Reevaluating mortgage payoff strategy

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JDDS
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Reevaluating mortgage payoff strategy

Post by JDDS » Thu Jul 19, 2018 1:09 am

Hi everybody,

I have a mortgage at 2.625% (15 years, 20% down) on which I have made the minimum payment since acquiring it in summer 2016, i.e. I have a bit over 13 years left. There have been 3 changes to my financial situation in the last year, which may mean it is time for me to reevaluate my payoff plan.

1. state of IL tax increase from 3.75% to 4.95% (summer 2017)
2. federal tax overhall: my mortgage interest was previously approx 2/3 deductable, none now (2018)
3. I'm moving from contracting 1099misc to W2, which implies moving from a solo 401(k) to a group 401(k) (summer 2018)

After #1 the plan seemed even more solid, keep directing extra resources to deductable (traditional) retirement accounts, but after #2 and especially #3 the situation is different.
#2 means that the mortgage is really 2.625% and not like ~2.2%
#3 means I am now limited to $18,500 employee elective contributions, no more 20% profit share as employer, the net change is that I will have $20-$25k annually outside retirement accounts to redirect

Background thoughts:
I chose to contribute the maximum to my solo 401(k) the last couple of years because I recognized that the opportunity may not last forever, I was in a position to do it without much sacrifice and that these years while I was young were foolish to pass up. I was not sure this would be a long term plan, as I do agree with some posters that just because you can contribute up to $x into a retirement account does not mean that you necessarily need to do so. Thus my feelings are mixed on this change in circumstance.
This mortgage is the only debt I have ever held (very fortunate). I do not lose sleep overnight by holding it, but I prefer to hold it only as long as it is somewhat beneficial.

Questions:
1 perhaps obviously, how aggressive should I be paying off the mortgage?
2 perhaps more interesting to me: I have a preference for some amount of #1 above the minimum, but what criteria should I use to reevaluate #1 in the future? For example, my marginal rate is 28.95%, so if I could get a CD paying more than 2.625%/(1-28.95%) = 3.6945% I would come out ahead, to avoid hastle I'd pry tell myself to look for a 4% CD (in the short term that seems unlikely). Should I instead be looking at some mix of stocks/bonds?

Yes, I have read our wiki on paying down debt vs investing :)
Here's a summary of portfolio in case it is useful background.

Emergency funds: yes approx 6 months
Debt: mortgage 15 years 2.625%
Tax Filing Status: Single
Tax Rate: 24% Federal, 4.95% State
State of Residence: Illinois
Age: ~32
Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 30% of stocks
Portfolio size: mid 6 figures
Approx 35% taxable, 53% traditional (SEP IRA + Solo 401(K)) and 12% Roth (IRA), spread across total stock, total international stock, and bonds+CDs

Edit: I answered some questions in this followup post

Thanks for any thoughts, insights or experience!

mhalley
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Re: Reevaluating mortgage payoff strategy

Post by mhalley » Thu Jul 19, 2018 1:46 am

I wouldn’t pay a penny extra on it. Over time you will pay the mortgage with inflated dollars.
BUT, carrying debt is a personal decision. Having a paid for house is a great feeling. If you are maxing out all retirement accounts, investing in an hsa, plus saving money in a taxable account then by all means pay down the mortgage if you are debt adverse.
When I took out my first mortgage in 1986 it was at 9%. My second house mortgage was 6%. I paid them both off early and love being debt free. I have paid off 1% car loans early, so I don’t always follow my own advice. :beer
Another caveat might be to not retire with a mortgage, but again that is what makes personal finance personal.
Another option would be to split extra money half to mortgage and half to savings. Pros and cons to each strategy.

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Re: Reevaluating mortgage payoff strategy

Post by mortfree » Thu Jul 19, 2018 5:19 am

Not enough info.

What is the mortgage balance in dollars?

How much equity is in the home and how much of your net worth does it represent? That is, do you have too much in the house already?

You could increase your cash savings/emergency fund to 12 months. Then continue adding to your taxable account.

Are there any home improvements that need to be done?

Finally, do you expect you will be able to borrow money at 2.625% again? If not, why pay it off too quick?

If you want the mortgage paid off then I would target payoff in 8 years because you’ll be 40 and it’s a round number.
Last edited by mortfree on Thu Jul 19, 2018 12:20 pm, edited 1 time in total.

NextMil
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Re: Reevaluating mortgage payoff strategy

Post by NextMil » Thu Jul 19, 2018 5:26 am

Pay off the mortgage your future self will thank you.

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Re: Reevaluating mortgage payoff strategy

Post by Grt2bOutdoors » Thu Jul 19, 2018 6:38 am

I don’t like debt on my castle. Business debt I view differently. How big is the remaining mortgage amount compared to annual savings and compared to total taxable portfolio.
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Re: Reevaluating mortgage payoff strategy

Post by bradpevans » Thu Jul 19, 2018 6:42 am

At 2.625%, I would not pay it off, I would invest those dollars you might use to pay it off. Getting your money in the market sooner is one of the best things you can do.

At the point where you can *pay it off* then I might do that. Paying it down doesn't help your cash flow and it locks your money up until you sell.

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Re: Reevaluating mortgage payoff strategy

Post by Tamarind » Thu Jul 19, 2018 7:09 am

It depends on what else you would do with the dollars you can no longer get into tax-advantaged accounts due to change #3.

If this were me I'd probably add them to a taxable retirement account and not pay extra on the mortgage. But you certainly could pay it down. You can also do some of both.

It doesn't sound like you're considering it, but just in case: under no circumstances should you pass up any tax-advantaged space you have access to in order to pay down the mortgage.

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Re: Reevaluating mortgage payoff strategy

Post by alrick » Thu Jul 19, 2018 7:14 am

I am in a like position, but retired. Have a 2.75%, 15 year fixed mortgage on condo valued at $525,000 with $175,000 balance. I am considering a four year plan to pay off. Keep paying $1775 per month and making $25,000 annual payments on principal each of next four years. This still leaves substantial cash assets to redeploy to take advantage of any significant down market, which I would not have if I paid off the loan all at once. I usually take a balanced approach to these things.

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Re: Reevaluating mortgage payoff strategy

Post by JoeRetire » Thu Jul 19, 2018 7:31 am

JDDS wrote:
Thu Jul 19, 2018 1:09 am
1 perhaps obviously, how aggressive should I be paying off the mortgage?
Paying off a 2.625% loan should only be done if you have no place else to invest your money. If you have maxed everything else out and are completely on track to meet your longterm goals, and have no need for additional liquidity, then pay off the mortgage. Otherwise, enjoy that fact of holding a mortgage well below the current rates that will only feel better with time.
2 perhaps more interesting to me: I have a preference for some amount of #1 above the minimum, but what criteria should I use to reevaluate #1 in the future? For example, my marginal rate is 28.95%, so if I could get a CD paying more than 2.625%/(1-28.95%) = 3.6945% I would come out ahead, to avoid hastle I'd pry tell myself to look for a 4% CD (in the short term that seems unlikely). Should I instead be looking at some mix of stocks/bonds?
Yes. You should be invested in a well-diversified portfolio of stocks and bonds.

Unless you are extremely risk-averse, you shouldn't have a large portion of your assets in CDs.

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Re: Reevaluating mortgage payoff strategy

Post by whodidntante » Thu Jul 19, 2018 7:35 am

I wouldn't pay it off. Though I did struggle to decide that, same as you. I naturally have leverage aversion and I decided to overcome it in the face of incredibly low rates. I decided it made sense to take on more debt, not less. So I did.

It happened to work out very well for me, but one should not play results when evaluating strategy. It leads to the wrong conclusion. Leverage was either a good decision in light of the facts available at the time, or it wasn't. Cost and terms are a big factor. Your mortgage has excellent cost and terms. Availability of investments with higher expected returns is another. Your ability to act rationally and liquidity to ride through downturns is another. A mortgage actually improves liquidity because you didn't lock up your money in asphalt and particle board.

Some people want to compare a mortgage payoff to risk free investments of a similar term. That is not what I have done. I would invest the money according to your desired asset allocation, whatever it is. Don't try to make sure you win with the decision to retain the debt. This is mental gymnastics and will make your portfolio conservative to a fault, and possibly increase your tax bill depending on where you place fixed income. It is ok to lose when the decision to invest had good expected returns and acceptable risk.

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9-5 Suited
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Re: Reevaluating mortgage payoff strategy

Post by 9-5 Suited » Thu Jul 19, 2018 7:45 am

I have remarkably similar situation down to age, location, portfolio size, and mortgage characteristics (though at 3.5% mine is a little more expensive).

I have found that with no other debt, a manageable mortgage, and a strong income, I have a preference for liquid money. At least to a certain extent. So I settled on creating a new item in my IPS which is a % split between taxable investments and mortgage interest. Currently the ratio is 3:1 in favor of taxable which is also part of an 80/20 AA portfolio like yours. So I'm taking a bit of a hit on the bond side because even when tax-protecting the bonds they yield less than my mortgage. For you, that actually wouldn't be the case. You would get a stronger yield than 2.6% (not much, but a little) on a very safe bond fund.

If I were in your situation I'd probably go 4:1 or 5:1 on my ratio ... that mortgage is so inexpensive! But I never like doing nothing on the mortgage for emotional reasons. It's nice to feel like the balance is moving faster than it should. Just a little mental boost.

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Re: Reevaluating mortgage payoff strategy

Post by BolderBoy » Thu Jul 19, 2018 8:36 am

JDDS wrote:
Thu Jul 19, 2018 1:09 am
This mortgage is the only debt I have ever held (very fortunate). I do not lose sleep overnight by holding it, but I prefer to hold it only as long as it is somewhat beneficial.

Age: ~32
At age 32 it likely doesn't much matter what you do with the mortgage either way.

Insofar as a mortgage ever being beneficial (when it could be paid off), you'll get a lot of argument about that. Businesses can leverage debt such that it can look like an asset. Individuals cannot. So it comes down mostly to how you feel about debt.
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Earl Lemongrab
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Re: Reevaluating mortgage payoff strategy

Post by Earl Lemongrab » Thu Jul 19, 2018 11:55 am

I wouldn't accelerate a low-cost loan like that, even without deduction. At your age, time is way on your side with investing and I would concentrate on that.

Remember that you're paying with inflation-discounted dollars. Right now, the inflation rate is 2.9%.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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Re: Reevaluating mortgage payoff strategy

Post by MichCPA » Thu Jul 19, 2018 12:12 pm

If inflation is at 2.3% and your mortgage is at 2.625% your real cost of financing is pretty immaterial. But try to ask yourself if you were just starting out would you take out a mortgage to do any of the alternatives your are considering. For instance if your had a chance to earn 2.625% risk free then you would theoretically be indifferent to the two courses of action. Whether or not you should invest is similar to asking whether you would take out a 2.625% fixed margin loan. Honestly, I don't see a huge issue wither way. I would probably put a little bit extra to the house, but not be in a huge hurry to pay it off. Then invest the rest. That would change if risk free rates rose in the future, like you pointed out.

JDDS
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Re: Reevaluating mortgage payoff strategy

Post by JDDS » Thu Jul 19, 2018 6:23 pm

Thanks all, I will try to answer several of the questions without doing a ton of quoting.

Equity: I put 20% down, with the minimum payments I have approx 28% now, which represents about 7% of my net worth

Remaining balance:
low 6 figures
this would be approx 55% of my current taxable holdings
this is 2-3 years of annual savings, more if you exclude the amounts going into retirement accounts

Yes, I will continue to fund my 401(k) $18500 and Roth IRA $5500; I do not have access to an HSA.

There are house projects to do, but I have ~$10k set aside for this now, and I admittedly may add a bit more to this rather than as extra payments.

I already have some new things to consider from what's been mentioned so far, thanks again,
JDDS

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grabiner
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Re: Reevaluating mortgage payoff strategy

Post by grabiner » Thu Jul 19, 2018 10:05 pm

Even with the mortgage non-deductible, it's likely not worth paying down unless you can pay it off. Paying it down would be equivalent to buying a 13-year, risk-free bond yielding 2.625%, and that isn't a particularly good yield for such a long duration. In addition, you might get a deduction in the future, either because you donate enough to charity to go over $12K, or if the current tax changes expire on schedule.

If you pay it off, that would be equivalent to buying a bond portfolio with a 6-year duration and a 2.625% yield, and that's about the market rate for 6-year munis. However, that is break-even only if you can pay it off at no cost; if you have to sell stock for a capital gain, that makes paying the mortgage off more expensive.

The duration would also be reduced if you are likely to sell the home in a few years.
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JBTX
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Re: Reevaluating mortgage payoff strategy

Post by JBTX » Thu Jul 19, 2018 11:58 pm

I would unequivocally NOT pay it off. You can take the proceeds and put them in ibonds or cds or 2-5 year tbills and essentially earn offsetting interest and maintain your liquidity

What if interest rates go up? You are borrowing at a low rate and can invest at a higher rate. There is basically negligible down side risk and return, but high upside if rates go up. It's like getting a lottery ticket for free. You probably won't make anything, but it cost you nothing, and it could payoff handsomely.

Paying it off is akin to giving away a free call option on interest rates.

Paying off a 2.6% mortgage is not a rational financial decision. It is completely an emotional one. It flummoxes me to no end how so many Bogleheads advocate an emotional decision in this case.

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Re: Reevaluating mortgage payoff strategy

Post by MindBogler » Fri Jul 20, 2018 6:55 am

JBTX wrote:
Thu Jul 19, 2018 11:58 pm
Paying off a 2.6% mortgage is not a rational financial decision. It is completely an emotional one. It flummoxes me to no end how so many Bogleheads advocate an emotional decision in this case.
I agree 100%. You have a great rate that is easily beat with safe assets. Inflation is already running higher than your mortage. Continue investing the difference and you will almost certainly come out ahead. Either way, you'll be in a better financial position with that extra cash in hand rather than locked in your residence.

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Re: Reevaluating mortgage payoff strategy

Post by CyclingDuo » Fri Jul 20, 2018 7:50 am

JDDS wrote:
Thu Jul 19, 2018 1:09 am
I have a mortgage at 2.625% (15 years, 20% down) on which I have made the minimum payment since acquiring it in summer 2016, i.e. I have a bit over 13 years left.

#3 means I am now limited to $18,500 employee elective contributions, no more 20% profit share as employer, the net change is that I will have $20-$25k annually outside retirement accounts to redirect
Not sure we really needed to read beyond point 3 for our personal preference.

We would not pay off the mortgage at that loan rate.

Instead, we would suggest investing in a taxable account with the $20-25K that previously was going into your solo 401k.

Example at a 6% rate of return for that money over the next 15 years compared to paying down the mortgage....

$20K per year ($1666.66 per month at 6% return) = $465,517.54 after 15 years
$25K per year ($2083.33 per month at 6% return) = $581,898.32 after 15 years
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Admiral
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Re: Reevaluating mortgage payoff strategy

Post by Admiral » Fri Jul 20, 2018 8:39 am

I have 13 years left on a fixed 15 YR note at 2.25%. The mortgage amount is roughly 1/3 of the probable market value of the house, perhaps slightly less. I too likely will no longer deduct mortgage interest, though at only $6k per year it's not exactly a huge amount to deduct anyway.

I have never even considered paying if off early (at least not this early). It is sked to be paid off about 2-3 years after I reach FI. When I hit FI, I might pay it off, though the interest savings would be only a few thousand bucks at that point.

I would never pay early on a rate that low. Too much opportunity cost for a tiny return.

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Re: Reevaluating mortgage payoff strategy

Post by misscourtneyk » Fri Jul 20, 2018 9:38 am

I have also struggled with this decision a lot over the past few years, and eventually came to the determination not to pay down my own mortgage (3.3% rate). Your rate is even cheaper than mine - you will almost certainly come out ahead by investing rather than paying off the mortgage, with the added benefit that your money is not locked up in your home. As someone else mentioned, unless you can pay it off in entirety, paying down your mortgage is no better than buying a long term bond at (insert your rate here). No thanks.
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Re: Reevaluating mortgage payoff strategy

Post by indexonlyplease » Fri Jul 20, 2018 10:00 am

NextMil wrote:
Thu Jul 19, 2018 5:26 am
Pay off the mortgage your future self will thank you.
+1

I laugh how many here talk about low er's for investing. Like the differnce being in a Target Fund vs 3 fund because you save on the er. But we have no problem paying 3.3% for 30 years on a mortgage. This does not make sense. I look at paying off the mortgage as making 3.3% on my money. Average house go's up 4% year.

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Earl Lemongrab
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Re: Reevaluating mortgage payoff strategy

Post by Earl Lemongrab » Fri Jul 20, 2018 10:38 am

indexonlyplease wrote:
Fri Jul 20, 2018 10:00 am
NextMil wrote:
Thu Jul 19, 2018 5:26 am
Pay off the mortgage your future self will thank you.
+1

I laugh how many here talk about low er's for investing. Like the differnce being in a Target Fund vs 3 fund because you save on the er. But we have no problem paying 3.3% for 30 years on a mortgage. This does not make sense. I look at paying off the mortgage as making 3.3% on my money. Average house go's up 4% year.
Only because you ignore opportunity cost. The money that you don't use for paying off can be invested and will likely (not guaranteed of course) beat that interest rate handily.

I used mortgages and home loans during my accumulating/investing. My retired self with generous nest egg thanks me.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

bradpevans
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Re: Reevaluating mortgage payoff strategy

Post by bradpevans » Fri Jul 20, 2018 10:54 am

Earl Lemongrab wrote:
Fri Jul 20, 2018 10:38 am
indexonlyplease wrote:
Fri Jul 20, 2018 10:00 am
NextMil wrote:
Thu Jul 19, 2018 5:26 am
Pay off the mortgage your future self will thank you.
+1

I laugh how many here talk about low er's for investing. Like the differnce being in a Target Fund vs 3 fund because you save on the er. But we have no problem paying 3.3% for 30 years on a mortgage. This does not make sense. I look at paying off the mortgage as making 3.3% on my money. Average house go's up 4% year.
Only because you ignore opportunity cost. The money that you don't use for paying off can be invested and will likely (not guaranteed of course) beat that interest rate handily.

I used mortgages and home loans during my accumulating/investing. My retired self with generous nest egg thanks me.
I'm with Earl here. Getting that money invested sooner is piece that many people forgot about.

fittan
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Re: Reevaluating mortgage payoff strategy

Post by fittan » Fri Jul 20, 2018 11:23 am

With a 15 year, you've already "accelerated" your mortgage payoff (compared to 30 year norm), so why "accelerate" the "accelerated"?

As other have advised, invest the money...

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Re: Reevaluating mortgage payoff strategy

Post by Mjar » Fri Jul 20, 2018 11:37 am

bradpevans wrote:
Fri Jul 20, 2018 10:54 am
Earl Lemongrab wrote:
Fri Jul 20, 2018 10:38 am
indexonlyplease wrote:
Fri Jul 20, 2018 10:00 am
NextMil wrote:
Thu Jul 19, 2018 5:26 am
Pay off the mortgage your future self will thank you.
+1

I laugh how many here talk about low er's for investing. Like the differnce being in a Target Fund vs 3 fund because you save on the er. But we have no problem paying 3.3% for 30 years on a mortgage. This does not make sense. I look at paying off the mortgage as making 3.3% on my money. Average house go's up 4% year.
Only because you ignore opportunity cost. The money that you don't use for paying off can be invested and will likely (not guaranteed of course) beat that interest rate handily.

I used mortgages and home loans during my accumulating/investing. My retired self with generous nest egg thanks me.
I'm with Earl here. Getting that money invested sooner is piece that many people forgot about.
I am in a similar position as the OP with a rate of 2.99% and 60k left on a nearly 400k home but in the end all points every one is making is valid but every time I see these discussion the point I feel people leave out is that the OP and any others have to be confident in their investing strategy vs just blindly saying you can beat that interest rate by doing XYZ. Which goes back to the emotional side of this decision.

If everyone could get X% from the market consistently where they are not worried then why not take out a HELOC at a low rate and invest it in the market if one is very confident? the OP's mortgage rate is guaranteed, returns in market are not, the only thing guaranteed in the market is fluctuates.

As emotional as this is, and we are talking about investing early, then why not live a boring life and invest every conceivable dollar into the market...no more expenses than what you truly need and invest everything you could....no one does that...why?...because it makes people happy doing things and experiencing life on their terms but does it make financial sense?...technically no same goes for paying off the mortgage with a low rate, you can always make it more lucrative to not pay it off. I have a buddy that when we have gone to the club throws money around as a baller but makes a quarter of me and doesn't save for retirement, to me he is wasting money that he could go towards maxing out his 401k or saving for a rainy day or a down payment but doesn't because that has more value...me I want to have fun and spend some money but not as much as him. And someone may spend less money than me, etc. To each his own I say.

I agree if you are maxing out 401k, IRA/Roth IRA, HSA and living under your means and are debt adverse pay it off, else keep your money liquid.

My only 2 reasons to drive to consider paying down the house is to make sure my wife if I were to pass away only has to worry about the kids financially and not have a mortgage to worry about that make it harder make ends meet. Second is if I lose my job then I am not stressed about losing my home where I can get a part time job until I find another job to cover basics. Again emotional decision.

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Re: Reevaluating mortgage payoff strategy

Post by NextMil » Fri Jul 20, 2018 11:47 am

indexonlyplease wrote:
Fri Jul 20, 2018 10:00 am
NextMil wrote:
Thu Jul 19, 2018 5:26 am
Pay off the mortgage your future self will thank you.
+1

I laugh how many here talk about low er's for investing. Like the differnce being in a Target Fund vs 3 fund because you save on the er. But we have no problem paying 3.3% for 30 years on a mortgage. This does not make sense. I look at paying off the mortgage as making 3.3% on my money. Average house go's up 4% year.
Agreed, and on an aggressive pay down schedule the spread of what might be made (ignoring risk of sequence of returns) has never been provocative to me, especially since we are maxing retirement savings and some of us taxable as well in the first place. Its not like we are putting zero in the market. I like the diversification of a wealth building strategy that includes paying off the mortgage quickly. Why put all your eggs in one basket?

I have also never met anyone that has said I am so upset I own my house free and clear, in fact, they are usually emphatic that it was the best thing they ever did. I don't fault people for going another route, its just not for me.

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Re: Reevaluating mortgage payoff strategy

Post by Admiral » Fri Jul 20, 2018 11:48 am

Mjar wrote:
Fri Jul 20, 2018 11:37 am
bradpevans wrote:
Fri Jul 20, 2018 10:54 am
Earl Lemongrab wrote:
Fri Jul 20, 2018 10:38 am
indexonlyplease wrote:
Fri Jul 20, 2018 10:00 am
NextMil wrote:
Thu Jul 19, 2018 5:26 am
Pay off the mortgage your future self will thank you.
+1

I laugh how many here talk about low er's for investing. Like the differnce being in a Target Fund vs 3 fund because you save on the er. But we have no problem paying 3.3% for 30 years on a mortgage. This does not make sense. I look at paying off the mortgage as making 3.3% on my money. Average house go's up 4% year.
Only because you ignore opportunity cost. The money that you don't use for paying off can be invested and will likely (not guaranteed of course) beat that interest rate handily.

I used mortgages and home loans during my accumulating/investing. My retired self with generous nest egg thanks me.
I'm with Earl here. Getting that money invested sooner is piece that many people forgot about.
I am in a similar position as the OP with a rate of 2.99% and 60k left on a nearly 400k home but in the end all points every one is making is valid but every time I see these discussion the point I feel people leave out is that the OP and any others have to be confident in their investing strategy vs just blindly saying you can beat that interest rate by doing XYZ. Which goes back to the emotional side of this decision.

If everyone could get X% from the market consistently where they are not worried then why not take out a HELOC at a low rate and invest it in the market if one is very confident? the OP's mortgage rate is guaranteed, returns in market are not, the only thing guaranteed in the market is fluctuates.

As emotional as this is, and we are talking about investing early, then why not live a boring life and invest every conceivable dollar into the market...no more expenses than what you truly need and invest everything you could....no one does that...why?...because it makes people happy doing things and experiencing life on their terms but does it make financial sense?...technically no same goes for paying off the mortgage with a low rate, you can always make it more lucrative to not pay it off. I have a buddy that when we have gone to the club throws money around as a baller but makes a quarter of me and doesn't save for retirement, to me he is wasting money that he could go towards maxing out his 401k or saving for a rainy day or a down payment but doesn't because that has more value...me I want to have fun and spend some money but not as much as him. And someone may spend less money than me, etc. To each his own I say.

I agree if you are maxing out 401k, IRA/Roth IRA, HSA and living under your means and are debt adverse pay it off, else keep your money liquid.

My only 2 reasons to drive to consider paying down the house is to make sure my wife if I were to pass away only has to worry about the kids financially and not have a mortgage to worry about that make it harder make ends meet. Second is if I lose my job then I am not stressed about losing my home where I can get a part time job until I find another job to cover basics. Again emotional decision.
Your worries can be addressed as follows:
1) Life insurance
2) Emergency Fund

No one has claimed that investing in the market (as opposed to debt reduction) is a surefire win. All investing has risks. What if you pay off your house tomorrow and the r.e. market tanks the day after and your home becomes worth less than you paid? Would you say that it was a guaranteed return? You've eliminated the debt but can still lose money.

The value of your house is irrelevant until you sell it. If you put your invest-able assets into the house, you have made a conscious decision to place liquid funds into an ill-liquid asset. That is your choice. If you want to access your funds, that requires a sale or a HELOC...a loan which may carry an interest rate higher than a mortgage rate.

The point is simply that with a low mortgage rate, the risk of not being able to beat it investing is low, AND you preserve liquidity.

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Re: Reevaluating mortgage payoff strategy

Post by Earl Lemongrab » Fri Jul 20, 2018 11:49 am

Mjar wrote:
Fri Jul 20, 2018 11:37 am
I am in a similar position as the OP with a rate of 2.99% and 60k left on a nearly 400k home but in the end all points every one is making is valid but every time I see these discussion the point I feel people leave out is that the OP and any others have to be confident in their investing strategy vs just blindly saying you can beat that interest rate by doing XYZ. Which goes back to the emotional side of this decision.
One of my key financial principles that I used when I developed my portfolio and stratey in 2007 was to get emotion out of the equation.

If you don't have confidence in your investing strategy, then you'll continue to make emotional mistakes. You'll panic when stocks go down. You'll panic when stocks go up.

There is always a risk-free guaranteed investment. CDs for example. Or paying down loans. No strategy that has risk is guaranteed to beat that. Most people have to realize that to get where they want, they need to take on the risk.

A leverage from a low-cost home loan is a great method. The loan is not related to the investments at all. A downturn in the market won't result in a margin call against your house.

I like the analogy I read that likened loans to power saws. If you know the dangers and capabilities of the saw, it's a great tool. If you're afraid of it, you're likely to mess up the job or hurt yourself.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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Re: Reevaluating mortgage payoff strategy

Post by bradpevans » Fri Jul 20, 2018 12:02 pm

Mjar wrote:
Fri Jul 20, 2018 11:37 am
bradpevans wrote:
Fri Jul 20, 2018 10:54 am
Earl Lemongrab wrote:
Fri Jul 20, 2018 10:38 am
indexonlyplease wrote:
Fri Jul 20, 2018 10:00 am
NextMil wrote:
Thu Jul 19, 2018 5:26 am
Pay off the mortgage your future self will thank you.
+1

I laugh how many here talk about low er's for investing. Like the differnce being in a Target Fund vs 3 fund because you save on the er. But we have no problem paying 3.3% for 30 years on a mortgage. This does not make sense. I look at paying off the mortgage as making 3.3% on my money. Average house go's up 4% year.
Only because you ignore opportunity cost. The money that you don't use for paying off can be invested and will likely (not guaranteed of course) beat that interest rate handily.

I used mortgages and home loans during my accumulating/investing. My retired self with generous nest egg thanks me.
I'm with Earl here. Getting that money invested sooner is piece that many people forgot about.
I am in a similar position as the OP with a rate of 2.99% and 60k left on a nearly 400k home but in the end all points every one is making is valid but every time I see these discussion the point I feel people leave out is that the OP and any others have to be confident in their investing strategy vs just blindly saying you can beat that interest rate by doing XYZ. Which goes back to the emotional side of this decision.

If everyone could get X% from the market consistently where they are not worried then why not take out a HELOC at a low rate and invest it in the market if one is very confident? the OP's mortgage rate is guaranteed, returns in market are not, the only thing guaranteed in the market is fluctuates.

As emotional as this is, and we are talking about investing early, then why not live a boring life and invest every conceivable dollar into the market...no more expenses than what you truly need and invest everything you could....no one does that...why?...because it makes people happy doing things and experiencing life on their terms but does it make financial sense?...technically no same goes for paying off the mortgage with a low rate, you can always make it more lucrative to not pay it off. I have a buddy that when we have gone to the club throws money around as a baller but makes a quarter of me and doesn't save for retirement, to me he is wasting money that he could go towards maxing out his 401k or saving for a rainy day or a down payment but doesn't because that has more value...me I want to have fun and spend some money but not as much as him. And someone may spend less money than me, etc. To each his own I say.

I agree if you are maxing out 401k, IRA/Roth IRA, HSA and living under your means and are debt adverse pay it off, else keep your money liquid.

My only 2 reasons to drive to consider paying down the house is to make sure my wife if I were to pass away only has to worry about the kids financially and not have a mortgage to worry about that make it harder make ends meet. Second is if I lose my job then I am not stressed about losing my home where I can get a part time job until I find another job to cover basics. Again emotional decision.
The pay mortgage vs. invest question is about a *fixed* amount of money, not incremental money is in your text above, so, while the statements are true, I don't think they apply here. (And similarly for the "take out a loan and invest to "beat" the loan").

If the plan is to aggressively pay down the mortgage and then start investing the mortgage payment, my suggestion is to do the reverse, and get funds invested sooner, funds that have high likelihood to beat the mortgage rate since they will be invested long term

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Re: Reevaluating mortgage payoff strategy

Post by WannabeBogleHead01 » Fri Jul 20, 2018 3:14 pm

We met in the middle. Our mortgage rate is 2.78%, with about 90k remaining. We’re fortunate enough to be able to max both our 401k’s, HSA and Backdoor Roth. We have roughly $4k/month remaining to invest. We put $2k in Taxable, $1200 in Cash/Slush, and $800 extra on the mortgage. Works well for us.

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Re: Reevaluating mortgage payoff strategy

Post by willthrill81 » Fri Jul 20, 2018 5:11 pm

This is a situation where 'inverting' the decision could be insightful.

If you owned your home free and clear, would you take out a 15 year mortgage at 2.625% on it?

Nitpickers will note that this isn't a precise inversion because the OP doesn't have all of the money in hand to pay off the mortgage currently, but it's still a good thought exercise.
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Re: Reevaluating mortgage payoff strategy

Post by grabiner » Fri Jul 20, 2018 6:41 pm

JBTX wrote:
Thu Jul 19, 2018 11:58 pm
Paying off a 2.6% mortgage is not a rational financial decision. It is completely an emotional one. It flummoxes me to no end how so many Bogleheads advocate an emotional decision in this case.
It could be a rational financial decision. The reason is that it is rational to accept lower returns with less risk; this is why most investors (Including me, and I have long had one of the most aggressive portfolios on the Bogleheads) hold some bonds.

My own mortgage is also at 2.625%, but I don't pay it off because it is still deductible, and also because my taxable account is all stock and I would have a large capital gain for paying it off. But if neither of those applied, it would be a rational financial decision. I could sell Admiral shares of Vanguard Intermediate-Term Tax-Exempt, yielding 2.43% with a five-year duration, and pay off a ten-year mortgage, yielding 2.625% with a five-year duration. This is a small net gain, with no increase in risk. (And if I wanted to increase my risk, I could still do that, by selling other bonds to buy more stock.)

In my actual situation, paying off the mortgage is not a rational decision, and for the OP (not deductible but a longer term), it's close.
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Re: Reevaluating mortgage payoff strategy

Post by JBTX » Fri Jul 20, 2018 6:59 pm

grabiner wrote:
Fri Jul 20, 2018 6:41 pm
JBTX wrote:
Thu Jul 19, 2018 11:58 pm
Paying off a 2.6% mortgage is not a rational financial decision. It is completely an emotional one. It flummoxes me to no end how so many Bogleheads advocate an emotional decision in this case.
It could be a rational financial decision. The reason is that it is rational to accept lower returns with less risk; this is why most investors (Including me, and I have long had one of the most aggressive portfolios on the Bogleheads) hold some bonds.

My own mortgage is also at 2.625%, but I don't pay it off because it is still deductible, and also because my taxable account is all stock and I would have a large capital gain for paying it off. But if neither of those applied, it would be a rational financial decision. I could sell Admiral shares of Vanguard Intermediate-Term Tax-Exempt, yielding 2.43% with a five-year duration, and pay off a ten-year mortgage, yielding 2.625% with a five-year duration. This is a small net gain, with no increase in risk. (And if I wanted to increase my risk, I could still do that, by selling other bonds to buy more stock.)

In my actual situation, paying off the mortgage is not a rational decision, and for the OP (not deductible but a longer term), it's close.
But you are ignoring the value of liquidity, and also ignoring the intrinsic value of the interest rate "call option".

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Re: Reevaluating mortgage payoff strategy

Post by grabiner » Fri Jul 20, 2018 7:08 pm

JBTX wrote:
Fri Jul 20, 2018 6:59 pm
grabiner wrote:
Fri Jul 20, 2018 6:41 pm
JBTX wrote:
Thu Jul 19, 2018 11:58 pm
Paying off a 2.6% mortgage is not a rational financial decision. It is completely an emotional one. It flummoxes me to no end how so many Bogleheads advocate an emotional decision in this case.
It could be a rational financial decision. The reason is that it is rational to accept lower returns with less risk; this is why most investors (Including me, and I have long had one of the most aggressive portfolios on the Bogleheads) hold some bonds.

My own mortgage is also at 2.625%, but I don't pay it off because it is still deductible, and also because my taxable account is all stock and I would have a large capital gain for paying it off. But if neither of those applied, it would be a rational financial decision. I could sell Admiral shares of Vanguard Intermediate-Term Tax-Exempt, yielding 2.43% with a five-year duration, and pay off a ten-year mortgage, yielding 2.625% with a five-year duration. This is a small net gain, with no increase in risk. (And if I wanted to increase my risk, I could still do that, by selling other bonds to buy more stock.)

In my actual situation, paying off the mortgage is not a rational decision, and for the OP (not deductible but a longer term), it's close.
But you are ignoring the value of liquidity, and also ignoring the intrinsic value of the interest rate "call option".
I have a large taxable account, so I don't get extra value from the liquidity; the OP is in the same situation. And the call option works both ways; if I hold the munis and a mortgage and rates fall, I can refinance my mortgage at a lower rate, and the muni issuers can call their bonds. (With rates this low, the call option isn't worth as much for either me or the muni issuers.) An argument in favor of paying off the mortgage is that the munis have a bit of risk; in an economic decline, some munis might default, but the mortgage still has to be paid.

The call issue is a reason that comparing a mortgage payoff to an investment in Treasuries, which have zero risk and are not callable, is not quite a fair comparison. Admiral shares of Vanguard Intermediate-Term Treasury currently yield 2.72%, which would be 2.07% after federal tax.
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Re: Reevaluating mortgage payoff strategy

Post by Earl Lemongrab » Fri Jul 20, 2018 7:55 pm

willthrill81 wrote:
Fri Jul 20, 2018 5:11 pm
This is a situation where 'inverting' the decision could be insightful.

If you owned your home free and clear, would you take out a 15 year mortgage at 2.625% on it?

Nitpickers will note that this isn't a precise inversion because the OP doesn't have all of the money in hand to pay off the mortgage currently, but it's still a good thought exercise.
Sounds like a good deal. I'd probably do that. I did take out a five-year loan for investing.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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Re: Reevaluating mortgage payoff strategy

Post by willthrill81 » Fri Jul 20, 2018 7:58 pm

Earl Lemongrab wrote:
Fri Jul 20, 2018 7:55 pm
willthrill81 wrote:
Fri Jul 20, 2018 5:11 pm
This is a situation where 'inverting' the decision could be insightful.

If you owned your home free and clear, would you take out a 15 year mortgage at 2.625% on it?

Nitpickers will note that this isn't a precise inversion because the OP doesn't have all of the money in hand to pay off the mortgage currently, but it's still a good thought exercise.
Sounds like a good deal. I'd probably do that. I did take out a five-year loan for investing.
Some would go for it, and some wouldn't. There are a lot of factors at work.

I know one fellow who did just that in 1999 and put it in all in the NASDAQ. He wound up paying for his house twice. :oops:
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Reevaluating mortgage payoff strategy

Post by JBTX » Fri Jul 20, 2018 8:08 pm

grabiner wrote:
Fri Jul 20, 2018 7:08 pm
JBTX wrote:
Fri Jul 20, 2018 6:59 pm
grabiner wrote:
Fri Jul 20, 2018 6:41 pm
JBTX wrote:
Thu Jul 19, 2018 11:58 pm
Paying off a 2.6% mortgage is not a rational financial decision. It is completely an emotional one. It flummoxes me to no end how so many Bogleheads advocate an emotional decision in this case.
It could be a rational financial decision. The reason is that it is rational to accept lower returns with less risk; this is why most investors (Including me, and I have long had one of the most aggressive portfolios on the Bogleheads) hold some bonds.

My own mortgage is also at 2.625%, but I don't pay it off because it is still deductible, and also because my taxable account is all stock and I would have a large capital gain for paying it off. But if neither of those applied, it would be a rational financial decision. I could sell Admiral shares of Vanguard Intermediate-Term Tax-Exempt, yielding 2.43% with a five-year duration, and pay off a ten-year mortgage, yielding 2.625% with a five-year duration. This is a small net gain, with no increase in risk. (And if I wanted to increase my risk, I could still do that, by selling other bonds to buy more stock.)

In my actual situation, paying off the mortgage is not a rational decision, and for the OP (not deductible but a longer term), it's close.
But you are ignoring the value of liquidity, and also ignoring the intrinsic value of the interest rate "call option".
I have a large taxable account, so I don't get extra value from the liquidity; the OP is in the same situation. And the call option works both ways; if I hold the munis and a mortgage and rates fall, I can refinance my mortgage at a lower rate, and the muni issuers can call their bonds. (With rates this low, the call option isn't worth as much for either me or the muni issuers.) An argument in favor of paying off the mortgage is that the munis have a bit of risk; in an economic decline, some munis might default, but the mortgage still has to be paid.

The call issue is a reason that comparing a mortgage payoff to an investment in Treasuries, which have zero risk and are not callable, is not quite a fair comparison. Admiral shares of Vanguard Intermediate-Term Treasury currently yield 2.72%, which would be 2.07% after federal tax.
If rates go down, you can simply pay mortgage off. There is little risk on the downside. If rates go up, you can hold the mortgage and reinvest in higher rates, or free money.
Last edited by JBTX on Fri Jul 20, 2018 8:10 pm, edited 1 time in total.

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Re: Reevaluating mortgage payoff strategy

Post by JBTX » Fri Jul 20, 2018 8:10 pm

willthrill81 wrote:
Fri Jul 20, 2018 5:11 pm
This is a situation where 'inverting' the decision could be insightful.

If you owned your home free and clear, would you take out a 15 year mortgage at 2.625% on it?

Nitpickers will note that this isn't a precise inversion because the OP doesn't have all of the money in hand to pay off the mortgage currently, but it's still a good thought exercise.

In a heart beat. One regret is I should have taken out more from my last cash out refi at 3.25.

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Re: Reevaluating mortgage payoff strategy

Post by JBTX » Fri Jul 20, 2018 9:12 pm

Misc random thoughts:

I find it odd that people will put most of their money in risky stocks that can lose half their value in no time but feel stress about a 2.6% mortgage.

If you are willing to invest in equity mutual funds, because of the long term payoff, in spite of the volatility risk, why would not you take a 2.6% loan and invest more?

We invest substantial amounts in stocks of companies many of which have debt taken out a rates higher than our mortgage

The market values mortgages at substantially more than 2.65%. Seems odd to divest of something that is clearly below market value.

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Re: Reevaluating mortgage payoff strategy

Post by willthrill81 » Fri Jul 20, 2018 11:31 pm

JBTX wrote:
Fri Jul 20, 2018 9:12 pm
Misc random thoughts:

I find it odd that people will put most of their money in risky stocks that can lose half their value in no time but feel stress about a 2.6% mortgage.
Because if you fail to make the payments on your mortgage, you lose your house. If you don't experience extended unemployment during a big market downturn, a relatively short-lived 50% drop in stocks' value may not otherwise affect you personally at all.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Reevaluating mortgage payoff strategy

Post by JBTX » Fri Jul 20, 2018 11:50 pm

willthrill81 wrote:
Fri Jul 20, 2018 11:31 pm
JBTX wrote:
Fri Jul 20, 2018 9:12 pm
Misc random thoughts:

I find it odd that people will put most of their money in risky stocks that can lose half their value in no time but feel stress about a 2.6% mortgage.
Because if you fail to make the payments on your mortgage, you lose your house. If you don't experience extended unemployment during a big market downturn, a relatively short-lived 50% drop in stocks' value may not otherwise affect you personally at all.
But the premise here is people have the money and are able to pay it off, but should they pay it off? So mortgage default isnt really a risk here.

On the flip side, you lose your job and your mortgage was already paid off. You run through your reserves, and you can't cash out refinance because you don't have a job. If you keep the low interest mortgage, worst case you pay it off with the additional offsetting reserves and still have additional liquidity.

I've never understood the logic that I'm gonna go broke and won't have the money to pay my mortgage, so I will deplete my reserves now to pay it off in advance of going broke. The only problem with a mortgage is if you take the money and spend it, or invest it foolishly.

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Re: Reevaluating mortgage payoff strategy

Post by willthrill81 » Fri Jul 20, 2018 11:58 pm

JBTX wrote:
Fri Jul 20, 2018 11:50 pm
willthrill81 wrote:
Fri Jul 20, 2018 11:31 pm
JBTX wrote:
Fri Jul 20, 2018 9:12 pm
Misc random thoughts:

I find it odd that people will put most of their money in risky stocks that can lose half their value in no time but feel stress about a 2.6% mortgage.
Because if you fail to make the payments on your mortgage, you lose your house. If you don't experience extended unemployment during a big market downturn, a relatively short-lived 50% drop in stocks' value may not otherwise affect you personally at all.
But the premise here is people have the money and are able to pay it off, but should they pay it off? So mortgage default isnt really a risk here.
If they have the funds to pay it off, then yes, you're correct. But that's not the OP's situation.
JBTX wrote:
Fri Jul 20, 2018 11:50 pm
On the flip side, you lose your job and your mortgage was already paid off. You run through your reserves, and you can't cash out refinance because you don't have a job.
Yes, but many here with paid-off homes take out a HELOC in advance of needing the money for just such an occasion.
JBTX wrote:
Fri Jul 20, 2018 11:50 pm
If you keep the low interest mortgage, worst case you pay it off with the additional offsetting reserves and still have additional liquidity.
What if those "offsetting reserves" are stocks that are down 50% in value or more? Yes, you could keep those reserves in fixed-income, but the interest rate arbitrage between that and your mortgage isn't likely to be significant, if there even is any, unless you have a very low mortgage rate and/or it's tax deductible for you.
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Re: Reevaluating mortgage payoff strategy

Post by JBTX » Sat Jul 21, 2018 12:18 am

willthrill81 wrote:
Fri Jul 20, 2018 11:58 pm
JBTX wrote:
Fri Jul 20, 2018 11:50 pm
willthrill81 wrote:
Fri Jul 20, 2018 11:31 pm
JBTX wrote:
Fri Jul 20, 2018 9:12 pm
Misc random thoughts:

I find it odd that people will put most of their money in risky stocks that can lose half their value in no time but feel stress about a 2.6% mortgage.
Because if you fail to make the payments on your mortgage, you lose your house. If you don't experience extended unemployment during a big market downturn, a relatively short-lived 50% drop in stocks' value may not otherwise affect you personally at all.
But the premise here is people have the money and are able to pay it off, but should they pay it off? So mortgage default isnt really a risk here.
If they have the funds to pay it off, then yes, you're correct. But that's not the OP's situation.
OP is evaluating paying off low rate mortgage more aggressively.

JBTX wrote:
Fri Jul 20, 2018 11:50 pm
On the flip side, you lose your job and your mortgage was already paid off. You run through your reserves, and you can't cash out refinance because you don't have a job.
Yes, but many here with paid-off homes take out a HELOC in advance of needing the money for just such an occasion.
Perhaps so, but I rarely see that discussed in the plethora of mortgage payoff threads. If people are seeking an emotional benefit from being debt free, having a HELOC kind of defeats the purpose.


JBTX wrote:
Fri Jul 20, 2018 11:50 pm
If you keep the low interest mortgage, worst case you pay it off with the additional offsetting reserves and still have additional liquidity.
What if those "offsetting reserves" are stocks that are down 50% in value or more? Yes, you could keep those reserves in fixed-income, but the interest rate arbitrage between that and your mortgage isn't likely to be significant, if there even is any, unless you have a very low mortgage rate and/or it's tax deductible for you.
Presumably you manage the risk such that you don't deplete your reserves.

Having a low rate mortgage is kind of an inflation hedge. If inflation and interest rates go up, you get to pay off your mortgage in deflated dollars. I can recall my parents having mortgage in late 70s / early 80s that was substantially below market rates. The banks were always trying to get them to pay it off. As good of a deal as they had, the mortgage rates they had were at least twice as high as 2.6%.

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Re: Reevaluating mortgage payoff strategy

Post by NextMil » Sat Jul 21, 2018 2:22 am

Seriously delinquent and defaulting of mortgages is under 5% of all mortgages at the height post recession, and normally it hovers around 2%. I am willing to wager amongst bogleheads it’s essentially non-existent.

Therefore, I strongly believe that the invest instead of pay down the mortgage is less risky argument lacks merit as the underlying risk lacks merit.

Also, I never understood the inflation argument for not paying it down. Inflation is increasing, but wage increases are not keeping up, so exactly why are you better off? Seems to me the opposite is true.

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Re: Reevaluating mortgage payoff strategy

Post by Admiral » Sat Jul 21, 2018 7:10 am

NextMil wrote:
Sat Jul 21, 2018 2:22 am
Seriously delinquent and defaulting of mortgages is under 5% of all mortgages at the height post recession, and normally it hovers around 2%. I am willing to wager amongst bogleheads it’s essentially non-existent.

Therefore, I strongly believe that the invest instead of pay down the mortgage is less risky argument lacks merit as the underlying risk lacks merit.

Also, I never understood the inflation argument for not paying it down. Inflation is increasing, but wage increases are not keeping up, so exactly why are you better off? Seems to me the opposite is true.
That depends on the person. That may be true on average but my employer gives 3% raises yearly. Mortgage rate stays the same, income increases. Beyond that, over time lots of people (not all people of course) get higher paying jobs. Salary increases, mortgage rate stays the same.

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Re: Reevaluating mortgage payoff strategy

Post by NextMil » Sat Jul 21, 2018 8:52 am

Admiral wrote:
Sat Jul 21, 2018 7:10 am
NextMil wrote:
Sat Jul 21, 2018 2:22 am
Seriously delinquent and defaulting of mortgages is under 5% of all mortgages at the height post recession, and normally it hovers around 2%. I am willing to wager amongst bogleheads it’s essentially non-existent.

Therefore, I strongly believe that the invest instead of pay down the mortgage is less risky argument lacks merit as the underlying risk lacks merit.

Also, I never understood the inflation argument for not paying it down. Inflation is increasing, but wage increases are not keeping up, so exactly why are you better off? Seems to me the opposite is true.
That depends on the person. That may be true on average but my employer gives 3% raises yearly. Mortgage rate stays the same, income increases. Beyond that, over time lots of people (not all people of course) get higher paying jobs. Salary increases, mortgage rate stays the same.
That’s really close. If inflation ticks up over 2% a 3% raise minus taxes and you might be feeling a big squeeze on discretionary even with a fixed housing cost. I would prefer to not have a mortgage and be subject to such swings.

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Re: Reevaluating mortgage payoff strategy

Post by Meaty » Sat Jul 21, 2018 9:15 am

bradpevans wrote:
Thu Jul 19, 2018 6:42 am
At 2.625%, I would not pay it off, I would invest those dollars you might use to pay it off. Getting your money in the market sooner is one of the best things you can do.

At the point where you can *pay it off* then I might do that. Paying it down doesn't help your cash flow and it locks your money up until you sell.
+1. I stole this idea from white coat investor. My plan is to save in my taxable account until I can payoff the mortgage in a lump sum. That’ll preserve liquidity and (hopefully) allow that money to grow at a higher interest rate than my mortgage
"Discipline equals Freedom" - Jocko Willink

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Re: Reevaluating mortgage payoff strategy

Post by bdpb » Sat Jul 21, 2018 9:35 am

Listen to grabiner and compare your mortgage payoff with investing in bonds. If you decide not to payoff and have additional taxable funds, here is a suggestion for the taxable funds.

Instead of investing the taxable, use it to pay taxes on Roth IRA conversions. Currently, the state of IL does not tax Roth IRA conversions. You would effectively be adding to your Roth IRA without paying state income taxes. You will also therefore be saving the annual tax drag of about .6% on the taxable account. It may also open back door Roth possibilities if and when you have the need.

Usually, one should have a large traditional IRA/401k assets before this makes sense (because of lower fed rates at withdrawal), but you are filling up a 401k at a young age and may have future large solo 401k contributions again someday. You may well end up near or at the same fed rates when you withdraw.

So, the question would be, is it better to pay 24% now or pay some unknown federal tax rate (maybe between 12 and 24 or more) + some unknown state tax (maybe between 0 and 9 or more) + annual tax drag.

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Re: Reevaluating mortgage payoff strategy

Post by grabiner » Sat Jul 21, 2018 2:18 pm

JBTX wrote:
Sat Jul 21, 2018 12:18 am
Having a low rate mortgage is kind of an inflation hedge. If inflation and interest rates go up, you get to pay off your mortgage in deflated dollars. I can recall my parents having mortgage in late 70s / early 80s that was substantially below market rates. The banks were always trying to get them to pay it off. As good of a deal as they had, the mortgage rates they had were at least twice as high as 2.6%.
However, you should not look at the mortgage in isolation. Having a fixed-rate mortgage means that you will benefit from unexpected inflation. Conversely, having fixed-rate bonds means that you will be hurt by unexpected inflation, as you will be paid back with deflated dollars. Having both bonds and a mortgage, with the same duration, cancels out the inflation effect, so you come out ahead if the bond rate exceeds the mortgage whether inflation is high or low.

Another conclusion you should draw here is that TIPS become less attractive if you have a large fixed-rate mortgage. TIPS protect you against inflation risk, but you have a large expense which is not affected by inflation.
Wiki David Grabiner

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