Pay Off Mortgage with Windfall?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Newbie444
Posts: 14
Joined: Mon Jul 18, 2011 7:19 pm

Pay Off Mortgage with Windfall?

Post by Newbie444 » Wed Mar 28, 2018 9:37 am

I'm struggling with whether to use an upcoming windfall of $600k to pay off my current mortgage, and would love opinions or tips on considering anything that I haven't already. My current mortgage is a 30-year fixed of $500k at 4% taken out in 2016.

Main upside to paying off mortgage would be huge psychological relief at not having a mortgage payment and owning my home outright. Downside is that I would have a big chunk of my assets tied to my home so that if the housing market tanks or some un-insured catastrophe happens to destroy the home or there's some big financial emergency, I wouldn't be able to walk away from the house if absolutely necessary. However, the chances of any of those things happening is very low (knocking on wood). And there would be an asset protection benefit since I live in a state where a primary residence is protected from most creditors. There's also a chance that I might sell my home and move to a higher-priced home in a few years. I'm 40 and have no kids to fund college for, and I have no debt other than the mortgage.

Other downside is that I wouldn't be able to use the money to invest, but I have over $900k in savings and investments (including maxing out all tax-advantaged investments) so I don't feel any urgent need to add to my investments. I'm also very risk-adverse and believe the current stock market is overpriced so I also don't have a desire to put a ton of $$ into investments now, or spend time chasing down the best investments.

Does anyone know if a fee-based financial planner would be helpful with this type of decision?

User avatar
djpeteski
Posts: 566
Joined: Fri Mar 31, 2017 9:07 am

Re: Pay Off Mortgage with Windfall?

Post by djpeteski » Wed Mar 28, 2018 9:50 am

I would pay off my mortgage and try it out. If you really hate not having a mortgage, you can always get another one.

To me, a guaranteed 4% ROI is pretty darn good. The safety net of having a paid off home is very dramatic. Having a paid off home is psychologically amazing.

Financial planners do not have the ability to predict the future, and have a vested interest in seeing you not pay off the mortgage. Either they can make increased fees or more fee based appointments to help you with decisions with the more money you have in the market. I do not think they can give you truly unbiased opinions.

If you are very risk adverse pay off the house. You can then dollar cost average the mortgage payment into the market. Much safer than dumping 500k into the market next week.

As far as a repeat housing crisis, it hit my area really bad. I bought my home for about 215, and short time later could have sold it for 400. Then a short time after that, I could only get 130 for it. Now its hovering around 275. What did all those price gyrations mean to me? Nothing as I held on to this house that I really like.

Hillview
Posts: 294
Joined: Fri Feb 02, 2018 7:27 am

Re: Pay Off Mortgage with Windfall?

Post by Hillview » Wed Mar 28, 2018 9:53 am

It is a judgement call. For us we paid off the mortgage and now have money to put into the market monthly vs feeling like we had to have a very large Emergency Fund in case of job loss to cover the mortgage. Our accountant thought this was a bad idea as our rate was low BUT emotionally it worked for us. How big is your EF? How stable is your income?

b4nash
Posts: 119
Joined: Wed Apr 11, 2012 11:20 am

Re: Pay Off Mortgage with Windfall?

Post by b4nash » Wed Mar 28, 2018 9:57 am

I side with paying it off. Get that mortgage monkey off your back and increase your free cash flow. :D

Jack FFR1846
Posts: 7182
Joined: Tue Dec 31, 2013 7:05 am

Re: Pay Off Mortgage with Windfall?

Post by Jack FFR1846 » Wed Mar 28, 2018 9:58 am

Pay off the mortgage.

Let's say you don't and the housing market goes in the toilet. You still owe your mortgage. How is this any different? Just pay it off and be done with it.
Bogle: Smart Beta is stupid

Chadnudj
Posts: 716
Joined: Tue Oct 29, 2013 11:22 am

Re: Pay Off Mortgage with Windfall?

Post by Chadnudj » Wed Mar 28, 2018 9:58 am

No one has ever said it has to be all of one or all of the other....so why not do both?

Take $300k and recharacterize/paydown your mortgage (from a $500k mortgage to a $200k one).
Take the other $300k and invest it according to your desired asset allocation.

That way you lock in a 4% return on half the money (and reduce your mortgage payment drastically, freeing up money to dollar-cost average into investing), and you put the other half to work for you in the market (where you have risk, but could end up doing better than 4% long term). If you decide "meh, I hate having a mortgage" you could always take out the amount necessary to pay off the remaining $200k on your mortgage from the $300k invested (or your other investments, in a tax-efficient way to minimize capital gains).

Independent George
Posts: 253
Joined: Wed Feb 17, 2016 12:13 pm

Re: Pay Off Mortgage with Windfall?

Post by Independent George » Wed Mar 28, 2018 10:03 am

Chadnudj wrote:
Wed Mar 28, 2018 9:58 am
No one has ever said it has to be all of one or all of the other....so why not do both?

Take $300k and recharacterize/paydown your mortgage (from a $500k mortgage to a $200k one).
Take the other $300k and invest it according to your desired asset allocation.
Beat me to it - I was going to say the exact same thing. Depending on your mortgage terms, you might also refinance at the same and cut the balance to 15 year (or even less - I haven't done the math on the payments and rates yet).

Silk McCue
Posts: 959
Joined: Thu Feb 25, 2016 7:11 pm

Re: Pay Off Mortgage with Windfall?

Post by Silk McCue » Wed Mar 28, 2018 10:05 am

I would pay off the mortgage and begin investing the $28k you are paying annually on the mortgage. It will be a freeing experience.

You have a nice next egg and you should continue to grow that by investing in an asset allocation that is appropriate for you. It's ok to be risk averse but there is guaranteed risk in not risking.

Cheers

mortfree
Posts: 1050
Joined: Mon Sep 12, 2016 7:06 pm

Re: Pay Off Mortgage with Windfall?

Post by mortfree » Wed Mar 28, 2018 10:06 am

you will have 1.5 million in assets versus a 500k mortgage.

Chad and George have great ideas if you don't want to sink all of it towards the mortgage payoff.

one more: if you are unsure of what to do, put 100k towards the mortgage and see how that "feels".

kudos on being here for 7 years and only 10 posts.

knowledge
Posts: 110
Joined: Wed Mar 02, 2011 5:44 pm

Re: Pay Off Mortgage with Windfall?

Post by knowledge » Wed Mar 28, 2018 10:09 am

Not sure how any financial planner would be helpful to this decision - I think you'd get a full list of inputs to your decision from this thread. That said, your post makes it pretty clear that you want to pay off your mortgage, so I would do that.

joeblow
Posts: 106
Joined: Sat Nov 28, 2015 12:17 pm

Re: Pay Off Mortgage with Windfall?

Post by joeblow » Wed Mar 28, 2018 10:09 am

An opportunity for zero debt, a million invested/saved, at age 40 with no kids' college to fund? I'd pay it off in a heartbeat and relish in the position I was in.

User avatar
goingup
Posts: 3122
Joined: Tue Jan 26, 2010 1:02 pm

Re: Pay Off Mortgage with Windfall?

Post by goingup » Wed Mar 28, 2018 10:15 am

Lots of people, with or without windfall are deciding to pay off their mortgages early. It has to do with changes in the tax law. For us, it makes sense because we could no longer meet the standard deduction threshold.

With a windfall, I'd pay it all off. The reason I don't like the pay 1/2 and invest 1/2 scenario is that you don't get as much benefit. You've sunk $250K into the mortgage which becomes illiquid. You're still paying 4% on the balance. With a $250K balance you really won't meet a standard deduction.

Pay it off now. Start saving in a taxable account with your increased cash flow so you can retire early, if you so choose. :beer

User avatar
randomizer
Posts: 1320
Joined: Sun Jul 06, 2014 3:46 pm

Re: Pay Off Mortgage with Windfall?

Post by randomizer » Wed Mar 28, 2018 10:16 am

I’d split the difference and pay off a chunk, invest the rest. Sometimes difficult tradeoffs are best met with a compromise (other times a compromise is actually worse; this doesn’t seem like one of those times).
75:25 — HODL the course!

User avatar
goingup
Posts: 3122
Joined: Tue Jan 26, 2010 1:02 pm

Re: Pay Off Mortgage with Windfall?

Post by goingup » Wed Mar 28, 2018 10:16 am

knowledge wrote:
Wed Mar 28, 2018 10:09 am
Not sure how any financial planner would be helpful to this decision - I think you'd get a full list of inputs to your decision from this thread. That said, your post makes it pretty clear that you want to pay off your mortgage, so I would do that.
I agree. There's a real possibility the FP would say, "hey, don't pay off that mortgage...purchase this annuity I'm selling".

User avatar
Pajamas
Posts: 5705
Joined: Sun Jun 03, 2012 6:32 pm

Re: Pay Off Mortgage with Windfall?

Post by Pajamas » Wed Mar 28, 2018 10:18 am

Depends on whether you think your net future investment returns will be greater than your net cost of mortgage interest.

What would you do with the $600k if you did NOT have a mortgage or other debt? Thinking about that might be helpful.

One alternative might be to think of your mortgage as a reverse fixed income investment. Your net on a 4% mortgage probably looks pretty good compared to the net on a fixed income investment right now, but it might not in the near future. $600k is a large portion of your net worth. However, since you are very risk adverse, paying off your mortgage might be the right decision to make if you have a low stock:bond investment ratio.

NextMil
Posts: 288
Joined: Wed Dec 13, 2017 12:33 pm

Re: Pay Off Mortgage with Windfall?

Post by NextMil » Wed Mar 28, 2018 10:20 am

I would pay that thing off in a heart beat. Reduce your real risk. Be free, and invest the rest.

soccerrules
Posts: 688
Joined: Mon Nov 14, 2016 4:01 pm

Re: Pay Off Mortgage with Windfall?

Post by soccerrules » Wed Mar 28, 2018 10:21 am

joeblow wrote:
Wed Mar 28, 2018 10:09 am
An opportunity for zero debt, a million invested/saved, at age 40 with no kids' college to fund? I'd pay it off in a heartbeat and relish in the position I was in.
+1 Pay it off
I could be you - zero debt, $1M invested ......... but 12 years older and 6 years of college left to fund.... (whaa whaa whaa) :happy

I did LOL at the kudos to the OP for minimal posts for a 7 year subscriber - that was funny. :D
Don't let your outflow exceed your income or your upkeep will be your downfall.

User avatar
Meg77
Posts: 2310
Joined: Fri May 22, 2009 1:09 pm
Location: Dallas, TX
Contact:

Re: Pay Off Mortgage with Windfall?

Post by Meg77 » Wed Mar 28, 2018 10:21 am

Newbie444 wrote:
Wed Mar 28, 2018 9:37 am
I'm struggling with whether to use an upcoming windfall of $600k to pay off my current mortgage, and would love opinions or tips on considering anything that I haven't already. My current mortgage is a 30-year fixed of $500k at 4% taken out in 2016.
4% is a pretty solid guaranteed rate of return. In addition, the boost in your cash flow from not having a mortgage would enable you to invest more each month and add a lot of flexibility to your budget. Effectively by doing so you'd be dollar cost averaging this windfall into your investment portfolio over time instead of lump sum investing it all at once now. Sounds like a solid plan to me, especially given that stocks and bonds and real estate prices are all near all time highs. Sure they could continue to go up, but odds are we'll face a bear market in the near term given the run we've been on.
Newbie444 wrote:
Wed Mar 28, 2018 9:37 am
Downside is that I would have a big chunk of my assets tied to my home so that if the housing market tanks or some un-insured catastrophe happens to destroy the home or there's some big financial emergency, I wouldn't be able to walk away from the house if absolutely necessary.
This doesn't make sense to me. Realistically, you can't/won't walk away from the home anyway with a net worth over a million - especially just because the value dips in a recession. And I'm sure it has happened, but I've never heard of a well-insured home suffering a total loss somehow. Just make sure you have a comprehensive policy. Actually, having a home paid off makes it much easier for you to sell it quickly if you need to for some reason in an emergency or if you get a job offer out of state, etc.
Newbie444 wrote:
Wed Mar 28, 2018 9:37 am
There's also a chance that I might sell my home and move to a higher-priced home in a few years. I'm 40 and have no kids to fund college for, and I have no debt other than the mortgage.
Having a paid off home will make it easier for you to qualify for a mortgage on a new home without having to be under contract or sell the existing home first. You can also take out a home equity line against the current home right before buying the new one to cover the down payment too (or even to pay cash depending on the equity and other resources you want to throw in). So no need to keep $600k in cash for a future purchase when you could earn 4% on the funds by paying off your existing debt.
Newbie444 wrote:
Wed Mar 28, 2018 9:37 am
I'm also very risk-adverse and believe the current stock market is overpriced so I also don't have a desire to put a ton of $$ into investments now, or spend time chasing down the best investments.
I think you just answered your question.
Newbie444 wrote:
Wed Mar 28, 2018 9:37 am
Does anyone know if a fee-based financial planner would be helpful with this type of decision?
No. I'm a certified financial planner and a banker, and I can tell you this is simply a personal decision that must be made based on your values. You know the pros and cons - all a planner can do is lay those out for you and let you decide (and/or try to sell you some product to put the money in instead). This is a good problem to have, but I say wipe out that mortgage and be done with it! As others have noted, if you hate being debt free you can always go get some more loans.

:)
"An investment in knowledge pays the best interest." - Benjamin Franklin

123
Posts: 3390
Joined: Fri Oct 12, 2012 3:55 pm

Re: Pay Off Mortgage with Windfall?

Post by 123 » Wed Mar 28, 2018 11:17 am

I would pay off the mortgage with the windfall. The only reason I would not pay off the mortgage is if you think there is a reasonable chance that you would sell the home in the next 5 - 7 years.

You have substantial other assets so I can appreciate that you've likely never felt that the mortgage payment was ever in position where you wouldn't be able to pay it.

It does feel good to live in a property that is without a mortgage, I recommend it.

I wouldn't tell any friends or family about the windfall and/or mortgage payoff.

I wouldn't even think about asking a financial planner what to do. They only want to sell you something, most likely a universal life insurance or annuity product if they got $600K to go after.
The closest helping hand is at the end of your own arm.

Ben Mathew
Posts: 91
Joined: Tue Mar 13, 2018 11:41 am
Location: Seattle
Contact:

Re: Pay Off Mortgage with Windfall?

Post by Ben Mathew » Wed Mar 28, 2018 3:00 pm

Paying off the $500K mortgage @4% interest is equivalent to investing in a risk-free bond that yields a 4% nominal interest rate in a tax-shielded account. Since you have maxed out your tax-shielded space, this makes a lot of sense for you. The main reason not to do it would be if you wanted to invest in a higher yielding asset like stocks. You'd need the after-tax return of the stocks to be higher than the tax-free return of the bonds to come out ahead. Since you say you are risk-averse, and also believe that the stock market is currently overpriced, this does not sound like what you should be doing. So go ahead and invest in the tax-free risk-free 4% bond that is your home mortgage.

magicrat
Posts: 317
Joined: Sat Nov 29, 2014 7:04 pm

Re: Pay Off Mortgage with Windfall?

Post by magicrat » Wed Mar 28, 2018 3:31 pm

My personal approach is to pre-pay my mortgage such that it will be paid off at my target retirement date. YMMV

User avatar
cfs
Posts: 4139
Joined: Fri Feb 23, 2007 1:22 am
Location: ~ Mi Propio Camino ~

Re: Pay Off Mortgage with Windfall?

Post by cfs » Wed Mar 28, 2018 3:37 pm

Well, you can check the link to read about "the good feeling" on paying your mortgage.

"I did it and feel great about it (paid off mortgage)": viewtopic.php?f=2&t=226220

Good luck, y gracias por leer ~cfs~

p.s. Retired with no mortgage
~ Member of the Active Retired Force since 2014 ~

WhiteMaxima
Posts: 1178
Joined: Thu May 19, 2016 5:04 pm

Re: Pay Off Mortgage with Windfall?

Post by WhiteMaxima » Wed Mar 28, 2018 3:45 pm

I would divide 600k in 3, 1/3 to pay mortgage, 1/3 to lump sum 3 fund folio. 1/3 in saving account and DCA into 3 fund folio over years. You can also treat the 200k as emergency fund. You could use it to pay off mortgage if you want.

JoeRetire
Posts: 1065
Joined: Tue Jan 16, 2018 2:44 pm

Re: Pay Off Mortgage with Windfall?

Post by JoeRetire » Wed Mar 28, 2018 3:58 pm

Newbie444 wrote:
Wed Mar 28, 2018 9:37 am
Main upside to paying off mortgage would be huge psychological relief at not having a mortgage payment and owning my home outright.
Everyone who pays off their mortgage feels good about their decision.
Everyone who chooses not to pay off their mortgage feels good about their decision.

You need to decide what is more important to you.
There's also a chance that I might sell my home and move to a higher-priced home in a few years.
So wait a few years, until you move.
Other downside is that I wouldn't be able to use the money to invest, but I have over $900k in savings and investments (including maxing out all tax-advantaged investments) so I don't feel any urgent need to add to my investments. I'm also very risk-adverse and believe the current stock market is overpriced so I also don't have a desire to put a ton of $$ into investments now, or spend time chasing down the best investments.
So put the new money in the same investments as the old money.
Does anyone know if a fee-based financial planner would be helpful with this type of decision?
Yes, certainly.

JBTX
Posts: 3346
Joined: Wed Jul 26, 2017 12:46 pm

Re: Pay Off Mortgage with Windfall?

Post by JBTX » Wed Mar 28, 2018 4:05 pm

Option 1: Pay it all off. 4.1% guaranteed rate or return is not bad and better than current bonds

Option 2: Start paying it off faster over time, and invest or do something with the rest, or keep as liquidity. If interest rates increase over time, you may find sitting on a 4.1% mortgage not a bad deal.

I'd look at it strictly as a financial decision - is 4.1% fixed/guaranteed rate of return (via paying it off), but not having some additional liquidity, good for your situation? it is really a judgment call.

I don't think the thought process about paying it off making you "too much invested" in your home really makes sense. You own the home either way. Your exposure if the price goes up or down is the same either way.

You don't need a financial planner to tell you what to do here.

BigOldBear
Posts: 43
Joined: Thu Mar 01, 2018 11:52 pm

Re: Pay Off Mortgage with Windfall?

Post by BigOldBear » Wed Mar 28, 2018 4:08 pm

If it were me, I would definitely pay off the mortgage as many others have suggested. It will be a load off your mind, allow you to survive longer on your emergency fund if you need to for some reason, allow you to dollar cost average into the markets with the freed up cash flow, and give you a decent risk free return equivalent of 4%.

After paying it off, I would also look into taking out a Home Equity Line of Credit which you could tap into at any time if there is a need, but if no need, keep the balance $0. This could provide additional buffer for unforeseen problems in the future. This might address some of the other concerns you expressed while still paying off the 1st mortgage.

delamer
Posts: 5119
Joined: Tue Feb 08, 2011 6:13 pm

Re: Pay Off Mortgage with Windfall?

Post by delamer » Wed Mar 28, 2018 4:34 pm

How much is your house worth?

User avatar
Watty
Posts: 13439
Joined: Wed Oct 10, 2007 3:55 pm

Re: Pay Off Mortgage with Windfall?

Post by Watty » Wed Mar 28, 2018 10:28 pm

goingup wrote:
Wed Mar 28, 2018 10:16 am
knowledge wrote:
Wed Mar 28, 2018 10:09 am
Not sure how any financial planner would be helpful to this decision - I think you'd get a full list of inputs to your decision from this thread. That said, your post makes it pretty clear that you want to pay off your mortgage, so I would do that.
I agree. There's a real possibility the FP would say, "hey, don't pay off that mortgage...purchase this annuity I'm selling".
Many financial advisors get paid 1% of your assets under management so if you used $500K to pay off the mortgage then they would make $5,000 less from you each year. That gives them a big conflict of interest so you have to watch out for that.

There is a wiki on managing a windfall if you have not seen it.
https://www.bogleheads.org/wiki/Managing_a_windfall

One of the standard suggestions is to park windfall money someplace ultra safe for at least six months while you decide what to do with the money. There is a lot to be said for doing that.

There is also a wiki on paying down loans vs investing.

https://www.bogleheads.org/wiki/Paying_ ... _investing

Investing the money and getting a higher return is harder than it sounds because you will have a sequence of returns risk. Here is an example that 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.

protagonist
Posts: 5291
Joined: Sun Dec 26, 2010 12:47 pm

Re: Pay Off Mortgage with Windfall?

Post by protagonist » Wed Mar 28, 2018 10:35 pm

Newbie444 wrote:
Wed Mar 28, 2018 9:37 am
I'm struggling with whether to use an upcoming windfall of $600k to pay off my current mortgage, and would love opinions or tips on considering anything that I haven't already. My current mortgage is a 30-year fixed of $500k at 4% taken out in 2016.

Main upside to paying off mortgage would be huge psychological relief at not having a mortgage payment and owning my home outright. Downside is that I would have a big chunk of my assets tied to my home so that if the housing market tanks or some un-insured catastrophe happens to destroy the home or there's some big financial emergency, I wouldn't be able to walk away from the house if absolutely necessary. However, the chances of any of those things happening is very low (knocking on wood). And there would be an asset protection benefit since I live in a state where a primary residence is protected from most creditors. There's also a chance that I might sell my home and move to a higher-priced home in a few years. I'm 40 and have no kids to fund college for, and I have no debt other than the mortgage.

Other downside is that I wouldn't be able to use the money to invest, but I have over $900k in savings and investments (including maxing out all tax-advantaged investments) so I don't feel any urgent need to add to my investments. I'm also very risk-adverse and believe the current stock market is overpriced so I also don't have a desire to put a ton of $$ into investments now, or spend time chasing down the best investments.

Does anyone know if a fee-based financial planner would be helpful with this type of decision?
I would pay off the mortgage.

Your comment "Main upside to paying off mortgage would be huge psychological relief at not having a mortgage payment and owning my home outright." reinforces that. I think the same way you do. Some here don't.

Financially, you might do better by investing, but you might also do worse. You will never know, so there is no "wrong" decision regardless of outcome- just a good guess or a bad guess. You have plenty of money invested already, as you acknowledge.

Paying it off is the right decision because it will make you feel good. That is the one thing you can be sure of.

Howie
Posts: 131
Joined: Sun Jan 02, 2011 7:46 pm

Re: Pay Off Mortgage with Windfall?

Post by Howie » Wed Mar 28, 2018 10:58 pm

The majority of responses suggest paying it off. Is there a lower interest rate level where- at or below- it might be prudent to, instead, keep the mortgage?

protagonist
Posts: 5291
Joined: Sun Dec 26, 2010 12:47 pm

Re: Pay Off Mortgage with Windfall?

Post by protagonist » Wed Mar 28, 2018 11:29 pm

Howie wrote:
Wed Mar 28, 2018 10:58 pm
The majority of responses suggest paying it off. Is there a lower interest rate level where- at or below- it might be prudent to, instead, keep the mortgage?
My assumption is that mortgage rates will always tend to hover higher than current "safe investment" interest rates (banks, T-bills, etc) under all scenarios. On the other hand, if for whatever reason you think bank interest rates will soar, and for whatever reason you truly believe you are correct, then I suppose you might choose to take a fixed mortgage. I do believe interest rates will rise, but I also don't believe I have a crystal ball, I could be wrong, and I can safely say that paying off my mortgage has made me happy in the past (and probably would in the future). So I would never say "never", but it would take a lot to convince me to stay in debt if I could afford to get out of it. I would probably take a mortgage if, after taxes, I could make more by leaving the money in the bank (or a CD).
Last edited by protagonist on Thu Mar 29, 2018 8:10 am, edited 1 time in total.

User avatar
grabiner
Advisory Board
Posts: 22179
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Pay Off Mortgage with Windfall?

Post by grabiner » Wed Mar 28, 2018 11:40 pm

Howie wrote:
Wed Mar 28, 2018 10:58 pm
The majority of responses suggest paying it off. Is there a lower interest rate level where- at or below- it might be prudent to, instead, keep the mortgage?
See Paying down loans versus investing on the wiki. Paying down a mortgage is an investment which gives you risk-free future payments, so it should be compared to a low-risk bond fund which also gives you future payments. For a fair comparison, use a bond fund of the same duration.

For example, my own mortgage is at 2.625%, and since I can deduct all the interest at 24% (I have enough taxes and charity to exceed the standard deduction), the return I would get on a mortgage prepayment is 2.00%. The mortgage has 11 years left, so paying off the mortgage would have a 5-year duration. The current yield on Vanguard Intermediate-Term Tax-Exempt Admiral shares, also with a 5-year duration, is 2.39%. Therefore, if I had enough money to pay off the mortgage, I would still expect to come out ahead without taking much risk by investing in municipal bonds. If the mortgage interest were not deductible, then it would be worth paying off the mortgage.
Wiki David Grabiner

Nate79
Posts: 2774
Joined: Thu Aug 11, 2016 6:24 pm
Location: Portland, OR

Re: Pay Off Mortgage with Windfall?

Post by Nate79 » Thu Mar 29, 2018 12:13 am

Considering the pitiful expected 10 year returns of the stock market that everyone is crying about there seems to be a strong chance that paying it off will beat stock returns. And it is tax advantage on top.

Whether or not the asset value of the house goes up or down is immaterial. You are paying off a debt you owe irregardless of asset value unless you live in a state that allows you to walk away with no recourse.

madbrain
Posts: 4946
Joined: Thu Jun 09, 2011 5:06 pm
Location: San Jose, California

Re: Pay Off Mortgage with Windfall?

Post by madbrain » Thu Mar 29, 2018 3:05 am

With a 30-year mortgage and so many years remaining on it, you are still likely to get a higher return by investing rather than paying it off.
But of course, it isn't a guaranteed return, there is risk involved. If you invest in very safe instruments, given your rate, your return will not be as much. The new tax law changes things significantly.

I have a lower rate mortgage than you - 3.375% on a 30 year fixed. Maturity is in 2042. I had done significant prepayments in the last 6 years, but not full payoff. I recast it last summer at no cost , in order to lower the minimum payment.

I still kept the mortgage, as paying it off in full would have generated significant taxable capital gains, and CA taxes even long-term gains as regular income, which is 9.3% in my tax bracket. Even if I could have paid it off in full without the tax bill, it wouldn't have been a great return, given that the interest was then deductible at both federal & state level. The return would have been only 2.21%.

Tax reform changes things a little bit - I can still deduct the mortgage interest at the state level, but not at the federal level. I will be in the 22% federal tax bracket. So, the return on prepayment would now be 3.06% - significantly higher than before. I have been weighing my options. So far, I'm keeping the mortgage - with a $306k remaining balance (down from $417k conforming originally 6 years ago).

I have about $520k in taxable accounts as of today, 80% of which is in equity - the rest in munis. The equities are highly appreciated. I would have to sell the munis, plus over half the equities, in order to pay the mortgage off and the tax bill. I would probably have about $140 - $160k left in taxable after payoff. This isn't a very comfortable cushion to me - about 2x bare minimum annual expenses. I have been disabled before, and have been unemployed before. Never for over 6 months, but I think I would still be far more worried having such a small cushion to deplete. I have been in that situation before, and never want it to happen again. I feel safer with a mortgage than without.

The worst possible scenario is to have a paid off house, not being able to access home equity or other credit and not being able to meet expenses. I disagree with the posters that claim houses can be sold quickly.

There are times when selling any house becomes very difficult, such as after the last financial crisis in 2008, when many consumers could no longer qualify for mortgages due to job loss, and lenders tightened their standards very significantly. I would never count on being able to sell a house quickly. That said, the city or county might take years to foreclose if property taxes are not paid. I bought a foreclosed home, and tax records showed that taxes hadn't been paid for 4 years, before the bank foreclosed and made them current. But it's still not a chance many want to take.

These are the same times during which lenders take away home equity lines of credit. And unemployed homeowners can generally not open new home equity loans or lines of credit, just as they can't get a new forward mortgage, for the simple reason that documented income is too low.

And these times also coincide with recessions and drops in stock prices. During these times, liquidity is critical. Maybe not a concern for OP, but it is one of the worst cases I worry about, even with $1.7M in current home equity, and $500k in taxable.

Significant uninsured disaster is also a possibility. Earthquakes a concern in CA. Sometimes we don't feel any for a year. And then there are also days that we feel 5 small ones, with the epicenter less than 5 miles away. I don't insure for earthquake as the deductible is and premiums are way too high. It's very hard to imagine the kind of damage it would take for a total loss. I worry much less about this case than about financial crises. And even less about a combination of earthquake and financial crises. Though it's not impossible - "the big one", if it happens in our lifetimes, might possibly plunge California and the entire nation into a recession. At which point the liquidity can be used to go live somewhere else, temporarily or permanently.

Of course, I also have Roth IRAs I could tap, but that would involve penalties and isn't a great idea to tap.

So, in the end, for me, the reasons for not paying off are liquidity & taxes.

Even if those 2 concerns were eliminated, as they seem to be in your case with the windfall and significant assets, I also believe that I will get a higher return over the next 24 years than 3.06%, given current overall portfolio allocation which is about 70% equities, and thus, I would still lean towards keeping the mortgage.

I should mention that over 100% of my taxable account is the result of a windfall - inheritance when my dad's passed away in 2010. And it appreciated by several hundred thousands since then. Had I paid off the mortgage, I would have a significantly lower net worth, and lower liquidity as well. But it did bring down my debt very significantly from the original 80% LTV loan at $660K balance, when I sold my previous house in 2012 - after the end of the financial crisis, to get the conforming loan I have now at 3.375%. The previous rate was 4.375%. I would also have done much better by keeping the higher-balance, higher-interest loan. I just wasn't in love with having that much debt. For a couple years I had $900K of debt - $660k on primary residence, and $250k on previous house. And only about 1/6th the income. I still managed, somehow, but cash flow was not great.
Current amount is much more manageable. The P&I since my recast is only $1500/month, and $900 of that being interest. That's less than what many people pay to rent a bedroom in better parts of town. But it's for a 4600 sq ft mansion.

Newbie444
Posts: 14
Joined: Mon Jul 18, 2011 7:19 pm

Re: Pay Off Mortgage with Windfall?

Post by Newbie444 » Thu Mar 29, 2018 11:14 am

Many, many thanks to all for the thoughtful and helpful advice. I visited my bank this morning and arranged for full payoff of my mortgage. It's what I've been wanting to do, and I just needed a sanity check that I wasn't ignoring some major downside, which you all have confirmed. I feel even better than I thought I would :D

I love this site. I've read posts intermittently over the years to continue to educate myself but I haven't contributed much because I don't consider myself especially savvy regarding finance or investments. I take a much more conservative approach than probably is conventionally wise, and it's worked out for me so far but I don't think my approach would necessarily work for everyone else. I will try to contribute more than 10 posts over the next 7 years though ;)

mortfree
Posts: 1050
Joined: Mon Sep 12, 2016 7:06 pm

Re: Pay Off Mortgage with Windfall?

Post by mortfree » Thu Mar 29, 2018 11:31 am

wow, that is taking care of business - congrats.

enjoy being mortgage free.

I take a balanced, conservative approach to a lot of things, but also do a lot of anti-boglehead things too (car loans, extra to mortgage, individual stocks, etc).

User avatar
Watty
Posts: 13439
Joined: Wed Oct 10, 2007 3:55 pm

Re: Pay Off Mortgage with Windfall?

Post by Watty » Thu Mar 29, 2018 12:09 pm

Newbie444 wrote:
Thu Mar 29, 2018 11:14 am
Many, many thanks to all for the thoughtful and helpful advice. I visited my bank this morning and arranged for full payoff of my mortgage. It's what I've been wanting to do, and I just needed a sanity check that I wasn't ignoring some major downside, which you all have confirmed. I feel even better than I thought I would :D
Congratulations!

A couple of things to put on your list of things to do.

1) Contact your home insurance company to have the lender taken off your home insurance policy. You may be able to raise your deductible if you want to.

2) In a few months when the paperwork has had time to clear double check with your local county, or whoever takes care of recording liens in your area, to make sure that the mortgage lien was actually removed. Do this even if you get paperwork saying that the lien was removed. It is rare but occasionally there can be a snafu with that and it is much easier to get that fixed now instead of years from now. In some areas you may be able to do that online.

3) If you had an escrow account be sure that your insurance and property taxes are paid even if you don't get a bill for it.

4) If you were able to itemize your taxes and deduct the mortgage interest then make sure that your other payroll withholdings are adjusted to make sure that enough taxes are withheld from your pay.

5) If you had an online automatic payment of your mortgage then cancel that.

User avatar
Pajamas
Posts: 5705
Joined: Sun Jun 03, 2012 6:32 pm

Re: Pay Off Mortgage with Windfall?

Post by Pajamas » Thu Mar 29, 2018 1:51 pm

Watty wrote:
Thu Mar 29, 2018 12:09 pm

2) In a few months when the paperwork has had time to clear double check with your local county, or whoever takes care of recording liens in your area, to make sure that the mortgage lien was actually removed. Do this even if you get paperwork saying that the lien was removed. It is rare but occasionally there can be a snafu with that and it is much easier to get that fixed now instead of years from now. In some areas you may be able to do that online.
+1 on this. The national bank that issued and held my mortgage did not do this until I requested it.

Funancials
Posts: 15
Joined: Sat Feb 17, 2018 2:09 pm

Re: Pay Off Mortgage with Windfall?

Post by Funancials » Thu Mar 29, 2018 8:58 pm

Reverse the scenario:

If you had a paid off house, would you pull all of the equity out in order to invest it?

Hell no.

Pay it off immediately.

BigOldBear
Posts: 43
Joined: Thu Mar 01, 2018 11:52 pm

Re: Pay Off Mortgage with Windfall?

Post by BigOldBear » Thu Mar 29, 2018 11:05 pm

Funancials wrote:
Thu Mar 29, 2018 8:58 pm
Reverse the scenario:

If you had a paid off house, would you pull all of the equity out in order to invest it?

Hell no.

Pay it off immediately.
Agree, but I probably would take out a Home Equity Line of Credit, while I still qualify for it, just in case I need to access the equity for some unexpected situation. I wouldn’t draw on the equity line to invest.

boglebill2015
Posts: 81
Joined: Mon Aug 03, 2015 5:11 pm

Re: Pay Off Mortgage with Windfall?

Post by boglebill2015 » Fri Mar 30, 2018 1:19 am

madbrain wrote:
Thu Mar 29, 2018 3:05 am


I still kept the mortgage, as paying it off in full would have generated significant taxable capital gains, and CA taxes even long-term gains as regular income, which is 9.3% in my tax bracket.
Can you explain this, I am unaware of how paying off a mortgage creates taxable gains.

mortfree
Posts: 1050
Joined: Mon Sep 12, 2016 7:06 pm

Re: Pay Off Mortgage with Windfall?

Post by mortfree » Fri Mar 30, 2018 3:57 am

boglebill2015 wrote:
Fri Mar 30, 2018 1:19 am
madbrain wrote:
Thu Mar 29, 2018 3:05 am


I still kept the mortgage, as paying it off in full would have generated significant taxable capital gains, and CA taxes even long-term gains as regular income, which is 9.3% in my tax bracket.
Can you explain this, I am unaware of how paying off a mortgage creates taxable gains.
Funds to payoff the mortgage are most likely currently invested (not liquid cash) so selling those shares would create a taxable event.

clutchied
Posts: 528
Joined: Mon Jan 05, 2015 12:11 pm

Re: Pay Off Mortgage with Windfall?

Post by clutchied » Fri Mar 30, 2018 9:20 am

I would dump the proceeds into bonds and then use the bond coupons to pay the mortgage.

Your rate is low and tax subsidized. You can always try it out and see how you like it :)


The goal is to end up with a paid off house and still all that capital.

lakpr
Posts: 268
Joined: Fri Mar 18, 2011 9:59 am

Re: Pay Off Mortgage with Windfall?

Post by lakpr » Fri Mar 30, 2018 11:16 am

clutchied wrote:
Fri Mar 30, 2018 9:20 am
I would dump the proceeds into bonds and then use the bond coupons to pay the mortgage.

Your rate is low and tax subsidized. You can always try it out and see how you like it :)
Starting 2018, this may not be true. It depends on the filing status and the specific state one is living in, of course, but I found that my mortgage interest is no longer deductible.

MFJ, state of residence = NJ, mortgage principal balance = 280K
Property taxes are > 10K, so the difference between std. deduction and property taxes = 14K.
We do some charity: $2K
So for us to opt for itemized deduction, the mortgage interest should be > 12K per year.
Our interest rate = 3% on a 15-year mortgage, the outstanding loan balance should be at least $400K, we are far below that threshold.
Essentially it means our entire mortgage now is post-tax (no tax subsidy).

MP173
Posts: 1881
Joined: Fri Dec 07, 2007 6:03 pm

Re: Pay Off Mortgage with Windfall?

Post by MP173 » Fri Mar 30, 2018 2:31 pm

Congratulations on making a decision. Seriously. Sometimes the windfall can make one paralyzed with indecision....full disclosure - had that occur to me.

Perhaps the best advise when receiving a windfall is to do nothing and allow a few months to pass. I basically agree with your decision to pay off the mortgage. Your personal free cash flow (pfcf) will increase $2700 month and that is a great position to be in. I have paid off two mortgages early and always enjoyed that freedom.

Ed

User avatar
goingup
Posts: 3122
Joined: Tue Jan 26, 2010 1:02 pm

Re: Pay Off Mortgage with Windfall?

Post by goingup » Fri Mar 30, 2018 6:44 pm

Congrats OP. I agree with your decision. In another thread I think you mentioned this "windfall" was the proceeds from selling a highly appreciated prior home. Using your windfall to pay off your new home's mortgage seems to make perfect sense. :beer

JoeRetire
Posts: 1065
Joined: Tue Jan 16, 2018 2:44 pm

Re: Pay Off Mortgage with Windfall?

Post by JoeRetire » Fri Mar 30, 2018 6:55 pm

Newbie444 wrote:
Thu Mar 29, 2018 11:14 am
Many, many thanks to all for the thoughtful and helpful advice. I visited my bank this morning and arranged for full payoff of my mortgage. It's what I've been wanting to do, and I just needed a sanity check that I wasn't ignoring some major downside, which you all have confirmed. I feel even better than I thought I would :D
So what is your plan for when you sell this house and move into a higher-priced home in a few years?
Will you pay the difference in cash so that you aren't once again bothered by a mortgage?

Funancials
Posts: 15
Joined: Sat Feb 17, 2018 2:09 pm

Re: Pay Off Mortgage with Windfall?

Post by Funancials » Fri Mar 30, 2018 6:59 pm

BigOldBear wrote:
Thu Mar 29, 2018 11:05 pm
Funancials wrote:
Thu Mar 29, 2018 8:58 pm
Reverse the scenario:

If you had a paid off house, would you pull all of the equity out in order to invest it?

Hell no.

Pay it off immediately.
Agree, but I probably would take out a Home Equity Line of Credit, while I still qualify for it, just in case I need to access the equity for some unexpected situation. I wouldn’t draw on the equity line to invest.
For sure and completely agree. I’ve always had a Heloc, but I’ve never used it. Highly recommend.

Bogle_Bro
Posts: 45
Joined: Sat Mar 31, 2018 11:43 am
Location: Frisco Texas, Mortgage Banker & Attorney

Re: Pay Off Mortgage with Windfall?

Post by Bogle_Bro » Sat Mar 31, 2018 1:14 pm

dont tie the money up in the house.

359,348 is the amount of interest paid over the course of a 500k 30fixed 4% mortgage

405,680 is the amount of compound interest gained on 500k invested with just a 2% annual return over 30 years

User avatar
grabiner
Advisory Board
Posts: 22179
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Pay Off Mortgage with Windfall?

Post by grabiner » Sat Mar 31, 2018 2:16 pm

Bogle_Bro wrote:
Sat Mar 31, 2018 1:14 pm
dont tie the money up in the house.

359,348 is the amount of interest paid over the course of a 500k 30fixed 4% mortgage

405,680 is the amount of compound interest gained on 500k invested with just a 2% annual return over 30 years
This is not a fair comparison. If you use $500K in cash to pay off a mortgage, you will have more money available each month in the future; you can invest the money that was not going to mortgage payments, and earn more on it.

The fair comparison is easy to make. If the mortgage rate is equal to the return on your investments, you break even. Principal payments on the mortgage do not change your net worth. But if you have a $500K mortgage at 4%, you will lose $20K of net worth to the interest next year, and if you have a $500K investment, you need to earn 4% on that investment to gain $20K of net worth.

This doesn't mean that you should always pay down a mortgage if you can earn a higher rate on low-risk investments. You may get a benefit from liquidity, or from keeping tax-deferred growth even after the mortgage was gone (if you can invest the money in a 401(k) or IRA instead of paying down the mortgage).
Wiki David Grabiner

Post Reply