Mr.No - another should I pay off my mortgage, post

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MrNo
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Mr.No - another should I pay off my mortgage, post

Post by MrNo » Tue Sep 11, 2018 4:37 pm

Hello everyone, I’be been following this forum for over a year and this is my 1st post. I learned a lot by reading posts daily.

Question:
1. Should we pay off our mortgage or not?

I’ve been debating about this for long time. Should we pay off the mortgage and be done with it or keep investing and hopefully in 7 years we will double our investment in taxable account. Market is close to all time high and I am thinking why not cash it out and pay off our mortgage. I understand I will have to pay taxes on capital gains. My right side of the brain keeps telling me: let it be and let it grow :) , stay the course & write off the mortgage interest.

We live in decent neighborhood in Bay Area and school is 8min walking distance. My oldest one just started going to school. We are not sure if this is our forever home but we really like our neighborhood and neighbors. Hopefully things will not change. We've lived here for 5 years now and we love our house.

My job situation is pretty stable, I am working for a Mega Corp & I want to believe that I will have this job for next couple of years but you never know :happy . Very happy where I am & just got awarded as a top 1% performer. Thats kind a big deal within the company.


Base Salary $155k. This year bonus was exceptionally strong, almost doubled my salary. Usually Bonus is between 10-20% of my salary.
Emergency funds: six+ months of expenses
Debt:
• Mortgage - $392K – interest rate 3.375%
• Credit cards ~4k – paid off monthly
• No other debts
• His car might have to be replaced soon. Its 11 year old, 92k miles but it runs fine without any issues

Tax Filing Status: Married Filing Jointly
Tax Rate: 33% Federal, 10% State. This year my earnings are really good, usually I am in lower tax bracket.
State of Residence: CA
Age: 45
Married, 3 kids. Ages 5, 3 and 2 weeks . DW is full time mom.
Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 10% of stocks

Current retirement assets

Taxable
$300k – Vanguard
$100k – Savings (AMEX)

His 401k
$480k

His Roth IRA at Vanguard
$100k

Her Traditional IRA at Vanguard
$45K

Each Kid has a 529
5 year old – $23k
3 year old - $18k
Newborn - $11.5k

Contributions

New annual Contributions
$18k his 401k (6.5% match)
$5500 his Roth IRA
$7000 his Mega back door IRA
Contributing to ESPP 10%

Home worth estimate per Zillow is $1.3MIL. Houses around me have been selling between $1.2 - $1.45MIL

I really appreciate your wisdom & input.
Thank you and please let me know if you need any additional info.

Thanks,
MisterNo

psteinx
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Re: Mr.No - another should I pay off my mortgage, post

Post by psteinx » Tue Sep 11, 2018 5:59 pm

So:

Income, $155K base + bonus = close to $300K recently, but the bonus is obviously less secure and has been much lower in the past.

Assets:
Taxable $400K, 75/25 equity cash
Emergency funds: A bit unclear - Is this the 25% AMEX savings, or more on top of that?
Tax deferred $625K
529s (for 3 kids) ~$52K
House: $1.3M value, $392K mortgage at 3.375%
Contributions: ~$46K/year to various tax deferred (I assume the ESPP is tax deferred)

Some thoughts:

1) The 529s are pretty small. Obviously your kids are young and you have time. But I would consider bumping these up somewhat on the savings priority list. Tax-free growth (if used for acceptable purposes) is even better than tax-deferred. Obviously, lots of caveats for this.

2) As for the mortgage versus taxable payoff. That depends in part on whether you're itemizing. Given recent tax changes and your higher income, you may want to do some analysis on this. If you get no itemization on the mortgage interest, then you have to earn a lot, pre-tax, in a taxable account, to offset the 3.375% (non-deductible) interest you're paying.

3) But also, some taxable readily available as an emergency fund/general buffer is good.

4) Re: selling taxable equities - the level of capital gains matters. If your ~$300K in equities is on a low basis, then there's a pretty heavy tax drag to selling.

5) Assuming the taxable equities are on non-trivial cap gains, and that your $100K in Amex cash is basically your e-fund, then I think I'd be inclined to attack the mortgage more through income than through a one time equity sell-off.

Olemiss540
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Re: Mr.No - another should I pay off my mortgage, post

Post by Olemiss540 » Tue Sep 11, 2018 6:02 pm

I am going to be MR NO as that's a NO from me.

You are killing it, and can consider splitting extra taxable cash between investments and mortgage pay down. That's a great mortgage rate to tax a big tax hit to pay off IMO.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

MrNo
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Re: Mr.No - another should I pay off my mortgage, post

Post by MrNo » Tue Sep 11, 2018 6:22 pm

So:

Income, $155K base + bonus = close to $300K recently, but the bonus is obviously less secure and has been much lower in the past.

Assets:
Taxable $400K, 75/25 equity cash
Emergency funds: A bit unclear - Is this the 25% AMEX savings, or more on top of that?
Tax deferred $625K
529s (for 3 kids) ~$52K
House: $1.3M value, $392K mortgage at 3.375%
Contributions: ~$46K/year to various tax deferred (I assume the ESPP is tax deferred)

Some thoughts:
psteinx wrote:
Tue Sep 11, 2018 5:59 pm
1) The 529s are pretty small. Obviously your kids are young and you have time. But I would consider bumping these up somewhat on the savings priority list. Tax-free growth (if used for acceptable purposes) is even better than tax-deferred. Obviously, lots of caveats for this.
Yes - this is on our priority list as well ..as you can see the newborn has already 11.5k
psteinx wrote:
Tue Sep 11, 2018 5:59 pm
2) As for the mortgage versus taxable payoff. That depends in part on whether you're itemizing. Given recent tax changes and your higher income, you may want to do some analysis on this. If you get no itemization on the mortgage interest, then you have to earn a lot, pre-tax, in a taxable account, to offset the 3.375% (non-deductible) interest you're paying.
Yes I am itemizing my mortgage.
psteinx wrote:
Tue Sep 11, 2018 5:59 pm
3) But also, some taxable readily available as an emergency fund/general buffer is good.

4) Re: selling taxable equities - the level of capital gains matters. If your ~$300K in equities is on a low basis, then there's a pretty heavy tax drag to selling.
From this $300k, capital gains are ~50k, nothing spectacular. I've been investing since 2015
psteinx wrote:
Tue Sep 11, 2018 5:59 pm
5) Assuming the taxable equities are on non-trivial cap gains, and that your $100K in Amex cash is basically your e-fund, then I think I'd be inclined to attack the mortgage more through income than through a one time equity sell-off.
This $100k in AMEX is besides my efund. I have additional $50k as a eFund.
Total in savings is $150k. I am debating if I should invest $100k, part in 529 and rest in my taxable ..or take a blue pill and pay off my mortgage.
If I take a blue pill, my eFund would be really low, but that does not concern me. My ESPP contributions will offset that in December, it should be additional ~$20k
Last edited by MrNo on Tue Sep 11, 2018 10:34 pm, edited 2 times in total.

delamer
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Re: Mr.No - another should I pay off my mortgage, post

Post by delamer » Tue Sep 11, 2018 6:24 pm

You are a one income family in a VHCOL area.

How many months of expenses would you have in cash (or short-term bonds) — outside of tax-advantaged accounts — if you paid off the mortgage and accounting for LTCG taxes? Keep in mind that if you lost your job, you’d might have increased health insurance costs too.

I hope you both have lots of term life insurance.

betablocker
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Re: Mr.No - another should I pay off my mortgage, post

Post by betablocker » Tue Sep 11, 2018 6:42 pm

Cheap, manageable and tax deductible debt is almost an asset. If you don’t believe me follow Buffett. His whole empire is based on insurance float. Dont send your money into the ether for a 2% return (factoring in the tax deduction). With that bonus you aren’t in 33% anymore. Stay liquid. I read a great book called The Value of Debt in Bulding Wealth that lays that case out well: https://www.amazon.com/Value-Debt-Build ... 6/ref=nodl_

Starfish
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Re: Mr.No - another should I pay off my mortgage, post

Post by Starfish » Tue Sep 11, 2018 6:51 pm

Your effective tax rate is about 2%. Inflation is about 3%. You use today's money - expensive - to pay off tomorrow's debt in cheaper money. Why? You actually make money off that debt as long as is under inflation assuming you put your money surplus in something that at least tracks inflation. You don't even need real return.

DJP1944
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Re: Mr.No - another should I pay off my mortgage, post

Post by DJP1944 » Tue Sep 11, 2018 7:04 pm

I'm in the "pay it off" camp. Lots of great responses here so far and are all probably mathematically righteous.

For me though, it transcends the math. It feels good not to owe anyone money. Also, it keeps life more simple.

JBTX
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Re: Mr.No - another should I pay off my mortgage, post

Post by JBTX » Tue Sep 11, 2018 7:06 pm

No. Absolutely not. Especially if you can itemize. Paying off a 2% after tax mortgage would be nothing short of.....silly.

smitcat
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Re: Mr.No - another should I pay off my mortgage, post

Post by smitcat » Tue Sep 11, 2018 7:28 pm

I would not pay off the mortgage.
Better said, I did not pay off mortgages when in a similar situation and it worked out very well.

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willthrill81
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Re: Mr.No - another should I pay off my mortgage, post

Post by willthrill81 » Tue Sep 11, 2018 7:39 pm

Here's a response rife with mental accounting and human biases, but it's what we're doing and feel comfortable with.

Use income to pay off the mortgage. Do not sell a dime of your investments to do so. And while you're doing so, maintain a healthy savings rate.
“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

bradpevans
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Re: Mr.No - another should I pay off my mortgage, post

Post by bradpevans » Tue Sep 11, 2018 7:45 pm

I’m in the don’t pay it off camp as well

If you did pay it off, would that monthly cash flow go right back into the market?
If so, even more reason to leave it there, rather than pull it out, take a tax hit, then start piling up the money again

InvestingGeek
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Re: Mr.No - another should I pay off my mortgage, post

Post by InvestingGeek » Tue Sep 11, 2018 8:03 pm

You're pretty long on real-estate already ($1M on your house with a total net worth of about $2M). That's a lot of risk in one asset and asset class, especially in a place like the Bay Area. I'd be looking to spread the risk around by adding more to stocks and bonds, not taking money out of stocks and dumping even more into RE.

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Watty
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Re: Mr.No - another should I pay off my mortgage, post

Post by Watty » Tue Sep 11, 2018 8:10 pm

I am usually a pro "pay off the mortgage" person but I don't think you are there yet.

You might do something like pay it down by $200K now and then try to get the rest paid off over the next five years or so.

You can contact your lender to see if they will "recast your mortgage"(Google this). They are not required to do this but they often will for a processing fee of a couple of hundred dollars. They way this works is that if you pay it down by 50%(or whatever) then your required mortgage payment will be reduced by the same percentage. The interest rate and length of the loan remain the same. This could be important if something happens like you are disabled or interest rates go up a lot.

If you do decide to pay it off now you should check to see if waiting until January would save you any taxes on the capital gains since you may be in a lower tax bracket in 2019.

Grt2bOutdoors
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Re: Mr.No - another should I pay off my mortgage, post

Post by Grt2bOutdoors » Tue Sep 11, 2018 8:18 pm

DJP1944 wrote:
Tue Sep 11, 2018 7:04 pm
I'm in the "pay it off" camp. Lots of great responses here so far and are all probably mathematically righteous.

For me though, it transcends the math. It feels good not to owe anyone money. Also, it keeps life more simple.
It may feel good, but doing what feels good may sometimes cause more pain than good. As a single earner household with 4 dependents I would not throw all of my "liquid" assets into an "illiquid" asset. Yes, yes, we know the Bay area housing is hot and it's easy to sell a house, UNTIL it isn't. It was only 10 years ago that the entire real estate market literally froze due to illiquidity in the bond market ~ did everyone forget? If the OP loses his employment or experiences a lower bonus payout, how good will it feel to have a paid off house, no accessible money and bills to pay?

I'm all for paying off mortgages, but this one of the times that I'm not. It's one thing to have $700K in accessible taxable monies (nearly 2x mortgage debt) but you don't. You have $400K and $392K in debt, $8K in readily accessible taxable assets would not permit me to sleep well at night. The OP should ask his wife, how she'd feel with a paid off house and $8K in the bank afterwards. I want to be there for the conversation when he asks :twisted:
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

DJP1944
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Re: Mr.No - another should I pay off my mortgage, post

Post by DJP1944 » Tue Sep 11, 2018 8:28 pm

Grt2bOutdoors wrote:
Tue Sep 11, 2018 8:18 pm
DJP1944 wrote:
Tue Sep 11, 2018 7:04 pm
I'm in the "pay it off" camp. Lots of great responses here so far and are all probably mathematically righteous.

For me though, it transcends the math. It feels good not to owe anyone money. Also, it keeps life more simple.
It may feel good, but doing what feels good may sometimes cause more pain than good. As a single earner household with 4 dependents I would not throw all of my "liquid" assets into an "illiquid" asset. Yes, yes, we know the Bay area housing is hot and it's easy to sell a house, UNTIL it isn't. It was only 10 years ago that the entire real estate market literally froze due to illiquidity in the bond market ~ did everyone forget? If the OP loses his employment or experiences a lower bonus payout, how good will it feel to have a paid off house, no accessible money and bills to pay?

I'm all for paying off mortgages, but this one of the times that I'm not. It's one thing to have $700K in accessible taxable monies (nearly 2x mortgage debt) but you don't. You have $400K and $392K in debt, $8K in readily accessible taxable assets would not permit me to sleep well at night. The OP should ask his wife, how she'd feel with a paid off house and $8K in the bank afterwards. I want to be there for the conversation when he asks :twisted:
Fair enough. Watty's plan listed above this comment is probably a better alternative. You are right though, my "pay it off" comment wasn't thoughtful enough about the OP's personal situation.

Grt2bOutdoors
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Re: Mr.No - another should I pay off my mortgage, post

Post by Grt2bOutdoors » Tue Sep 11, 2018 8:31 pm

betablocker wrote:
Tue Sep 11, 2018 6:42 pm
Cheap, manageable and tax deductible debt is almost an asset. If you don’t believe me follow Buffett. His whole empire is based on insurance float. Dont send your money into the ether for a 2% return (factoring in the tax deduction). With that bonus you aren’t in 33% anymore. Stay liquid. I read a great book called The Value of Debt in Bulding Wealth that lays that case out well: https://www.amazon.com/Value-Debt-Build ... 6/ref=nodl_
Buffett has millions of policy payments coming in each day. Buffett also has operating companies that make real, tangible products generating billions in real operating profit. Buffett is not basing his empire solely on insurance float. That said, a single individual is NOT Buffett and no one should be deluded into thinking as much. There is no comparison between Berkshire Hathaway and the OP or even yourself, Betablocker.

Debt is manageable for Berkshire Hathaway because it has access to many different levers. The OP has access to two levers - his employment and his assets. If he loses his employment, things will be worse, but still in great shape with $400K in taxable. The next scenario where he pays off the mortgage and loses his job, it will get rougher still - an $8K fund is two months of bills. Not nearly enough. That's where you lose unless you find new employment in exactly 2 months.

For those reasons, my answer is NO, do not pay off the mortgage because the dream is not grounded in reality. The reality is you have 3 young kids and a stay at home wife, you place the thought of a mortgage free home on backburner until you protect what is most valuable. You win by not losing. As another poster stated, hope the OP has significant term life insurance on both him and wife.
Last edited by Grt2bOutdoors on Tue Sep 11, 2018 8:35 pm, edited 1 time in total.
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desiderium
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Re: Mr.No - another should I pay off my mortgage, post

Post by desiderium » Tue Sep 11, 2018 8:35 pm

I am a generally a pay it off guy but you have too many young kids! Congratulations on your beautiful family. You have an enormous responsibility and that argues strongly to stay liquid.

MrNo
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Re: Mr.No - another should I pay off my mortgage, post

Post by MrNo » Tue Sep 11, 2018 10:33 pm

Thank you everybody for great input & guiding/advising me to take a red pill aka not pay off the mortgage & keep investing in the market and let money grow. I am really grateful for your explanation and putting things `in the right perspective. It seems I am on right track and I have to keep doing what I am doing.

Can you please elaborate on "term life insurance". I do have one policy through the work that I can take with me if I leave but I think that might not be enough or right choice.

delamer
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Re: Mr.No - another should I pay off my mortgage, post

Post by delamer » Tue Sep 11, 2018 11:02 pm

MrNo wrote:
Tue Sep 11, 2018 10:33 pm
Thank you everybody for great input & guiding/advising me to take a red pill aka not pay off the mortgage & keep investing in the market and let money grow. I am really grateful for your explanation and putting things `in the right perspective. It seems I am on right track and I have to keep doing what I am doing.

Can you please elaborate on "term life insurance". I do have one policy through the work that I can take with me if I leave but I think that might not be enough or right choice.

Here is some information on term life insurance: https://www.investopedia.com/terms/t/termlife.asp

(Stay way from whole life or any policy that combines insurance with investing. Term coverage is cheaper.)

Your work coverage is probably term life insurance. If you can continue it if you leave the company then it is a good base benefit since you don’t have to qualify. But you should find out much coverage you have and what the premium would be if you left your job. You are likely correct that you need more than you’ll get through work.

You need term coverage for your wife too. Even though the risk of her dying while your kids are young is small, the result would be catastrophic for your family. You would have to pay someone to take care of your kids and do all of the other tasks (cooking, cleaning, etc.) that your wife takes care care of now.

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Re: Mr.No - another should I pay off my mortgage, post

Post by Grt2bOutdoors » Wed Sep 12, 2018 7:08 am

If you are purchasing term life through work chances are you might be paying group rates. Group rates account for the healthy (best rates, lowest risk of early death), the not so healthy (higher rates, higher risk of premature death) and are blended to obtain a group price that everyone eligible at company pays. Take a look at term4sale.com and see what the premiums are for someone your age and health status. Typically you want a policy that is roughly 10x your salary less assets (unless you either need more insurance coverage or are unwilling to have current assets liquidated after your death). A 20 year term is usually sufficient to meet most needs but some may opt to take a 30 year term. Your health is usually at its best when young, as you age things can happen that are beyond your control and it could be more difficult and costly to obtain insurance coverage. Simply pay premium and you are covered, don’t and the coverage will lapse/expire. If you find you have plenty of assets and no longer need coverage- don’t pay the next premium. Otherwise, keep paying to retain that coverage once obtained.
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kaudrey
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Re: Mr.No - another should I pay off my mortgage, post

Post by kaudrey » Wed Sep 12, 2018 8:42 am

I wouldn't sell investments to pay off the mortgage, but why not throw your bonus at it every year? Since you don't know how much that will be, it sounds like you aren't counting on it to live. I'd do that, and otherwise keep paying the monthly amount until the bonuses end up paying it off at some point down the road.

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Re: Mr.No - another should I pay off my mortgage, post

Post by Jack FFR1846 » Wed Sep 12, 2018 8:51 am

This doesn't have to be an all or nothing decision. You don't have to sell investments, taking cap gains to transfer that money to paying off the mortgage. When I had a mortgage, if we only had an extra $10 come time to pay, we put an extra $10 on the mortgage payment. When a bonus came in and we had $10k to spare, we put $10k towards the mortgage. Since paying off our mortgage, we've had no regrets whatsoever. I've yet to run into anyone who's lamented paying off their mortgage. You can pay off the mortgage and then put more towards the investment side of things, which is what I've done.

I do understand those people who say that mortgages are cheap, so you should put money into the market instead. I guess I'd ask.....if you could refi your house at zero cost at the same rate and take the entire equity out, to invest, would you? For me the answer is absolutely not. For someone on the other end of the spectrum, they would. Where do you sit on this?
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Re: Mr.No - another should I pay off my mortgage, post

Post by simas » Wed Sep 12, 2018 8:59 am

willthrill81 wrote:
Tue Sep 11, 2018 7:39 pm
Use income to pay off the mortgage. Do not sell a dime of your investments to do so. And while you're doing so, maintain a healthy savings rate.
this. it is a great feeling to be completely debt free, however I would not sell almost all of your investments to do.

for us , we used income to chip at it and sold some RSUs at the end to finish it off.

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Re: Mr.No - another should I pay off my mortgage, post

Post by FOGU » Wed Sep 12, 2018 9:10 am

The $900k of equity in your house seems like idle capital to me. Don't decimate your compounding assets only to exacerbate that situation.

Having a paid off house is not nearly as psychologically or emotionally gratifying as it is made out to be. The taxes, insurance, assessments, maintenance, repairs and protection never go away.
~ Don't just do something. Sit there. ~

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Re: Mr.No - another should I pay off my mortgage, post

Post by bloom2708 » Wed Sep 12, 2018 9:28 am

I'm in the "not pay it off" camp with a lump.

I would look at being 80/20 at age 45 with 1 income. 70-30 or 65/35 seem more reasonable.

I would put an extra $1,000/month on the mortgage principle now and then. When you get those large bonuses, whack off a chunk of it. Pay cash for your next car (also controversial).

In SF, your house is readily sale-able and the spread between the home value and mortgage is wide. With the new $24k standard deduction, I doubt you will be itemizing. But, Interest + Property taxes + Charitble donations could slight exceed the standard deduction. Even then the benefit is only ABOVE the standard deduction. Anyone gets the first benefit without itemizing.

Good luck!
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Re: Mr.No - another should I pay off my mortgage, post

Post by thatme » Wed Sep 12, 2018 9:45 am

I'm currently contributing any additional savings each month 1/2 to extra mortgage principal, and 1/2 to taxable. My mortgage rate is similar, I can deduct the interest, but I'd like to chip away at it and pay it off over the next 10 years (have further to go than you). I'd recommend something similar rather than liquidating the taxable account.

Also, term life insurance is cheap. I have $2MM 20-year term and pay $66/month. I'm about 6 years into the policy, 14 to go, and then I hopefully won't need the insurance any longer due to strong savings.

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Re: Mr.No - another should I pay off my mortgage, post

Post by willthrill81 » Wed Sep 12, 2018 10:36 am

simas wrote:
Wed Sep 12, 2018 8:59 am
willthrill81 wrote:
Tue Sep 11, 2018 7:39 pm
Use income to pay off the mortgage. Do not sell a dime of your investments to do so. And while you're doing so, maintain a healthy savings rate.
this. it is a great feeling to be completely debt free, however I would not sell almost all of your investments to do.

for us , we used income to chip at it and sold some RSUs at the end to finish it off.
It takes time, but it is a great feeling. Since we starting aggressively paying off our mortgage a little over three years ago, we've whittled it down to the point that we only owe the amount that our home has appreciated since we bought it almost four years ago (i.e. we could sell it and recover our nominal purchase price with cash in hand). We expect to be finished in about 18-20 months and will have a small party where we 'burn the mortgage' (mere copies of all our documents :wink: ).
“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: Mr.No - another should I pay off my mortgage, post

Post by Admiral » Wed Sep 12, 2018 11:20 am

MrNo wrote:
Tue Sep 11, 2018 4:37 pm
Hello everyone, I’be been following this forum for over a year and this is my 1st post. I learned a lot by reading posts daily.

Question:
1. Should we pay off our mortgage or not?

I’ve been debating about this for long time. Should we pay off the mortgage and be done with it or keep investing and hopefully in 7 years we will double our investment in taxable account. Market is close to all time high and I am thinking why not cash it out and pay off our mortgage. I understand I will have to pay taxes on capital gains. My right side of the brain keeps telling me: let it be and let it grow :) , stay the course & write off the mortgage interest.

We live in decent neighborhood in Bay Area and school is 8min walking distance. My oldest one just started going to school. We are not sure if this is our forever home but we really like our neighborhood and neighbors. Hopefully things will not change. We've lived here for 5 years now and we love our house.

My job situation is pretty stable, I am working for a Mega Corp & I want to believe that I will have this job for next couple of years but you never know :happy . Very happy where I am & just got awarded as a top 1% performer. Thats kind a big deal within the company.


Base Salary $155k. This year bonus was exceptionally strong, almost doubled my salary. Usually Bonus is between 10-20% of my salary.
Emergency funds: six+ months of expenses
Debt:
• Mortgage - $392K – interest rate 3.375%
• Credit cards ~4k – paid off monthly
• No other debts
• His car might have to be replaced soon. Its 11 year old, 92k miles but it runs fine without any issues

Tax Filing Status: Married Filing Jointly
Tax Rate: 33% Federal, 10% State. This year my earnings are really good, usually I am in lower tax bracket.
State of Residence: CA
Age: 45
Married, 3 kids. Ages 5, 3 and 2 weeks . DW is full time mom.
Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 10% of stocks

Current retirement assets

Taxable
$300k – Vanguard
$100k – Savings (AMEX)

His 401k
$480k

His Roth IRA at Vanguard
$100k

Her Traditional IRA at Vanguard
$45K

Each Kid has a 529
5 year old – $23k
3 year old - $18k
Newborn - $11.5k

Contributions

New annual Contributions
$18k his 401k (6.5% match)
$5500 his Roth IRA
$7000 his Mega back door IRA
Contributing to ESPP 10%

Home worth estimate per Zillow is $1.3MIL. Houses around me have been selling between $1.2 - $1.45MIL

I really appreciate your wisdom & input.
Thank you and please let me know if you need any additional info.

Thanks,
MisterNo
You don't state your mortgage term (unless I missed it in a follow up). Is it 30 years? Did you price out moving to 15 years? You have the cash to support a larger payment, so that might be one option (not sure what the rates are these days, your rate is pretty low so it might not be a good option).

I would be nervous about using that much of my liquidity to pay off the house in a one-income family. I would not pay it off. But then I am rarely an advocate for paying off housing debt that is under 4%. The whole "being debt free feels great" argument is fine as far as it goes but guess what? If you own a home (even free and clear) you still have obligations: taxes and insurance. Those don't go away.

Golf maniac
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Location: Charlotte NC

Re: Mr.No - another should I pay off my mortgage, post

Post by Golf maniac » Wed Sep 12, 2018 2:12 pm

I agree with the do not pay off mtg crowd here for the same reasons given by many, your personal situation and the need for liquidity. Not sure how much you have in term life from your company but you need to max this out during the next open season for you. Then look at a 20 year term life policy on the outside. Depending on your DW skills and ability to earn if you are gone, you need to figure out how much her annual expenses would be if you are gone. This will require discussions of where she would want to live (possibly move to get closer to her family), housing changes, expense changes, and her income potential. Then look at your assets and how long they would last (her potential income - expenses = funds needed each year). Take the term life from company and how long will that last. Then the term life from the outside. So I wanted to give my wife 15 years of income when our kids were young and I had company term life and outside term life to provide her the ability to work and earn about $30k on her own and the investments and term life to make up the difference. Each person will have their own comfort level and what they need but it is a discussion you need to have with DW. You are a high earner and it would take a lot to replace that income.

Your in great shape but just need to get the insurance side nailed down.

Comment above on your wife needing a term life policy is on point also, you may need to move or change jobs if she dies. Again, think about expenses and your plans if she dies.

betablocker
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Re: Mr.No - another should I pay off my mortgage, post

Post by betablocker » Wed Sep 12, 2018 4:12 pm

Grt2bOutdoors wrote:
Tue Sep 11, 2018 8:31 pm
betablocker wrote:
Tue Sep 11, 2018 6:42 pm
Cheap, manageable and tax deductible debt is almost an asset. If you don’t believe me follow Buffett. His whole empire is based on insurance float. Dont send your money into the ether for a 2% return (factoring in the tax deduction). With that bonus you aren’t in 33% anymore. Stay liquid. I read a great book called The Value of Debt in Bulding Wealth that lays that case out well: https://www.amazon.com/Value-Debt-Build ... 6/ref=nodl_
Buffett has millions of policy payments coming in each day. Buffett also has operating companies that make real, tangible products generating billions in real operating profit. Buffett is not basing his empire solely on insurance float. That said, a single individual is NOT Buffett and no one should be deluded into thinking as much. There is no comparison between Berkshire Hathaway and the OP or even yourself, Betablocker.

Debt is manageable for Berkshire Hathaway because it has access to many different levers. The OP has access to two levers - his employment and his assets. If he loses his employment, things will be worse, but still in great shape with $400K in taxable. The next scenario where he pays off the mortgage and loses his job, it will get rougher still - an $8K fund is two months of bills. Not nearly enough. That's where you lose unless you find new employment in exactly 2 months.

For those reasons, my answer is NO, do not pay off the mortgage because the dream is not grounded in reality. The reality is you have 3 young kids and a stay at home wife, you place the thought of a mortgage free home on backburner until you protect what is most valuable. You win by not losing. As another poster stated, hope the OP has significant term life insurance on both him and wife.
Agreed but it is important for people on this board to understand the potential value of leverage when it is cheap and manageable. Many Bogleheads seem to come from the Munger camp of, "liquor, ladies (or lads to keep the aliteration), and leverage." Any of those used incorrectly are bad but the point is Buffett himself uses them. If you have steady cash flows and don't overextend, cheap asset back leverage makes sense. I think it is very analogous.

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grabiner
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Re: Mr.No - another should I pay off my mortgage, post

Post by grabiner » Wed Sep 12, 2018 9:42 pm

MrNo wrote:
Tue Sep 11, 2018 4:37 pm
• Mortgage - $392K – interest rate 3.375%
Tax Rate: 33% Federal, 10% State. This year my earnings are really good, usually I am in lower tax bracket.
See Paying down loans versus investing on the wiki.

Can you still deduct the interest? This depends on how much you donate to charity, since you can only deduct $10,000 of state and local taxes, and the mortgage interest of $13,230 makes a total slightly less than the standard deduction of $24,000.

If you can deduct the interest, in what will probably be a 24% federal and 9.3% state tax bracket, the effective rate is only 2.25%, and you can earn more than that on a low-risk bond investment.

If you cannot deduct the interest from your federal tax, the rate is 3.06% after CA tax, and that is probably worth paying down, as you can't earn 3.06% unless you take more risk. However....
Taxable
$300k – Vanguard
$100k – Savings (AMEX)
If you have capital gains in that Vanguard taxable account, it isn't worth paying tax on those gains to pay down the mortgage at this rate, even if the mortgage isn't tax-deductible. Use as much of the savings account as you don't need for an emergency fund or other short-term needs, sell anything you can sell without a significant capital gain, and use dividends from the taxable account and new money to pay down the mortgage.[/quote]
Wiki David Grabiner

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