Paying Off Mortgage Question

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Topic Author
AC1984
Posts: 21
Joined: Fri Aug 24, 2018 7:53 am

Paying Off Mortgage Question

Post by AC1984 » Sat Jul 20, 2019 4:18 pm

Hey everyone, so I recently listened to an intriguing ChooseFI episode focused on how or whether to pay off your mortgage on the path to financial independence. The idea was that if you have extra money available every month, to put into a stock index (VTSAX) instead of the mortgage payment, and use the money in that fund to pay the off mortgage when the total exceeds what you owe on the house. The idea is that the rate of return over a 15ish year period (conservatively 5-6%) is going to be substantially more than the mortgage rate (mine is 3.65%). What do people think of this concept? I’m 2.5 years into a 30-year fixed rate mortgage, and have been paying it pretty aggressively...but reconsidering if something like this is a better idea. One question I have also is how would capital gains tax affect this decision, assuming we’re talking about a taxable brokerage account? Im not clear how a tax advantaged account would work if you want to pay the house off early with this method. Is there another way to work something like this to your advantage? If there’s something I’m missing or you have other thoughts, please share!

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willthrill81
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Re: Paying Off Mortgage Question

Post by willthrill81 » Sat Jul 20, 2019 4:22 pm

What they were referring to is known as a sinking fund. It's a good concept since it allows you to retain the liquidity of the funds since home equity is an illiquid asset, and, in this instance, stand a good historical chance of earning a higher return than the mortgage. I believe that it's perfectly plausible. However, it probably only makes good sense to do so after you've maxed out all of your tax-advantaged space (e.g. 401k, IRA, HSA, etc.).
“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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abuss368
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Re: Paying Off Mortgage Question

Post by abuss368 » Sat Jul 20, 2019 4:25 pm

AC1984 wrote:
Sat Jul 20, 2019 4:18 pm
Hey everyone, so I recently listened to an intriguing ChooseFI episode focused on how or whether to pay off your mortgage on the path to financial independence. The idea was that if you have extra money available every month, to put into a stock index (VTSAX) instead of the mortgage payment, and use the money in that fund to pay the off mortgage when the total exceeds what you owe on the house. The idea is that the rate of return over a 15ish year period (conservatively 5-6%) is going to be substantially more than the mortgage rate (mine is 3.65%). What do people think of this concept? I’m 2.5 years into a 30-year fixed rate mortgage, and have been paying it pretty aggressively...but reconsidering if something like this is a better idea. One question I have also is how would capital gains tax affect this decision, assuming we’re talking about a taxable brokerage account? Im not clear how a tax advantaged account would work if you want to pay the house off early with this method. Is there another way to work something like this to your advantage? If there’s something I’m missing or you have other thoughts, please share!
I have heard of this before. The idea is the fund will grow and offset the cost of interest. This approach may work as we will not know in advance what returns the markets will provide.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Paying Off Mortgage Question

Post by KlangFool » Sat Jul 20, 2019 4:27 pm

AC1984 wrote:
Sat Jul 20, 2019 4:18 pm
Hey everyone, so I recently listened to an intriguing ChooseFI episode focused on how or whether to pay off your mortgage on the path to financial independence. The idea was that if you have extra money available every month, to put into a stock index (VTSAX) instead of the mortgage payment, and use the money in that fund to pay the off mortgage when the total exceeds what you owe on the house. The idea is that the rate of return over a 15ish year period (conservatively 5-6%) is going to be substantially more than the mortgage rate (mine is 3.65%). What do people think of this concept? I’m 2.5 years into a 30-year fixed rate mortgage, and have been paying it pretty aggressively...but reconsidering if something like this is a better idea. One question I have also is how would capital gains tax affect this decision, assuming we’re talking about a taxable brokerage account? Im not clear how a tax advantaged account would work if you want to pay the house off early with this method. Is there another way to work something like this to your advantage? If there’s something I’m missing or you have other thoughts, please share!
AC1984,

1) Why would you generate enough long-term capital gain in one year to pay any tax?

2) Even if (1) is true, you could generate the long-term capital gain over many years to pay zero taxes.

3) Why 100% stock? Just invest the money according to your asset allocation. Keep the stock in your taxable account and fixed income in your tax-advantaged account.

4) Check this out.

https://www.bogleheads.org/wiki/Tax_gain_harvesting

5) Do you max up all your tax-advantaged accounts? If not, you may be paying 20+% taxes in order to save the 3.65% mortgage interest. Why is that a good idea?

KlangFool

squirm
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Re: Paying Off Mortgage Question

Post by squirm » Sat Jul 20, 2019 4:53 pm

So what do you do when the s&p losses half it's value?

Topic Author
AC1984
Posts: 21
Joined: Fri Aug 24, 2018 7:53 am

Re: Paying Off Mortgage Question

Post by AC1984 » Sat Jul 20, 2019 4:54 pm

willthrill81 wrote:
Sat Jul 20, 2019 4:22 pm
What they were referring to is known as a sinking fund. It's a good concept since it allows you to retain the liquidity of the funds since home equity is an illiquid asset, and, in this instance, stand a good historical chance of earning a higher return than the mortgage. I believe that it's perfectly plausible. However, it probably only makes good sense to do so after you've maxed out all of your tax-advantaged space (e.g. 401k, IRA, HSA, etc.).
Side question about an HSA: I have good health insurance through work that covers me and my spouse at $83 biweekly. That means I can’t have a HSA right? Would that also be true for my wife if she’s on my plan?

Topic Author
AC1984
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Re: Paying Off Mortgage Question

Post by AC1984 » Sat Jul 20, 2019 4:55 pm

squirm wrote:
Sat Jul 20, 2019 4:53 pm
So what do you do when the s&p losses half it's value?
If that were the case, nothing and just keep paying the mortgage as is right?

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willthrill81
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Re: Paying Off Mortgage Question

Post by willthrill81 » Sat Jul 20, 2019 4:57 pm

AC1984 wrote:
Sat Jul 20, 2019 4:54 pm
willthrill81 wrote:
Sat Jul 20, 2019 4:22 pm
What they were referring to is known as a sinking fund. It's a good concept since it allows you to retain the liquidity of the funds since home equity is an illiquid asset, and, in this instance, stand a good historical chance of earning a higher return than the mortgage. I believe that it's perfectly plausible. However, it probably only makes good sense to do so after you've maxed out all of your tax-advantaged space (e.g. 401k, IRA, HSA, etc.).
Side question about an HSA: I have good health insurance through work that covers me and my spouse at $83 biweekly. That means I can’t have a HSA right? Would that also be true for my wife if she’s on my plan?
You would probably know if your insurance plan was a high deductible health plan (HDHP). Only those are eligible for HSA plans, and your HR office could readily tell you. If only one person is covered by the HDHP, then the single limits apply (i.e. $3,500 max. contribution). If you have a family plan, the limits are doubled (i.e. $7k).
“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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willthrill81
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Re: Paying Off Mortgage Question

Post by willthrill81 » Sat Jul 20, 2019 4:57 pm

AC1984 wrote:
Sat Jul 20, 2019 4:55 pm
squirm wrote:
Sat Jul 20, 2019 4:53 pm
So what do you do when the s&p losses half it's value?
If that were the case, nothing and just keep paying the mortgage as is right?
Correct.
“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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abuss368
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Re: Paying Off Mortgage Question

Post by abuss368 » Sat Jul 20, 2019 4:58 pm

AC1984 wrote:
Sat Jul 20, 2019 4:55 pm
squirm wrote:
Sat Jul 20, 2019 4:53 pm
So what do you do when the s&p losses half it's value?
If that were the case, nothing and just keep paying the mortgage as is right?
What other choice would you have? The mortgage is due regardless of market conditions.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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abuss368
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Re: Paying Off Mortgage Question

Post by abuss368 » Sat Jul 20, 2019 4:59 pm

AC1984 wrote:
Sat Jul 20, 2019 4:54 pm
willthrill81 wrote:
Sat Jul 20, 2019 4:22 pm
What they were referring to is known as a sinking fund. It's a good concept since it allows you to retain the liquidity of the funds since home equity is an illiquid asset, and, in this instance, stand a good historical chance of earning a higher return than the mortgage. I believe that it's perfectly plausible. However, it probably only makes good sense to do so after you've maxed out all of your tax-advantaged space (e.g. 401k, IRA, HSA, etc.).
Side question about an HSA: I have good health insurance through work that covers me and my spouse at $83 biweekly. That means I can’t have a HSA right? Would that also be true for my wife if she’s on my plan?
I would consider following up with your Human Resources department regarding the specifics of the plan. HSA are only possible with a high deductible plan (as defined by the IRS).
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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willthrill81
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Re: Paying Off Mortgage Question

Post by willthrill81 » Sat Jul 20, 2019 5:02 pm

abuss368 wrote:
Sat Jul 20, 2019 4:58 pm
AC1984 wrote:
Sat Jul 20, 2019 4:55 pm
squirm wrote:
Sat Jul 20, 2019 4:53 pm
So what do you do when the s&p losses half it's value?
If that were the case, nothing and just keep paying the mortgage as is right?
What other choice would you have? The mortgage is due regardless of market conditions.
That's why holding a mortgage during retirement increases your sequence of returns risk; you must make the monthly payment even if your portfolio is suffering.
“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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abuss368
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Re: Paying Off Mortgage Question

Post by abuss368 » Sat Jul 20, 2019 5:04 pm

AC1984 wrote:
Sat Jul 20, 2019 4:18 pm
Hey everyone, so I recently listened to an intriguing ChooseFI episode focused on how or whether to pay off your mortgage on the path to financial independence. The idea was that if you have extra money available every month, to put into a stock index (VTSAX) instead of the mortgage payment, and use the money in that fund to pay the off mortgage when the total exceeds what you owe on the house. The idea is that the rate of return over a 15ish year period (conservatively 5-6%) is going to be substantially more than the mortgage rate (mine is 3.65%). What do people think of this concept? I’m 2.5 years into a 30-year fixed rate mortgage, and have been paying it pretty aggressively...but reconsidering if something like this is a better idea. One question I have also is how would capital gains tax affect this decision, assuming we’re talking about a taxable brokerage account? Im not clear how a tax advantaged account would work if you want to pay the house off early with this method. Is there another way to work something like this to your advantage? If there’s something I’m missing or you have other thoughts, please share!
One additional aspect is to consider paying off your mortgage by retirement! Nothing better than being debt free. Will also insulate you somewhat from market conditions. I have family that retired this way and it works.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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Vulcan
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Re: Paying Off Mortgage Question

Post by Vulcan » Sat Jul 20, 2019 5:08 pm

abuss368 wrote:
Sat Jul 20, 2019 5:04 pm
One additional aspect is to consider paying off your mortgage by retirement! Nothing better than being debt free. Will also insulate you somewhat from market conditions. I have family that retired this way and it works.
Yet another aspect to consider is paying off the mortgage effectively makes the money disappear from need-based financial aid calculations at most US colleges, if that is something you may potentially benefit from.
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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abuss368
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Re: Paying Off Mortgage Question

Post by abuss368 » Sat Jul 20, 2019 5:09 pm

Vulcan wrote:
Sat Jul 20, 2019 5:08 pm
abuss368 wrote:
Sat Jul 20, 2019 5:04 pm
One additional aspect is to consider paying off your mortgage by retirement! Nothing better than being debt free. Will also insulate you somewhat from market conditions. I have family that retired this way and it works.
Yet another aspect to consider is paying off the mortgage effectively makes the money disappear from need-based financial aid calculations at most US colleges, if that is something you may potentially benefit from.
Good to know. Thank you for sharing.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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Vulcan
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Re: Paying Off Mortgage Question

Post by Vulcan » Sat Jul 20, 2019 5:11 pm

abuss368 wrote:
Sat Jul 20, 2019 5:09 pm
Vulcan wrote:
Sat Jul 20, 2019 5:08 pm
abuss368 wrote:
Sat Jul 20, 2019 5:04 pm
One additional aspect is to consider paying off your mortgage by retirement! Nothing better than being debt free. Will also insulate you somewhat from market conditions. I have family that retired this way and it works.
Yet another aspect to consider is paying off the mortgage effectively makes the money disappear from need-based financial aid calculations at most US colleges, if that is something you may potentially benefit from.
Good to know. Thank you for sharing.
:beer
More details here

http://www.thecollegesolution.com/will- ... d-chances/
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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abuss368
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Re: Paying Off Mortgage Question

Post by abuss368 » Sat Jul 20, 2019 5:12 pm

Vulcan wrote:
Sat Jul 20, 2019 5:11 pm
abuss368 wrote:
Sat Jul 20, 2019 5:09 pm
Vulcan wrote:
Sat Jul 20, 2019 5:08 pm
abuss368 wrote:
Sat Jul 20, 2019 5:04 pm
One additional aspect is to consider paying off your mortgage by retirement! Nothing better than being debt free. Will also insulate you somewhat from market conditions. I have family that retired this way and it works.
Yet another aspect to consider is paying off the mortgage effectively makes the money disappear from need-based financial aid calculations at most US colleges, if that is something you may potentially benefit from.
Good to know. Thank you for sharing.
:beer
More details here

http://www.thecollegesolution.com/will- ... d-chances/
Awesome. Will check out.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

Topic Author
AC1984
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Joined: Fri Aug 24, 2018 7:53 am

Re: Paying Off Mortgage Question

Post by AC1984 » Sat Jul 20, 2019 5:16 pm

willthrill81 wrote:
Sat Jul 20, 2019 5:02 pm
abuss368 wrote:
Sat Jul 20, 2019 4:58 pm
AC1984 wrote:
Sat Jul 20, 2019 4:55 pm
squirm wrote:
Sat Jul 20, 2019 4:53 pm
So what do you do when the s&p losses half it's value?
If that were the case, nothing and just keep paying the mortgage as is right?
What other choice would you have? The mortgage is due regardless of market conditions.
That's why holding a mortgage during retirement increases your sequence of returns risk; you must make the monthly payment even if your portfolio is suffering.
Regardless, I’m paying more than the minimum and if I reduce what I’m paying currently by $150 biweekly I’m still ahead and will have it paid in full within 22ish years. So I’ll be able to afford the payment either way, the question is whether it makes sense to put the extra money into the principal or into a taxable investment index fund. I’m already maxing out (between me and my wife) two Roth IRAs, most of my 401k and 457b, and roughly half of her 401k. Another consideration would be to max hers out too at the expense of not paying more on the mortgage.

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abuss368
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Re: Paying Off Mortgage Question

Post by abuss368 » Sat Jul 20, 2019 5:28 pm

AC1984 wrote:
Sat Jul 20, 2019 5:16 pm
willthrill81 wrote:
Sat Jul 20, 2019 5:02 pm
abuss368 wrote:
Sat Jul 20, 2019 4:58 pm
AC1984 wrote:
Sat Jul 20, 2019 4:55 pm
squirm wrote:
Sat Jul 20, 2019 4:53 pm
So what do you do when the s&p losses half it's value?
If that were the case, nothing and just keep paying the mortgage as is right?
What other choice would you have? The mortgage is due regardless of market conditions.
That's why holding a mortgage during retirement increases your sequence of returns risk; you must make the monthly payment even if your portfolio is suffering.
Regardless, I’m paying more than the minimum and if I reduce what I’m paying currently by $150 biweekly I’m still ahead and will have it paid in full within 22ish years. So I’ll be able to afford the payment either way, the question is whether it makes sense to put the extra money into the principal or into a taxable investment index fund. I’m already maxing out (between me and my wife) two Roth IRAs, most of my 401k and 457b, and roughly half of her 401k. Another consideration would be to max hers out too at the expense of not paying more on the mortgage.
You could also build both sides of the Balance Sheet with the extra funds - that is increase investments and pay down debt.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

sandramjet
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Re: Paying Off Mortgage Question

Post by sandramjet » Sat Jul 20, 2019 5:35 pm

This is really a bit of an apples and oranges question ...
You are really asking yourself "should I take a stable return now, or increase my risk in hopes of a greater reward later"? Paying off the mortgage is a known return, with little risk. On the other hand, putting the money aside in the market is taking on market risk (as mentioned ... the market might drop), with the expectation (hope?) that you will do better over the long run. It is fine if you consciously take that risk -- just don't think that the risk doesn't exist. (FWIW, this is in fact what I am doing -- not paying my mortgage early, but investing for later. And I understand the additional risk I am taking)

KlangFool
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Re: Paying Off Mortgage Question

Post by KlangFool » Sat Jul 20, 2019 5:40 pm

AC1984 wrote:
Sat Jul 20, 2019 5:16 pm
willthrill81 wrote:
Sat Jul 20, 2019 5:02 pm
abuss368 wrote:
Sat Jul 20, 2019 4:58 pm
AC1984 wrote:
Sat Jul 20, 2019 4:55 pm
squirm wrote:
Sat Jul 20, 2019 4:53 pm
So what do you do when the s&p losses half it's value?
If that were the case, nothing and just keep paying the mortgage as is right?
What other choice would you have? The mortgage is due regardless of market conditions.
That's why holding a mortgage during retirement increases your sequence of returns risk; you must make the monthly payment even if your portfolio is suffering.
Regardless, I’m paying more than the minimum and if I reduce what I’m paying currently by $150 biweekly I’m still ahead and will have it paid in full within 22ish years. So I’ll be able to afford the payment either way, the question is whether it makes sense to put the extra money into the principal or into a taxable investment index fund. I’m already maxing out (between me and my wife) two Roth IRAs, most of my 401k and 457b, and roughly half of her 401k. Another consideration would be to max hers out too at the expense of not paying more on the mortgage.
AC1984,

<<Another consideration would be to max hers out too at the expense of not paying more on the mortgage.>>

That would be a better idea. You are paying the marginal tax rate (10% to 20+%) on the $150 in order to save 3+% mortgage interest. How does that make any sense?

KlangFool

Topic Author
AC1984
Posts: 21
Joined: Fri Aug 24, 2018 7:53 am

Re: Paying Off Mortgage Question

Post by AC1984 » Sat Jul 20, 2019 5:45 pm

KlangFool wrote:
Sat Jul 20, 2019 5:40 pm
AC1984 wrote:
Sat Jul 20, 2019 5:16 pm
willthrill81 wrote:
Sat Jul 20, 2019 5:02 pm
abuss368 wrote:
Sat Jul 20, 2019 4:58 pm
AC1984 wrote:
Sat Jul 20, 2019 4:55 pm


If that were the case, nothing and just keep paying the mortgage as is right?
What other choice would you have? The mortgage is due regardless of market conditions.
That's why holding a mortgage during retirement increases your sequence of returns risk; you must make the monthly payment even if your portfolio is suffering.
Regardless, I’m paying more than the minimum and if I reduce what I’m paying currently by $150 biweekly I’m still ahead and will have it paid in full within 22ish years. So I’ll be able to afford the payment either way, the question is whether it makes sense to put the extra money into the principal or into a taxable investment index fund. I’m already maxing out (between me and my wife) two Roth IRAs, most of my 401k and 457b, and roughly half of her 401k. Another consideration would be to max hers out too at the expense of not paying more on the mortgage.
AC1984,

<<Another consideration would be to max hers out too at the expense of not paying more on the mortgage.>>

That would be a better idea. You are paying the marginal tax rate (10% to 20+%) on the $150 in order to save 3+% mortgage interest. How does that make any sense?

KlangFool
Good point, that’s why I appreciate everyone here...there’s so much I’m sure I don’t know and haven’t considered :)

cherijoh
Posts: 6357
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Paying Off Mortgage Question

Post by cherijoh » Sun Jul 21, 2019 11:15 am

AC1984 wrote:
Sat Jul 20, 2019 4:18 pm
Hey everyone, so I recently listened to an intriguing ChooseFI episode focused on how or whether to pay off your mortgage on the path to financial independence. The idea was that if you have extra money available every month, to put into a stock index (VTSAX) instead of the mortgage payment, and use the money in that fund to pay the off mortgage when the total exceeds what you owe on the house. The idea is that the rate of return over a 15ish year period (conservatively 5-6%) is going to be substantially more than the mortgage rate (mine is 3.65%). What do people think of this concept? I’m 2.5 years into a 30-year fixed rate mortgage, and have been paying it pretty aggressively...but reconsidering if something like this is a better idea. One question I have also is how would capital gains tax affect this decision, assuming we’re talking about a taxable brokerage account? Im not clear how a tax advantaged account would work if you want to pay the house off early with this method. Is there another way to work something like this to your advantage? If there’s something I’m missing or you have other thoughts, please share!

Are you also maxing out tax-advantaged retirement plans? In the long run, this will get you closer to financial idependence than paying extra on your mortage. People who are gung ho to pay off their mortgage quickly seem to forget that they are making their mortgage payments with nominal dollars which are worth a whole lot less after inflation.

cherijoh
Posts: 6357
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Paying Off Mortgage Question

Post by cherijoh » Sun Jul 21, 2019 11:22 am

AC1984 wrote:
Sat Jul 20, 2019 4:54 pm
willthrill81 wrote:
Sat Jul 20, 2019 4:22 pm
What they were referring to is known as a sinking fund. It's a good concept since it allows you to retain the liquidity of the funds since home equity is an illiquid asset, and, in this instance, stand a good historical chance of earning a higher return than the mortgage. I believe that it's perfectly plausible. However, it probably only makes good sense to do so after you've maxed out all of your tax-advantaged space (e.g. 401k, IRA, HSA, etc.).
Side question about an HSA: I have good health insurance through work that covers me and my spouse at $83 biweekly. That means I can’t have a HSA right? Would that also be true for my wife if she’s on my plan?
HSAs are health savings accounts that are only available if you have a qualifying high-deductible health insurance plan. Workplace plans can offer high-deductible plans so you might have one. But if your plan has co-pays for doctor visits or prescriptions, than you are not in an eligible plan.

Jablean
Posts: 297
Joined: Sat Jun 02, 2018 2:38 pm

Re: Paying Off Mortgage Question

Post by Jablean » Sun Jul 21, 2019 11:54 am

I love it when people think that conservative growth is 5-6% when we are excited when economic growth gets close to 3%. I also know that history is on your side but in history we've had more rational hands in charge of when to goose or not goose the economy. Our family has always said that we were comfortable being aggressive in the stock market. But now that I found Bogleheads and looked at my total portfolio we, or at least I am since I do the money, are rather on the conservative side and I like having cash at my credit union. What you are proposing doesn't have to be something you set in stone for 20 years. You might wind up doing it for 3 months, you might split your extra money 50/50 to mortgage and investment, you might decide to put it all into a college fund one year and just pay minimums. Are your credit cards paid off every month? Do you have any student debt? We paid off our house this year, 20 years after purchase. Pretty slow and steady (maybe an extra 100 a month) for 15 years and then when it got down in high credit card territory I enjoyed knocking it down in bigger chunks.

Topic Author
AC1984
Posts: 21
Joined: Fri Aug 24, 2018 7:53 am

Re: Paying Off Mortgage Question

Post by AC1984 » Sun Jul 21, 2019 3:44 pm

Jablean wrote:
Sun Jul 21, 2019 11:54 am
I love it when people think that conservative growth is 5-6% when we are excited when economic growth gets close to 3%. I also know that history is on your side but in history we've had more rational hands in charge of when to goose or not goose the economy. Our family has always said that we were comfortable being aggressive in the stock market. But now that I found Bogleheads and looked at my total portfolio we, or at least I am since I do the money, are rather on the conservative side and I like having cash at my credit union. What you are proposing doesn't have to be something you set in stone for 20 years. You might wind up doing it for 3 months, you might split your extra money 50/50 to mortgage and investment, you might decide to put it all into a college fund one year and just pay minimums. Are your credit cards paid off every month? Do you have any student debt? We paid off our house this year, 20 years after purchase. Pretty slow and steady (maybe an extra 100 a month) for 15 years and then when it got down in high credit card territory I enjoyed knocking it down in bigger chunks.
Makes sense, I’m only 35 so have time to be flexible with how to allocate the funds. I do have an absurd amount of student debt, but it’s not really a factor - I’m on am income based plan capped at 15% of income and in five more years I’ll qualify for PSLF (total forgiveness with no tax burden). Also I am trying to build a legit emergency fund. I think the only way for me to actually do it is to treat it like an auto-debited bill that goes to another account.

Stradovinski
Posts: 13
Joined: Wed Apr 04, 2018 9:10 pm

Re: Paying Off Mortgage Question

Post by Stradovinski » Sun Jul 21, 2019 4:20 pm

Considering the long run we have had in the market, it’s not crazy to assume there will be a drop at some point in the next so many years. One person asked what you do when the market drops...well actually that is a great time to buy.

Not everyone is affected when this happens (except on paper). It seems like you have a long time horizon so I wouldn’t worry too much about that from a fund performance standpoint. However it will take discipline, and also the assumption that should the market actually go down, your income remains intact.

As someone else stated, it is hard to answer with certainty. Paying more on the mortgage is a given return. The other methods has some risk. You have to decide if you are willing to eat it if the market dives at the wrong time.

Unfortunately can’t answer about the tax implications. Actually wish I thought of this as an option back in the day. Interesting idea.

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Re: Paying Off Mortgage Question

Post by willthrill81 » Sun Jul 21, 2019 5:21 pm

Stradovinski wrote:
Sun Jul 21, 2019 4:20 pm
Considering the long run we have had in the market, it’s not crazy to assume there will be a drop at some point in the next so many years.
It wouldn't be crazy to make that assumption, but the data do not support it. The length of time since the last recession has not been a statistically significant predictor of the next recession.
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Re: Paying Off Mortgage Question

Post by scubadiver » Sun Jul 21, 2019 8:41 pm

sandramjet wrote:
Sat Jul 20, 2019 5:35 pm
This is really a bit of an apples and oranges question ...
You are really asking yourself "should I take a stable return now, or increase my risk in hopes of a greater reward later"? Paying off the mortgage is a known return, with little risk. On the other hand, putting the money aside in the market is taking on market risk (as mentioned ... the market might drop), with the expectation (hope?) that you will do better over the long run. It is fine if you consciously take that risk -- just don't think that the risk doesn't exist. (FWIW, this is in fact what I am doing -- not paying my mortgage early, but investing for later. And I understand the additional risk I am taking)
To a degree, this is what we are doing as well. After maxing 401k and Roth IRA space, we split additional savings between paying down our mortgage, 529 plan for kids, and accruing taxable investments above our emergency fund level. In a couple of years my currently stay-at-home wife will return to work and we will accelerate this additional savings. As a federal employee, I will also have a pension. This buys down my vulnerability to sequence of return risks, not that I expect to still have a mortgage when we hit the retirement milestone.

Not arguing that this is optimal, just stating that it's what we do. YMMV.

Scubadiver
Last edited by scubadiver on Sun Jul 21, 2019 9:22 pm, edited 1 time in total.

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Re: Paying Off Mortgage Question

Post by grabiner » Sun Jul 21, 2019 9:18 pm

AC1984 wrote:
Sat Jul 20, 2019 4:18 pm
Hey everyone, so I recently listened to an intriguing ChooseFI episode focused on how or whether to pay off your mortgage on the path to financial independence. The idea was that if you have extra money available every month, to put into a stock index (VTSAX) instead of the mortgage payment, and use the money in that fund to pay the off mortgage when the total exceeds what you owe on the house. The idea is that the rate of return over a 15ish year period (conservatively 5-6%) is going to be substantially more than the mortgage rate (mine is 3.65%). What do people think of this concept?
See Paying down loans versus investing on the wiki.

This is not really a fair comparison for a sinking fund, because of the risk involved. You can pay down the mortgage and still take that extra risk, by moving an equal amount from bonds to stock in your 401(k) or IRA when you make the extra payment.

The fair comparison would be to a bond fund. If your mortgage is tax-deductible at a high rate, you can come close to the mortgage rate by investing in long-term municipal bonds. If you take the standard deduction, you will lose a significant amount by holding the mortgage and investing in bonds in your taxable account. You have to decide whether this is worthwhile for you.

But if you do use a sinking fund, you have the option, not the requirement, of using it to pay off the mortgage all at once. If interest rates are high, or you would have a large capital gain on the sinking fund, you might well choose to keep a mortgage that you can pay off at any time.

And this is exactly what I do. My taxable account is all stock, and my spare money goes into stock in my taxable account. But I count my mortgage as a negative bond, so I hold an equal amount of bonds in my employer plan which I do not count in my asset allocation. I don't make extra mortgage payments because I have nine years left on my mortgage, which is at 2.625%, fully deductible (I have more than the standard deduction in state income tax and charity alone), and 1.79% after federal and state tax; nine-year munis yield more than 1.79% after state tax. And I don't pay off the whole thing, even though I could, because I would have a large capital gain for selling enough stock.
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Re: Paying Off Mortgage Question

Post by majiaknight » Mon Jul 22, 2019 5:01 pm

Ask yourself in another way: are you willing to take a loan (3.65% APR, potentially no tax benefit if using standard deduction) to invest in stock index which historically could give you a 5-6% return over 15 years?

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Re: Paying Off Mortgage Question

Post by KlangFool » Mon Jul 22, 2019 5:09 pm

majiaknight wrote:
Mon Jul 22, 2019 5:01 pm
Ask yourself in another way: are you willing to take a loan (3.65% APR, potentially no tax benefit if using standard deduction) to invest in stock index which historically could give you a 5-6% return over 15 years?
Are you willing to pay 20+% taxes in order to save 3.65% mortgage interest? This is the situation that OP is in.

KlangFool

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Re: Paying Off Mortgage Question

Post by petulant » Mon Jul 22, 2019 5:22 pm

AC1984 wrote:
Sun Jul 21, 2019 3:44 pm
Jablean wrote:
Sun Jul 21, 2019 11:54 am
I love it when people think that conservative growth is 5-6% when we are excited when economic growth gets close to 3%. I also know that history is on your side but in history we've had more rational hands in charge of when to goose or not goose the economy. Our family has always said that we were comfortable being aggressive in the stock market. But now that I found Bogleheads and looked at my total portfolio we, or at least I am since I do the money, are rather on the conservative side and I like having cash at my credit union. What you are proposing doesn't have to be something you set in stone for 20 years. You might wind up doing it for 3 months, you might split your extra money 50/50 to mortgage and investment, you might decide to put it all into a college fund one year and just pay minimums. Are your credit cards paid off every month? Do you have any student debt? We paid off our house this year, 20 years after purchase. Pretty slow and steady (maybe an extra 100 a month) for 15 years and then when it got down in high credit card territory I enjoyed knocking it down in bigger chunks.
Makes sense, I’m only 35 so have time to be flexible with how to allocate the funds. I do have an absurd amount of student debt, but it’s not really a factor - I’m on am income based plan capped at 15% of income and in five more years I’ll qualify for PSLF (total forgiveness with no tax burden). Also I am trying to build a legit emergency fund. I think the only way for me to actually do it is to treat it like an auto-debited bill that goes to another account.
Don't use the sinking fund approach. It's mental accounting.

Max out your work retirement contributions--whether TSP or 457 or whatever. This is important because it's the best form of saving and it never hits your AGI used in IBR/PAYE payments. So you save more money on future loan calculations.

If you don't make enough to comfortably max the retirement contributions, set it at as high a level as you can while still keeping a budget and leaving enough saving to maintain an emergency fund.

Allocate the whole retirement plan to stocks. Bonds won't make sense for a while for you.

Save up enough for an emergency fund that will let you sleep at night. Save up enough for your next car. Save up enough to cover your next major tech purchases. Save up enough to cover all insurance deductibles.

At that point, and only at that point, you will have extra money. You can decide then whether to send it to the mortgage or stocks. Paying down the mortgage is safer. Buying stocks has a higher return. You can't really lose either way. I would recommend paying down the mortgage since the retirement plan is in stocks. ;)

After your PSLF triggers, you should:

-have only a mortgage as your debt
-substantial assets in retirement plan
-a much lower mortgage balance than today

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Re: Paying Off Mortgage Question

Post by whodidntante » Mon Jul 22, 2019 5:34 pm

It's possible that you owe significant capital gains tax this way. It's money that you earned for taking risk rather than by working, so I guess that's not the end of the world. But you'll need to do estimated payments or increase your withholding to avoid a penalty. And I would not even consider paying STCG tax rates to pay off a low-interest mortgage, unless your marginal tax rate is low.

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Re: Paying Off Mortgage Question

Post by majiaknight » Mon Jul 22, 2019 5:49 pm

KlangFool wrote:
Mon Jul 22, 2019 5:09 pm
majiaknight wrote:
Mon Jul 22, 2019 5:01 pm
Ask yourself in another way: are you willing to take a loan (3.65% APR, potentially no tax benefit if using standard deduction) to invest in stock index which historically could give you a 5-6% return over 15 years?
Are you willing to pay 20+% taxes in order to save 3.65% mortgage interest? This is the situation that OP is in.

KlangFool
I understand what you mean but your argument is a little misleading. The 20%+ tax is deferred if put in traditional 401K not saved compared to the 3.65% mortgage interest. OP still takes the risk of losing principal of 401K investments if investing in stock index.
But I'd agree w/ u that I'd prioritize maxing 401K over accelerated mortgage payment in this case.

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Re: Paying Off Mortgage Question

Post by willthrill81 » Mon Jul 22, 2019 5:59 pm

majiaknight wrote:
Mon Jul 22, 2019 5:49 pm
KlangFool wrote:
Mon Jul 22, 2019 5:09 pm
majiaknight wrote:
Mon Jul 22, 2019 5:01 pm
Ask yourself in another way: are you willing to take a loan (3.65% APR, potentially no tax benefit if using standard deduction) to invest in stock index which historically could give you a 5-6% return over 15 years?
Are you willing to pay 20+% taxes in order to save 3.65% mortgage interest? This is the situation that OP is in.

KlangFool
I understand what you mean but your argument is a little misleading. The 20%+ tax is deferred if put in traditional 401K not saved compared to the 3.65% mortgage interest. OP still takes the risk of losing principal of 401K investments if investing in stock index.
But I'd agree w/ u that I'd prioritize maxing 401K over accelerated mortgage payment in this case.
I agree. You don't automatically 'save' your marginal tax rate when you make contributions to tax-deferred accounts since you're very likely to pay some amount of tax on the withdrawals.
“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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AC1984
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Re: Paying Off Mortgage Question

Post by AC1984 » Mon Jul 22, 2019 7:10 pm

petulant wrote:
Mon Jul 22, 2019 5:22 pm
AC1984 wrote:
Sun Jul 21, 2019 3:44 pm
Jablean wrote:
Sun Jul 21, 2019 11:54 am
I love it when people think that conservative growth is 5-6% when we are excited when economic growth gets close to 3%. I also know that history is on your side but in history we've had more rational hands in charge of when to goose or not goose the economy. Our family has always said that we were comfortable being aggressive in the stock market. But now that I found Bogleheads and looked at my total portfolio we, or at least I am since I do the money, are rather on the conservative side and I like having cash at my credit union. What you are proposing doesn't have to be something you set in stone for 20 years. You might wind up doing it for 3 months, you might split your extra money 50/50 to mortgage and investment, you might decide to put it all into a college fund one year and just pay minimums. Are your credit cards paid off every month? Do you have any student debt? We paid off our house this year, 20 years after purchase. Pretty slow and steady (maybe an extra 100 a month) for 15 years and then when it got down in high credit card territory I enjoyed knocking it down in bigger chunks.
Makes sense, I’m only 35 so have time to be flexible with how to allocate the funds. I do have an absurd amount of student debt, but it’s not really a factor - I’m on am income based plan capped at 15% of income and in five more years I’ll qualify for PSLF (total forgiveness with no tax burden). Also I am trying to build a legit emergency fund. I think the only way for me to actually do it is to treat it like an auto-debited bill that goes to another account.
Don't use the sinking fund approach. It's mental accounting.

Max out your work retirement contributions--whether TSP or 457 or whatever. This is important because it's the best form of saving and it never hits your AGI used in IBR/PAYE payments. So you save more money on future loan calculations.

If you don't make enough to comfortably max the retirement contributions, set it at as high a level as you can while still keeping a budget and leaving enough saving to maintain an emergency fund.

Allocate the whole retirement plan to stocks. Bonds won't make sense for a while for you.

Save up enough for an emergency fund that will let you sleep at night. Save up enough for your next car. Save up enough to cover your next major tech purchases. Save up enough to cover all insurance deductibles.

At that point, and only at that point, you will have extra money. You can decide then whether to send it to the mortgage or stocks. Paying down the mortgage is safer. Buying stocks has a higher return. You can't really lose either way. I would recommend paying down the mortgage since the retirement plan is in stocks. ;)

After your PSLF triggers, you should:

-have only a mortgage as your debt
-substantial assets in retirement plan
-a much lower mortgage balance than today
This sounds really reasonable to me, thanks for the ideas.

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Re: Paying Off Mortgage Question

Post by grabiner » Mon Jul 22, 2019 10:07 pm

petulant wrote:
Mon Jul 22, 2019 5:22 pm
Max out your work retirement contributions--whether TSP or 457 or whatever. This is important because it's the best form of saving and it never hits your AGI used in IBR/PAYE payments. So you save more money on future loan calculations.

If you don't make enough to comfortably max the retirement contributions, set it at as high a level as you can while still keeping a budget and leaving enough saving to maintain an emergency fund.

Allocate the whole retirement plan to stocks. Bonds won't make sense for a while for you.

Save up enough for an emergency fund that will let you sleep at night. Save up enough for your next car. Save up enough to cover your next major tech purchases. Save up enough to cover all insurance deductibles.

At that point, and only at that point, you will have extra money. You can decide then whether to send it to the mortgage or stocks. Paying down the mortgage is safer. Buying stocks has a higher return. You can't really lose either way. I would recommend paying down the mortgage since the retirement plan is in stocks. ;)
The PSLF is another incentive to pay down the mortgage. If you invest in a taxable account, the dividends from that account will be part of your income, so they will increase the amount you owe on your student loans. And since the student loans will go away, this is a total loss. You can view the IBR payment increase as an additional dividend tax.
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Re: Paying Off Mortgage Question

Post by AC1984 » Tue Jul 23, 2019 4:36 am

grabiner wrote:
Mon Jul 22, 2019 10:07 pm
petulant wrote:
Mon Jul 22, 2019 5:22 pm
Max out your work retirement contributions--whether TSP or 457 or whatever. This is important because it's the best form of saving and it never hits your AGI used in IBR/PAYE payments. So you save more money on future loan calculations.

If you don't make enough to comfortably max the retirement contributions, set it at as high a level as you can while still keeping a budget and leaving enough saving to maintain an emergency fund.

Allocate the whole retirement plan to stocks. Bonds won't make sense for a while for you.

Save up enough for an emergency fund that will let you sleep at night. Save up enough for your next car. Save up enough to cover your next major tech purchases. Save up enough to cover all insurance deductibles.

At that point, and only at that point, you will have extra money. You can decide then whether to send it to the mortgage or stocks. Paying down the mortgage is safer. Buying stocks has a higher return. You can't really lose either way. I would recommend paying down the mortgage since the retirement plan is in stocks. ;)
The PSLF is another incentive to pay down the mortgage. If you invest in a taxable account, the dividends from that account will be part of your income, so they will increase the amount you owe on your student loans. And since the student loans will go away, this is a total loss. You can view the IBR payment increase as an additional dividend tax.
That would only be true if one were to use/sell any of the money in taxable accounts though right? In my particular case I’m not touching those for several years ideally, and PSLF will apply in about 5 years. I do like the idea of continuing to build a solid emergency fund and trying yo max out all tax advantaged accounts.

My income is roughly $155,000 with all the overtime I’m getting in the last couple years, but otherwise my salary is $90k. I’m currently putting $15% into a 457 and 15% into the 401k, with an extra 5% Roth 401k. Any thoughts about whether to keep that 5% in Roth or make it pretax? I understand the points about income with PSLF payments, but fortunately for me this also doesn’t apply in the same way currently because my extra pay is from overtime and not guaranteed salary, so I submit documentation of the salary info which is used to calculate the percentage of my income.

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Re: Paying Off Mortgage Question

Post by petulant » Tue Jul 23, 2019 7:01 am

AC1984 wrote:
Tue Jul 23, 2019 4:36 am
That would only be true if one were to use/sell any of the money in taxable accounts though right? In my particular case I’m not touching those for several years ideally, and PSLF will apply in about 5 years. I do like the idea of continuing to build a solid emergency fund and trying yo max out all tax advantaged accounts.
Well, he's talking about dividends. Dividends are taxable each year you receive them. So if you put $100,000 in taxable stocks with a yield of 2%, your income will be an additional $2,000 per year even if you don't sell. This $2,000 would be taxed mostly at the long-term capital gains/qualified dividend rate, but it would also be on your AGI and cause additional IBR payments in the future.
AC1984 wrote:
Tue Jul 23, 2019 4:36 am
My income is roughly $155,000 with all the overtime I’m getting in the last couple years, but otherwise my salary is $90k. I’m currently putting $15% into a 457 and 15% into the 401k, with an extra 5% Roth 401k. Any thoughts about whether to keep that 5% in Roth or make it pretax? I understand the points about income with PSLF payments, but fortunately for me this also doesn’t apply in the same way currently because my extra pay is from overtime and not guaranteed salary, so I submit documentation of the salary info which is used to calculate the percentage of my income.
You want to contribute the maximum to 457/401(k) that your budget will allow due to the tax and IBR savings, especially in years where your income would exceed $100,000. I would consider additional contributions in Roth to possibly take precedence over extra mortgage payments but not be part of the initial strategy to control AGI. I leave the mechanics of executing that with your HR to you.
Last edited by petulant on Tue Jul 23, 2019 7:01 am, edited 1 time in total.

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Re: Paying Off Mortgage Question

Post by arsenalfan » Tue Jul 23, 2019 7:01 am

Behavioral issue: You have to have the discipline to follow the plan, cash out and pay off the mortgage.

Our ISP says any windfall/surplus goes 33% towards mortgage and 67% towards aftertax.

Now our aftertax account is greater than the mortgage balance. It is tempting to take the risk and let the investments ride, rather than pay off the house.

There's not a compelling argument to do either, so the power of inertia kind of wins.

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Re: Paying Off Mortgage Question

Post by Admiral » Tue Jul 23, 2019 7:12 am

My personal opinion is nobody should pre-pay a sub-4% mortgage: Odds are very good that over time you should easily be able to average more than that by investing, even relatively conservatively. Is there risk? Yes. But there's also risk in a lack of liquidity (i.e. having your extra cash locked away in your house), not to mention the general risk in real estate investing.

Over 4%, it gets dicey in terms of the decision.

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Re: Paying Off Mortgage Question

Post by AC1984 » Tue Jul 23, 2019 8:14 am

You all are awesome, I so appreciate the nuanced discussion and food for thought on all this.

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Re: Paying Off Mortgage Question

Post by cherijoh » Tue Jul 23, 2019 8:23 am

willthrill81 wrote:
Sun Jul 21, 2019 5:21 pm
Stradovinski wrote:
Sun Jul 21, 2019 4:20 pm
Considering the long run we have had in the market, it’s not crazy to assume there will be a drop at some point in the next so many years.
It wouldn't be crazy to make that assumption, but the data do not support it. The length of time since the last recession has not been a statistically significant predictor of the next recession.
Maybe not, but the post you are answering didn't attempt to predict when the next downturn would occur - just that we should expect one sometime. Are you saying "this time is different" and we should expect that the bull market would continue forever? :wink:

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Re: Paying Off Mortgage Question

Post by Admiral » Tue Jul 23, 2019 8:44 am

cherijoh wrote:
Tue Jul 23, 2019 8:23 am
willthrill81 wrote:
Sun Jul 21, 2019 5:21 pm
Stradovinski wrote:
Sun Jul 21, 2019 4:20 pm
Considering the long run we have had in the market, it’s not crazy to assume there will be a drop at some point in the next so many years.
It wouldn't be crazy to make that assumption, but the data do not support it. The length of time since the last recession has not been a statistically significant predictor of the next recession.
Maybe not, but the post you are answering didn't attempt to predict when the next downturn would occur - just that we should expect one sometime. Are you saying "this time is different" and we should expect that the bull market would continue forever? :wink:
There always "will be a drop at some point in the next so many years."

The tricky part is predicting how many years constitute "so many." :D

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Re: Paying Off Mortgage Question

Post by Ketawa » Tue Jul 23, 2019 9:06 am

AC1984 wrote:
Sat Jul 20, 2019 4:18 pm
Hey everyone, so I recently listened to an intriguing ChooseFI episode focused on how or whether to pay off your mortgage on the path to financial independence. The idea was that if you have extra money available every month, to put into a stock index (VTSAX) instead of the mortgage payment, and use the money in that fund to pay the off mortgage when the total exceeds what you owe on the house. The idea is that the rate of return over a 15ish year period (conservatively 5-6%) is going to be substantially more than the mortgage rate (mine is 3.65%). What do people think of this concept? I’m 2.5 years into a 30-year fixed rate mortgage, and have been paying it pretty aggressively...but reconsidering if something like this is a better idea. One question I have also is how would capital gains tax affect this decision, assuming we’re talking about a taxable brokerage account? Im not clear how a tax advantaged account would work if you want to pay the house off early with this method. Is there another way to work something like this to your advantage? If there’s something I’m missing or you have other thoughts, please share!
Someone recommended ChooseFI to me and I listened to a few episodes. I think this was one of them, 133R, unless it was a follow-up. Anyway, I was disappointed by the discussion. (Ultimately, I decided that the podcast wasn't for me and where I'm headed, but I could see a lot of people liking it.)

The premise was that if you borrow at 4%, then invest using a modest assumption of 6% nominal returns investing in equities, you will end up better off, i.e. wealthier, than if you plow money into the mortgage. Frankly, there's nothing interesting about that. I could tell you that borrowing at 4% to earn 6% will make you wealthier without looking at any spreadsheets.

There's also nothing special about using a sinking fund in order to pay off the mortgage. Unless you are 100% equities, it's a form of mental accounting. The interesting question, as grabiner described above, is whether you could be wealthier with similar risk simply by putting money towards your mortage while selling bonds in tax-advantaged accounts. I don't think liquidity is that much of a concern; that is why people have an emergency fund or other ways to access cash quickly. Do people really need $100Ks of liquidity? We regularly advise people to build up an emergency fund, then max tax-advantaged accounts, then...more liquidity from borrowing at higher rates than your fixed income earns is that high on the list? Plus, there are other benefits to prepaying a mortgage that others have pointed out, like home equity not being considered in financial aid calculations for many colleges. I'll add another: if you prepay your 30 year mortgage, you can get guaranteed savings by being able to refinance earlier to a 15 year or 20 year mortgage (unless interest rates go up a lot), and that's likely to happen a lot earlier than the sinking fund being worth the added risk.

Granted, if you are 100% equities, selling bonds in tax-advantaged isn't an option. I'm guessing a lot of people listening to podcasts like ChooseFI are 100% equities.

The most interesting part of the episode, to me, was when one of the hosts made a side remark wondering whether he would actually pull the trigger to pay off the mortage once the side fund was large enough. They didn't really explore that. I wanted them to talk about it more! My guess is that many of the people following the FI path would not. Inevitably, a recession will hit, and the dangers of being 100% equities and leveraged using a 30 year mortgage may be a lot more challenging to handle than they expected. We've had over 10 years of a bull market and people have short memories. I'm not predicting when the next recession will happen, but there will be one, eventually.

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Re: Paying Off Mortgage Question

Post by Admiral » Tue Jul 23, 2019 9:46 am

willthrill81 wrote:
Mon Jul 22, 2019 5:59 pm
majiaknight wrote:
Mon Jul 22, 2019 5:49 pm
KlangFool wrote:
Mon Jul 22, 2019 5:09 pm
majiaknight wrote:
Mon Jul 22, 2019 5:01 pm
Ask yourself in another way: are you willing to take a loan (3.65% APR, potentially no tax benefit if using standard deduction) to invest in stock index which historically could give you a 5-6% return over 15 years?
Are you willing to pay 20+% taxes in order to save 3.65% mortgage interest? This is the situation that OP is in.

KlangFool
I understand what you mean but your argument is a little misleading. The 20%+ tax is deferred if put in traditional 401K not saved compared to the 3.65% mortgage interest. OP still takes the risk of losing principal of 401K investments if investing in stock index.
But I'd agree w/ u that I'd prioritize maxing 401K over accelerated mortgage payment in this case.
I agree. You don't automatically 'save' your marginal tax rate when you make contributions to tax-deferred accounts since you're very likely to pay some amount of tax on the withdrawals.
On some level this is semantics (what we mean when we say "saved") but Klang, overall, is correct in that the money is "kept" and not "spent" to pay the taxes. In addition, the money "kept" is itself invested, and is presumably earning interest (hopefully above the mortgage rate, though that of course depends).

His point is valid. And let's not forget that the tax eventually paid is likely to be lower than the current marginal rate that's being avoided (for most people).

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Re: Paying Off Mortgage Question

Post by willthrill81 » Tue Jul 23, 2019 10:01 am

Admiral wrote:
Tue Jul 23, 2019 8:44 am
cherijoh wrote:
Tue Jul 23, 2019 8:23 am
willthrill81 wrote:
Sun Jul 21, 2019 5:21 pm
Stradovinski wrote:
Sun Jul 21, 2019 4:20 pm
Considering the long run we have had in the market, it’s not crazy to assume there will be a drop at some point in the next so many years.
It wouldn't be crazy to make that assumption, but the data do not support it. The length of time since the last recession has not been a statistically significant predictor of the next recession.
Maybe not, but the post you are answering didn't attempt to predict when the next downturn would occur - just that we should expect one sometime. Are you saying "this time is different" and we should expect that the bull market would continue forever? :wink:
There always "will be a drop at some point in the next so many years."

The tricky part is predicting how many years constitute "so many." :D
Yes. Stradovinski's statement of "the long run we have had in the market" is time specific, which insinuates that the rest of that sentence was as well.
“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

kaudrey
Posts: 1023
Joined: Fri Nov 22, 2013 2:40 pm

Re: Paying Off Mortgage Question

Post by kaudrey » Tue Jul 23, 2019 3:18 pm

We did this, and paid off the mortgage last year. Although we just invested according to our AA in our taxable brokerage account.
We had 7 years left on a 20 year mortgage, and decided to pull the plug. It was partly because our AA was getting a little out of whack anyway, so we were planning to sell some stocks, and then realized if we sold a little more, we could be done with the mortgage.

It's a great feeling.

Topic Author
AC1984
Posts: 21
Joined: Fri Aug 24, 2018 7:53 am

Re: Paying Off Mortgage Question

Post by AC1984 » Tue Jul 23, 2019 5:13 pm

kaudrey wrote:
Tue Jul 23, 2019 3:18 pm
We did this, and paid off the mortgage last year. Although we just invested according to our AA in our taxable brokerage account.
We had 7 years left on a 20 year mortgage, and decided to pull the plug. It was partly because our AA was getting a little out of whack anyway, so we were planning to sell some stocks, and then realized if we sold a little more, we could be done with the mortgage.

It's a great feeling.
What is AA? Still a newbie..:)

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