided that I wouldn't be able to handle a market crash while knowing that I had passed up an opportunity to become debt free. When I held the mortgage, I used to track the markets constantly for fear of decline. Now post-mortgage, I don't pay attention to the market nearly as often, and I sleep better at night - totally worth it to me as a lower-risk-tolerance person.

That said - I do think the OP's situation is a bit different, with an after-tax interest rate of less than 2% (assuming he can claim it all as itemized deductions). Swings the math more towards keeping the mortgage I think, depending on the OP's risk tolerance. Hope this helps!


Really helpful post. Thanks cokersx3. I certainly can relate to the sleep well at night part with 0 mortgage and all savings routed into the market. I'd likely pay minimal attention to the market. On the other hand my after-tax interest rate is really low. I'm very much on the fence because of the merit of both sides of this argument. I guess it's kind of my fault for having such a low rate for only 15 years. :annoyed
Good problem to have though. :sharebeer
bertilak wrote:
  • Simply comparing expected return in the market with the mortgage interest rate ignores the value of the risk-free return you get by paying off the mortgage. That's a guarantee that has some significant value. Don't leave it out of your calculations.

    For those who like liability matching portfolios, paying off a mortgage significantly reduces the liabilities that need to be matched.
Technically if I put all the money in the market at a 50/50 allocation, with a balance of mid-long term munis (state specific and national) I'd basically be liability matching similar to Grabiner's suggestion of holding a bond fund with a 7-year duration. Eventually, with ongoing monthly additions, I'd be fully matched against my mortgage while still holding a considerable equity position. At that point I could change the allocation further by investing future money into equities only. Hmmm....this option sounds like a better compromise of sorts as opposed to half into the market and half towards principal. Am I missing something here? This idea sounds pretty sound to me.

MP173
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Re: Not Another Payoff The Mortgage Thread....

Post by MP173 » Mon May 29, 2017 10:14 pm

You reduced your term from 30 years to 15 years....and reduced your monthly payment.

Thus, you have already moved in the right direction. I have paid off two mortgages early - different methods.

The first I used personal free cash flow to aggressively make additional payments. I added $100 per month to my payment and the next month another $100, etc until I reached a level $1000 above the payment. I kept that level until the mortgage was eliminated.

After remarrying and we jointly purchased a house, I kept the house with the paid off mortgage. I was not cut out to be a landlord and eventually sold that house, using part of the proceeds to pay the entire mortgage off. It must be noted that we were making aggressive extra payments on the "marriage house" and had melted several thousands off.

I do not like debt. That is my decision. Perhaps it is due to living on a variable income keeping fixed costs as low as possible. The wife and I purchased new cars in 2015 and have paid both off early with double payments, even tho the interest rates were low. The result is that the wife is retiring this week and we have no debt. It is a great feeling (both that she is retiring and there is no debt on our personal balance sheet).

Follow your personal financial compass on this one. I see that there is no incorrect answer.

Ed

SJR
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Re: Not Another Payoff The Mortgage Thread....

Post by SJR » Tue May 30, 2017 8:07 am

MP173 wrote:
Follow your personal financial compass on this one. I see that there is no incorrect answer.

Ed
That's exactly what I'm trying to do. That compass is a bit waterlogged though. Thank you for taking the time to share your story.

I think the idea I mentioned above is a winner for me (after sleeping on it last night ). I have a few questions though on implementation and hoping others can weigh in.

I realize there are a dozen ways to go about this and there may not be one right answer.
My original plan was to pay off the mortgage and then invest new savings 60/40. Now that I'm deciding to keep the mortgage and using bonds to sort of offset the mortgage (in my mind at least ), would it be prudent to alter the allocation to be more bond heavy initially (until I reach the point where I'm "even")? That would follow the logic of what I'm trying to accomplish and may be more in line with my risk tolerance (60/40 with no mortgage is certainly more conservative than 60/40 with a mortgage ). Essentially the goal is eventually to have the equivalent of the mortgage in bonds while at the same time having built a equity position. The idea for this is a hodgepodge of many of your posts (mainly based on cherijoh's earlier posting).

Or am I just making myself crazy for no reason ? Therefore, I should just implement a 50/50 allocation and contribute to each equally until I have enough bond holdings to be comfortable with changing the allocation to be more stock heavy.

It's essentially a question of risk and as i have no prior experience with something like this I am trying to get a handle of what my expectations and risk will be in either scenario.

PS I am 80/20 in retirement with money held in taxable , Roth IRAs, and 401ks. I'd use a separate account at vanguard for the above investments.

My next question is how to split the bond portion up. I'm in NY so was considering 50/50 between NY Long Term Tax Exempt (an intermediate fund doesn't currently exist) and Intermediate Term Tax Exempt. I realize that with increasing interest rates the funds will likely lose value in principal, but as I am DCAing on a monthly basis and with no specific time frame when the money is needed at this point , I should be ok and able to sleep. In the short term the funds would be "illiquid" in a sense (if i didn't want to take a loss) but that would be no worse than pouring the money into the house.

Again I realize there is no correct answer but my hope is that others that have similar portfolios could weigh in and share with me their experiences and how it has worked for them.

Finally, if my idea is considered good and can be refined further into a finished product of sorts then maybe others can use it for themselves. I realize that many here quarrel with the same dilemma and another option would hopefully be helpful to some.

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Re: Not Another Payoff The Mortgage Thread....

Post by MP173 » Tue May 30, 2017 2:49 pm

I think you are agonizing over this too much.

You have an ideal situation:
1. Low interest rate.
2. Reduced term by 50%.
3. Reduced Payment by refinancing.
4. You are generating personal free cash flow.

Congratulations!

I think to completely use the chunk of money saved in a short period of time to pay off the mortgage might be a little overkill. Keep your powder dry and be able to use it if necessary. Make big chunk payments (quarterly, yearly, etc) or regular payments (extra per month) as your situation dictates.

Allocate according to how you feel comfortable.

Again, personally I do not like debt. Probably has quite a bit to do with how I was raised by my parents.

You are in a good spot.

Ed

SJR
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Re: Not Another Payoff The Mortgage Thread....

Post by SJR » Tue May 30, 2017 4:34 pm

MP173 wrote:I think you are agonizing over this too much.

You have an ideal situation:
1. Low interest rate.
2. Reduced term by 50%.
3. Reduced Payment by refinancing.
4. You are generating personal free cash flow.

Congratulations!

I think to completely use the chunk of money saved in a short period of time to pay off the mortgage might be a little overkill. Keep your powder dry and be able to use it if necessary. Make big chunk payments (quarterly, yearly, etc) or regular payments (extra per month) as your situation dictates.

Allocate according to how you feel comfortable.

Again, personally I do not like debt. Probably has quite a bit to do with how I was raised by my parents.

You are in a good spot.

Ed
Thanks Ed. I basically agree with everything you said.

I also dislike debt due to my upbringing (quite likely).

Oh, and I already am throwing another $500 towards principal every month. It automatically goes together with the rest of my payment in one lump sum.

I'm going to sleep on this some more before deciding on an allocation. Thanks again. Really appreciate it.

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Re: Not Another Payoff The Mortgage Thread....

Post by jackholloway » Tue May 30, 2017 5:58 pm

I paid mine off when doing so would take <10% of my portfolio, but I paid an extra payment from the first, and never reduced my payment as refis reduced my rate. That reduced term from the initial 30 years to 15. That meant my competing needs to eliminate debt and to always invest over time while still keeping cash around for emergencies..

Were I you,I would make sure I had a 1-2 yr emergency fund, given your high risk profession, then take the guaranteed risk free return of paying it off. I am not you, so do something sensible. :happy

mjd0717
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Re: Not Another Payoff The Mortgage Thread....

Post by mjd0717 » Tue May 30, 2017 7:12 pm

Most of the talk around the subject seems to put the decision in an all-or-nothing context. Why can't additional mortgage payments just be seen as part of an overall investment strategy? Furthermore, the strategy can be re-evaluated at regular intervals taking into account life events, etc. That may make the conversation easier for people to comprehend.

mortfree
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Re: Not Another Payoff The Mortgage Thread....

Post by mortfree » Tue May 30, 2017 7:25 pm

mjd0717 wrote:Most of the talk around the subject seems to put the decision in an all-or-nothing context. Why can't additional mortgage payments just be seen as part of an overall investment strategy? Furthermore, the strategy can be re-evaluated at regular intervals taking into account life events, etc. That may make the conversation easier for people to comprehend.
I think the fear is that you are overpaying your mortgage each month and while that extra money is helping to reduce the debt it is likely that the required monthly payment isn't going to be eliminated any time soon. So you are losing out on cash flow and losing out on investing that money.

If I came on here and said I have a 50k loan and 100k cash I would get two answers.

If it is a car loan people would say to pay it off. Even if it was 0% (consumer debt bad)

If it is a mortgage no way should I pay it off.


Disclaimer. I paid off my mortgage at age 39.

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Re: Not Another Payoff The Mortgage Thread....

Post by Pax » Tue May 30, 2017 7:47 pm

Here is what I did, as at the moment I was self-employed and had my first "big mortgage". I calculated the amount needed to make payments as if my 30 year mortgage was a 15 year mortgage. I took the difference and put the money in a mutual balanced mutual fund (Janus Balance Fund). The idea was that in case of no work, I would be able to stop investing on the fund and any moneys there could then be used as emergency funds during that time.
My thinking was that at the 15 year mark, I could write a check from the Balanced Fund to pay off the mortgage.

I was getting older, I became more eager to see the payoff date sooner and -- later, I changed the strategy. When the fund reached $100K, I continued to make the additional payments to the principal as if I had a 15 year mortgage; and, today the mortgage will be paid off in 7 years; or if I chose, I could use the $100k, and get it paid in 4.5 years instead of 7.

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Re: Not Another Payoff The Mortgage Thread....

Post by grabiner » Tue May 30, 2017 8:44 pm

mortfree wrote:I think the fear is that you are overpaying your mortgage each month and while that extra money is helping to reduce the debt it is likely that the required monthly payment isn't going to be eliminated any time soon. So you are losing out on cash flow and losing out on investing that money.

If I came on here and said I have a 50k loan and 100k cash I would get two answers.

If it is a car loan people would say to pay it off. Even if it was 0% (consumer debt bad)

If it is a mortgage no way should I pay it off.
"Good debt" versus "bad debt" shouldn't be viewed this way. "Good debt" is debt which is desirable to take out because it gives you something of greater value than the interest cost: a mortgage which lets you buy a house, or a student loan which gets you a college degree. In contrast, an auto loan is usually a more expensive way to buy a car. But once you have the debt, whether it should be paid down depends on whether you have a better use of the money; the financial effect of the debt depends on the repayment terms, not on the purpose of the loan.

Paying off an auto loan is more attractive than paying off a mortgage, for several reasons. The auto interest is not deductible. The auto loan has a shorter term, which makes paying it off equivalent to buying shorter-term bonds. And paying off an auto loan will allow you to raise your insurance deductibles, which saves you more money than the interest. This is enough to make paying off a 2% car loan usually worthwhile, while making extra payments against a 3% mortgage (2% in a 33% combined federal and state tax bracket) usually isn't.
Wiki David Grabiner

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Re: Not Another Payoff The Mortgage Thread....

Post by EvanRude » Tue May 30, 2017 9:48 pm

Long time lurker, first time poster.

We paid cash for our current house 16 years ago and never looked back. There is great comfort in knowing that the house is paid for. However, here is a twist for those that feel they are potentially losing market gains. Treat the amount that you pay down on a house as being part of fixed income/bonds for asset allocation purposes. By forgoing even the historically low mortgage interest rates of today you are "earning" income every month.

SJR
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Re: Not Another Payoff The Mortgage Thread....

Post by SJR » Thu Jun 01, 2017 10:14 pm

jackholloway wrote:I paid mine off when doing so would take <10% of my portfolio, but I paid an extra payment from the first, and never reduced my payment as refis reduced my rate. That reduced term from the initial 30 years to 15. That meant my competing needs to eliminate debt and to always invest over time while still keeping cash around for emergencies..

Were I you,I would make sure I had a 1-2 yr emergency fund, given your high risk profession, then take the guaranteed risk free return of paying it off. I am not you, so do something sensible. :happy
Still scratching my head trying to understand the meaning behind the word "sensible". :confused
Pax wrote:Here is what I did, as at the moment I was self-employed and had my first "big mortgage". I calculated the amount needed to make payments as if my 30 year mortgage was a 15 year mortgage. I took the difference and put the money in a mutual balanced mutual fund (Janus Balance Fund). The idea was that in case of no work, I would be able to stop investing on the fund and any moneys there could then be used as emergency funds during that time.
My thinking was that at the 15 year mark, I could write a check from the Balanced Fund to pay off the mortgage.

I was getting older, I became more eager to see the payoff date sooner and -- later, I changed the strategy. When the fund reached $100K, I continued to make the additional payments to the principal as if I had a 15 year mortgage; and, today the mortgage will be paid off in 7 years; or if I chose, I could use the $100k, and get it paid in 4.5 years instead of 7.
I'm leaning towards doing something similar by investing the money and knowing that if I decided to use that money to pay it off eventually that would be fine. Obviously, it would have to make sense at that time.
EvanRude wrote:Long time lurker, first time poster.

We paid cash for our current house 16 years ago and never looked back. There is great comfort in knowing that the house is paid for. However, here is a twist for those that feel they are potentially losing market gains. Treat the amount that you pay down on a house as being part of fixed income/bonds for asset allocation purposes. By forgoing even the historically low mortgage interest rates of today you are "earning" income every month.
If I went this route, I would surely feel comfortable with a more aggressive AA due to not having a mortgage hanging over my head. Viewing it as a bond works as well, and I would venture to say, is a way to rationalize in one's mind why the more aggressive AA is sensible and prudent.

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