Reevaluating mortgage payoff strategy

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JBTX
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Re: Reevaluating mortgage payoff strategy

Post by JBTX » Sat Jul 21, 2018 2:30 pm

grabiner wrote:
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.
That isn't how I would do it. I am suggesting you keep the mortgage, and reinvest in relatively short term securities, which are yielding almost as much as the mortgage rate. Typically this would cost you because long term rates are greater than short term rates, and mortgage rates tend to be higher than risk free long bonds because mortgages have a payoff option, which means the lender needs to get a higher rate to compensate for that.

But now you have money in TIPS, CD's, money markets, short term treasuries, maybe some municipals, plus the mortgage at an unusually low rate. This is for the most part breaking even now, maybe a small drag due to taxes. If interest rates drop, and you expect them to stay there, simply liquidate the holding and payoff the mortgage. Little is lost. If interest rates go up, you can keep the mortgage, and keep the money in higher short term rates, or perhaps reinvest them in higher long term rates - at that point your example becomes true, but you have locked in to a positive interest rate spread during the life of those securities.

You could argue that the likelihood of rates going up enough to make that spread worthwhile is small. That could be true, if things behave like the last 30 years. But if inflation rears its head in a big way, you could end up having a nice cash flow going forward.

There aren't many good inflation hedges out there. Having a long term low interest mortgage is one of them.

Kitces frames it a bit differently, but the result is the same

https://www.kitces.com/blog/why-a-mortg ... -that-are/

HelenaJustina
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Re: Reevaluating mortgage payoff strategy

Post by HelenaJustina » Sat Jul 21, 2018 2:59 pm

Have you run an actual amortization table to compare both scenarios? You may find it useful to nail down the actual dollar amount you would be saving in interest, rather then getting bogged down in theoretical comparative rates of return.

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grabiner
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Re: Reevaluating mortgage payoff strategy

Post by grabiner » Sun Jul 22, 2018 3:09 pm

HelenaJustina wrote:
Sat Jul 21, 2018 2:59 pm
Have you run an actual amortization table to compare both scenarios? You may find it useful to nail down the actual dollar amount you would be saving in interest, rather then getting bogged down in theoretical comparative rates of return.
If you do this, make sure to compare the time value of money. If you pay down $10,000 against a 2.625% mortgage, and the mortgage is paid off in 13 years, you will reduce the interest paid on the mortgage by $4005. However, you would not be $4005 better off, because you get no benefit until you eliminate $14,005 of mortgage payments 13 years from now; you could have invested the $10,000 for those 13 years and earned something.

The most common version of the time value error occurs when comparing mortgages of different durations. You will pay far more interest on a 30-year mortgage than on a 15-year mortgage, even if the rates are close, but you will pay both interest and principal much later, and thus there isn't as much of a benefit for going to 15 years as it appears. In particular, it is usually better to take out the longer-term mortgage if the shorter-term mortgage would limit your ability to save for retirement; you can always make extra payments against the longer-term mortgage or refinance it to a shorter term if your income increases later.
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Admiral
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Re: Reevaluating mortgage payoff strategy

Post by Admiral » Sun Jul 22, 2018 3:32 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.
Can we please retire this illogical thought exercise at this point? Choosing to invest instead of pre-paying on or paying off a mortgage is not the inverse of owning your home outright and then taking out a mortgage against it.

In the former, as long as you make your monthly payments, you have a place to live while you either invest, make accelerated payments, or pay off the loan completely when you can, or any combination thereof. In the latter, this is not the case: if you take a loan against your home and stop paying what you owe, you can be forced to sell your home to make good. Big difference.

There is no equivalence between the two.

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Earl Lemongrab
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Re: Reevaluating mortgage payoff strategy

Post by Earl Lemongrab » Sun Jul 22, 2018 4:00 pm

^^^ Er, what?

In either case you have a fixed monthly payment. If you don't pay it, they foreclose.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

Admiral
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Re: Reevaluating mortgage payoff strategy

Post by Admiral » Sun Jul 22, 2018 4:09 pm

Earl Lemongrab wrote:
Sun Jul 22, 2018 4:00 pm
^^^ Er, what?

In either case you have a fixed monthly payment. If you don't pay it, they foreclose.
The issue is not that you carry a mortgage and don't make the payment. The issue is using your EXCESS capital (above and beyond what you MUST pay) to either invest or to pay off the loan, which people compare to having a paid off house and taking a loan against it to invest.

My point is this is not a valid comparison.

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willthrill81
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Re: Reevaluating mortgage payoff strategy

Post by willthrill81 » Sun Jul 22, 2018 6:30 pm

Admiral wrote:
Sun Jul 22, 2018 4:09 pm
Earl Lemongrab wrote:
Sun Jul 22, 2018 4:00 pm
^^^ Er, what?

In either case you have a fixed monthly payment. If you don't pay it, they foreclose.
The issue is not that you carry a mortgage and don't make the payment. The issue is using your EXCESS capital (above and beyond what you MUST pay) to either invest or to pay off the loan, which people compare to having a paid off house and taking a loan against it to invest.

My point is this is not a valid comparison.
Apparently you didn't read the fine print on my post. Here it is.
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 NextMil » Sun Jul 22, 2018 8:00 pm

Admiral wrote:
Sun Jul 22, 2018 4:09 pm
Earl Lemongrab wrote:
Sun Jul 22, 2018 4:00 pm
^^^ Er, what?

In either case you have a fixed monthly payment. If you don't pay it, they foreclose.
The issue is not that you carry a mortgage and don't make the payment. The issue is using your EXCESS capital (above and beyond what you MUST pay) to either invest or to pay off the loan, which people compare to having a paid off house and taking a loan against it to invest.

My point is this is not a valid comparison.
What? Of course it’s valid. There are absolutely people out there that have a paid off home and would take out a low interest mortgage and use it to invest. Its a valid argument, because everyday you don’t pay it off you are making a decision to keep it.

Blueraidermike
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Re: Reevaluating mortgage payoff strategy

Post by Blueraidermike » Mon Jul 23, 2018 8:45 am

If you have an emergency fund, if you are contributing the max in your 401K/IRAs than pay the mortgage off. Don't over complicate this. You are 32 and on your way!

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Earl Lemongrab
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Re: Reevaluating mortgage payoff strategy

Post by Earl Lemongrab » Mon Jul 23, 2018 10:46 am

Blueraidermike wrote:
Mon Jul 23, 2018 8:45 am
If you have an emergency fund, if you are contributing the max in your 401K/IRAs than pay the mortgage off. Don't over complicate this. You are 32 and on your way!
I say the opposite. At 32, investing is the long-term play. Pay the mortgage as you go and invest in taxable.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

indexonlyplease
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Re: Reevaluating mortgage payoff strategy

Post by indexonlyplease » Wed Jul 25, 2018 7:19 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.
Thanks for making sense.

indexonlyplease
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Re: Reevaluating mortgage payoff strategy

Post by indexonlyplease » Wed Jul 25, 2018 7:32 am

Admiral wrote:
Sun Jul 22, 2018 3:32 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.
Can we please retire this illogical thought exercise at this point? Choosing to invest instead of pre-paying on or paying off a mortgage is not the inverse of owning your home outright and then taking out a mortgage against it.

In the former, as long as you make your monthly payments, you have a place to live while you either invest, make accelerated payments, or pay off the loan completely when you can, or any combination thereof. In the latter, this is not the case: if you take a loan against your home and stop paying what you owe, you can be forced to sell your home to make good. Big difference.

There is no equivalence between the two.
If someone bought a home with a 15 year payment plan they could invest while paying off the home. Then they would have the best situation. A guarantee paid off house with gaurentee savings on the home interest. When home paid off they would have another 25 years to keep investing. Adding Roth IRA, taxable accounts ect. So, no matter what the market is doing the house will be paid off and investing still continued.

It is really that simple. I would think people here would not buy a car and make payments for 6 years so they can invest the extra savings instead of a 3 year car payment.

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Earl Lemongrab
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Re: Reevaluating mortgage payoff strategy

Post by Earl Lemongrab » Wed Jul 25, 2018 10:56 am

indexonlyplease wrote:
Wed Jul 25, 2018 7:19 am
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.
Thanks for making sense.
There's always a risk-free investment strategy that no risky one will be guaranteed to beat. Yet we don't advocate everyone put all their money in them. We advise, for younger people, as much as 80% stocks. Why? Because those risk-free investments generally will about keep up with inflation at best.

I think taking out low-cost loans to invest is a great idea for many people. I have done it myself, and it helped me retire.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

Dottie57
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Re: Reevaluating mortgage payoff strategy

Post by Dottie57 » Wed Jul 25, 2018 11:13 am

Back in the 1990’s, I refinanced my mortgage from 10% to 8%. I continued paying the same amount and I ended up significantly shortening the mortgage time. I also used ESPP purchases to pay the mortgage down.

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