Is paying down the mortgage the right choice?

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SubieGirl14
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Is paying down the mortgage the right choice?

Post by SubieGirl14 » Wed Jan 03, 2018 11:44 pm

Hi,

I joined the forum a couple of years ago, and posted asking how we were doing. Not sure how to link to that post, but would be happy to if anyone can let me know. In short, in 2015 we lived in NY, had a HHI of around $190k, mortgage balance of $130k on a 15 year loan for a Co-op apartment, and around $285k between 401k & Roth. I received a lot of very insightful responses and appreciate the time everyone took to respond. Although I have not been posting, I have continued reading the forum on a regular basis.

Current info:

MFJ both in our early 40's
State of residence: NC (moved almost 2 years ago)
Joint income: $140k plus bonus of $3-8k

Debt:
$125k mortgage balance on $350k home 28 years left (recast after last extra payment, planning to continue making at least original payment)
No other debt, cars paid off, no cc debt

Assets:
$402k between our 401k/IRA's - (invested between VTSAX vanguard total stock market ER .04%, and VEXAX vanguard extended market ER .08%)
$56k ROTH accounts (invested in VTSAX vanguard total stock market ER .04%)
$25k EF in CD at Ally

We have taken a paycut moving here from NY but we feel the quality of life is worth it. We have started aggressively paying off our mortgage, hoping to be finished within the next 7-10 years. We are currently maxing out my 401k, DH does not have an option for 401k. We are also maxing out both ROTH IRA's. Since we are 100% equity in our retirement accounts, I am using the home equity as the bond portion of our allocation.

My questions are, is it wrong to view the mortgage equity as the bond portion of our allocation? Should we add bonds in the retirement accounts? We like the idea of a paid off home even though we know its mostly from an emotional stand point. We plan to be in this home for as long as we can.

We don't have kids and are not looking to leave an inheritance to anyone. Taking that into account, is it relatively safe to assume that we will have enough to retire at 60 if we keep maxing out 1 401k and 2 roths? Hard to estimate health care costs this far out, but I assume we will need somewhere around $80k per year after retirement. We do not have pensions and I am not counting on SS, so that would be a bonus.

I appreciate your time and any insight you can give!

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camillus
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Re: Is paying down the mortgage the right choice?

Post by camillus » Wed Jan 03, 2018 11:47 pm

What is the rate on the mortgage? :D

SubieGirl14
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Re: Is paying down the mortgage the right choice?

Post by SubieGirl14 » Wed Jan 03, 2018 11:50 pm

Sorry, 4%

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Watty
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Re: Is paying down the mortgage the right choice?

Post by Watty » Thu Jan 04, 2018 12:30 am

SubieGirl14 wrote:
Wed Jan 03, 2018 11:44 pm
My questions are, is it wrong to view the mortgage equity as the bond portion of our allocation? Should we add bonds in the retirement accounts?
I assume that you meant your home equity which would be around $225K($350-125K).

Treating that as a bond would be incorrect, that asset is residential real estate and since your are living in the house you should not count it as port of your investment portfolio even though it is part of your net worth.

The reason is having a lot of home equity reduces the effective rent you need to pay each month for your housing cost. Taking the free rent and also counting it as an investment would be double counting the value of the home equity.

If instead of living in the house you had an identical house that you rented out then you could consider that home equity as part of your investments.

People often try to shoehorn things into being a stock or bond which is a mistake since there are lots of different assets classes like; rental houses, commercial property, apartment building, gold, diamonds, collectables, fine art, farmland, timberland, private loans, and so on. Each of these(and many others) are different asset classes that you should not try to lump into being a stock or a bond.

SGM
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Re: Is paying down the mortgage the right choice?

Post by SGM » Thu Jan 04, 2018 5:22 am

I would pay off the mortgage early. It is a great feeling to have no debt. When the mortgage was paid off we had more to invest and took advantage of it. If your income went down unexpectedly you would no longer have a house payment to worry about. Once the mortgage was paid off I would increase investments in taxable accounts assuming you are maximizing the tax advantaged space.

There are good arguments for not paying down a mortgage, but I much prefer having no debt. I had a 30 year mortgage for about 2 years when I bought my first house, but after that it was only 15 year mortgages and made extra payments monthly.

SubieGirl14
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Re: Is paying down the mortgage the right choice?

Post by SubieGirl14 » Thu Jan 04, 2018 7:52 am

Thank you for the responses, I appreciate it. We only have the option of 1 401k for tax deferred and we do max that. Should I add a bond fund to my 401k with the new money I contribute or re-allocate? We were sitting on some CD's that were paying pretty good interest, but as they matured, we have been paying the mortgage down. I guess I just incorrectly kept thinking of that portion as our bond portion. Watty's post makes perfect sense though.

If we keep paying the original amount on our mortgage even though we recast, we have about 12 years left. We are planning to do that as well as add any bonuses that we receive to pay it down which should get us to a 7-10 year payoff. I am looking at the house as part of the retirement planning, just not sure if I am focusing too much on paying it off and should be focusing more on taxable investing.

SGM
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Re: Is paying down the mortgage the right choice?

Post by SGM » Thu Jan 04, 2018 8:39 am

If you won't be using your tax advantaged accounts soon I would keep it mostly if not all in stocks. I am retired, but recently decided to decrease my bonds in my Roth because I don't expect to take any money out of it for 20 years if at all. I would be comfortable with no bonds in the Roths and some muni bond funds in taxable, but my situation may not be typical.

If you are going to put any bond funds into tax advantaged accounts I would put them in a tax deferred account rather than a Roth. Do you know how you will react to a bear market? If you will panic sell rather than continue to buy stock funds when the market is down then maybe you need more bond funds. I never panicked because I considered it a blessing in disguise to invest in a bear market while accumulating. More shares for the same amount of investment sounded good to me. I did have job security though.

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Watty
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Re: Is paying down the mortgage the right choice?

Post by Watty » Thu Jan 04, 2018 8:51 am

SubieGirl14 wrote:
Thu Jan 04, 2018 7:52 am
I guess I just incorrectly kept thinking of that portion as our bond portion.
Sometimes it better to be lucky than right. :beer The stock markets are at an all time high so things worked out well for you.

Unless I missed something you don't have a lot of retirement money in taxable accounts so moving the money to something like a target date fund would not have any tax consequences so I would consider doing that ASAP unless you can come up with a compelling reason not to.

In the right situation target date funds are an excellent choice and not some "investing for dummies" choice that needs to be improved on. When I retired I moved almost all of my retirement funds to target date funds. The main reasons to not use a target date fund are if you have retirement money in a taxable account or if you don't have access to a good low cost one in your 401k. In that case you could use a three fund portfolio to mimic one.

https://www.bogleheads.org/wiki/Three-fund_portfolio
Last edited by Watty on Thu Jan 04, 2018 5:04 pm, edited 1 time in total.

SubieGirl14
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Re: Is paying down the mortgage the right choice?

Post by SubieGirl14 » Thu Jan 04, 2018 3:39 pm

Thank you for the responses.

SGM - Although I am not going to love seeing by balances plummet, I am expecting that over the period I am invested, there will be multiple ups and downs. I am ok with that back and forth because I know the money is in there for at least another 17 years before I start any withdrawals.

The idea of being debt free, including the house is mostly emotional...warm and fuzzy feeling...not necessarily best mathematical decision. Is warm and fuzzy worth it? Not 100% sure, but when reading about all of the people that are debt free on this forum, I can't wait to be there as well. I don't have that feeling when one of my friends just upgraded to a new Mercedes or bought a much larger or more expensive house. I am 100% sure we would never upgrade the house, so I can definitely see us being here for a long time. Does that make paying it off as soon as possible a good idea versus adding a taxable account to our mix?

Watty - you are right, not a lot at all in taxable. (not really a lot anywhere, but trying :D ) Do you recommend a Target Date Fund for the ROTH or the 401k? I have options for both, and pretty low ER of .08.

Thanks again!

WhiteMaxima
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Re: Is paying down the mortgage the right choice?

Post by WhiteMaxima » Thu Jan 04, 2018 4:08 pm

Equity return 7~8% vs mortgage rate at 4% with tax deduction. The conclusion is not difficult. If interest jump to 7%. The conclusion will be different.

Ruger
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Re: Is paying down the mortgage the right choice?

Post by Ruger » Thu Jan 04, 2018 4:34 pm

SGM wrote:
Thu Jan 04, 2018 5:22 am
I would pay off the mortgage early. It is a great feeling to have no debt. When the mortgage was paid off we had more to invest and took advantage of it. If your income went down unexpectedly you would no longer have a house payment to worry about. Once the mortgage was paid off I would increase investments in taxable accounts assuming you are maximizing the tax advantaged space.
I agree with this....there is no way I could have afforded a mortgage on my own after my husband died, nor could I have afforded to retire.
Having no debt is indeed a great feeling.

MP173
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Re: Is paying down the mortgage the right choice?

Post by MP173 » Thu Jan 04, 2018 4:42 pm

I personally enjoy being debt free. That is my personal view. Everyone is different.

Smart of you to be planning 20 years in advance.

I can only imagine the higher quality of life in NC vs NYC.

Good luck.
Ed

SubieGirl14
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Re: Is paying down the mortgage the right choice?

Post by SubieGirl14 » Thu Jan 04, 2018 4:57 pm

Thank you all!

We no longer get a deduction since we have paid the mortgage down so much. Still get the point though, the market returns are much higher.

The quality of life is indeed like night and day! We loved living in NYC but commuting was really a nightmare and we weren't home enough to enjoy much of our life. It is completely different here and so far, we have no regrets!

I think that I am a person that would be ecstatic about being debt free. I feel like we don't have as much in retirement savings as we should at this point, and a paid off home would be a part of our retirement that was taken care of.

Ruger - I am sorry for your loss. I have thought about what happens if one of us becomes sick and can't work, as we have seen this happen with friends recently. I think not having to worry about losing our home could take some stress out of already stressful situations.

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Watty
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Re: Is paying down the mortgage the right choice?

Post by Watty » Thu Jan 04, 2018 5:03 pm

SubieGirl14 wrote:
Thu Jan 04, 2018 3:39 pm
Watty - you are right, not a lot at all in taxable. (not really a lot anywhere, but trying ) Do you recommend a Target Date Fund for the ROTH or the 401k? I have options for both, and pretty low ER of .08.
It sound like a target date fund would be ideal for you now in all the retirement accounts. If things change later on and there would be a better choice in the future then you can move the money around in the retirement accounts without any tax issues.

I would not recommend it but if you want to be more or less aggressive than the target date fund that is nearest to your expected retirement date then you can buy whichever date fund has the asset allocation you want.

hexagon
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Re: Is paying down the mortgage the right choice?

Post by hexagon » Thu Jan 04, 2018 5:17 pm

While I would not view home equity as a bond, you can consider funds going towards paying the mortgage early as purchasing bonds at 4% (since you are not deducting interest). So until bond rates get over 4% I think it makes perfect sense to put extra funds towards the mortgage rather than towards bonds (after maxing out tax advantaged contributions).

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pezblanco
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Re: Is paying down the mortgage the right choice?

Post by pezblanco » Thu Jan 04, 2018 6:45 pm

hexagon wrote:
Thu Jan 04, 2018 5:17 pm
While I would not view home equity as a bond, you can consider funds going towards paying the mortgage early as purchasing bonds at 4% (since you are not deducting interest). So until bond rates get over 4% I think it makes perfect sense to put extra funds towards the mortgage rather than towards bonds (after maxing out tax advantaged contributions).
+1

I started a thread a couple of days ago about this. If you have a mortgage and for whatever reason you need to purchase bonds (e.g. you think you are too heavy into stocks), then paying down the mortgage is a no-brainer for many people. If you can't itemize, you are purchasing a bond that gives you the mortgage interest rate TAX FREE. The big down side of this is less liquidity ... once the money goes into the mortgage, it is gone ... with a bond fund, you can get it out and reallocate it.

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grabiner
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Re: Is paying down the mortgage the right choice?

Post by grabiner » Thu Jan 04, 2018 8:23 pm

Your home is not a bond, because it doesn't have the investment characteristics of a bond; its price rises and falls, and it is expensive to sell. It's more like an annuity, as it is guaranteed to pay you exactly enough to live in a home as long as you own it. Thus, it's probably better not to count the home in your investment allocation, but to use a more aggressive allocation because you have the home; a 20% drop in your investments no longer costs you 20% of your retirement standard of living.

But it does make sense to look at the mortgage as a negative bond, because it works the same way. A mortgage, like a bond, is a promise to pay money on a fixed future date, but you are doing the payment.

This is how I manage my own allocation. I was 90% stock before I bought my home, and moved to 100% net stock after buying it; that is, my positive bond allocation in my employer plan was equal to my negative bond allocation in my mortgage.
Wiki David Grabiner

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