Paying off mortgage early

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someuser001
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Paying off mortgage early

Post by someuser001 » Wed Jun 13, 2018 9:28 pm

What is the Bogleheads position on paying off mortgage early?

I have a reasonable mortgage that i can keep going on. Trying to figure out if there is value in paying off mortgage early. I am in the 3rd year of a 7/1 ARM at 3.8%

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grabiner
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Re: Paying off mortgage early

Post by grabiner » Wed Jun 13, 2018 10:03 pm

Wiki link: Paying down loans versus investing

Since you have four years left before your ARM resets, paying down your mortgage is equivalent to buying a risk-free four-year bond. (After four years, you will still owe money on the mortgage, but you will owe it at the market rate.) 3.8% is a high return for a four-year bond, particularly if it is tax-free (that is, the mortgage interest in non-deductible). Therefore, if you are maxing out your retirement accounts, and don't need the liquidity in your taxable account, it is worth paying down that mortgage
Wiki David Grabiner

alex_686
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Re: Paying off mortgage early

Post by alex_686 » Wed Jun 13, 2018 10:04 pm

First, a mortgage is a negative bond.

Second, what is the best use of your cash? Invest it in a 3.8% bond - that is 3.8% risk free. Or do you invest it something else - some higher return higher risk investment?

If it were me, I would invest it in equities over a mortgage. I am confident that I would come out ahead 9 times out of 10. But that is my risk tolerance. Others would prefer the low risk approach. Have a higher cash flow, more flexialbity and thus options. No right answer, just judge, risk, return, and flexiablity.

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grabiner
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Re: Paying off mortgage early

Post by grabiner » Wed Jun 13, 2018 10:20 pm

alex_686 wrote:
Wed Jun 13, 2018 10:04 pm
First, a mortgage is a negative bond.

Second, what is the best use of your cash? Invest it in a 3.8% bond - that is 3.8% risk free. Or do you invest it something else - some higher return higher risk investment?

If it were me, I would invest it in equities over a mortgage. I am confident that I would come out ahead 9 times out of 10. But that is my risk tolerance. Others would prefer the low risk approach. Have a higher cash flow, more flexialbity and thus options. No right answer, just judge, risk, return, and flexiablity.
This answer can only be right if your investments are 100% stock. Otherwise, given this rate, you can get a better benefit for the same risk level by paying down the mortgage, and moving an equal amount from bonds to stock.

I am on the other side of this. My mortgage with 10 years left is 2.625%, which is 2.00% after federal tax, and I can earn more than this on munis; therefore, I can earn more taking very little risk if I buy bonds rather than paying down my mortgage. I actually choose to buy the bonds in my employer plan and invest new taxable money in stocks, for tax reasons; in particular, there is no low-cost muni fund for Maryland.
Wiki David Grabiner

book lover
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Re: Paying off mortgage early

Post by book lover » Thu Jun 14, 2018 8:29 am

In 1990, when we purchased our house, two books that influenced that decision to pay it off early were Ron Blue's The Debt Squeeze and The Richest Man In Babylon. My wife and I are conservative and have had no regrets with our decision.

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midareff
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Re: Paying off mortgage early

Post by midareff » Thu Jun 14, 2018 8:40 am

grabiner wrote:
Wed Jun 13, 2018 10:20 pm


I am on the other side of this. My mortgage with 10 years left is 2.625%, which is 2.00% after federal tax, and I can earn more than this on munis; therefore, I can earn more taking very little risk if I buy bonds rather than paying down my mortgage. I actually choose to buy the bonds in my employer plan and invest new taxable money in stocks, for tax reasons; in particular, there is no low-cost muni fund for Maryland.
I am also on the other side. I have about 20 years or so left on a 3.0% mortgage which is in the 2.0 to 2.25% range after Federal tax. IT Munis this year have averaged about 2.85% and are easily obtainable through Vanguard. No tax problems in Florida. Took a 1.49% new car loan for three years in March. Also remember, the longer these things run and the greater the inflation rate the less you are paying in today's real dollars. As long as I can make money on their money with minimal risk I will do it.

NextMil
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Re: Paying off mortgage early

Post by NextMil » Thu Jun 14, 2018 8:40 am

grabiner wrote:
Wed Jun 13, 2018 10:20 pm
This answer can only be right if your investments are 100% stock. Otherwise, given this rate, you can get a better benefit for the same risk level by paying down the mortgage, and moving an equal amount from bonds to stock.

I am on the other side of this. My mortgage with 10 years left is 2.625%, which is 2.00% after federal tax, and I can earn more than this on munis; therefore, I can earn more taking very little risk if I buy bonds rather than paying down my mortgage. I actually choose to buy the bonds in my employer plan and invest new taxable money in stocks, for tax reasons; in particular, there is no low-cost muni fund for Maryland.
I am doing a split between the two. So some pay down some investing to maybe use for pay down eventually. I am also recasting yearly to reduce the required payment to reduce risk, but still paying the same amount - so that is purely risk mitigation. I am doing all of this while having an emergency fund, of course.

What I am really struggling with is the behavioral side of it. When I was crushing consumer debt, there was this one singular goal, and I really enjoyed the game of paying down as fast as humanly possible - I know sounds weird right, almost masochistic, but I am starting to come around to the idea that zeroing in one target, could behaviorally have an impact on the speed in which it gets done, rather than trudging along and hedging both sides of the coin.

Now you could make the argument that instead of doing a little of both, I pick one over the other - aggressive pay down, or aggressive investment to pay it off in fell swoop when the balance on taxable is higher than what is left on the mortgage, but I am really starting to think I need to pick one approach.

I too am at 9.5 years left at 2.875%, which I think would be 1.9% effective, but the tax rules just changed and not sure I am going to be able to itemize this time around, so it may truly now be 2.875%.

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Re: Paying off mortgage early

Post by Jefferson » Thu Jun 14, 2018 10:33 am

I completely get the main reasons that cause people to choose not to pay off a mortgage early. You likely would get much better returns on your investments (i.e., more money in the long run) and you don't want to use up a large portion of your liquidity (if you need money fast, it's a lot easier to sell some stocks than your house!). But I think there are plenty of situations, including mine, where it does make sense to pay it off early.

One is your source of income. My wife and I own our own business. It's doing quite well now, so the cash flow is certainly there to make extra payments to principal. But I have no idea what our income will look like in ten years.

Another is your liquid net worth. We've got enough money to make extra payments even after maxing out 401k contributions, adding to taxable, adding to cash savings, giving some to charities, living well, etc, but not so much that I'm not worried about what this mortgage could mean 10-15 years from now if things go south.

Essentially, I'm satisfied with our monthly savings (in all buckets), but still want the peace of mind of not having the debt. I'm willing to forego some potential investment returns to reduce the risk of being in a bad situation later.

chevca
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Re: Paying off mortgage early

Post by chevca » Thu Jun 14, 2018 10:52 am

someuser001 wrote:
Wed Jun 13, 2018 9:28 pm
What is the Bogleheads position on paying off mortgage early?
Pretty much 50% say do it and 50% say don't. :happy

Personal preference.

winterfan
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Re: Paying off mortgage early

Post by winterfan » Thu Jun 14, 2018 10:55 am

We paid off our mortgage pretty early with a chunk of cash we had on hand and I kind of regret it. The thing I regret most is now we would like to buy a different home. We live in a tight market and can't really sell our house and then buy a different house. We feel kind of stuck in our house. I do like not having a mortgage payment though!

JoeRetire
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Re: Paying off mortgage early

Post by JoeRetire » Thu Jun 14, 2018 10:58 am

someuser001 wrote:
Wed Jun 13, 2018 9:28 pm
What is the Bogleheads position on paying off mortgage early?
The Bogleheads position is all over the place.

There are some who think all debt is bad debt and thus getting rid of a mortgage as quickly as possible is a priority.
There are some who won't sleep well at night unless they are mortgage-free, particularly in retirement.
There are some who think holding an inexpensive mortgage is a good way to arbitrage your investable assets.
There are some who attempt to equate mortgages with "negative bonds".
There are some who would first consider your overall portfolio and goals, then decide if paying off the mortgage gets you closer to those goals.
There are some who would value more liquidity over paying off a cheap loan.
And there are other positions.

A few quick searches here should quickly uncover most of those positions.

JoeRetire
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Re: Paying off mortgage early

Post by JoeRetire » Thu Jun 14, 2018 11:03 am

someuser001 wrote:
Wed Jun 13, 2018 9:28 pm
I have a reasonable mortgage that i can keep going on. Trying to figure out if there is value in paying off mortgage early. I am in the 3rd year of a 7/1 ARM at 3.8%
If you don't pay off the mortgage, what would you do with the excess funds? If you would invest it, what kind of return would you expect to get?

How much does holding a mortgage bother you? Does it worry you? Keep you awake at night?

basspond
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Re: Paying off mortgage early

Post by basspond » Thu Jun 14, 2018 11:06 am

We didn't pay off early but switched from 30 to 15 years a year into the 30. The interest rate difference was about 1.5%. Basically our payment stayed the same and instead of paying twice the value of the house in interest, the 15 year note total interest was less then 1/2 the value of the house.

bloom2708
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Re: Paying off mortgage early

Post by bloom2708 » Thu Jun 14, 2018 11:07 am

The mortgage has to go at some point.

I just read a thread with a 57 year old with a large mortgage set to go through age 84. Gulp.

I know there are some that want to pass away with a big mortgage (at a ripe old age), but that plan is sub-optimal.

There is some personal preference, balance with a desire to not have that anchor.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

MDfan
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Re: Paying off mortgage early

Post by MDfan » Thu Jun 14, 2018 11:23 am

bloom2708 wrote:
Thu Jun 14, 2018 11:07 am
The mortgage has to go at some point.

I just read a thread with a 57 year old with a large mortgage set to go through age 84. Gulp.

I know there are some that want to pass away with a big mortgage (at a ripe old age), but that plan is sub-optimal.

There is some personal preference, balance with a desire to not have that anchor.
I'm 56 and have a 3.375% mortgage (just north of $300k) scheduled to run through age 74. Unfortunately, we have used our house to pay off some student loans (mine), do multiple improvements and even pay for a little bit of the kids' college. Not ideal, but for some of us, it is what it is. I won't have it paid off by the time I retire, but I'm hoping to have it paid off in 10 years. Right now, we are both maxing out 401ks for our last 6 or so years of working, and we still have one kid left to get through college. Between a pension, SS, and the amount we have in our investment accounts (retirement accounts and a healthy inheritance amount), I'm not too worried about getting the mortgage paid off anytime soon. But I can imagine it would feel great to have it paid off or be very close to paying it off.

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Re: Paying off mortgage early

Post by JoeRetire » Thu Jun 14, 2018 11:25 am

bloom2708 wrote:
Thu Jun 14, 2018 11:07 am
I know there are some that want to pass away with a big mortgage (at a ripe old age), but that plan is sub-optimal.
Sub-optimal in what way?

chevca
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Re: Paying off mortgage early

Post by chevca » Thu Jun 14, 2018 11:29 am

JoeRetire wrote:
Thu Jun 14, 2018 11:25 am
bloom2708 wrote:
Thu Jun 14, 2018 11:07 am
I know there are some that want to pass away with a big mortgage (at a ripe old age), but that plan is sub-optimal.
Sub-optimal in what way?
Leaving a bit of a mess for the heirs would be a way.

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Re: Paying off mortgage early

Post by bloom2708 » Thu Jun 14, 2018 11:31 am

JoeRetire wrote:
Thu Jun 14, 2018 11:25 am
bloom2708 wrote:
Thu Jun 14, 2018 11:07 am
I know there are some that want to pass away with a big mortgage (at a ripe old age), but that plan is sub-optimal.
Sub-optimal in what way?
Not everyone stumbles into Bogleheads at 26. I get that.

In another dimension high school graduates are issues their Bogleheads username and password. :wink:

I know everything can be argued. That is fine. If it isn't sub-optimal, then it is the opposite and optimal. I won't agree with that. Take your path. Whatever works.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

Admiral
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Re: Paying off mortgage early

Post by Admiral » Thu Jun 14, 2018 11:37 am

There's a distinction between "pay down" and "pay off." At your rate paying off might make sense, while paying down might not. I am not a fan of ARMs, personally, due to the rate risk, but some don't care.

It's impossible to give proper advice without knowing your other financial particulars. What is your emergency fund? How much of your assets would be in your home? Are you maxing out tax advantaged space (if the answer to the last question is no, then you should absolutely not pay it down). How long will you keep the house? How much liquidity do you have? Do you have a taxable account? Will you need that money for anything?

Many, many factors to consider.

I have 13 years left on a 15 year loan at 2.25%. I do not and likely will never pay it down, though I might pay it off early for cash flow reasons in 7 or so years. (And yes, I also buy bonds, every month, in my tax advantaged account, because I am not a 100% equities guy.) I always itemized, though that may change this year, but my interest was so low (less than $6k per year on a $300k loan) that there was no huge savings there.

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Re: Paying off mortgage early

Post by -buzz- » Thu Jun 14, 2018 12:48 pm

NextMil wrote:
Thu Jun 14, 2018 8:40 am
I am doing a split between the two. So some pay down some investing to maybe use for pay down eventually. I am also recasting yearly to reduce the required payment to reduce risk, but still paying the same amount - so that is purely risk mitigation. I am doing all of this while having an emergency fund, of course.
...
Now you could make the argument that instead of doing a little of both, I pick one over the other - aggressive pay down, or aggressive investment to pay it off in fell swoop when the balance on taxable is higher than what is left on the mortgage, but I am really starting to think I need to pick one approach.
It is behaviorally easier to have a singular focus - either debt pay down or investment accummulation.

If your goal includes paying off the mortgage by a certain time (retirement, kids in college, etc.), then the goal dictates how aggressively the pay down has to occur.

Otherwise, I prefer the split approach. The behavioral aspect is making a plan and sticking to it.

We have a 3.125% mortgage with 13 years left and do not expect to itemize deductions this year due to the higher standard deduction.

Here is our approach:
1) We round the mortgage payment up a little to get a small amount of additional principal reduction every month.
2) Our monthly budget already includes tax deferred savings, so any savings over my budget goes to taxable investments.
3) We have a "sell trigger" balance for taxable investments. When our taxable investment balance reaches that level, we sell $50k, set some aside for CG taxes, and put the rest on principal.

This approach preserves the majority of our liquidity. Every time we reach the sell trigger and do principal reduction, it will reduce the mortgage timeline by about 2 years.

This approach does reduce long term investment compounding compared to staying leveraged and paying minimum mortgage only. We can live with that because we are also reducing risk by eliminating debt.

NextMil
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Re: Paying off mortgage early

Post by NextMil » Thu Jun 14, 2018 2:53 pm

-buzz- wrote:
Thu Jun 14, 2018 12:48 pm

Here is our approach:
1) We round the mortgage payment up a little to get a small amount of additional principal reduction every month.
2) Our monthly budget already includes tax deferred savings, so any savings over my budget goes to taxable investments.
3) We have a "sell trigger" balance for taxable investments. When our taxable investment balance reaches that level, we sell $50k, set some aside for CG taxes, and put the rest on principal.

This approach preserves the majority of our liquidity. Every time we reach the sell trigger and do principal reduction, it will reduce the mortgage timeline by about 2 years.

This approach does reduce long term investment compounding compared to staying leveraged and paying minimum mortgage only. We can live with that because we are also reducing risk by eliminating debt.
I really like this plan. Gives you exposure to both sides, but mechanically it sort of pushes you to shove cash into investments as quickly as possible with the stated goal of paying it off and risk reduction. I think I will adopt this approach. Seems very logical and minimizes risk.

One question, how often are you finding you are doing the pay downs? I am sure its dictated by the market to some degree.

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midareff
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Re: Paying off mortgage early

Post by midareff » Thu Jun 14, 2018 3:28 pm

chevca wrote:
Thu Jun 14, 2018 10:52 am
someuser001 wrote:
Wed Jun 13, 2018 9:28 pm
What is the Bogleheads position on paying off mortgage early?
Pretty much 50% say do it and 50% say don't. :happy

Personal preference.
and individual current and expected cash and income flows.

McDougal
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Re: Paying off mortgage early

Post by McDougal » Thu Jun 14, 2018 4:07 pm

bloom2708 wrote:
Thu Jun 14, 2018 11:07 am
The mortgage has to go at some point.

I just read a thread with a 57 year old with a large mortgage set to go through age 84. Gulp.

I know there are some that want to pass away with a big mortgage (at a ripe old age), but that plan is sub-optimal.

There is some personal preference, balance with a desire to not have that anchor.
Well the word is MORTgage :D

ConcernedKid
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Re: Paying off mortgage early

Post by ConcernedKid » Thu Jun 14, 2018 4:41 pm

OP,

I don't think you can go wrong either way. The only time I think it makes a difference is if you are close to retirement and want to keep your "income" as low as possible to qualify for income-dependent subsidies. In that instance, paying off the mortgage will allow you to live the same lifestyle for less money. For instance, if you have a $200k mortgage that requires $900/mo. or ($10,800/year), you would need $270k in investments to generate $10,800 with a 4% SWR. If you are doing Roth conversion ladders, if you need to qualify for ACA subsidies or lower Medicare rates, you can keep your income a lot lower if your mortgage is paid off.

Other than that, I think it's 6 one way and 1/2 dozen the other.

JoeRetire
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Re: Paying off mortgage early

Post by JoeRetire » Thu Jun 14, 2018 5:31 pm

bloom2708 wrote:
Thu Jun 14, 2018 11:31 am
JoeRetire wrote:
Thu Jun 14, 2018 11:25 am
bloom2708 wrote:
Thu Jun 14, 2018 11:07 am
I know there are some that want to pass away with a big mortgage (at a ripe old age), but that plan is sub-optimal.
Sub-optimal in what way?
Not everyone stumbles into Bogleheads at 26. I get that.

In another dimension high school graduates are issues their Bogleheads username and password. :wink:

I know everything can be argued. That is fine. If it isn't sub-optimal, then it is the opposite and optimal. I won't agree with that. Take your path. Whatever works.
I have absolutely no idea what you mean. Can you not explain what you meant that passing away with a big mortgage at a ripe old age is sub-optimal? I'm not trying to argue - just trying to understand.

JoeRetire
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Re: Paying off mortgage early

Post by JoeRetire » Thu Jun 14, 2018 5:33 pm

chevca wrote:
Thu Jun 14, 2018 11:29 am
Leaving a bit of a mess for the heirs would be a way.
Sorry, I don't understand.
How is bequeathing a house with a mortgage a mess for the heirs?

chevca
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Re: Paying off mortgage early

Post by chevca » Thu Jun 14, 2018 5:46 pm

Just one more thing to take care of paying the mortgage, or paying it off at sale. Not a huge mess, just a bit of a mess.

JoeRetire
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Re: Paying off mortgage early

Post by JoeRetire » Thu Jun 14, 2018 5:53 pm

chevca wrote:
Thu Jun 14, 2018 5:46 pm
Just one more thing to take care of paying the mortgage, or paying it off at sale. Not a huge mess, just a bit of a mess.
I've sold houses having mortgages and one without. Frankly, handling two checks at the closing wasn't all that much harder than handling one.

But I understand what you mean now and I thank your for replying and clearing that up.

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Re: Paying off mortgage early

Post by bloom2708 » Fri Jun 15, 2018 8:29 am

JoeRetire wrote:
Thu Jun 14, 2018 5:31 pm
I have absolutely no idea what you mean. Can you not explain what you meant that passing away with a big mortgage at a ripe old age is sub-optimal? I'm not trying to argue - just trying to understand.
Let's say you are 26 and stumble into Bogleheads. You put together a plan for 30 years down the road. Would that plan include having a $300k mortgage at 57? Would your plan include $900 in car payments at 60? No.

Everyone is where they are right now. Whatever happened or didn't happen doesn't matter. You are here.

If you are 57 with a $300k mortgage, that is just fine. You have it. You can keep it, sell the house. Take a bigger one at 67. Many options.

Looking forward with a long runway I think it is a better solution to not have a mortgage as you approach retirement. It doesn't really matter what I think. If you want a mortgage at 55, 65, 75, 85, great.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

wolf359
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Re: Paying off mortgage early

Post by wolf359 » Fri Jun 15, 2018 9:10 am

JoeRetire wrote:
Thu Jun 14, 2018 10:58 am
someuser001 wrote:
Wed Jun 13, 2018 9:28 pm
What is the Bogleheads position on paying off mortgage early?
The Bogleheads position is all over the place.

There are some who think all debt is bad debt and thus getting rid of a mortgage as quickly as possible is a priority.
There are some who won't sleep well at night unless they are mortgage-free, particularly in retirement.
There are some who think holding an inexpensive mortgage is a good way to arbitrage your investable assets.
There are some who attempt to equate mortgages with "negative bonds".
There are some who would first consider your overall portfolio and goals, then decide if paying off the mortgage gets you closer to those goals.
There are some who would value more liquidity over paying off a cheap loan.
And there are other positions.

A few quick searches here should quickly uncover most of those positions.
This is a good summary of most of the positions. There's a couple of new factors for this specific case. Some questions come to mind:

1. Why did you get a 7/1 year ARM?
- Was it because you intended to move in 7 years? If you still plan on moving within (now 4 years), then don't bother tying up all your liquidity in the house. Just keep your expenses minimal and move as scheduled.
- Was it because you couldn't afford the payments of a 15 year or 30 year fixed mortgage? If so, then affordability may be an issue. Only make a move if you can pay OFF, not pay DOWN the mortgage. Liquidity may be a key factor if you're that close to the edge. Accumulate the extra payments in a sinking fund, then pay off the mortgage all at once when you can.
- Was it because you observed that the long-term interest rate environment was little to no inflation, and that interest rates were unusually low or negative for long periods of time? If so, what do you think rates will be in 4 years when the balance is due? The Fed has been raising rates, and the last statement is that they plan to continue doing so. Either paying off the mortgage or refinancing to a fixed rate now is your best move in that case.

2. What are the pre-payment terms of your 7/1 ARM?
- I don't know this, and I have no idea if it varies from contract to contract. You should read your mortgage to verify this. As I understand the product, you effectively have a 30 year mortgage, for which the interest rate is fixed for 7 years, and the rate adjusts every year for the remaining 23 years. If you prepay, does it simply reduce your principal, or does it advance your payment schedule (so that if you pre-pay the next 12 payments, the ARM payments are now a year sooner?)
- Once you are in an ARM, prepayments still save you money, but the calculations are more complicated. There are prepayment calculators specifically for ARMs.

Paying off a mortgage makes the expense go away because your mortgage payments stop. Paying down a mortgage saves you money in the long term, because you have fewer years of payments. However, your ARM is a complicating factor. Can you afford the mortgage after the 4 year mark, if interest rates are higher than they are now? Or are you intending to pay off the mortgage in the next 4 years, before that event occurs? If you had the financial ability to do this, then why did you commit to a 7/1 ARM in the first place? (Those reasons may take priority over the repayment benefits.)

JoeRetire
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Re: Paying off mortgage early

Post by JoeRetire » Fri Jun 15, 2018 12:24 pm

bloom2708 wrote:
Fri Jun 15, 2018 8:29 am
JoeRetire wrote:
Thu Jun 14, 2018 5:31 pm
I have absolutely no idea what you mean. Can you not explain what you meant that passing away with a big mortgage at a ripe old age is sub-optimal? I'm not trying to argue - just trying to understand.
Looking forward with a long runway I think it is a better solution to not have a mortgage as you approach retirement.
It's sub-optimal because you think it's better not to have a mortgage.
Okay, got it.

Admiral
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Re: Paying off mortgage early

Post by Admiral » Fri Jun 15, 2018 1:24 pm

JoeRetire wrote:
Fri Jun 15, 2018 12:24 pm
bloom2708 wrote:
Fri Jun 15, 2018 8:29 am
JoeRetire wrote:
Thu Jun 14, 2018 5:31 pm
I have absolutely no idea what you mean. Can you not explain what you meant that passing away with a big mortgage at a ripe old age is sub-optimal? I'm not trying to argue - just trying to understand.
Looking forward with a long runway I think it is a better solution to not have a mortgage as you approach retirement.
It's sub-optimal because you think it's better not to have a mortgage.
Okay, got it.
I think the vast majority of Bh's would agree with bloom2708's general point: That one should try, if at all possible, to reduce or eliminate debt when going into retirement, when income is fixed. Seems like common sense, not brain surgery to me.

Now whether one should hold a mortgage at all, ever, is a different and unrelated issue.

-buzz-
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Re: Paying off mortgage early

Post by -buzz- » Fri Jun 15, 2018 2:06 pm

NextMil wrote:
Thu Jun 14, 2018 2:53 pm
-buzz- wrote:
Thu Jun 14, 2018 12:48 pm

Here is our approach:
1) We round the mortgage payment up a little to get a small amount of additional principal reduction every month.
2) Our monthly budget already includes tax deferred savings, so any savings over my budget goes to taxable investments.
3) We have a "sell trigger" balance for taxable investments. When our taxable investment balance reaches that level, we sell $50k, set some aside for CG taxes, and put the rest on principal.

This approach preserves the majority of our liquidity. Every time we reach the sell trigger and do principal reduction, it will reduce the mortgage timeline by about 2 years.

This approach does reduce long term investment compounding compared to staying leveraged and paying minimum mortgage only. We can live with that because we are also reducing risk by eliminating debt.
I really like this plan. Gives you exposure to both sides, but mechanically it sort of pushes you to shove cash into investments as quickly as possible with the stated goal of paying it off and risk reduction. I think I will adopt this approach. Seems very logical and minimizes risk.

One question, how often are you finding you are doing the pay downs? I am sure its dictated by the market to some degree.
You're right. It is partially dictated by investment performance and how much we can save.

We set the sell trigger amount high enough that we think it will take a couple of years to get there. That timing is important for us because it coincides with college costs starting to be clear for our first child entering college.

Our goal is to put three children through their undergrad debt free. If our college savings accounts aren't where we need them to be at that point, we will still have the flexibility to hold off longer on the mortgage.

Once we reach the trigger the first time, we think that we can get there again every 1-2 years.

sreynard
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Re: Paying off mortgage early

Post by sreynard » Fri Jun 15, 2018 2:32 pm

JoeRetire wrote:
Fri Jun 15, 2018 12:24 pm
bloom2708 wrote:
Fri Jun 15, 2018 8:29 am
JoeRetire wrote:
Thu Jun 14, 2018 5:31 pm
I have absolutely no idea what you mean. Can you not explain what you meant that passing away with a big mortgage at a ripe old age is sub-optimal? I'm not trying to argue - just trying to understand.
Looking forward with a long runway I think it is a better solution to not have a mortgage as you approach retirement.
It's sub-optimal because you think it's better not to have a mortgage.
Okay, got it.
It is sub-optimal because most BH's deferred paying taxes when their income are high. If expenses are kept relatively low in retirement they may be able to pay little or no taxes on that money, ever. Tax free money is optimal compared to paying a larger tax bill than necessary.

Total portfolio value may be lower paying off the mortgage before retirement, but so are fixed expenses, and hence need for a large portfolio. High fixed expenses reduce flexibility if something goes wrong.

The ACA, new tax changes, and low bond yields have just made it more optimal to pay it off early.

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Toons
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Re: Paying off mortgage early

Post by Toons » Fri Jun 15, 2018 2:53 pm

Pay it off today ,,,,,,,,,or
Tomorrow.








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"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

Admiral
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Re: Paying off mortgage early

Post by Admiral » Fri Jun 15, 2018 4:28 pm

-buzz- wrote:
Fri Jun 15, 2018 2:06 pm
NextMil wrote:
Thu Jun 14, 2018 2:53 pm
-buzz- wrote:
Thu Jun 14, 2018 12:48 pm

Here is our approach:
1) We round the mortgage payment up a little to get a small amount of additional principal reduction every month.
2) Our monthly budget already includes tax deferred savings, so any savings over my budget goes to taxable investments.
3) We have a "sell trigger" balance for taxable investments. When our taxable investment balance reaches that level, we sell $50k, set some aside for CG taxes, and put the rest on principal.

This approach preserves the majority of our liquidity. Every time we reach the sell trigger and do principal reduction, it will reduce the mortgage timeline by about 2 years.

This approach does reduce long term investment compounding compared to staying leveraged and paying minimum mortgage only. We can live with that because we are also reducing risk by eliminating debt.
I really like this plan. Gives you exposure to both sides, but mechanically it sort of pushes you to shove cash into investments as quickly as possible with the stated goal of paying it off and risk reduction. I think I will adopt this approach. Seems very logical and minimizes risk.

One question, how often are you finding you are doing the pay downs? I am sure its dictated by the market to some degree.
You're right. It is partially dictated by investment performance and how much we can save.

We set the sell trigger amount high enough that we think it will take a couple of years to get there. That timing is important for us because it coincides with college costs starting to be clear for our first child entering college.

Our goal is to put three children through their undergrad debt free. If our college savings accounts aren't where we need them to be at that point, we will still have the flexibility to hold off longer on the mortgage.

Once we reach the trigger the first time, we think that we can get there again every 1-2 years.
I'm not judging how this approach works in your case, but might point out that many/most people may not have six figure (or high five figure) taxable accounts such that they can take 50k and put it toward a mortgage...or at any rate couldn't and also have an adequate emergency fund remaining. I'd also point out that by pre-paying, you're limiting the money you may have in the future to fund college. Your expenses at that time may be lower, but you've put tens or hundreds of thousands into your house that you could otherwise use to fund college. You could, of course, take a home equity loan to pay for it (and many do) but if you're going to take a loan to get at the money in your house, what not just have a mortgage and a big taxable account?

Just as a counterargument...

JoeRetire
Posts: 875
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Re: Paying off mortgage early

Post by JoeRetire » Fri Jun 15, 2018 5:35 pm

sreynard wrote:
Fri Jun 15, 2018 2:32 pm
JoeRetire wrote:
Fri Jun 15, 2018 12:24 pm
bloom2708 wrote:
Fri Jun 15, 2018 8:29 am
JoeRetire wrote:
Thu Jun 14, 2018 5:31 pm
I have absolutely no idea what you mean. Can you not explain what you meant that passing away with a big mortgage at a ripe old age is sub-optimal? I'm not trying to argue - just trying to understand.
Looking forward with a long runway I think it is a better solution to not have a mortgage as you approach retirement.
It's sub-optimal because you think it's better not to have a mortgage.
Okay, got it.
It is sub-optimal because most BH's deferred paying taxes when their income are high. If expenses are kept relatively low in retirement they may be able to pay little or no taxes on that money, ever. Tax free money is optimal compared to paying a larger tax bill than necessary.

Total portfolio value may be lower paying off the mortgage before retirement, but so are fixed expenses, and hence need for a large portfolio. High fixed expenses reduce flexibility if something goes wrong.

The ACA, new tax changes, and low bond yields have just made it more optimal to pay it off early.
I guess some folks have a different idea of what the term "optimal" means while holding a cheap mortgage.

-buzz-
Posts: 49
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Location: USA

Re: Paying off mortgage early

Post by -buzz- » Fri Jun 15, 2018 6:03 pm

Admiral wrote:
Fri Jun 15, 2018 4:28 pm
I'm not judging how this approach works in your case, but might point out that many/most people may not have six figure (or high five figure) taxable accounts such that they can take 50k and put it toward a mortgage...or at any rate couldn't and also have an adequate emergency fund remaining. I'd also point out that by pre-paying, you're limiting the money you may have in the future to fund college. Your expenses at that time may be lower, but you've put tens or hundreds of thousands into your house that you could otherwise use to fund college. You could, of course, take a home equity loan to pay for it (and many do) but if you're going to take a loan to get at the money in your house, what not just have a mortgage and a big taxable account?

Just as a counterargument...

You are right. This approach definitely is not for everyone.

We want to be debt-free including mortgage before retirement about 10 years from now. By that time, hopefully all three children will have graduated with undergrad degrees.

I would not propose this approach to anyone if it jeopardizes their emergency fund or drops liquidity to the point that they might need to borrow for foreseeable expenses like college. It wouldn't make sense to pay off one debt just to take on another, especially with current low fixed rate mortgages.
Last edited by -buzz- on Fri Jun 15, 2018 6:04 pm, edited 1 time in total.

dknightd
Posts: 451
Joined: Wed Mar 07, 2018 11:57 am

Re: Paying off mortgage early

Post by dknightd » Fri Jun 15, 2018 6:04 pm

I still owe on a mortgage (about 50K at 3.25%). If I stick to scheduled payment it will be paid off when I'm 68. I plan to retire before 68. Currently it is paid automagically from my paycheck. When I quit getting a pay check I'll probably pay it off. Mostly because it will be one less thing to forget to pay. Or maybe not. I'm in no hurry. I could probably arrange another way to automatically pay it off. Right now I have a pretty safe way to earn 3.25 tax deferred. So even if I can no longer deduct home loan interest from taxes I more or less break even. I might go to the trouble of rearranging automatically having it payed off since I know the mortgage is fixed at 3.25, and I don't know what will happen on the investment end. And if I took out $50k now it might bump me up to the next tax bracket.

I guess my response is - it depends ;)

sreynard
Posts: 293
Joined: Thu May 02, 2013 8:11 pm

Re: Paying off mortgage early

Post by sreynard » Mon Jun 18, 2018 12:45 pm

JoeRetire wrote:
Fri Jun 15, 2018 5:35 pm
sreynard wrote:
Fri Jun 15, 2018 2:32 pm
JoeRetire wrote:
Fri Jun 15, 2018 12:24 pm
bloom2708 wrote:
Fri Jun 15, 2018 8:29 am
JoeRetire wrote:
Thu Jun 14, 2018 5:31 pm
I have absolutely no idea what you mean. Can you not explain what you meant that passing away with a big mortgage at a ripe old age is sub-optimal? I'm not trying to argue - just trying to understand.
Looking forward with a long runway I think it is a better solution to not have a mortgage as you approach retirement.
It's sub-optimal because you think it's better not to have a mortgage.
Okay, got it.
It is sub-optimal because most BH's deferred paying taxes when their income are high. If expenses are kept relatively low in retirement they may be able to pay little or no taxes on that money, ever. Tax free money is optimal compared to paying a larger tax bill than necessary.

Total portfolio value may be lower paying off the mortgage before retirement, but so are fixed expenses, and hence need for a large portfolio. High fixed expenses reduce flexibility if something goes wrong.

The ACA, new tax changes, and low bond yields have just made it more optimal to pay it off early.
I guess some folks have a different idea of what the term "optimal" means while holding a cheap mortgage.
Sorry Joe, I didn't see your reply.

It has little to do with the interest rate of the mortgage, but the size of the monthly payment and what that does to your annual budget, withdraw rate, taxes, etc. in retirement.

Large monthly expenses can be 'sub-optimal' in retirement because they decrease flexibility and increase risk. Especially sequence of returns risk. Something retirees tend to want to reduce. At work they call it a "variable cost structure". When times are good, you can up the spending, but when things look grim, you can cut back on expenses to weather the storm.

To be fair, what is optimal may vary greatly depending on personal situation and and how the future plays out. There are pro's and con's, costs and benefits, to every option. One is never all good or all bad.

Personally, I plan to try to keep taxable income rather low before 70 to fill my tax bracket with Roth IRA conversions. My spreadsheet is showing some relatively big tax bills ahead after SS and RMD's start. I'm still working through all the pro's and con's. Of course I may die before then and not have to worry about it.... Retiring before I die would be a really big pro.... :wink:

frugaltigris
Posts: 21
Joined: Fri Sep 01, 2017 8:44 am

Re: Paying off mortgage early

Post by frugaltigris » Mon Jun 18, 2018 1:13 pm

Thanks for sharing this. I am in a similar situation and debating whether to pay it off. Can you please share the way to earn 3.25% tax deferred?
dknightd wrote:
Fri Jun 15, 2018 6:04 pm
I still owe on a mortgage (about 50K at 3.25%). If I stick to scheduled payment it will be paid off when I'm 68. I plan to retire before 68. Currently it is paid automagically from my paycheck. When I quit getting a pay check I'll probably pay it off. Mostly because it will be one less thing to forget to pay. Or maybe not. I'm in no hurry. I could probably arrange another way to automatically pay it off. Right now I have a pretty safe way to earn 3.25 tax deferred. So even if I can no longer deduct home loan interest from taxes I more or less break even. I might go to the trouble of rearranging automatically having it payed off since I know the mortgage is fixed at 3.25, and I don't know what will happen on the investment end. And if I took out $50k now it might bump me up to the next tax bracket.

I guess my response is - it depends ;)

Admiral
Posts: 1127
Joined: Mon Oct 27, 2014 12:35 pm

Re: Paying off mortgage early

Post by Admiral » Mon Jun 18, 2018 1:23 pm

frugaltigris wrote:
Mon Jun 18, 2018 1:13 pm
Thanks for sharing this. I am in a similar situation and debating whether to pay it off. Can you please share the way to earn 3.25% tax deferred?
dknightd wrote:
Fri Jun 15, 2018 6:04 pm
I still owe on a mortgage (about 50K at 3.25%). If I stick to scheduled payment it will be paid off when I'm 68. I plan to retire before 68. Currently it is paid automagically from my paycheck. When I quit getting a pay check I'll probably pay it off. Mostly because it will be one less thing to forget to pay. Or maybe not. I'm in no hurry. I could probably arrange another way to automatically pay it off. Right now I have a pretty safe way to earn 3.25 tax deferred. So even if I can no longer deduct home loan interest from taxes I more or less break even. I might go to the trouble of rearranging automatically having it payed off since I know the mortgage is fixed at 3.25, and I don't know what will happen on the investment end. And if I took out $50k now it might bump me up to the next tax bracket.

I guess my response is - it depends ;)
A bond fund held in a tax-deferred account at over 3% yield.

frugaltigris
Posts: 21
Joined: Fri Sep 01, 2017 8:44 am

Re: Paying off mortgage early

Post by frugaltigris » Mon Jun 18, 2018 1:26 pm

Thanks
Admiral wrote:
Mon Jun 18, 2018 1:23 pm
frugaltigris wrote:
Mon Jun 18, 2018 1:13 pm
Thanks for sharing this. I am in a similar situation and debating whether to pay it off. Can you please share the way to earn 3.25% tax deferred?
dknightd wrote:
Fri Jun 15, 2018 6:04 pm
I still owe on a mortgage (about 50K at 3.25%). If I stick to scheduled payment it will be paid off when I'm 68. I plan to retire before 68. Currently it is paid automagically from my paycheck. When I quit getting a pay check I'll probably pay it off. Mostly because it will be one less thing to forget to pay. Or maybe not. I'm in no hurry. I could probably arrange another way to automatically pay it off. Right now I have a pretty safe way to earn 3.25 tax deferred. So even if I can no longer deduct home loan interest from taxes I more or less break even. I might go to the trouble of rearranging automatically having it payed off since I know the mortgage is fixed at 3.25, and I don't know what will happen on the investment end. And if I took out $50k now it might bump me up to the next tax bracket.

I guess my response is - it depends ;)
A bond fund held in a tax-deferred account at over 3% yield.

dknightd
Posts: 451
Joined: Wed Mar 07, 2018 11:57 am

Re: Paying off mortgage early

Post by dknightd » Tue Jun 19, 2018 8:17 am

frugaltigris wrote:
Mon Jun 18, 2018 1:13 pm
Thanks for sharing this. I am in a similar situation and debating whether to pay it off. Can you please share the way to earn 3.25% tax deferred?
TIAA traditional in a SRA account. Currently earns 3.25%. Guaranteed by TIAA to earn 3%. I can take out the money at any time (and just have to pay normal income tax on it). For right now it is just sitting there, keeping up with inflation. It should really be in stocks for long term gains, but I'm happy enough to leave it there for now.
You may or may not have access to this particular investment, but there are similar ways to earn about 3% long term. Right now 3% is more or less a break even "investment" so I perhaps I should call it a good way to park money.

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