Mortgage to prepay or not prepay

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John Laurens
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Mortgage to prepay or not prepay

Post by John Laurens » Wed Nov 06, 2019 9:13 pm

Where would you say the consensus is for Bogleheads who have maxed all tax advantaged accounts with 2019 tax laws for prepaying mortgage over taxable investing? Is it 50:50? 60:40 in one direction or another, etc? If there were a poll, what would you guess the results?

Regards,
John
Last edited by John Laurens on Wed Nov 06, 2019 10:32 pm, edited 1 time in total.

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Re: Mortgage to prepay or not prepay

Post by Grt2bOutdoors » Wed Nov 06, 2019 9:28 pm

Depends on mortgage rate, your liquidity, job security, amount of time left on mortgage, alternative investment vehicle, your ability, need and willingness to take risk.
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Re: Mortgage to prepay or not prepay

Post by grabiner » Wed Nov 06, 2019 9:30 pm

It depends on your after-tax mortgage rate and the remaining term. For a fair comparison, compare the after-tax rate to the after-tax yield on a bond fund of the same duration (likely a muni fund if you can afford to max out your taxable account). The duration is the remaining term on the mortgage (or the time until you will move and pay it off that way) for a single payment, or less than half the term if you pay off all at once. And then you have to consider other factors, primarily the value of liquidity.

I am one of the main advocates of paying down a mortgage, but it doesn't make sense for me because I have a 2.625% rate (I paid a lot of points to get that rate) and can still deduct all the interest at 24% federal and 8.2% MD for a 1.78% after-tax rate. That isn't a good return for a nine-year duration. It is a good return for a 4.5-year duration, so I would pay off the mortgage if I could pay it all off without a capital gain, but I would need the stock market to decline back to its December 2018 level for that to happen. (I get no value from the liquidity because the mortgage balance is much less than my taxable account value.)
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Re: Mortgage to prepay or not prepay

Post by Windylotus » Wed Nov 06, 2019 9:41 pm

John Laurens wrote:
Wed Nov 06, 2019 9:13 pm
Where would you say the consensus is for Bogleheads who have maxed all tax advantaged accounts with 2019 tax laws for prepaying mortgage over taxable investing? Is it 50:50? 60:40 in one direction or another, etc?

Regards,
John
John, I was literally asking myself a similar question a few weeks back. All my tax advantage accounts have been maxed out for the year. I paid my home off on Monday and have no regrets. It's a great feeling. I was at 3.625% with a payoff in 2025.

If we were currently in a big bear market, I may have leaned toward taxable investing instead. Good luck

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John Laurens
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Re: Mortgage to prepay or not prepay

Post by John Laurens » Wed Nov 06, 2019 10:31 pm

I was just wondering where individuals thought the collective Boglehead group was on the subject.

I know the majority of investing subjects there is a general consensus on broad principles.

My thinking is it’s probably 60% prioritize taxable investing over prepay mortgage. I figured others had a better sense than me.

Regards,
John

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Re: Mortgage to prepay or not prepay

Post by KlangFool » Wed Nov 06, 2019 10:52 pm

John Laurens wrote:
Wed Nov 06, 2019 10:31 pm
I was just wondering where individuals thought the collective Boglehead group was on the subject.

I know the majority of investing subjects there is a general consensus on broad principles.

My thinking is it’s probably 60% prioritize taxable investing over prepay mortgage. I figured others had a better sense than me.

Regards,
John
John Laurens,

1) There is another side to this. Would you put too many eggs into the house by paying off the mortgage?

2) At 3.49% and I am betting that the inflation would only go beyond that, why would I prepay the mortgage? It is a good inflation hedge.

KlangFool

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Re: Mortgage to prepay or not prepay

Post by grabiner » Wed Nov 06, 2019 11:15 pm

KlangFool wrote:
Wed Nov 06, 2019 10:52 pm
1) There is another side to this. Would you put too many eggs into the house by paying off the mortgage?
The amount of your net worth in the house is independent of whether you have a mortgage; you have more equity if you pay down the mortgage, but less risk on that equity. If you have a $400K house with a $300K mortgage, and home prices decline by 20%, your net worth drops by $80K, which is 80% of your home equity. If you pay off the mortgage and home prices decline 20%, your net worth drops by $20K, which is only 20% of your home equity. (The only exception is if you have negative equity and can get rid of it by defaulting on the mortgage.)
2) At 3.49% and I am betting that the inflation would only go beyond that, why would I prepay the mortgage? It is a good inflation hedge.
This is offset by your bond holdings. If you hold equal amounts in bonds and a mortgage, and there is inflation, you pay back the mortgage with deflated dollars, but your bond values are in deflated dollars, so you break even from inflation, and gain or lose according to the difference in interest rates. Selling bonds to pay off the mortgage does not change your inflation risk.

If you have 100% stocks, you don't have an inflation hedge, but you also don't need one; inflation isn't inherently bad for stock investors. Likewise if all your bonds are TIPS or I-Bonds (which you should be holding if you expect inflation to be high); these bonds are protected against inflation, so you don't need a hedge.

The one situation in which a hedge is valuable is if you have non-inflation fixed-dollar assets, such as a pension you have already started receiving. You can't sell your pension to pay off a loan, but a fixed-dollar loan does hedge the inflation risk of the pension.

From an investment standpoint, the relevant number for comparison isn't inflation, but opportunity cost. If you pay down a mortgage, you have a guaranteed return equal to the mortgage rate, but you have given up whatever return and risk you could have gotten by investing the money.
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Re: Mortgage to prepay or not prepay

Post by JBTX » Wed Nov 06, 2019 11:17 pm

John Laurens wrote:
Wed Nov 06, 2019 10:31 pm
I was just wondering where individuals thought the collective Boglehead group was on the subject.

I know the majority of investing subjects there is a general consensus on broad principles.

My thinking is it’s probably 60% prioritize taxable investing over prepay mortgage. I figured others had a better sense than me.

Regards,
John
For me, it would be primarily based on rate, and secondarily based on age/investment horizon. At 4.0% or especially above, at current rates, I would probably start paying some down if I were unable to refinance to a lower rate. I'm currently at 3.25 % on a fairly modest mortgage and have no plans to pay it down.

I suspect I could always refinance to a 15 year rate that was lower than my pay down rate threshold.

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Re: Mortgage to prepay or not prepay

Post by JoeRetire » Thu Nov 07, 2019 7:03 am

John Laurens wrote:
Wed Nov 06, 2019 9:13 pm
Where would you say the consensus is for Bogleheads who have maxed all tax advantaged accounts with 2019 tax laws for prepaying mortgage over taxable investing?
There is no consensus.
Is it 50:50? 60:40 in one direction or another, etc? If there were a poll, what would you guess the results?
50:50 is the exact opposite of a consensus.

In general, there is general agreement about very few things here.
Certainly mortgage payoff and social security claiming strategies aren't among them.
Don't be a lemming.

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Re: Mortgage to prepay or not prepay

Post by Brianmcg321 » Thu Nov 07, 2019 8:09 am

Nothing gets more folks riled up than politics, religion, and whether to pay off your mortgage. :D
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Watty
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Re: Mortgage to prepay or not prepay

Post by Watty » Thu Nov 07, 2019 8:18 am

John Laurens wrote:
Wed Nov 06, 2019 9:13 pm
Where would you say the consensus is for Bogleheads .....
I think that the general consensus is that there is no consensus.

I tend to be in the "pay it off" camp when someone can totally pay off a mortage but paying a couple of hundred extra dollars a month is a much different situation especially if you have a fixed rate mortage.

One option with a fixed rate mortgage is to invest the extra money until you have a significant amount and then see if your lender will "recast your mortage"(Google this) if you make a large prepayment. They are not required to but they often will for a processing fee of a few hundred dollars. The way this works is that if you pay your mortage down by 20%(or whatever) then your required monthly payment is reduced by the same percentage. The interest rate and length of the mortage stay the same. This could be important in case something happens like you are laid off, it interest rates go up a lot.

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Re: Mortgage to prepay or not prepay

Post by Jack FFR1846 » Thu Nov 07, 2019 9:07 am

JoeRetire wrote:
Thu Nov 07, 2019 7:03 am
There is no consensus.
I doubt there are 2 Bogleheads who would agree on both the terms and whether one should pay the mortgage. I'm at the far end and would pay it off even it the interest rate was 0%. I hate debt.
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Re: Mortgage to prepay or not prepay

Post by Tamarind » Thu Nov 07, 2019 9:17 am

I have a belief, probably not supported by the math, that folks who refinance to get a lower interest rate should prepay enough to pay off the mortgage by the end of their original term.

I.e I bought with a 15-year fixed mortgage at 4.375%. In year 8 I refinanced to a 5/1 ARM with a 10-year term at 3.09%. I am prepaying exactly the amount required to have paid off the mortgage after 7 years on the ARM.

My thinking is that one often calculates interest rate savings when thinking about a refi, but those only hold true if one does not extend the term.

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Re: Mortgage to prepay or not prepay

Post by chevca » Thu Nov 07, 2019 9:17 am

John Laurens wrote:
Wed Nov 06, 2019 10:31 pm
My thinking is it’s probably 60% prioritize taxable investing over prepay mortgage. I figured others had a better sense than me.
That would be my guess also.

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Re: Mortgage to prepay or not prepay

Post by rai » Thu Nov 07, 2019 9:26 am

It’s all over the map but I think more people are saying the math points to not pre paying although the heart may be to pre paying.

Myself I’m just hedging my bets suppose that I have a surplus $700 a month to invest over an above all my tax shelters (HSA, 401K etc) then I’m putting $350 towards a mortgage and $350 to a taxable account.
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Re: Mortgage to prepay or not prepay

Post by nguy44 » Thu Nov 07, 2019 9:34 am

This is something I am considering. With the 2019 tax law changes, the amount of my mortgage deduction no longer makes a difference with the 24k deduction. The rate and balance are low (2.875%, 53K), with about 8.5 years to go... so maybe it is time to pay it off early next year (I have enough cash to cover or some of the growth from my investments this year would also cover it).

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Re: Mortgage to prepay or not prepay

Post by abuss368 » Thu Nov 07, 2019 11:24 am

How about splitting it and build both sides of your personal balance sheet. That is one half to taxable investing and one half to paying down the mortgage.
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Re: Mortgage to prepay or not prepay

Post by brianH » Thu Nov 07, 2019 11:37 am

grabiner wrote:
Wed Nov 06, 2019 11:15 pm
This is offset by your bond holdings. If you hold equal amounts in bonds and a mortgage, and there is inflation, you pay back the mortgage with deflated dollars, but your bond values are in deflated dollars, so you break even from inflation, and gain or lose according to the difference in interest rates. Selling bonds to pay off the mortgage does not change your inflation risk.
Yep. It never made sense to me to hold bonds (and most older investors should probably have 20%+ based on common guidelines) that return less than the mortgage interest rate. The common counterpoint is using the bonds to rebalance the equities in a downturn, but one can also recast (or refinance in extreme cases) the mortgage and direct the increased cash flow from a lower monthly payment back into equities.

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Re: Mortgage to prepay or not prepay

Post by chevca » Thu Nov 07, 2019 11:50 am

Good ole Bogleheads.... ask a simple question, and get a way over explained bunch of answers. :happy

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Re: Mortgage to prepay or not prepay

Post by monkey_business » Thu Nov 07, 2019 12:17 pm

My reasons for putting extra into the mortgage, instead of investing even more into taxable are as follows:

- Not having a mortgage when older/retired. Personal preference.
- The main basket for investing is stocks and bonds. Putting extra into the mortgage feels like having an extra basket to put some eggs in, i.e. a bit of diversification so that not everything invested is "paper" assets.
- Having a paid off house seems like a nice psychological relief. While the math can work out in favor of just keeping the mortgage and investing instead, I really like the prospect of having drastically lower expenses. Without a mortgage, the remaining bills are low and could be paid for with a very minimal income.

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Re: Mortgage to prepay or not prepay

Post by corn18 » Thu Nov 07, 2019 12:57 pm

abuss368 wrote:
Thu Nov 07, 2019 11:24 am
How about splitting it and build both sides of your personal balance sheet. That is one half to taxable investing and one half to paying down the mortgage.
I did this. Since there isn't a right answer to the question, I split the difference. Now I get to feel good about both.
Don't do something, just stand there!

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Re: Mortgage to prepay or not prepay

Post by GT99 » Thu Nov 07, 2019 12:59 pm

This is definitely one of those questions that people overcomplicate, but any answer to the original question that doesn't start with "it depends" is wrong. It primarily depends on 3 things:
1. What is your investment horizon?
2. What is your risk tolerance?
3. How much liquidity do you need (which is somewhat tied to #1)?

These questions inform your asset allocation. Your mortgage is roughly the equivalent of your bond allocation (but generally better). If I'm putting 30% of my taxable income into bonds and I don't have a near term need for liquidity, pay down the mortgage up to that 30% rather than put it in bonds. If I do need liquidity, don't.
Done.

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Re: Mortgage to prepay or not prepay

Post by GT99 » Thu Nov 07, 2019 1:03 pm

Jack FFR1846 wrote:
Thu Nov 07, 2019 9:07 am

I doubt there are 2 Bogleheads who would agree on both the terms and whether one should pay the mortgage. I'm at the far end and would pay it off even it the interest rate was 0%. I hate debt.
There are many, many times we encounter decisions on doing what makes us feel good vs doing what's in our best financial interest. Paying off a 0% loan early would be one of them. And there's nothing wrong with that - doing what's in your best financial interest doesn't always have to be the #1 priority (if it were, nobody would spend money on fun!).

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Re: Mortgage to prepay or not prepay

Post by JoeRetire » Thu Nov 07, 2019 2:06 pm

Jack FFR1846 wrote:
Thu Nov 07, 2019 9:07 am
JoeRetire wrote:
Thu Nov 07, 2019 7:03 am
There is no consensus.
I doubt there are 2 Bogleheads who would agree on both the terms and whether one should pay the mortgage. I'm at the far end and would pay it off even it the interest rate was 0%. I hate debt.
Yup. That is the far end.
But it seems that there are a fair number here who are kept awake at night by the thought of a mortgage and so would pay it off.
So maybe not that far of an end.
Don't be a lemming.

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Re: Mortgage to prepay or not prepay

Post by JoeRetire » Thu Nov 07, 2019 2:11 pm

rai wrote:
Thu Nov 07, 2019 9:26 am
It’s all over the map but I think more people are saying the math points to not pre paying although the heart may be to pre paying.

Myself I’m just hedging my bets suppose that I have a surplus $700 a month to invest over an above all my tax shelters (HSA, 401K etc) then I’m putting $350 towards a mortgage and $350 to a taxable account.
abuss368 wrote:
Thu Nov 07, 2019 11:24 am
How about splitting it and build both sides of your personal balance sheet. That is one half to taxable investing and one half to paying down the mortgage.
corn18 wrote:
Thu Nov 07, 2019 12:57 pm
I did this. Since there isn't a right answer to the question, I split the difference. Now I get to feel good about both.
Are you generally a "let's just split the difference and call it good enough" type of person in general?

To me, that's the least desirable option. If you believe that paying off a mortgage is best, why wouldn't you use the entire $700 toward paying it off? And if you believe that paying off a mortgage isn't best, why would you use any of it toward paying it off?

I'm guessing this is more of a "I can't figure out what is best" kind of thing. But maybe I'm missing something here?
Don't be a lemming.

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Re: Mortgage to prepay or not prepay

Post by bungalow10 » Thu Nov 07, 2019 2:21 pm

My mortgage is with Chase and they allow as many fee-free recasts as I want. So if I pay down my mortgage principle, I can with a simple online transaction recast my new mortgage balance over the existing life and and get a reduced monthly PI payment amount.

To me this is a great option as it solves part of that liquidity problem. I'm reducing my monthly cash outlay in tandem with reducing the amount of cash I have saved. I have done this twice this last year and plan to do it again early next year.

I can also easily keep paying the old payment and having the excess go towards principle. It's the best of both worlds.
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Re: Mortgage to prepay or not prepay

Post by corn18 » Thu Nov 07, 2019 2:38 pm

JoeRetire wrote:
Thu Nov 07, 2019 2:11 pm
I'm guessing this is more of a "I can't figure out what is best" kind of thing. But maybe I'm missing something here?
DING! DING! DING! Winner, winner, chicken dinner!

I can't figure out what is best for me so I do both. :sharebeer
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Re: Mortgage to prepay or not prepay

Post by JoeRetire » Thu Nov 07, 2019 2:44 pm

corn18 wrote:
Thu Nov 07, 2019 2:38 pm
JoeRetire wrote:
Thu Nov 07, 2019 2:11 pm
I'm guessing this is more of a "I can't figure out what is best" kind of thing. But maybe I'm missing something here?
DING! DING! DING! Winner, winner, chicken dinner!

I can't figure out what is best for me so I do both. :sharebeer
That's understandable. These things can be hard. I'd suggest digging in, spending some time learning what is best, then acting accordingly.

But we all take shortcuts in life sometimes. Not everything has to be optimal.
Don't be a lemming.

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Re: Mortgage to prepay or not prepay

Post by monkey_business » Thu Nov 07, 2019 2:46 pm

JoeRetire wrote:
Thu Nov 07, 2019 2:11 pm
If you believe that paying off a mortgage is best, why wouldn't you use the entire $700 toward paying it off? And if you believe that paying off a mortgage isn't best, why would you use any of it toward paying it off?
That's a false dichotomy. You could also believe that you would like to pay off the mortgage faster, but not necessarily as fast as possible. For example, if you are thinking of retiring in 15 years and you just got a 30 year mortgage, you might want to put extra towards the mortgage to get rid of it by the time you retire.

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Re: Mortgage to prepay or not prepay

Post by abuss368 » Thu Nov 07, 2019 3:31 pm

corn18 wrote:
Thu Nov 07, 2019 12:57 pm
abuss368 wrote:
Thu Nov 07, 2019 11:24 am
How about splitting it and build both sides of your personal balance sheet. That is one half to taxable investing and one half to paying down the mortgage.
I did this. Since there isn't a right answer to the question, I split the difference. Now I get to feel good about both.
That is how I always approached it from a strategy stand point. There is no wrong answer and no impact or change to net worth at that moment. At least one can invest for the future and also deleverage.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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Re: Mortgage to prepay or not prepay

Post by abuss368 » Thu Nov 07, 2019 3:32 pm

JoeRetire wrote:
Thu Nov 07, 2019 2:11 pm
rai wrote:
Thu Nov 07, 2019 9:26 am
It’s all over the map but I think more people are saying the math points to not pre paying although the heart may be to pre paying.

Myself I’m just hedging my bets suppose that I have a surplus $700 a month to invest over an above all my tax shelters (HSA, 401K etc) then I’m putting $350 towards a mortgage and $350 to a taxable account.
abuss368 wrote:
Thu Nov 07, 2019 11:24 am
How about splitting it and build both sides of your personal balance sheet. That is one half to taxable investing and one half to paying down the mortgage.
corn18 wrote:
Thu Nov 07, 2019 12:57 pm
I did this. Since there isn't a right answer to the question, I split the difference. Now I get to feel good about both.
Are you generally a "let's just split the difference and call it good enough" type of person in general?

To me, that's the least desirable option. If you believe that paying off a mortgage is best, why wouldn't you use the entire $700 toward paying it off? And if you believe that paying off a mortgage isn't best, why would you use any of it toward paying it off?

I'm guessing this is more of a "I can't figure out what is best" kind of thing. But maybe I'm missing something here?
No wrong answer or impact to net worth. This is usually a personal preference when these threads appear. I guess what ever makes one sleep well at night is the correct answer. We may be dancing on the head of a needle.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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Re: Mortgage to prepay or not prepay

Post by pop77 » Thu Nov 07, 2019 4:19 pm

grabiner wrote:
Wed Nov 06, 2019 9:30 pm

(I get no value from the liquidity because the mortgage balance is much less than my taxable account value.)
How do you view the volatility you might have on your taxable account value Vs mortgage balance? As market is reaching new highs the difference between your current taxable account value and Dec 2018 value could be your mortgage balance :-).

I am now diverting new money beyond tax advantage to Vanguard Wellesley to accumulate to expedite payoff. I am also thinking about taking some money off table from my taxable account as it is reaching new highs to pay mortgage off more aggressively.

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Re: Mortgage to prepay or not prepay

Post by acegolfer » Thu Nov 07, 2019 5:26 pm

nguy44 wrote:
Thu Nov 07, 2019 9:34 am
This is something I am considering. With the 2019 tax law changes, the amount of my mortgage deduction no longer makes a difference with the 24k deduction. The rate and balance are low (2.875%, 53K), with about 8.5 years to go... so maybe it is time to pay it off early next year (I have enough cash to cover or some of the growth from my investments this year would also cover it).
2.875% is a very low rate. But I don't think you can find a 8.5 yr investment that guarantees a 2.875% return. Consider paying off as a 8.5-yr 2.875% CD. If you are willing to invest $53k into this 8.5-yr CD (and not break it), then pay off the mortgage. (If you are using 24k standard deduction, then equivalent CD rate will be 2.875%/(1-T))

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Re: Mortgage to prepay or not prepay

Post by ray.james » Thu Nov 07, 2019 5:41 pm

JoeRetire wrote:
Thu Nov 07, 2019 7:03 am
50:50 is the exact opposite of a consensus.
The best line in the thread :D
Of course, I do understand what OP meant.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

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Re: Mortgage to prepay or not prepay

Post by LiterallyIronic » Thu Nov 07, 2019 6:27 pm

John Laurens wrote:
Wed Nov 06, 2019 9:13 pm
Where would you say the consensus is for Bogleheads who have maxed all tax advantaged accounts with 2019 tax laws for prepaying mortgage over taxable investing? Is it 50:50? 60:40 in one direction or another, etc? If there were a poll, what would you guess the results?
I would guess that more than half would say to invest in taxable before pre-paying the mortgage. I'm on the other side of the coin - I pre-pay my mortgage despite not maxing out all tax-advantaged accounts.

In before KlangFool asks me why I'm paying 20% tax to save 3.875% on the mortgage.

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Re: Mortgage to prepay or not prepay

Post by stoptothink » Thu Nov 07, 2019 7:52 pm

LiterallyIronic wrote:
Thu Nov 07, 2019 6:27 pm
John Laurens wrote:
Wed Nov 06, 2019 9:13 pm
Where would you say the consensus is for Bogleheads who have maxed all tax advantaged accounts with 2019 tax laws for prepaying mortgage over taxable investing? Is it 50:50? 60:40 in one direction or another, etc? If there were a poll, what would you guess the results?
I would guess that more than half would say to invest in taxable before pre-paying the mortgage. I'm on the other side of the coin - I pre-pay my mortgage despite not maxing out all tax-advantaged accounts.

In before KlangFool asks me why I'm paying 20% tax to save 3.875% on the mortgage.
We max out all tax-advantaged space to the tune of $70k+ yr (including pair of 529s to state deduction max), but throw everything else at our 3.125% mortgage. Don't have a penny in taxable, but we should have the mortgage done <6yrs total (sometime in '21). Simply comes down to comfort level; I abhor debt.

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Re: Mortgage to prepay or not prepay

Post by Afty » Thu Nov 07, 2019 8:14 pm

My impression is that the Boglehead consensus leans to the taxable investing side. Personally I split it -- I put about 1/4 of our excess cash toward the mortgage and the other 3/4 in taxable.

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Re: Mortgage to prepay or not prepay

Post by cubsbank » Thu Nov 07, 2019 8:47 pm

I also had just logged in to ask this question. I am leaning towards investing over paying off. I am just putting what I would pay extra towards my principle in a taxable account. My question is should I choose a more aggressive allocation than my retirement allocations since I can handle the ups and downs as I still can pay my mortgage? This may be a better topic for a new thread but this topic is very timely for me as well. Currently my taxable account for my mortgage pay off is 100% stocks. Not too worry as I just started doing this so the amount isn't that high. My current mortgage rate is 3.25% with about 23 more years left. My thought is to keep this aggressive since I have likely a pretty long time line. Or should I throw some bonds in there at a smaller percentage (10-15) to have some "stability".

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grabiner
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Re: Mortgage to prepay or not prepay

Post by grabiner » Thu Nov 07, 2019 9:54 pm

pop77 wrote:
Thu Nov 07, 2019 4:19 pm
grabiner wrote:
Wed Nov 06, 2019 9:30 pm

(I get no value from the liquidity because the mortgage balance is much less than my taxable account value.)
How do you view the volatility you might have on your taxable account value Vs mortgage balance? As market is reaching new highs the difference between your current taxable account value and Dec 2018 value could be your mortgage balance :-).
My portfolio volatility won't change. If if pay off my mortgage, I will pay it off with bonds, not stocks. The volatility of my taxable account will decrease because I will sell taxable stocks, but the volatility of my employer plan will increase because I will sell bonds there to buy more stocks and keep my stock exposure. I don't really care which account has the volatility since I will spend both in retirement; what goes in my taxable account is determined by the tax situation and the options in my other accounts.

By the same token, even though my taxable account is all stock, I have liquidity because the taxable account is large enough. If I want to sell bonds to make a major home repair, I can sell stock in my taxable account, and move an equal amount from bonds to stock in my employer plan.
Wiki David Grabiner

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grabiner
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Re: Mortgage to prepay or not prepay

Post by grabiner » Thu Nov 07, 2019 9:59 pm

cubsbank wrote:
Thu Nov 07, 2019 8:47 pm
I also had just logged in to ask this question. I am leaning towards investing over paying off. I am just putting what I would pay extra towards my principle in a taxable account. My question is should I choose a more aggressive allocation than my retirement allocations since I can handle the ups and downs as I still can pay my mortgage?
View everything as one portfolio. It may make sense to have stocks in your taxable account because they have lower tax costs, whether you intend to pay off the mortgage or not. And if you do decide later to pay off the mortgage and would prefer to use bonds for that purpose, you can sell those taxable stocks and sell bonds to buy stock in your 401(k) or IRA.

This is what I do. My taxable account is 100% stock, and I have the option of using it to pay off the mortgage if that makes economic sense to me. (I had that option even from day one, as I could have sold stock to pay cash for my home, but I would have had a huge capital gain because I took out the mortgage at the 2013 market peak.) I do hold bonds in my employer plan, and I count the mortgage as a negative bond; if I sell bonds to pay off the mortgage, keeping the same amount in stock, I won't change my exposure to stock-market risk.
Wiki David Grabiner

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Re: Mortgage to prepay or not prepay

Post by catlady » Fri Nov 08, 2019 9:45 am

Mathematically it makes sense for us to keep our mortgage at 3.5% because of a combination of inflation and expected market returns. Mathematically it also makes sense for us not to own a house at all because of the extra costs involved, but life isn’t a math equation. We’re choosing to prepay our mortgage for a combination of piece of mind (smaller recurring expenses make future unexpected employment changes/large expenses easier to handle) and future career/early retirement flexibility. We’re putting about 25% of our monthly non-retirement savings towards the mortgage and the rest to VFIAX (or VTSAX depending on tax loss harvesting opportunities).

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Re: Mortgage to prepay or not prepay

Post by corn18 » Fri Nov 08, 2019 12:02 pm

I just ran the numbers for selling from my taxable to payoff my mortgage. I would have to pay $8500 in cap gains taxes to pay off the mortgage. Since we are planning to move in a little over 2 years, this makes no sense. I can get those same taxable funds out after I retire @ 0% cap gains, so it essentially would cost me $8500 to pay it off now. Glad we have that settled. I am paying extra every month, but that is just my monthly military pension.
Don't do something, just stand there!

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Re: Mortgage to prepay or not prepay

Post by JoeRetire » Fri Nov 08, 2019 1:12 pm

catlady wrote:
Fri Nov 08, 2019 9:45 am
We’re choosing to prepay our mortgage for a combination of piece of mind (smaller recurring expenses make future unexpected employment changes/large expenses easier to handle) and future career/early retirement flexibility.
I understand the piece of mind thought.
Could you expand on the future career/early retirement flexibility part?

If you have the money to pay off your mortgage, why would keeping the mortgage change your career or retirement options?
Don't be a lemming.

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Re: Mortgage to prepay or not prepay

Post by GerryL » Fri Nov 08, 2019 1:29 pm

John Laurens wrote:
Wed Nov 06, 2019 10:31 pm
I was just wondering where individuals thought the collective Boglehead group was on the subject.

I know the majority of investing subjects there is a general consensus on broad principles.

My thinking is it’s probably 60% prioritize taxable investing over prepay mortgage. I figured others had a better sense than me.

Regards,
John
When my mortgage was still young, and I was already maxing retirement account contributions and making monthly payments into a taxable account, I set up a regular monthly $100 (and later $150) extra auto-payment on my mortgage. Early on, extra payments are more valuable since they do more to shorten the life of the mortgage. Later on, as the mortgage aged, my expenses were growing faster than my pay and my job situation looked a little precarious, I stopped the prepayments. Well, until I made a $2500 prepayment and closed out the mortgage six months early -- and 23 years after I moved in.

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Re: Mortgage to prepay or not prepay

Post by Dottie57 » Fri Nov 08, 2019 1:32 pm

John Laurens wrote:
Wed Nov 06, 2019 10:31 pm
I was just wondering where individuals thought the collective Boglehead group was on the subject.

I know the majority of investing subjects there is a general consensus on broad principles.

My thinking is it’s probably 60% prioritize taxable investing over prepay mortgage. I figured others had a better sense than me.

Regards,
John
I prepaid. So happy I did. It lifted a burden.

Regards,

Dottie

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Re: Mortgage to prepay or not prepay

Post by deltaneutral83 » Fri Nov 08, 2019 2:41 pm

How about do both for twelve months, take half of disposable income and pay down mortgage, and take the other half and invest in a taxable, this way you keep both camps of Bogleheads happy :D . Reassess how you feel in 12 months.

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Re: Mortgage to prepay or not prepay

Post by Vanguard Fan 1367 » Fri Nov 08, 2019 3:46 pm

I haven’t seen the option of setting up a poll in this forum

I vote to pay off the mortgage.

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Re: Mortgage to prepay or not prepay

Post by anon_investor » Fri Nov 08, 2019 3:51 pm

Our mortgage has 25+ years left at sub 4%, but we do not plan to stay in the house when we retire, so I do not prepay. Since we already have an emergency fund and max out all our tax advantages accounts, we just put extra funds into our taxable account 100% into VTSAX (can't get much more tax efficient than that!).

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Re: Mortgage to prepay or not prepay

Post by michaeljc70 » Fri Nov 08, 2019 4:58 pm

I was making some extra payments just to get rid of it, then decided at 3.4% it just isn't worth prepaying. Of my payment, 80% goes to principal (5 years into a 15 year). If inflation ticks up, it could really benefit me. If not, I still think I can do better than 3.4% with my 75/25 AA (of course it isn't guaranteed).

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Re: Mortgage to prepay or not prepay

Post by catlady » Fri Nov 08, 2019 11:19 pm

JoeRetire wrote:
Fri Nov 08, 2019 1:12 pm
catlady wrote:
Fri Nov 08, 2019 9:45 am
We’re choosing to prepay our mortgage for a combination of piece of mind (smaller recurring expenses make future unexpected employment changes/large expenses easier to handle) and future career/early retirement flexibility.
I understand the piece of mind thought.
Could you expand on the future career/early retirement flexibility part?

If you have the money to pay off your mortgage, why would keeping the mortgage change your career or retirement options?
I’m estimating our healthcare costs would be less than or equal to the principal + interest portion of our mortgage. So by paying off the mortgage before early retirement we would only need 100% of our current yearly expenses vs 125% if were still had the mortgage payment and healthcare.

By lowering our monthly expenses it gives us flexibility if one of us would like to make a significant career change in the future. Specifically moving from a high stress lucrative career to something less demanding but also lower paying.

As I’m typing it out, I’m realizing it’s mental accounting and should be lumped into piece of mind.

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